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N. Sobel, Inc. v. Commissioner

40 B.T.A. 1263 (1939)

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N. Sobel, Inc. v. Commissioner

United States Board of Tax Appeals

40 B.T.A. 1263 (1939)

Facts

In 1929, N. Sobel, Inc. (plaintiff) purchased 100 units of stock from the Bank of United States (the bank) for $21,700. N. Sobel paid for the shares by issuing a note for $21,700 to the bank. When the note became due in November 1930, N. Sobel refused to pay and sued the bank, demanding cancellation of the stock purchase and loan on the grounds that the bank violated the law and breached certain promises, and the bank countersued for the full amount of the note, with interest. In December 1930, the bank closed due to insolvency. In October 1935, N. Sobel and the bank settled their claims, with N. Sobel paying half the amount of the note ($10,850). N. Sobel deducted $10,850 as a loss in 1935. The commissioner of internal revenue (defendant) rejected the deduction on the grounds that the stock had become worthless prior to the 1935 tax year. Additionally, the commissioner added $10,850 to N. Sobel’s gross income for 1935, reasoning that N. Sobel realized a gain in that amount because the settlement effectively wiped out half of its $21,700 debt.

Rule of Law

Issue

Holding and Reasoning (Sternhagen, J.)

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