Personal Income Tax Appeal Decision Form - California State Board Of Equalization (Page 3 of 4) in pdf

Appeal of BML Inc./Bayview Mortuary

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authority supporting that such a transformation can occur. While appellant refers to

Internal Revenue Code (IRC) section 162(k) and its exceptions in its appeal, it does not

appear that appellant contends that that section applies here. At protest, appellant

specifically denied that IRC section 162 applied in this matter, where appellant is

attempting to include the entire amount it spent to reacquire its treasury stock in its

calculation of basis and gain, and is not attempting to simply deduct its costs associated

with that reacquisition.

Respondent contends that appellant may not recognize gain or loss from

the sale or exchange of its treasury stock pursuant to the provisions of Revenue and

Taxation Code (R&TC) section 24942, subdivision (a). In addition, respondent contends

that, where a corporation acquires property (including treasury stock) as a contribution

to capital, and the property is not contributed by a shareholder, then the basis of the

property is zero, pursuant to IRC section 362(c)(1) (which R&TC section 24451

incorporates into California law). Respondent notes that it appears appellant may

contend that the stock reacquisition expense exception to IRC section 162 (see

discussion, infra) applies here. However, respondent further notes that appellant did

not attempt to deduct any expenses with respect to its costs to repurchase the treasury

stock (at the time of the purchase in 1993 or 1994). In addition, appellant did not claim

any loan expenses over the life of the loan at any time up to, and including, the appeal

year. Respondent also asserts that appellant does not provide any authority for the

contention that, upon termination of the corporation, the treasury stock should be

transformed from a capital account into an asset because appellant reacquired the

treasury stock. Even if this were so, respondent asserts that R&TC section 24343

(adopting IRC section 162) nevertheless assigns treasury stock a zero basis and

precludes the recognition of gain or loss on the disposition of the treasury stock.

Discussion

Respondent’s determination is presumed correct and appellant bears the burden

of proving that it is erroneous. (Todd v. McColgan (1949) 89 Cal.App.2d 509.) R&TC section

24942, subdivision (a), provides that no gain or loss shall be recognized to a corporation on the

receipt of money or other property in exchange for stock (including treasury stock) in that

corporation. IRC section 362(c)(1) (adopted by Rev. & Tax. Code, § 24451) also provides that,

where a corporation acquires property other than money as a contribution to capital, and the

property is not contributed by a shareholder, then the basis of the property is zero. Thus,

As discussed herein, IRC section 162(k) provides that no deduction shall be allowed for any amount paid

or incurred by a corporation to reacquire its stock, with certain exceptions as provided in IRC section

162(k)(2).

NOT TO BE CITED AS PRECEDENT

Personal Income Tax Appeal Decision Form - California State Board Of Equalization Page 3