## Facts

- Peter and Karla Fink were principal shareholders of a closely held, financially troubled corporation, holding 72.5% of its stock.
- To make the corporation more attractive to outside investors, they voluntarily surrendered part of their shares to the corporation, reducing their ownership to 68.5%.
- They received no consideration for the surrendered shares, and no other shareholders surrendered stock.
- The corporation’s stock was not publicly traded.
- The corporation was later liquidated.
- On their 1976 and 1977 joint returns, the Finks claimed ordinary loss deductions equal to the full adjusted basis of the surrendered shares.
- The Commissioner disallowed the deductions, treating the surrender as a contribution to capital that required reallocating the surrendered-share basis to the Finks’ remaining shares, with any loss recognized only upon disposition of those remaining shares.

## Issues

1. Whether a dominant shareholder who voluntarily surrenders shares to the corporation without consideration, while retaining control, may claim an immediate ordinary loss deduction for the surrendered shares’ basis.
2. Whether the surrender must be treated as a contribution to capital requiring basis reallocation to the shareholder’s remaining shares and deferral of any loss until those shares are disposed of.

## Decision

- The Supreme Court reversed the Sixth Circuit and reinstated the Tax Court’s decision for the Commissioner.
- A dominant shareholder who voluntarily surrenders shares without consideration while retaining control does not sustain an immediately deductible loss.
- The surrender is treated under contribution-to-capital rules: the shareholder must reallocate the surrendered shares’ basis to the shares retained and recognize any loss, if at all, upon disposition of the retained shares.
- Immediate loss recognition was rejected because, for closely held, nontraded stock, the economic effect of the surrender generally cannot be reliably measured in the year of surrender.
- Allowing immediate ordinary losses would encourage conversion of potential capital losses into ordinary losses through strategic pre-failure stock surrenders, undermining statutory limits on capital losses.

## Legal Principles

- A voluntary surrender of stock to a corporation by a dominant shareholder, without consideration and with retention of control, is treated as a contribution to capital for federal income tax purposes.
- The shareholder must reallocate basis from surrendered shares to retained shares; the transaction has no immediate tax consequences.
- A deductible loss must be actually sustained during the taxable year, and in closely held corporations the loss from a surrender often cannot be determined until disposition of the remaining shares.
- Tax law preserves the distinction between capital and ordinary losses; transactions that would routinely convert capital loss treatment into ordinary loss treatment are disfavored absent clear statutory authorization.

## Conclusion

The Court held that controlling shareholders who surrender shares to their corporation without consideration while retaining control cannot claim an immediate ordinary loss; instead, they must shift the surrendered basis to their remaining shares and recognize any loss only when those remaining shares are later disposed of.


Commissioner v. Fink, 483 U.S. 89 (1987)