## Facts

- Jerome and Doris Prizant filed joint federal income tax returns.
- A corporation, H.G. Prizant and Company, was organized in 1958 and received assets and business activity previously conducted through a related partnership.
- In January 1963, the corporation increased its capital structure and issued 420 shares to the partnership in exchange for cancellation of $42,000 of corporate debt owed to the partnership.
- At the time of issuance, the partnership was not actively conducting business but had not been legally terminated.
- On June 30, 1964, the partnership transferred its 420 shares to Jerome Prizant and two other partners.
- More than a year later, the corporation became insolvent and the stock became worthless.
- On their 1965 return, the Prizants claimed an ordinary loss deduction of $10,500 under I.R.C. § 1244 based on the stock’s worthlessness.
- Separately, Doris Prizant advanced funds to the corporation; in 1964 she was repaid more than she advanced, producing an excess amount treated by the Commissioner as ordinary income.

## Issues

1. Whether Doris Prizant realized taxable gain in 1964 when repaid more than she advanced to the corporation, and if so whether the excess was ordinary income rather than capital gain.
2. Whether Jerome Prizant’s 1965 loss from worthless stock qualified for ordinary loss treatment under I.R.C. § 1244 when the stock had been originally issued to a partnership and later distributed to him.

## Decision

- The Tax Court sustained the Commissioner’s determinations.
- Doris realized gain upon repayment in excess of her advances, and the excess was taxable as ordinary income.
- Jerome was not entitled to § 1244 ordinary loss treatment because the stock was not § 1244 stock in his hands; it had been originally issued to the partnership, not to Jerome.

## Legal Principles

- I.R.C. § 1244 requires that qualifying stock be originally issued to the taxpayer claiming the ordinary loss; a later distribution of shares from a partnership to a partner does not satisfy this requirement.
- A partnership’s lack of active operations does not by itself render it nonexistent for federal tax purposes; if it continues to exist legally, stock issued to it is treated as issued to the partnership.
- When a taxpayer advances funds as a loan and is repaid more than the amount advanced, the excess is ordinary income absent a sale or exchange of a capital asset or another basis for capital-gain treatment.

## Conclusion

The Tax Court treated the partnership as the original shareholder for § 1244 purposes and refused to treat the partner as the original recipient of shares distributed from the partnership, while also holding that an excess repayment over loan advances to a closely held corporation is ordinary income.


Prizant v. Commissioner, 30 T.C.M. (CCH) 817 (T.C. 1971)