## Facts

- Ethel M. Schmidt, a Kentucky taxpayer, owned 812 of 1,353 outstanding shares of Highland Co., a Kentucky construction corporation.
- Schmidt’s total basis in the 812 shares was $62,440 (658 inherited shares and 154 purchased shares).
- On January 4, 1965, Highland Co.’s shareholders unanimously adopted a resolution to dissolve and liquidate; a statement of intent to dissolve was filed, and shares were surrendered to a corporate officer during 1965.
- By December 31, 1965, Highland Co. had substantially liquidated tangible assets but still held cash, “street warrants,” and customer receivables, and it also had remaining liabilities.
- The stock was not formally canceled, and Highland Co. was not finally and completely dissolved by the end of 1965 (or by trial).
- Schmidt received liquidating distributions during 1965 and claimed a long-term capital loss on her 1965 return based on unrecovered basis minus her estimate of the maximum value of her interest in remaining corporate assets.
- The Commissioner disallowed the loss on the ground that it was not established that any loss was sustained in 1965, and determined a $1,954.33 deficiency.

## Issues

1. Whether Schmidt sustained a deductible long-term capital loss in 1965 on Highland Co. stock when the corporation’s liquidation and dissolution were still ongoing at year-end and additional distributions remained possible.

## Decision

- The Tax Court sustained the Commissioner’s deficiency determination.
- The court held Schmidt was not entitled to a 1965 capital loss deduction on the Highland Co. stock.
- Because liquidation was not completed and ultimate shareholder recovery was still subject to change, no loss was sustained in 1965.

## Legal Principles

- A loss is deductible only in the taxable year in which it is sustained; it must be fixed by an identifiable event and not depend on unresolved contingencies.
- In a corporate liquidation, a shareholder generally does not realize a loss on stock until the liquidation is completed or it is otherwise clear that no further distributions will be made.
- A taxpayer may not deduct a stock loss based on estimates of future recovery when material assets remain to be collected and liabilities remain to be resolved.

## Conclusion

Because Highland Co. still held significant assets and had not completed liquidation or dissolution by the end of 1965, Schmidt’s claimed stock loss depended on uncertain future collections and payments; the Tax Court therefore disallowed the 1965 capital loss deduction and upheld the deficiency.


Schmidt v. Commissioner, 55 T.C. 335 (1970)