## Facts

- S.S. White Dental Manufacturing Co., a Pennsylvania corporation, wholly owned a German subsidiary and was also a creditor of the subsidiary on an open account.
- The taxpayer’s 1918 book investment in the subsidiary (stock plus receivable) exceeded $130,000 and was treated as not exceeding the fair value of the subsidiary’s net assets.
- In March 1918, during World War I, the German government appointed a sequestrator who seized control of the subsidiary’s assets and business under German wartime authority.
- The sequestration deprived the taxpayer of the economic benefit of its investment and left it without an enforceable right to demand return or compensation during the war.
- In March 1920, the sequestrator returned possession to the German corporation; the business and assets had been materially impaired, including through mismanagement and investment in German war loans.
- In 1922, the subsidiary’s tangible assets and lease were sold for about $6,000.
- In 1924, the taxpayer obtained an award of approximately $70,000 from an international claims process.
- On its 1918 return, the taxpayer deducted the full amount of its investment as a loss under § 234(a) of the Revenue Act of 1918; the Commissioner disallowed the deduction as not shown by a “closed and completed transaction.”
- The Court of Claims ruled for the taxpayer and granted a refund; the United States sought Supreme Court review.

## Issues

1. Whether the 1918 wartime sequestration of the subsidiary’s assets constituted a “loss[] sustained during the taxable year” under § 234(a) of the Revenue Act of 1918.
2. Whether the sequestration was a “closed and completed” transaction permitting a 1918 deduction, despite later restoration of the business and later partial recovery.
3. How later compensation or recovery affects the timing of a loss deduction for stock and debt interests rendered worthless by governmental seizure.

## Decision

- The Supreme Court affirmed the judgment for the taxpayer.
- The Court held the loss was deductible in 1918 because the sequestration was the event that fixed and realized the loss.
- The later restoration of possession and later partial recovery did not prevent deductibility in 1918; any later recovery was to be addressed in the year received.

## Legal Principles

- A loss is “sustained” for income tax purposes when a definitive event occurs that effectively destroys the taxpayer’s property interest and fixes the loss.
- Wartime governmental seizure (sequestration) may constitute a “closed and completed” transaction even without a sale or liquidation, because the taxpayer lacks an enforceable right to regain the property or obtain compensation during the relevant period.
- Treasury regulations requiring losses to be evidenced by closed or completed transactions do not bar deductions where stock or debts become worthless due to a decisive external event.
- Subsequent restoration of value or partial compensation does not retroactively negate the earlier loss deduction; later recoveries are addressed in the later tax year when realized.

## Conclusion

The Court held that the German wartime sequestration in 1918 conclusively fixed the taxpayer’s loss on its investment in the German subsidiary, making the loss deductible that year notwithstanding later partial recovery and postwar developments.


United States v. S.S. White Dental Mfg. Co., 274 U.S. 398 (1927)