Dan E. Mason and Beverly R. Mason v. Commissioner of Internal Revenue

The tax court held that the Masons properly deducted from their 1967 gross income the losses of a Subchapter S corporation. 68 T.C. 163 (1977). We affirm.

Dan E. Mason formed a corporation, Arrow Equipment Sales (“Arrow”), from his solely owned business. Arrow made a valid election to be treated as an electing small business corporation under Subchapter S of the Internal Revenue Code, for the taxable year beginning January 1, 1967. On January 17, 1967, Arrow filed a voluntary petition in bankruptcy. The trustee sold some equipment for substantial losses and abandoned the remainder of the assets to creditors. The Arrow bankruptcy was closed on August 1, 1969.

On November 30, 1967 Mason filed a voluntary petition for bankruptcy as an individual. All of Arrow’s stock was listed as property of the bankrupt estate. On No vember 3, 1969, the trustee in the Mason bankruptcy filed and the bankruptcy court granted a petition for authorization to abandon the Arrow stock.

Arrow had reported a $47,580 loss on its 1967 small business corporation federal income tax return, which Mason, as sole shareholder, had reported as a deduction on his 1967 individual federal income tax return. The…