Federal Income Taxation–Section 165 (c) Loss Allowed for Securities Loaned to Brokerage Firm That Subsequently Became Insolvent and Sold the Securities to Meet the Claims of Creditors–Stahl v. United States

It is frequently said that there are only two certainties in life: death and taxes. The Court of Appeals for the District of Columbia Circuit recently upheld a district court decision that considerably eased the latter burden for plaintiff-taxpayer in Stahl v. United States. On April 12, 1962, Mrs. Stahl, a widowed musician and music teacher, reached an agreement with Balough & Company (Balough), a Washington securities firm, under which she was to surrender to it control of securities with a market value of approximately $210,000. Balough used the securities to meet the minimum capital requirements for brokerage firms established by the Securities and Exchange Commission (SEC). To comply with these requirements, the agreement was structured to subordinate the rights of Mrs. Stahl to the claims of all the firm’s creditors, present and future. As compensation for the use of the securities, Mrs. Stahl was to receive one per cent of the market value of the securities every three months. In addition, she was to receive the dividend and interest income that the securities produced. Consistent with the firm’s policy, Mrs. Stahl was made a member of the board of directors of Balough shortly before the subordination agreement was signed. The initial agreement provided that the securities were to be returned on May 12, 1963, but a subsequent amendment extended the termination date. Prior to the extended termination date, the securities were sold to meet the claims of Balough’s creditors and in August 1964 the firm filed a voluntary petition in bankruptcy.