- 32 -
To accede to petitioners' blandishments and hold that Metals
is entitled to a capital loss would, in effect, be the equivalent
of allowing a loss to which Metals was not entitled on the
conversion, under section 1032, albeit as a capital loss rather
than an ordinary loss, or the equivalent of a bond premium
amortization deduction disallowed by section 249.
We are not prepared to accept such an eccentric result. See
Darby v. Commissioner, 97 T.C. 51, 68 (1991). Petitioners assert
that respondent has not pointed to any specific provision of the
Internal Revenue Code that disallows the claimed capital loss.
The simple answer to that assertion is that deductions are a
matter of legislative grace, and it was petitioners' burden to
demonstrate that the claimed capital loss was allowable under the
Internal Revenue Code. INDOPCO, Inc. v. Commissioner, supra.
They simply have not carried that burden.
We hold that petitioners are not entitled to deduct a
capital loss for the amount of the excess of the fair market
value of Metals' shares utilized in the conversion over the
principal of the RMECC debentures. Such excess presumably will
become part of Metals' basis in its RMECC shares.9
9 The portion of the expenses of the conversion (and amounts
paid for fractional shares), see supra note 5, represented by the
fraction whose numerator is the principal amount of the debenture
and whose denominator is the total value of Metals' stock issued
on the conversions, would appear to be an additional capital loss
which can be allocated to the value of the stock representing
such principal.
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