*1303 Deductibility of (a) losses sustained upon sales of stock for nominal considerations and (b) had debts, determined.
*477 The Commissioner determined deficiencies in the petitioner's income taxes for the years and amounts as follows:
| Docket No. | Year | Deficiency |
| 43446 | 1924 | $342.04 |
| 1925 | 1,285.12 | |
| 51419 | 1926 | 1,504.09 |
| 1927 | 3,324.15 | |
| 1928 | 669.15 |
*478 The petitioner alleges that the Commissioner erred in disallowing claimed deductions for (a) losses sustained upon the sale of certain stock in each of these years; (b) a bad debt in the amount of $5,465.45 in 1925; and (c) taxes in the amount of $524.91 paid in 1925. The Commissioner concedes error in disallowing the claimed deduction for taxes paid in 1925. The proceedings were consolidated.
FINDINGS OF FACT.
The petitioner is a resident of Syracuse, New York.
The Crouse Grocery Company was organized in 1903 and engaged in the wholesale grocery business. Upon the organization of the Crouse Grocery Company, petitioner subscribed to and subsequently*1304 paid for 600 shares of its common stock at the par value of $100 per share; thereafter, petitioner acquired either the stock or the stock subscription rights of others by paying therefor the par value, except that in 1920 he acquired one share of this common stock for $80. Immediately before the transactions involved in these proceedings took place, petitioner owned all of the 850 shares of the common stock authorized and issued by the Crouse Grocery Company. For many years petitioner has been an officer and director of the Crouse Grocery Company and actively engaged in its management.
Under the will of Charles E. Crouse, an uncle, petitioner acquired 21 1/2 shares of the preferred stock of the Crouse Grocery Company, par value $100 per share. This preferred stock was distributed to petitioner in 1925 and 1926 and listed in the schedules attached to the decree of judicial settlement of the estate of Charles E. Crouse at a value of $80 per share, on date of transfer to the petitioner. The value of the preferred stock was $80 per share when distributed to the petitioner.
On June 26, 1924, petitioner sold and delivered to B. D. Kennedy 166 6/10 shares of the common stock of*1305 the Crouse Grocery Company for $50.
On February 28, 1925, petitioner sold and delivered to Joseph Stover 181 4/10 shares of the common stock of the Crouse Grocery Company for $100.
On December 19, 1926, petitioner sold and delivered to Joseph Stover 250 shares of the common stock of the Crouse Grocery Company for $100.
On December 24, 1927, petitioner sold and delivered to Joseph Stover 250 shares of the common stock of the Crouse Grocery Company for $5.
*479 On January 28, 1928, petitioner sold and delivered to Joseph Stover 21 1/3 shares of the preferred stock of the Crouse Grocery Company for $1.
Neither Kennedy nor Stover was related to the petitioner and at the time of the respective sales they were employed by the Crouse Grocery Company. The above sales of stock were bona fide for value and consummated by the delivery of the stock certificates, acceptance thereof and payment of the purchase price, without any agreement between the parties to the sales as to voting the stock or resale thereof to the petitioner, and thereafter the purchasers voted the stock so acquired and held by them.
During the taxable years under consideration, the Crouse Grocery Company*1306 was a going concern, actively carrying on its wholesale grocery business, the volume of which is reflected in the following statement of purchases, inventories, and net sales:
| Year | Purchases | Inventory | Net sales |
| 1924 | $593,000 | $167,000 | $685,000 |
| 1925 | 459,000 | 149,000 | 587,000 |
| 1926 | 490.000 | 95,000 | 604,000 |
| 1927 | 644,000 | 63,000 | 731,000 |
| 1928 | 635,000 | 68,000 | 734,000 |
During the years 1923 to 1928, inclusive, the Crouse Grocery Company sustained operating losses, but the company had not started dissolution proceedings, gone into the hands of a receiver, filed a petition in bankruptcy, made an assignment for the benefit of creditors, or in any way liquidated.
Petitioner claimed deductions upon his income-tax returns for the respective years for losses upon the above stock sales in the amount of the difference between the cost or other basis to him of the stock sold and its sales price. Petitioner sustained losses upon these sales as follows:
| 1924 | $16,610.00 |
| 1925 | 18,040.00 |
| 1926 | 24,900.00 |
| 1927 | 24,995.00 |
| 1928 | 1,705.67 |
The Commissioner disallowed the claimed deductions for the years 1924 and 1925 on the ground "that the sales*1307 were not bona fide transactions." The claimed deductions for 1926, 1927, and 1928, were disallowed on the ground that the stock "was actually worthless prior to the year 1926."
Over a period of years petitioner loaned money to his brother, Marlette Crouse, upon the security of the latter's interest in certain funds to be paid him out of an estate as he attained certain ages. Payments were made on these loans from the sources indicated. *480 In 1918 petitioner assigned the balance due on these loans to H. L. Benedict, who procured a judgment against Marlette Crouse in the amount of $3,831.32; this judgment was then assigned to the petitioner. A garnishee execution was levied on the judgment and collections made thereon almost up to the date Marlette Crouse died, at which time there was a balance due on the judgment.
The petitioner, his brother, Marlette Crouse, and their two sisters inherited the family residence at 610 West Genesee Street, Syracuse, New York, from their father. In 1910 the two brothers acquired the interests of their sisters and entered into the following agreement:
Memorandum of Agreement entered into at Syracuse, N.Y., on May 24, 1910, between George*1308 N. Crouse and Marlette Crouse, for value received and in consideration of George N. Crouse allowing Marlette Crouse credit on Marlette Crouse indebtedness to George N. Crouse, in the sum of Seven thousand Dollars ($7,000) for Marlette Crouse One Quarter (1/4) interest in the residence, barn, sheds and real estate of F. M. Crouse, Est., and known as 610 West Genesee St., Syracuse, N.Y., and in consideration of said George N. Crouse hereby agreeing to pay Marlette Crouse, when this property is disposed of by the present owners and sold, one half (1/2) of any amount received over twenty eight thousand Dollars ($28,000); said Marlette Crouse agrees in consideration of the above to pay George N. Crouse, when property is finally disposed of and sold, one half (1/2) of any amount less than twenty-eight thousand Dollars ($28,000), for which this said property may be sold.
As Jacob Crouse bid about $28,000 for this property, and as $40,000 is now the asking price and as a purchaser has been hard to find, the object of this agreement is for Marlette Crouse to share one half (1/2) of the profit above $28,000, or to share One Half (1/2) of the loss below $28,000, when property is finally disposed*1309 of by the present owners.
[Signed] GEORGE N. CROUSE (L.S.)
MARLETTE CROUSE (L.S.)
Witness
[Signed] MARJORIE M. QUINLAN
Witness
[Signed] LILLY WOLFE
The property was sold in 1916 for $17,000 and petitioner charged Marlette Crouse with $5,500 as his share of the loss on the sale.
Marlette Crouse died in 1925, leaving an insolvent estate. On his income-tax return for 1925, petitioner deducted $5,465.45 as a bad debt, representing the balance owing to him by Marlette Crouse. The Commissioner disallowed the claimed deduction, "for the reason that it is not properly substantiated."
OPINION.
SMITH: The evidence refutes the respondent's reasons for disallowing the claimed deductions for losses upon the sales of stock in the taxable years before us. The sales were made "with good faith; without fraud or deceit." Cf. . Thereafter, the petitioner had no interest in or control over *481 the stock sold. Likewise, the stock had not become worthless prior to 1926 or in the years under consideration; the Crouse Grocery Company was actively engaged in business and there had been no liquidation of its affairs. *1310 The stock may have depreciated considerably in value, but the petitioner could not, under the statute, take a loss unrealized by a sale or other disposition of the stock. As we said in :
* * * It is perfectly legal and proper for a taxpayer to sell such assets at a price representing their reduced value and thus to sustain a deductible loss which is allowed him by the statute. ; ; ; .
In computing the deductions allowable under the statute (section 214(a)(5) of the Revenue Acts of 1924 and 1926), the basis to be used for the stock acquired before March 1, 1913, is its cost or fair market value on that date, whichever is greater (section 204(b) of the Revenue Acts of 1924 and 1926), and the basis to be used for the stock acquired by purchase after that date is its cost (section 204(a), Revenue Acts of 1924 and 1926). The petitioner has established only the cost, thereby waiving any benefit that*1311 might result from proving a March 1, 1913, value in excess of the cost of the stock acquired prior to that date. Petitioner has not identified the one share of common stock purchased in 1920 for $80 as being in any particular lot sold; because of his failure to so identify this share, it will be allocated to the lot upon the sale of which he is claiming the greatest loss, thus bearing "down heavily upon the petitioner whose duty it was to prove" the larger loss, if larger loss there was. Cf. . This allocation will be in accord with the "first in, first out" rule, since petitioner sold 848 shares of this stock and we have evidence as to the time of purchase of only 601 shares of this stock. Cf. . The basis for computing the loss upon the sale in 1928 of the preferred stock which had been acquired by petitioner under the will of his uncle is its value "at the time of the distribution to the taxpayer" (section 113(a)(5), Revenue Act of 1928). This value has been found to be $80 per share. The deductible losses should be allowed accordingly. Cf. *1312 ; ; ; .
From the record we can not determine that the respondent erred in disallowing the deduction of $5,465.45 claimed as a bad debt in 1925. The evidence tends to support the petitioner's contention that this amount was the net balance of the judgment and account against Marlette Crouse, petitioner's brother, who died in 1925, *482 leaving an insolvent estate. Petitioner testified that he had advanced considerable money to his brother, frequently extricating him from social and financial difficulties. Money so advanced was repaid from trust funds payable to Marlette Crouse from time to time, but in 1918 the petitioner assigned the account against his brother to H. L. Benedict, who procured a judgment against Marlette Crouse, which was assigned to the petitioner. The earnings of Marlette Crouse were garnisheed almost up to the time of his death in partial satisfaction of the judgment. The unpaid balance on the judgment and the $5,500 (one-half of the difference between the 1910*1313 price placed upon the West Genesee Street property and what it sold for in 1916) charged to Marlette Crouse as per the 1910 agreement, make up the amount of the alleged bad debt. There is no explanation of the hiatus between the amount claimed as a deduction for a bad debt and the $5,500 plus the undisclosed balance due on the judgment. While the record sufficiently establishes the insolvency of the estate of Marlette Crouse, it does not show that the petitioner's claim against the estate was ever established. Furthermore, to allow the claimed deduction would in effect allow the petitioner to deduct as a bad debt the amount which he charged against Marlette Crouse upon the West Genesee Street transaction, which has not been shown to have ever been included in gross income; unless reflected in income, such accounts are not deductible as bad debts. See . In the circumstances, the respondent's disallowance of the claimed deduction is sustained.
Judgment will be entered under Rule 50.