1930 BTA LEXIS 2116">*2116 Upon the evidence, held that the petitioner is entitled to deduct certain losses sustained on investments made in the oil business and also to deduct losses sustained by reason of his payment of certain notes which he had endorsed.
20 B.T.A. 469">*470 In this proceeding the petitioner seeks a redetermination of its income-tax liabilities for the calendar years 1922 and 1923, for which years the respondent has determined deficiencies of $854.15 and $307.83, respectively.
The petitioner claims overassessments in the amounts of $6,934.41 and $3,280.52 for the years 1922 and 1923, respectively, making the total amount of taxes in controversy $11,376.93.
The following errors are assigned in the petition:
1. In computing the taxable net income of the petitioner for the calendar year 1922 the respondent has erroneously failed to deduct worthless and uncollectible bad debts or losses in the amount of $50,000.
2. In computing net income for 1922 the respondent has erroneously failed to allow losses in the amount of $3,000, sustained by the petitioner1930 BTA LEXIS 2116">*2117 on investments theretofore made by him in the oil business.
3. In computing the taxable net income of the petitioner for the calendar year 1923 the respondent has erroneously failed to deduct worthless and uncollectible bad debts or losses sustained by the petitioner in the amount of $30,000.
At the hearing petitioner abandoned the alternative claim that the amounts in 1 and 3 were bad debts.
FINDINGS OF FACT.
The petitioner is an individual residing at 117 West Seventy-Ninth Street, New York City. For several years prior to and during the taxable years on appeal he was a director, treasurer, and the largest stockholder of the Grayona Needlecraft Corporation, formerly known as the Lorimier, Greenbaum Co., and was employed as a salesman by that company. He spent about five or six months on the road each year. During the years in controversy, he was a man of substantial means and of very high financial rating.
For personal services rendered to the Grayona Needlecraft Corporation, the petitioner was compensated upon the basis of a percentage of the sales which he made and a bonus, which was fixed by the directors of the company at the close of each accounting period. 1930 BTA LEXIS 2116">*2118 He was furnished a substantial drawing account by the company.
Petitioner kept no individual books of account and filed his returns for the years involved on a cash receipts and disbursements basis.
The Grayona Needlecraft Corporation maintained an account with the petitioner, in its general ledger, under the caption "Bernard Greenbaum Salary a/c." There were charged to this account all drawings made by the petitioner on his drawing account, and all 20 B.T.A. 469">*471 other disbursements to, or in settlement of the personal obligations of, the petitioner. There were credited to this account cash receipts from, or for the account of, the petitioner, commissions and bonuses due the petitioner, amounts transferred to "Notes Receivable" account by journal entries, and various other amounts by unexplained journal entries.
The only books of account of the Grayona Needlecraft Corporation, relating to the calendar and fiscal years 1922 and 1923 which can be located are the general ledgers, and the cash book for the period May 1 to December 31, 1922. All other books of account have been lost or misplaced through repeated transfers of the office of the company, or through their having passed1930 BTA LEXIS 2116">*2119 into the possession of persons other than officers of the company in enforced liquidation of the business.
In 1912 Victor Greenbaum, a brother of the petitioner, and Walter Ross organized a corporation, known as Greenbaum & Ross, Inc., for the purpose of engaging in business as a sales agency for manufacturers of jewelry and novelties. One-half of the capital stock of the corporation was owned by each of those individuals. By 1915 the demands and exigencies of the business had so increased its expenses that the small amount of capital originally invested had become depleted, and the corporation was in need of additional working capital. Victor Greenbaum importuned the petitioner to extend financial assistance, and, with Ross, agreed that the petitioner should be compensated therefor on the basis of 10 per cent of the net profits of the business, so long as such assistance was rendered. After making one small loan, the petitioner, believing that the corporation would be more prompt in meeting its obligations to strangers, suggested that future loans be procured from the banks. Greenbaum and Ross, however, were without any financial credit and found it impossible to obtain loans1930 BTA LEXIS 2116">*2120 from that or any other source. The petitioner believed that the business was a sound proposition and would ultimately prove profitable, and he agreed to endorse the corporation's notes.
Between 1916 and 1918 the petitioner made loans to, and endorsed the notes of, Greenbaum & Ross, Inc., to the extent of approximately $65,000. Greenbaum and Ross were coendorsers on the corporation's notes.
From the beginning to the end, Greenbaum & Ross, Inc., operated at a loss, although until 1918 the petitioner and Greenbaum and Ross entertained high hopes of ultimate success. At no time had the corporation been in a position to meet its obligations in full, and frequently could not make even partial payments. As these obligations matured, the petitioner, as endorser, was called upon to make up any 20 B.T.A. 469">*472 deficiency in funds funds for payment, if renewal could not be arranged or was deemed inadvisable.
By 1918 Greenbaum & Ross, Inc., had accumulated a very large deficit; its liabilities exceeded its assets by approximately $60,000. Most of the liabilities were corporate notes discounted with banks and "loan sharks," on which the petitioner, Greenbaum, and Ross were endorsers. 1930 BTA LEXIS 2116">*2121 The notes were for not more than four months, bore 6 per cent interest, and there was a renewal charge of 10 per cent. The petitioner knew that neither Greenbaum nor Ross was in a position, Financially, to meet any part of these obligations, and he realized that in such circumstances he would be called upon to meet them in full. He was satisfied that to continue the business would only result in further and greater losses and subject his own financial position and credit to considerable risk, and he decided not to carry the business along any further. He insisted that Greenbaum and Ross wind up the business of the corporation and liquidate its affairs. The business was discontinued in the fall of 1918, although the corporation has never been formally dissolved.
All of the obligations of Greenbaum & Ross, Inc., have been paid, either by the petitioner out of personal funds or by the Grayona Needlecraft Corporation, upon the order of the petitioner. All the disbursements by the latter for that purpose have been charged on its books against the account with the petitioner.
In the fall of 1922 Victor Greenbaum, Walter Ross and several others organized the New Auto Paint System, 1930 BTA LEXIS 2116">*2122 Inc., for the purpose of acquiring and operating under exclusive license rights, for the Metropolitan District of New York, to repaint automobiles by a newly patented process. The name of the corporation was later changed to the Lyk-Glas Co. of Greater New York. The corporation issued $28,000 par value of preferred stock, all of which appears to have been paid for in cash. The petitioner subscribed for $5,000 par value of such preferred stock, and paid for the same in cash, at par. Purchasers of the preferred stock received an equal amount of common stock as a bonus.
The corporation acquired the exclusive license rights referred to above at a cost of $10,000. Representations had been made by the owners of the patented process that by its use automobiles could be repainted and refinished in from three to six days. This was a very material advantage over other methods of repainting and refinishing, which required upwards of two weeks for completion.
Shortly after organization, the corporation launched upon an intensive advertising campaign. This resulted in automobiles being sent in for repainting so fast that all available space was occupied in the small rented quarters, 1930 BTA LEXIS 2116">*2123 and the corporation was forced to seek new quarters with more floor space. Thereafter it moved into the 20 B.T.A. 469">*473 Willys-Knight Building, where it rented two floors containing approximately 60,000 square feet.
The cost of the license rights, moving the equipment and remodeling the new quarters had depleted the original paid-in capital of the corporation. The expenses of conducting the business were greatly increased in the larger quarters. The number of workmen employed had increased from approximately 20 to 163, and the weekly pay roll had advanced from a few hundred to about eight thousand dollars. The stockholders discussed the advisability of selling additional capital stock to raise funds for working capital. The petitioner opposed this, and suggested to the others that if the business was as good as it appeared to be they ought to keep it for themselves, and he agreed to endorse the notes of the corporation that it might acquire the needed working capital through loans. Between January, 1923, and when the business was finally discontinued in 1926, the petitioner endorsed upwards of $100,000 face value of the corporation's notes.
During the summer and fall of 19231930 BTA LEXIS 2116">*2124 the corporation met with many reverses. About the same time, a new quick-drying automobile paint appeared on the market under the trade name of "Duco." The corporation found it could not compete against users of this new painting process.
At no time during 1923 or subsequently was the corporation in a position to meet its obligations. Operations were carried on at a loss during the whole of that year. On October 31, 1923, the corporation's books showed a deficit of $56,675.97; on June 30, 1924, they showed a deficit of $58,290.64.
In the fall of 1923 the petitioner and the other stockholders realized that the business of the Lyk-Glas Co. could not be carried on successfully. At that time the petitioner was still engaged in liquidating the obligations of Greenbaum & Ross, Inc. He realized that he would be held liable on his endorsements of the obligations of the Lyk-Glas Co. Victor Greenbaum and Walter Ross were coendorsers on the corporation's notes, but the petitioner knew their financial condition was such that he could not look to them for assistance in liquidating these obligations. He believed that he could ultimately discharge these obligations, but his problem was1930 BTA LEXIS 2116">*2125 to spread them over such a period of time that his own financial position, as well as that of the Grayona Needlecraft Corporation, would not be seriously imperiled. Accordingly, he insisted that the corporation curtail its expenses to the minimum and continue business in a play for time. The business was continued at very much reduced losses until 1926, when its affairs were wound up by disposing of all of its 20 B.T.A. 469">*474 assets to an employee for $2,000, a part of which was paid in cash and the balance in notes. The notes have not been paid.
All of the obligations of the Lyk-Glas Co. have been paid, either by the petitioner out of personal funds or by the Grayona Needlecraft Corporation, upon the orders of the petitioner. All disbursements by the latter for that purpose have been charged on its books against the account with the petitioner.
During 1922 and 1923 the Grayona Needlecraft Corporation made disbursements in settlement of the obligations of Greenbaum & Ross, Inc., and the Lyk-Glas Co. of Greater New York, as follows:
| Disbursements in 1922 | |
| Date | Amount |
| May 1 | $500.00 |
| May 16 | 1,000.00 |
| May 22 | 500.00 |
| June 16 | 300.00 |
| July 1 | 200.00 |
| July 29 | 500.00 |
| Aug. 7 | 100.00 |
| Oct. 9 | $1,000.00 |
| Oct. 28 | 1,000.00 |
| Nov. 8 | 1,000.00 |
| Nov. 30 | 2,000.00 |
| Dec. 1 | 5,000.00 |
| Dec. 4 | 1,000.00 |
| Dec. 7 | 1,000.00 |
| Dec. 7 | $1,000.00 |
| Dec. 11 | 1,000.00 |
| Dec. 18 | 751.23 |
| Total for 1922 | 17,851.23 |
| Disbursements in 1923 | |
| Jan. 2 | $1,015.67 |
| Jan. 8 | 1,000.00 |
| Feb. 2 | 1,000.00 |
| Feb. 7 | 1,000.00 |
| Mar. 2 | 1,000.00 |
| Mar. 26 | 2,000.00 |
| Mar. 30 | 1,500.00 |
| Apr. 2 | 1,000.00 |
| Apr. 26 | 2,000.00 |
| Apr. 30 | 1,500.00 |
| May 3 | 595.00 |
| May 10 | 3,200.00 |
| May 14 | 501.00 |
| May 28 | 2,000.00 |
| May 29 | 2,000.00 |
| July 30 | 2,000.00 |
| July 31 | 1,400.00 |
| Aug. 1 | 600.00 |
| Aug. 9 | 3,000.00 |
| Aug. 28 | $2,000.00 |
| Sept. 14 | 500.00 |
| Sept. 15 | 500.00 |
| Sept. 24 | 500.00 |
| Do | 2,500.00 |
| Sept. 28 | 2,000.00 |
| Do | 3,000.00 |
| Do | 1,000.00 |
| Oct. 3 | 5,000.00 |
| Oct. 8 | 3,500.00 |
| Oct. 15 | 1,787.60 |
| Oct. 17 | 1,500.00 |
| Oct. 23 | 900.00 |
| Oct. 29 | 1,000.00 |
| Oct. 30 | 700.00 |
| Nov. 1 | 1,000.00 |
| Nov. 10 | 1,000.00 |
| Do | 1,500.00 |
| Nov. 12 | 1,000.00 |
| Nov. 13 | $2,000.00 |
| Nov. 14 | 790.00 |
| Nov. 15 | 1,000.00 |
| Nov. 28 | 2,000.00 |
| Dec. 3 | 1,000.00 |
| Do | 2,500.00 |
| Do | 1,500.00 |
| Dec. 10 | 500.00 |
| Dec. 11 | 2,000.00 |
| Dec. 17 | 2,500.00 |
| Do | 1,000.00 |
| Dec. 19 | 2,000.00 |
| Do | 500.00 |
| Dec. 22 | 500.00 |
| Dec. 29 | 500.00 |
| Total for 1923 | 79,489.27 |
On September 6, October 4, and November 16, 1923, the petitioner's account on the books of the Grayona Needlecraft Corporation was credited with the sums of $10,000, $787.60, and $1,879.60, respectively, 1930 BTA LEXIS 2116">*2127 representing sums received by that corporation in reimbursement for payments on obligations of Greenbaum & Ross, Inc., and the Lyk-Glas Co. Except for these three credits to his account on the books of the Grayona Needlecraft Corporation, the petitioner has never been reimbursed from any source for disbursements made by him, on in his behalf, in settlement of the obligations of the two defunct corporations.
During the fiscal year beginning May 1, 1921, and ending April 30, 1922, the notes receivable account and the petitioner's account, in the ledger of the Grayona Needlecraft Corporation, were charged 20 B.T.A. 469">*475 and credited, respectively, by journal entries, with the following amounts:
| Amount | |
| 1921: | |
| Aug. 31 | $8,402.35 |
| Sept. 30 | 3,698.93 |
| Oct. 31 | 2,553.50 |
| Nov. 30 | 1,978.15 |
| Dec. 31 | 5,913.52 |
| 1922: | |
| Jan. 31 | 1,039.82 |
| Feb. 28 | 28.19 |
| Mar. 31 | 4,848.78 |
| Apr. 30 | 3,472.77 |
| Total | 31,936.01 |
On April 30, 1922, the petitioner's account was charged and notes receivable account was credited with the sum of $31,936.01.
In his returns for the calendar years 1922 and 1923, the petitioner reported the sums of $78,659.23 and $65,957.63, respectively, as compensation1930 BTA LEXIS 2116">*2128 received from the Grayona Needlecraft Corporation. The petitioner did not claim any deduction in either of these returns for payments made by him, or by the Grayona Needlecraft Corporation upon his orders, in settlement of the obligations of Greenbaum & Ross, Inc., and of the Lyk-Glas Co. of Greater New York, and none have been allowed by the respondent.
In 1919 the petitioner invested $1,000 in the stock of the Victory Oil Trust, which was organized for the purpose of drilling wells on certain leased lands. The trust was later superseded by the consolidated Lease & Oil Co., and the shares of stock of the Victory Oil Trust were exchanged for an equal number of shares of the stock of the Consolidated Lease & Oil Co. During 1922 the petitioner visited Oklahoma City and learned that the latter company had forfeited its lease and gone out of business, within the year. At the time it discontinued business, the company had no assets, and the petitioner had never received anything from this investment.
On June 15, 1920, the petitioner purchased 1,000 shares of stock of the Texas United Oil Co. of Dallas, for which he paid $1,000. In 1921 the company went into bankruptcy and when1930 BTA LEXIS 2116">*2129 the proceedings were terminated in 1922, the investment proved to be worthless, and nothing was paid to the stockholders.
On October 19, 1918, the petitioner purchased 4,000 shares of stock of the Tell Oil & Gas Co., for which he paid $1,000. The promoter of the company died in 1922, and on his death it was discovered that the company had no assets. The company did not engage in any business after 1922.
20 B.T.A. 469">*476 The petitioner did not claim any deduction in his return for 1922 for losses of investments in the Consolidated Lease & Oil Co., the Texas United Oil Co., of Dallas, and the Tell Oil & Gas Co., and none have been allowed by the respondent.
OPINION.
MATTHEWS: The evidence leaves no doubt that the petitioner's investments in the capital stock of the Consolidated Lease & Oil Co., of the Texas United Oil Co. of Dallas, and of the Tell Oil & Gas Co., made subsequent to March 1, 1913, and amounting in all to $3,000, became entirely worthless in 1922. Nothing whatever was recovered by the petitioner from these investments, and, consequently, the entire amount is properly deductible from income of that year, as losses resulting from transactions entered into for profit1930 BTA LEXIS 2116">*2130 and not compensated for by insurance or otherwise.
During 1922 and 1923, upon orders of the petitioner, the Grayona Needlecraft Corporation, of which the petitioner was the principle stockholder and by whom he was employed as a salesman, disbursed the sums of $17,851.23 and $79,489.27, respectively, in payment of notes of Greenbaum & Ross, Inc., and of the Lyk-Glas Co. of Greater New York, which had been endorsed by the petitioner and for which he was liable by reason of the default of the principals. These disbursements were charged against the account of the petitioner on the books of the paying corporation. During 1923 there were three credits to the petitioner's account, totaling $12,667.20, representing sums received by the Grayona Needlecraft Corporation in reimbursement for payments on the notes of the defunct corporations. Thus the net disbursements made by the corporation and charged to the petitioner's account were $17,851.23 in 1922, and $66,822.07 in 1923.
At the time these disbursements were made, there was no prospect of the petitioner ever recovering anything from the principals, and, in fact, nothing has ever been recovered from them. Greenbaum & Ross, Inc.1930 BTA LEXIS 2116">*2131 , had discontinued business in 1918, and it was entirely without any resources. The Lyk-Glas Co. had operated at a tremendous loss, and at no time was it in a position to meet its obligations. In the summer of 1923 there were very definite indications that the business could not be carried on successfully, and the stockholders were anxious to wind up its affairs. It was not with any hope or expectation of ultimate success that the business of the Lyk-Glas Co. was continued until 1926. That was done upon the insistence of the petitioner that he needed time within which to cover his losses. He was still engaged in liquidating the obligations of Greenbaum & Ross, Inc., and he wanted to spread his losses so as to obviate any personal 20 B.T.A. 469">*477 financial embarrassment, and he proposed to do that by continuing the business so that the company would be in a position to renew its notes whenever he was unable to meet them at maturity. As to Victor Greenbaum and Walter Ross, who were coendorsers on the notes of the two defunct corporations, the evidence clearly shows that they have never been in a position to assist the petitioner in meeting these obligations, and that their financial1930 BTA LEXIS 2116">*2132 condition has continuously been such that the petitioner has not been able to recover anything from them.
As petitioner kept no individual books of account and filed his returns on a cash receipts and disbursements basis, he sustained losses as and when the disbursements were made by the Grayona Needlecraft Corporation and charged to his account. The fact that the disbursements were made by the corporation directly to the holders of the notes is not important. The result would not have been different had the corporation turned the funds over to the petitioner in the first instance, the petitioner then taking up the notes. See , affirming the Board's decision in .
In addition to the disbursements made by the Grayona Needlecraft Corporation in settlement of the obligations of the two defunct corporations, which we have listed in the findings of fact, there were three others which the petitioner testified were made for that purpose. These were made by checks drawn by the Lorimier Greenbaum Co. (Grayona Needlecraft Corporation), the descriptions of which are as follows: 1930 BTA LEXIS 2116">*2133
| No. | Date | Payee | Amount |
| 892 | Mar. 10, 1922 | Meyer Simon | $2,525.00 |
| 2201 | Mar. 10, 1922 | V. Greenbaum | 3,475.00 |
| 2395 | May 5, 1922 | Greenbaum & Ross | 500.00 |
The ledger of the Grayona Needlecraft Corporation shows that these three disbursements were not charged to the petitioner's account, but that they were charged to notes receivable account, and there is nothing in the record which shows that they were ever taken out of that account and charged to the account of the petitioner. Neither is there any evidence that the petitioner reimbursed or satisfied the corporation for these disbursements. The petitioner testified that these three items may have been included in the amount of $31,936.01, which by journal entry of April 30, 1922, was credited to notes receivable and charged to the petitioner's account. We seriously doubt that such is the case. Rather, we believe that that journal entry was intended to charge back to the petitioner's account 20 B.T.A. 469">*478 the total of the monthly credits to his account, during the fiscal year, through journal transfers to notes receivable account.
The losses sustained upon payment of the notes endorsed by petitioner amounted1930 BTA LEXIS 2116">*2134 to $17,851.23 for 1922, and $66,822.07 for 1923. The amounts claimed by taxpayer in his petition as deductions on account of such losses were $50,000 in 1922 and $30,000 in 1923. As the pleadings were not amended to conform with the proof, such losses should be allowed in the amounts of $17,851.23 for 1922, and $30,000 for 1923.
Judgment will be entered under Rule 50.