*2042 1. Corporate stock owned by the petitioner became worthless in the taxable year and the cost thereof should be allowed as a deduction from gross income.
2. Cost of certain stock sold by the petitioner in the taxable year should be determined by charging the earliest sales against the earliest purchases in accordance with article 39 of Regulations 69.
*910 The respondent has asserted a deficiency for the calendar year 1925, of $12,833.03. The only issues to be determined are: (1) Whether the petitioner sustained a loss in the amount of $23,500, which is the cost of preferred stock alleged to have become worthless in the taxable year; and (2) whether the cost of 2,362 shares of Skelly Oil Company stock sold in the taxable year should be determined on an average cost basis or by charging the earliest sales against the earliest purchases. All the facts relating to the second issue have been stipulated.
FINDINGS OF FACT.
The petitioner is an individual residing at Morristown, N.J.
During the period between January 11, 1923, and July 15, 1925, the*2043 petitioner acquired preferred stock in the Depollier Watch Company, *911 Inc., of Delaware, hereinafter referred to as the Delaware Company, at a total cost of $23,500. The Delaware Company was organized in March, 1922, primarily to manufacture and sell wrist watches which had a special feature described as a "shock absorber." All of the common stock was issued to Depollier, who was elected president, in exchange for a license to manufacture the patented article. Up to April, 1924, cash in the amount of $132,000 had been put into the business and practically all that amount had been dissipated. The directors decided that the management was bad and elected one Conover to replace Depollier as president. On February 1, 1925, Conover's resignation was requested. His management had been one of complete disaster. In October, 1925, due to lack of funds, it was necessary to cease the manufacture and sale of watches. Money had been borrowed at every available source, by pledging notes receivable, accounts receivable, and inventory.
Realizing that additional capital was essential to prevent a complete loss, efforts were made to raise money from the stockholders, but there was*2044 little response. In December, 1925, a plan of reorganization was submitted to the stockholders, whereby new capital was to be subscribed, but the plan was rejected. In March, 1926, the stockholders and one other person organized a new corporation under the laws of New York, hereinafter referred to as the New York Company, the name of which eventually became the Depollier Watch Company. The preferred stockholders of the Delaware Company subscribed and paid cash for preferred stock in the New York Company, and by agreement among themselves, received, without cost, common stock of a par value equal to their investment in and loans to the former. A new license was secured from the patentee, the license to the Delaware Company having been revoked pursuant to a provision contained therein that the licensor should have power to revoke in case the licensee became insolvent. Operations were started by the New York Company, which consisted largely of selling watches, the movements and cases being purchased from other companies. The inventory of the Delaware Company was disposed of from time to time, largely by sale to the New York Company, which also purchased a lease and some dies and*2045 tools from it. After changing its name in 1926, to the Durab Watch Company, the Delaware Company continued in existence and is so maintained at the present time, because an action is pending against it involving a claim and counterclaim for the delivery of proper movements and breach of contract.
At December 31, 1925, the liabilities of the Delaware Company greatly exceeded its assets, excluding the value assigned to the license *912 which had been or was in the process of being revoked. The common and preferred stocks of the Delaware Company were worthless.
On his income tax return for 1925, the petitioner deducted the cost of his preferred stock in the Delaware Company as a loss.
At various times between 1919 and 1923, the petitioner purchased shares of stock of the Skelly Oil Company as follows:
| Date | Number of shares | Purchase price | Cost per share |
| Oct. 14, 1919 | 3,000 | $31,500.00 | $10.50 |
| Oct. 20, 1919 | 1,000 | 10,500.00 | 10.50 |
| Oct. 31, 1919 | 400 | 5,165.00 | 12.9125 |
| Nov. 3, 1919 | 200 | 2,582.50 | 12.9125 |
| Nov. 5, 1919 | 400 | 5,165.00 | 12.9125 |
| Dec. 31, 1919 | 3,854 | 40,852.40 | 10.60 |
| Jan. 5, 1920 | 1,100 | 14,616.25 | 13.2875 |
| Apr. 7, 1920 | 300 | 3,311.25 | 11.0375 |
| Do | 400 | 4,465.00 | 11.1625 |
| Do | 500 | 5,643.75 | 11.2875 |
| Apr. 21, 1920 | 800 | 8,830.00 | 11.0375 |
| Dec. 2, 1920 | 4,000 | $30,075.00 | $7.51875 |
| Dec. 3, 1920 | 1,500 | 11,278.12 | 7,51875 |
| Dec. 7, 1920 | 1,000 | 7,768.75 | 7,76875 |
| Dec. 10, 1920 | 100 | 776.88 | 7.7688 |
| Dec. 13, 1920 | 5,100 | 39,620.63 | 7.76875 |
| July 7, 1922 | 500 | 6,102.50 | 12.205 |
| Do | 400 | 4,760.00 | 11.90 |
| Dec. 31, 1922 | 2,350 | 23,206.25 | 9.87498 |
| May 7, 1923 | 100 | 2,515.00 | 25.15 |
| May 8, 1923 | 100 | 2,415.00 | 24.15 |
| June 15, 1923 | 400 | 7,910.00 | 19.775 |
*2046 During 1919, the petitioner purchased 2,134 shares of stock of the Rangers Gulf Oil Company, at a total cost of $23,484. On May 20, 1921, the petitioner exchanged said shares of stock for 3,201 shares of stock of the Skelly Oil Company.
During 1923, the petitioner surrendered shares of stock of the Skelly Oil Company and received in exchange therefor shares of new stock of that company, as follows:
| Date | Number of old shares surrendered | Number of new shares received |
| Mar. 13, 1923 | 900 | 360 |
| Mar. 14, 1923 | 2,350 | 940 |
| Mar. 24, 1923 | 15,155 | 6,062 |
At various times between 1920 and 1925, the petitioner disposed of the stock of the Skelly Oil Company, as follows:
| Date | Number of shares | Selling price |
| Dec. 2, 1920 | 4,000 | $29,909.00 |
| Dec. 3, 1920 | 1,500 | 11,215.88 |
| Dec. 7, 1920 | 1,000 | 7,727.25 |
| Dec. 10, 1920 | 100 | 772.72 |
| Dec. 13, 1920 | 5,100 | 39,408.97 |
| Mar. 21, 1923 | 400 | 13,436.00 |
| Apr. 4, 1923 | 1,000 | |
| Apr. 19, 1923 | 200 | 5,968.00 |
| May 15, 1923 | 4,000 | |
| Jan. 20, 1925 | 500 | $12,920.00 |
| Jan. 27, 1925 | 500 | 13,420.00 |
| Jan. 27, 1925 | 500 | 13,232.50 |
| Jan. 27, 1925 | 500 | 13,670.00 |
| Jan. 28, 1925 | 100 | 2,809.00 |
| Jan. 28, 1925 | 262 | 7,359.58 |
*2047 The 1,000 shares disposed of on April 4, 1923, were given by petitioner to his daughter. The 4,000 shares disposed of on May 15, 1923, were transferred to the Mount Kemble Corporation, in exchange for shares of stock of that corporation.
*913 The petitioner is unable to identify shares of Skelly Oil Company stock disposed of from time to time with any particular shares acquired.
The petitioner included in income for 1925 an item of $270.07, representing a profit derived by his children from the sale of Skelly Oil Company stock.
OPINION.
LANSDON: The petitioner contends that, under the provisions of section 214(a)(5) of the Revenue Act of 1924, he is entitled to deduct an amount of $23,500, representing the cost of preferred stock in the Depollier Watch Company, Inc., alleged to have become worthless in the taxable year.
We have found from the evidence that the operations of the Delaware Company were disastrous throughout 1924, and the first part of 1925, and that operations were suspended in October, 1925, due to lack of sufficient funds. We have found that at December 31, 1925, the liabilities greatly exceeded the assets, and that the common and preferred*2048 stocks of the company were worthless. It remains only for us to determine whether the organization of the New York Company constituted a reorganization of the Delaware Company from which no loss may be recognized under the following provisions of section 203(b)(2) and (h)(1) of the Revenue Act of 1924:
(b)(2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
* * *
(h) As used in this section and sections 201 and 204 -
(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are*2049 transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
The facts are clear that there was no merger or consolidation of the two companies. The Delaware Company continued in existence and its stock remained outstanding. There was no agreement of any kind by which the New York Company took over the assets or liabilities of the Delaware Company except a portion of the inventory, a lease and the dies and tools which were purchased for cash. The organization of the New York Company was distinct and separate and we think the mere fact that the subscribers to its preferred stock, *914 by agreement among themselves several months subsequent to the end of the taxable year and as stockholders of a different corporation, were given an opportunity to recoup previous losses in other property does not prevent the recognition of a loss sustained in the taxable year. The respondent erred in disallowing the deduction claimed. Cf. ; *2050 ; and .
The petitioner alleges that the respondent erred in determining the gain derived in 1925 from the sale of 2,362 shares of stock of the Skelly Oil Company, upon the basis of average cost per share of all stock acquired, and contends that the cost of these shares should be determined by charging the earliest sales against the earliest purchases, in accordance with article 39 of Regulations 69, which provides:
Sale of Stock and Rights. - When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale over the cost or other basis of the stock will constitute gain. * * *
The respondent defends his determination of gain on the basis of average cost per share, which violates the above article of Regulations 69, on the ground that there are special features involved such as "wash sales," transfers without sale, and the exchange of all holdings for new*2051 stock, which make it impracticable to apply the rule contended for.
We do not agree with the respondent. "Wash sales" are specifically covered in section 204(a)(11) of the Revenue Act of 1926, and are to be treated in the manner therein provided. Such transactions occurring before December 31, 1920, do not come within the provisions of section 204(a)(11) and are regarded as ordinary and regular purchases and sales. We see no basis for the respondent's position that purchases and sales of the same stock having been made on the same days in December, 1920, average cost will be used as a basis for computing gain from sales in 1925. Article 39 of Regulations 69 provides for no such exception. The disposition in 1923, of two lots of stock of 1,000 shares and 4,000 shares, the former a gift by the petitioner to his daughter and the latter an exchange for stock of the Mount Kemble Corporation, should be considered as having been made at cost. The exchange of all holdings for new stock is merely one step in determining cost of the stock sold in 1925. The new shares take the same cost as the old shares for which they were given in exchange.
*2052 A similar question under the Revenue Act of 1921 was before the Circuit Court of Appeals, Second Circuit, in . *915 In upholding the rule that sales of stock shall be charged against the earliest purchases of such stock, where the identity of the lots sold can not be determined, the Court held that article 39 of Regulations 45, which is substantially the same as article 39 of Regulations 69, was binding and had the effect of law. Use of an average cost was not permitted. Cf. ; ; ; and .
Reviewed by the Board.
Decision will be entered under Rule 50.