1933 BTA LEXIS 1189">*1189 1. In 1925 petitioner contracted to sell his interest in a corporation for a fixed price, about two thirds of which was to be paid in monthly installments, the balance in cash at the time of contract. Petitioner placed his corporate stock in escrow, with power to recall it if any of the monthly payments were defaulted. The payments were completed and the stock delivered to the purchaser in 1926. Petitioner sustained a loss on the transaction. Held, the sale was consummated and the loss occurred in 1926.
2. Year when loss was sustained upon money loaned determined.
28 B.T.A. 73">*73 This is a proceeding for the redetermination of a deficiency in income tax asserted by the respondent for the year 1926 in the amount of $307.38. The errors assigned are (1) determining that losses sustained through sale of corporate stock and through bad debts occurred in 1925 rather than in 1926; (2) failure to treat such losses, if they occurred in 1925, as net losses and offset them against 1926 income.
28 B.T.A. 73">*74 FINDINGS OF FACT.
Petitioner was engaged in the1933 BTA LEXIS 1189">*1190 manufacture of coats and suits. It was necessary that the cloth be sponged and examined before using it for garments in order to prevent defects and shrinkage.
Prior to 1925 petitioner sent all of his work of that sort to sponging concerns not connected with his business, but often his work did not receive prompt treatment and he was delayed in getting the cloth returned. In order to secure better service petitioner, in December 1924 or January 1925, organized the Supreme Cloth Sponging Co. which gave preferential treatment to petitioner's work and at a lower rate than that charged to others. Petitioner paid in $8,000 cash for 80 percent of the Sponging Co.'s stock. He was president of the company but took no active part in its management. The company never engaged in the manufacture of clothing.
In addition to his purchase of stock petitioner loaned to the Sponging Co. sums which aggregated $8,000. By the summer of 1925 petitioner found that he was losing money heavily with respect to the company. On August 27, 1925, the petitioner, as the first party, George F. Lloyd and Isaac Simon, as the second parties, and Aaron Romm, as the third party, entered into a written agreement1933 BTA LEXIS 1189">*1191 containing the following provisions:
1. The first party agrees to sell and assign and transfer to the second and third parties eighty (80) shares of the capital stock of the Supreme Cloth Sponging Company, Inc., of the par value of One Hundred Dollars ($100.00) each, now owned and held by him in consideration of the sum of Five Thousand Dollars ($5,000.00) payable as follows:
Fifteen hundred Dollars ($1,500.00) on the execution and delivery of this agreement, receipt of which is hereby acknowledged, and paid by checks of third party; and
Thirty-five Hundred Dollars ($3500.00) by twelve (12) promissory notes payable Three Hundred Dollars ($300.00) monthly commencing October 15, 1925, said notes to bear interest at six per cent (6%) and to be made by the second and third parties and endorsed by Elias Bayer. Said notes to be in the form prepared by the attorney for the party of the first part.
2. Pending the payment of all of the said notes the said eighty (80) shares of stock shall be held in escrow by Reginald F. Isaacs, attorney for the party of the first part.
3. In consideration of the above purchase and upon the payment in full to the said Solomon Silberblatt of1933 BTA LEXIS 1189">*1192 the sum of Five thousand Dollars ($5,000.00) and interest as above provided, the said party of the first part covenants and agrees that he will release and discharge the Supreme Cloth Sponging Company, Inc., of and from any and all indebtedness to the said party of the first part for monies loaned or for or on account of any other matter or thing whatsoever, and upon the said payment in full as herein provided, will execute and deliver to the said Supreme Court Sponging Company, Inc. a general release of all claims, including a satisfaction of a chattel mortgage which the said party of the first part now holds upon the chattels and fixtures of said corporation, which chattel mortgage is unrecorded. It being further understood 28 B.T.A. 73">*75 and agreed that pending the payment in full of said sum as aforesaid the said chattel mortgage and the indebtedness of the corporation to the said party of the first part shall remain in full force and effect and that no discharge thereof shall be deemed to have occurred until the full payment of the consideration of said Five Thousand Dollars (5,000.00) as provided in this agreement. The party of the first part agrees that so long as said notes are1933 BTA LEXIS 1189">*1193 met in accordance with the tenor thereof he will not sue or molest the corporation in any manner or seek to recover the sums due to him from said corporation up to and including the date hereof.
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5. It is further understood and agreed that the Supreme Cloth Sponging Company, Inc., will execute and deliver to the said Solomon Silberblatt all its right, title and interest in and to the sum of One Thousand Dollars ($1,000.00) security deposited on lease dated June 15, 1923, between Bright Holding Corporation and Rubin & Mushkat, of the store and basement of premises No. 136-8 West 22nd Street, which said lease expires January 31st, 1927, and which was duly assigned to the said Supreme Cloth Sponging Company, Inc., on or about January 6th, 1925, with full power and authority to the said party of the first part to collect and receive the said security as and when the same shall be payable under the terms of said lease, together with all interest thereon, and said security shall at all times be and remain the sole and individual property of the party of the first part, free of any claim thereto on the part of the said corporation or the parties to this agreement.
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9. 1933 BTA LEXIS 1189">*1194 It is further agreed that the party of the first part shall execute and deliver at the time of the exchanging of the papers herein, a general release to the corporation, which said release shall remain in escrow, together with the stock, and to be delivered upon payment in full of the said notes as hereinabove provided.
On August 31, 1925, the petitioner, as the first party, George F. Lloyd, Isaac Simon, and Aaron Romm, as the second parties, and Reginald F. Isaacs, as the third party, entered into a written agreement which, after reciting petitioner's sale of the corporate stock to the second parties, and the terms of payment, provided among other things as follows:
2. That pending the payment of the said notes the said certificate of stock shall be endorsed by the first party and delivered to the third party to this agreement, who shall hold the same in escrow pending the payment in full of all of said notes and interest.
3. That in the event of the default in the payment of any of said notes, it is hereby expressly agreed that all monies previously paid, shall belong to the first party without off-set or counterclaim and free of any claim thereto by the parties of the1933 BTA LEXIS 1189">*1195 second part to this agreement and, that upon such default the said first party may, without notice, direct the third party to turn over and redeliver the said certificate of stock to the first party, in which event the said third party is hereby authorized so to do, and the first party shall then be entitled to retain said shares together with all monies previously paid on account of the purchase price, and the second parties further agree to remain liable for such other and further damages as the party of the first part may suffer by reason of the failure and default of the parties of the second part to fulfill and carry out the terms of their purchase agreement.
28 B.T.A. 73">*76 The purchase money notes were promptly paid, the final one in March 1926. Petitioner never received the $1,000 deposited as security on the lease of the building occupied by the Sponging Co., nor did he ever receive from the company or the purchasers of his corporate stock anything more than the $5,000 purchase price of the stock and a small amount of interest upon the deferred payments. Petitioner's shares of stock were placed in escrow about September 1, 1925, as called for by the agreements to sell. Neither1933 BTA LEXIS 1189">*1196 of the above agreements contained any reservation of title to the stock in the petitioner, other than the clause empowering him to recall the stock from escrow if any of the purchase money notes were defaulted.
At the time petitioner contracted to sell his corporate interests and as long as any of the purchase money notes remained unpaid, petitioner considered them of doubtful value, and was uncertain respecting the total amount of his loss in connection with the Sponging Co. He made no charge-off in respect of such loss in 1925, but on December 31, 1926, he charged off $10,903.83 as representing the amount so lost. Respondent disallowed the amount on the ground that petitioner's sale of his interest in the corporation was complete in 1925 and therefore the loss occurred in that year.
OPINION.
MARQUETTE: There is no dispute concerning the fact of the total amount of loss sustained by the petitioner in connection with the Supreme Cloth Sponging Co. The point here in controversy is whether that loss occurred in 1925 or in 1926, either in whole or in part.
The loss consisted of two items. One item, for money loaned, amounted to $8,000. It seems clear to us from the record1933 BTA LEXIS 1189">*1197 that petitioner sustained that loss in 1925. He knew in that year that the money loaned could never be recovered. By written contract in August 1925 petitioner agreed to cancel the debt if certain persons would buy his corporate stock at a specified price, and they did so. At the time the agreement was executed petitioner knew the exact amount he would lose by reason of his loans to the company, and by that agreement he definitely accepted that loss. Whether the purchasers of petitioner's stock fulfilled their part of the contract, or whether they did not, would neither enhance his loss in respect of the money loaned nor reduce it. The amount of that loss was fixed, and its existence determined not later than August 1925. If treated as a loss, it was not sustained in 1926, the taxable year. If treated as a bad debt, it was clearly ascertained to be worthless in 1925, although not charged off until 1926. The statute requires that both take place during the same taxable year. In our opinion, 28 B.T.A. 73">*77 therefore, petitioner is not entitled to any deduction for 1926 in respect of the $8,000 loaned to the Sponging Co.
Regarding petitioner's loss upon the sale of his corporate1933 BTA LEXIS 1189">*1198 stock the conditions are different. The contract for sale was made, and part of the purchase price was paid in 1925, but by agreement the balance of the purchase money was not due until 1926. Pending payment of the deferred installments petitioner deposited his stock in escrow, to be delivered to the purchasers only if they met their deferred payments promptly. If they did not, petitioner was empowered to withdraw the stock from the escrow agent.
Upon this statement of facts the respondent contends that the sale of the stock in question was consummated in 1925. He argues that petitioner knew in 1925 that he could not recover upon his investment in the company more than the $5,000 agreed price, and therefore that petitioner also then knew the minimum amount of his loss. In support of this contention he cites , and . In each of those cases corporate stock was sold at a loss, the purchase price to be paid over a period of years. In neither case does it appear that the stock was held in escrow pending payment of the installments of the purchase price, with power in the seller to recall1933 BTA LEXIS 1189">*1199 the stock upon failure to pay any installment. Nor does it appear in either case that the purchase money notes were of doubtful value at the time the contract of sale was made. Those cases, therefore, present facts materially different from those before us. What they decided was that section 212(d) of the Revenue Act of 1926 only authorized the spreading of profit from installment sales over the years when received, and did not authorize a like spread of loss upon an installment sale. No such issue is presented in the present proceeding.
The question here raised has been before us on several occasions. In , the taxpayer contracted in 1921 to sell and convey certain lands. The purchase price was payable over a period of years and the executed deed for the property was deposited in escrow with instructions to deliver it to the purchaser when all the payments had been made in full. We there held that the sale was not consummated in 1921, but in 1924, when the payments were completed and the deed delivered to the purchaser by the escrow agent. That decision was affirmed, 1933 BTA LEXIS 1189">*1200 . , is to the same effect.
In ; affd., , corporate stock was sold and title to it passed to the purchaser prior to December 31, 1921, although the purchase price was not fully paid until a later date. It appeared that payment of the deferred installments was not a condition procedent to the passing of title to the stock, and that failure to make the deferred payments 28 B.T.A. 73">*78 would not divest title from the purchaser. The sale, therefore, was held to have been consummated upon passing of title to the purchaser.
We think those cases are controlling, under the facts here presented. Petitioner placed the stock in escrow to be delivered to the purchaser if and when the latter made prompt payment of the deferred installments as they fell due. The right to recall the stock from escrow if any deferred payment was not promptly made was expressly reserved to the petitioner. Clearly, full payment of the purchase price was a condition precedent, and title to the stock passed only when the purchase payments were completed, which1933 BTA LEXIS 1189">*1201 was in 1926. Hence the sale was not consummated in 1925. It must be borne in mind that, although petitioner received promissory notes covering the deferred payments, the contract of sale makes it plain that those notes were neither given nor received as discharge of the unpaid balance. Furthermore, when the notes were given in 1925 their value was by no means certain and their ultimate payment was somewhat doubtful. If payment had been defaulted upon all or any considerable number of those notes, petitioner's loss upon his stock would have been substantially greater than it turned out to be. While that fact, if standing alone, and unsupported by other facts, would probably be insufficient to support petitioner's contention, in connection with all the circumstances of this case, we think it carries some weight. We conclude, therefore, that petitioner sustained a deductible loss in respect of his corporate stock in 1926, which should be allowed.
Decision will be entered under Rule 50.