*1829 The facts in this case fail to establish that a loss sustained by reason of corporate stock becoming worthless was sustained in the taxable year involved and the determination of the respondent is approved.
*740 The Commissioner determined a deficiency in income tax for 1926 in the amount of $10,894.22. The deficiency in tax results from the disallowance of certain losses alleged to have been sustained in the *741 taxable year. The original petition asserted the Commissioner erred in refusing to allow as a deduction from income a claimed loss of $37,755.37 stated to have been sustained by reason of the decedent, W. S. Forbes, being endorser on notes of the Adams Grain & Provision Company.
In an amended petition, the same issue raised in the original petition is reassigned, but was abandoned at the hearing and the only issue now raised and relied on by petitioners is the contention that the Commissioner erred in refusing to allow as a deduction a $50,000 loss alleged to have been sustained by reason of an investment*1830 in the stock of the Boyd Packing Company becoming worthless during the taxable year 1926.
The case is submitted on the pleadings, testimony of one witness, stipulation and exhibits.
FINDINGS OF FACT.
The petitioners are the duly appointed, qualified and acting administrators of the estate of W. S. Forbes, deceased, whose residence and principal business office were in Richmond, Va.
The Boyd Packing Company was incorporated under the laws of the State of Virginia in March or April, 1924, with an authorized capital of $50,000, divided into shares of $100 each. W. S. Forbes and C. H. Radcliff subscribed for the entire stock, the former acquiring 300 shares, for which he paid $30,000 cash, and the latter 200 shares, for which he paid $20,000 cash. Of the 300 shares paid for by Forbes, 200 were issued to him, 50 to a Mr. Hockaday, a vice president of the company, and the remaining 50 shares to J. H. B. Peay, the secretary and treasurer thereof. Hockaday and Peay never paid any money for their stock, but gave their notes for the same and upon its issuance immediately endorsed it and turned it over to Forbes. During 1924 Radcliff sold his 200 shares of stock to Forbes, who*1831 paid him $20,800 for it.
The Boyd Packing Company was engaged in the business of buying and selling dry salt meat and lard. It owned no machinery and but little plant equipment - some trucks, scales, labels and supplies necessary for shipment of its merchandise when sold.
In the spring of 1926, due to financial reverses and inability to procure requisite credit from the banks, the company decided to liquidate. With a view to discontinuing business, accounts payable were closed as quickly as possible and only such business as could be carried on with very limited capital was transacted.
At the end of 1926 the services of most of the employees were dispensed with, Hockaday, Peay, a stenographer and a shipping clerk being retained during the time the business affairs of the company were being wound up. The company did not get entirely out *742 of business, however, until the end of May, 1927, and its charter was not actually surrendered until February, 1928.
Its income-tax return for 1926 is signed and sworn to by its vice president, Hockaday, and its treasurer, Peay, the latter being the sole witness testifying in the case. A balance sheet of the company at December 31, 1926, as*1832 shown by its 1926 return, indicates:
| Assets | Liabilities | ||||
| Cash | $1,043.63 | Notes payable | $21,000.00 | ||
| Notes receivable | 539.10 | Accounts payable | 1,882.47 | ||
| Accounts receivable | $28,542.94 | ||||
| Less reserve for bad debts | 4,704.91 | Total liabilities | $22,882.47 | ||
| 23,838.03 | Capital stock | 50,000.00 | |||
| Inventories: | Surplus (deficit) (red) | 37,718.52 | |||
| Finished goods | 6,124.90 | ||||
| Supplies | 1,671.99 | ||||
| 7,796.89 | |||||
| Loans | 25.00 | ||||
| Deferred charges | 438.06 | ||||
| Furniture and fixtures | 1,298.20 | ||||
| Miscellaneous | 185.04 | ||||
| Total assets | 35,163.95 | Total liabilities and capital | 35,163.95 |
The company's income-tax return for 1927, signed and sworn to by its president, W. S. Forbes, and its treasurer, Peay, shows gross sales in the amount of $35,355.46, and a net loss of $384.73 for the year. Its balance sheet at December 31, 1927, as indicated by its 1927 return, shows:
| Assets | Liabilities | ||
| Cash | $301.11 | Notes and accounts payable | None. |
| Accounts receivable | 12,607.43 | Capital stock | $50,000.00 |
| Furniture and fixtures | 120.00 | Surplus (deficit) (red) | 36,971.46 |
| Total assets | 13,028.54 | Capital and surplus | 13,028.54 |
*1833 In the company's 1927 return filed in May, 1928, under "Remarks," appears the following: "Liquidated 1927. Charter surrendered." Under Schedule "G" of the return, bad debts are deducted in the amount of $2,779.12, with the following explanation: "Balance due by customers, which we have tried hard to collect since closing business June 1, 1927 to this writing May, 1928."
The 1927 return indicates that salaries of certain officers were still being paid to the extent of $3,341.30; that taxes, other than Federal, in the amount of $590.13, were that year paid; and that merchandise was bought for sale to the extent of $23,597.22.
The evidence shows that subsequent to June 1, 1927, there was collected from customers' accounts about $9,000 which was turned over to W. S. Forbes as a payment on a $16,000 indebtedness due him on account of the payment by him of the company's notes of that amount which he had assumed.
*743 The evidence indicates that the accounts receivable of the Boyd Packing Company at December 31, 1926, were not then worth their face value, but fails to show their actual value or that at that time the stock of the company was or had become worthless. Efforts*1834 were made throughout the year 1927 - even after the company ceased business in May - to collect the outstanding accounts receivable.
The assets of the Hermitage Building Company, an insolvent debtor of Boyd Packing Company, were not sold until 1927, at which time an unsuccessful attempt was made to collect the account against it. In the 1928 return of W. S. Forbes he claimed as a deductible loss the $50,000 investment in the stock of the Boyd Packing Company, which amount had been proviously so claimed in his 1926 return and disallowed. No claim was made for same in 1927, he then having no taxable income.
The decedent, W. S. Forbes, never received anything on his stock, the same being a complete loss to him.
OPINION.
SEAWELL: Petitioners' counsel cite the following from the Revenue Act of 1926 as the applicable law in the instant case:
SEC. 214. (a) In computing net income there shall be allowed as deductions:
* * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction*1835 entered into for profit, though not connected with the trade or business; * * *
The counsel for the respondent so cites section 214(a)(5) above. The same principle is applicable in each subsection and it is immaterial which is considered specially applicable in the instant case.
The question for our determination is whether the decedent, W. S. Forbes, sustained during the taxable year in issue, 1926, the loss of the cost of his stock in the Boyd Packing Company by reason of its becoming worthless in that year. The evidence shows that W. S. Forbes in 1924 invested $50,800 in stock of the Boyd Packing Company, resulting in his subsequently sustaining a loss of the same. The petitioners contend the loss was sustained in the taxable year 1926 and the respondent insists the loss is not shown to have been sustained in the taxable year.
The tax returns of the Boyd Packing Company, introduced in evidence without objection, signed and sworn to by its treasurer, indicate that its stock in 1926 and also in 1927 was not worthless and that its assets then exceeded its liabilities. The testimony of the treasurer at the hearing, however, tends to show that such stock was *744 *1836 worthless in the taxable year in issue and that a continuation of the business until the last of May, 1927, with a view to winding up the affairs of the company, only resulted in further losses.
There is no evidence that any of the stock of the Boyd Packing Company was bought or sold in 1926, or that any offer was made for the same, which might throw light on the value of such stock at that time.
The testimony of the treasurer of the company, if alone considered, would be quite convincing of the worthlessness of the company's stock in 1926, but his testimony is in conflict with representations and statements (some of which are explained and corrected) contained in the 1926 and 1927 tax returns of the company, signed and sworn to by him, indicating quite a different financial condition from what he testifies was the then true condition of the company, which continued to operate its business to a considerable extent for about five months in 1927 and did not actually surrender its charter until 1928.
Considering the entire evidence and giving due weight to the same, we are of the opinion that the petitioners have not adduced evidence sufficient to overcome the presumption of the*1837 correctness of the respondent's determination that the W. S. Forbes stock in the Boyd Packing Company did not become worthless in 1926 and that said Forbes did not in that year sustain a deductible loss in the amount of the cost of the same. The determination of the respondent is approved.
See ; ; (affd., ); ; and .
Judgment will be entered for the respondent.