*3792 Losses sustained by the petitioner upon sales of certain stocks in 1921 allowed as deductions from income.
*499 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1921, in the amount of $9,233.81.
The errors assigned are: (1) That the respondent included as part of petitioner's taxable net income for the year 1921, dividends received by the petitioner from other corporations, which corporations paid Federal income and excess profits taxes upon their net income, and (2) that the respondent refused to allow a loss sustained and claimed by the petitioner upon sales of stock made by it in 1921, amounting to the sum of $19,000. At the hearing the petitioner abandoned the first assignment of error.
FINDINGS OF FACT.
The petitioner in this proceeding is a corporation organized in June, 1920, to engage in a cotton brokerage business at Gastonia, N.C. Prior to June, 1920, the business was carried on by F. D. Barkey, George A. Gray and Charles D. Gray, as a partnership.
*3793 *500 In 1920 the partnership subscribed for 1,500 shares of stock of the Priscilla Spinning Co., paying therefor $100 per share. This was to be paid for in installments.
At the time of the organization of the Priscilla Spinning Co., Charles D. Gray, F. D. Barkey and another entered into a control agreement whereby it was agreed that if, for any reason, any of the parties decided to sell their stock in the Priscilla Spinning Co., they would first offer it to the other parties to the agreement before offering it to the public.
On July 1, 1920, when the petitioner was organized, it took over this stock subscription of 1,500 shares of the Priscilla Spinning Co. to be paid for at $100 per share. The petitioner assumed full liability on the said stock subscription. The stock itself had not yet been issued. Between July 1, 1920, and August 31, 1921, the petitioner corporation paid 50 per cent of the subscription on the said Priscilla Spinning Co. stock; said payment amounting to $75,000. In 1921 the corporation, having determined that a loss was being sustained upon certain investments, decided to sell a portion of the Priscilla Spinning Co. stock. Rather than have this*3794 stock offered to the public, Charles D. Gray purchased from the petitioner 500 shares of this stock at $70 per share. As payment he gave the petitioner a note for $10,000 and assumed the $25,000 remaining to be paid on the original cost of the stock. In 1921 ten shares of Priscilla Spinning Co. stock were sold by an employee of petitioner at $62.50 per share.
In 1922 or 1923, Charles D. Gray gave his note to the Priscilla Spinning Co. for the remaining balance due on the stock and the stock was issued to him. He left the stock with the Priscilla Spinning Co. as collateral for the note.
In January, 1924, Charles D. Gray had become the president and treasurer of the Priscilla Spinning Co. This company at this time was trying to collect payment from delinquent stockholders, and in January, 1924, Charles D. Gray sold his 500 shares of stock back to the petitioner at $70 per share in order to avoid obstructing such collections. In return the petitioner surrendered the note for $10,000 and assumed all amounts due the Priscilla Spinning Co. upon the 500 shares of stock.
About the same time that Charles D. Gray purchased the Priscilla Spinning stock he also purchased from the*3795 petitioner 200 shares of stock in the Grace Cotton Mills at $80 per share, giving his note for $16,000. The petitioner had purchased this stock for $20,000 in 1920, and at the time it sold it to Gray it had been fully paid for. Gray retained this stock until January, 1924, at which time he sold it back to the petitioner for $80 per share and the petitioner canceled the note which Gray had previously given them in payment for this same stock.
*501 At the time Gray purchased the stock in the Priscilla Spinning Co. and the Grace Cotton Mills in 1921, there was no arrangement or understanding, directly expressed or tacit, that the petitioner should, at any time, repurchase this stock. No interest on either of the notes was ever paid by Gray to the petitioner, nor was any demand made upon him by petitioner. Charles D. Gray and George A. Gray are brothers, and F. D. Barkley is their brother-in-law.
OPINION.
SIEFKIN: At the hearing the petitioner abandoned its first assignment of error and the sole question to be decided is whether the respondent@ erred in refusing to allow as a deduction from income in 1921, the amount of $19,000, alleged loss sustained by the petitioner*3796 upon the sale of certain stock.
The evidence discloses that at organization the petitioner received 1,500 shares of stock in the Priscilla Spinning Co., which was obtained by the predecessor partnership in 1920 for $100 per share. At the time acquired by the petitioner, 50 per cent of this had been paid for. The petitioner was also the owner of 200 shares of stock in the Grace Cotton Mills, which it had acquired for $20,000 in 1920.
In order to establish a loss in 1921, the petitioner decided to sell certain of its stock and Charles D. Gray, one of the officers of the petitioner, in conformity with certain control agreements which he had entered into, purchased, in December, 1921, 500 shares of the Priscilla Spinning Co. stock at $70 per share for which he gave a note for $10,000 and assumed the $25,000 remaining to be paid upon the original cost of this stock. He also purchased 200 shares of the Grace Cotton Mills stock at $80 per share, giving his note for $16,000. The testimony and evidence indicate that the market value of the stock purchased was about the same as the price paid.
In January, 1924, Charles D. Gray sold the Priscilla Spinning Co. stock back to the petitioner*3797 at $70 per share and also sold the Grace Cotton Mills stock back to the petitioner at $80 per share. In return for the Priscilla Spinning Co. stock, the petitioner surrendered to Gray his note for $10,000, which he had previously given, and also assumed all amounts due upon such stock. As payment for the Grace Cotton Mills stock petitioner surrendered to Gray the note for $16,000 which he had previously given the petitioner.
Each of the witnesses testified that at the time the stock was sold to Charles D. Gray there was no agreement, express or tacit, that the petitioner should, at any time, repurchase this stock. It was simply sold by the petitioner in order to establish a loss during 1921. This *502 intention of the petitioner in no way affected the validity of the sale. In , we stated:
The taxpayer admits that the transfer described in paragraph 4 of the findings was made in order that he might deduct a loss for the taxable year. If the transaction was a sale, the taxpayer's admission expresses a perfectly legal intent. *3798 ; ; ; .
Nor do we consider that the subsequent repurchase of this stock by the petitioner in any way invalidates the sale in 1921. The testimony shows that Gray resold the Priscilla Spinning Co. stock to the petitioner in order to relieve himself of indebtedness to the Priscilla Spinning Co. because that company, of which he was an officer at the time, was making a drive to collect payment for stock from delinquent stockholders. The Grace Cotton Mills stock was resold to the petitioner because the bank to which the petitioner owed money suggested that it clear up the indebtedness of the petitioner's officers to the petitioner in order to be able to present a better financial statement to the Federal Reserve Bank System.
In , we allowed as a deduction from income losses sustained upon the sale of stock by a corporation to its officers, directors and employees. In that case, the corporation, after*3799 having sold one lot of the stock of a warehouse company at a loss, invested further amounts in such stock at par the next year. It was held that this was in conformity with sound business and did not affect the validity of the sale of stock. In that case the respondent contended that the sales were not bona fide and relied upon the decision in . However, in that case, one reason for holding that the transfer of stock to officers of the corporation at a price below par was not bona fide, was because at the time of sale the stock was reasonably worth its cost to the corporation. In that case it further developed that the two owners of the capital stock of the petitioner, simultaneously with the above transaction, purchased other like stock at par value.
We must conclude that the petitioner, in the instant proceeding, is entitled to deduct from taxable income for the year 1921, the sum of $4,000 representing loss on the sale of the Grace Cotton Mills stock, and $15,000 representing loss on the sale of the Priscilla Spinning Co. stock.
Judgment will be entered on 15 days' notice, under Rule 50.