*1554 The petitioner sustained a loss in the fiscal year ended June 30, 1923, when certain corporate stock owned by it became worthless, resulting in a net loss for that year which may be applied to its tax liability for two succeeding taxable years in conformity with the provisions of section 204 of the Revenue Act of 1921.
*234 The respondent has asserted a deficiency in income taxes for the fiscal year ended June 30, 1925, in the amount of $10,412.02. The *235 single issue raised is whether an alleged loss from worthlessness of stock of a subsidiary corporation was sustained in 1922 or 1923, and whether the amount of such loss may be carried forward as a "net loss."
FINDINGS OF FACT.
The petitioner is a Minnesota corporation, with its principal office at Minneapolis. The P. L. Howe Lumber Mills was a Montana corporation with its principal place of business at Eureka, Montana. Of the latter's outstanding capital stock of 9,200 shares having a par value of $100 each, the petitioner owned 8,829 shares on May 1, 1922, which*1555 had been acquired by it during the period from 1906 to 1919, at a cost of $264,900.
For many years prior to 1923, the P. L. Howe Lumber Mills had been operated as a branch of petitioner. It manufactured lumber which petitioner sold in its retail yards.
Under date of May 1, 1922, the petitioner entered into an agreement with certain creditors and others having an interest in the affairs of the P. L. Howe Lumber Mills, providing for the liquidation of that corporation. The instrument reads in part as follows:
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WHEREAS, the Lumber Company in the conduct of its business has become indebted in an aggregate amount which exceeds the sum of eleven hundred thousand dollars ($1,100,000), practically all of which indebtedness is evidenced by negotiable promissory notes of the Lumber Company, endorsed by the second party, heretofore issued and now owned or controlled by the Creditors above named; and
WHEREAS, in the conduct of its business the Lumber Company has suffered serious loss and is now unable to meet its obligations in the usual course or to raise additional funds or capital with which to continue its operations, or to continue in business without such additional funds*1556 or capital; and
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WHEREAS, it is deemed advisable in the circumstances, by all parties hereto, that the assets of the Lumber Company be sold and the proceeds of the sale thereof be applied as soon as may be to the payment of its indebtedness in the manner and under the plan hereinafter set forth and not otherwise; and
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WHEREAS, on account of losses heretofore incurred and depreciation in value of assets already suffered because of existing business conditions, it has become manifest and is now conceded by all the parties hereto that the capital stock of the Lumber Company has no present or prospective value whatsoever except as a convenient means of holding its assets and liquidating its affairs; and
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Now, THEREFORE, The parties hereto in consideration of the premises and of the promises, undertakings and agreements of the others and each of the others herein contained, each for himself and not for any of the others, do hereby promise, undertake and agree among themselves and to and with each of the others, as follows:
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*236 Before the terms of this agreement shall have become effective as hereinafter provided, the second party will cause not*1557 less than ninety per cent of the capital stock of the Lumber Company now outstanding to be duly sold, assigned, transferred and set over by the present owner or owners thereof to the Trustee, to be by it held and used in the manner and for the purposes hereinafter expressed.
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Before the terms of this agreements shall have become effective as hereinafter provided the second party shall cause resignations of present officers and directors of the Lumber Company to be duly presented and accepted and successors to such officers and directors to be duly elected, all as designated or requested by said Winton acting in this respect for the Creditors and the proposed Committee.
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The Lumber Company will sell all of its assets, at such times and in such manner (at public or private sale), whether as a whole or in separate parcels, as to the Committee may seem from time to time advisable, and at such prices and on such terms, in each and every case, as the Committee may deem in the circumstances satisfactory and adquate; and the Lumber Company will appy all proceeds of such sales, and all other moneys from time to time received, first, to the payment of cost of current*1558 operation and expense of current management, second, as and when requested so to do by the Committee, to the equal pro rata payment of the claims held by all creditors of the Lumber Company, whether parties to this agreement or not, and, third, the balance then remaining, if any, to be promptly paid to the Elevator Company and to be by it distributed pro rata to the persons, firms and corporations who shall have sold, assigned, transferred and set over shares in the Lumber Company under paragraph 4 hereof.
The Committee may in its discretion authorize the Lumber Company to borrow new and additional funds for the purposes of its business * * *.
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After this agreement shall have been signed by all the parties hereto and the document so signed shall have been deposited with the Trustee and after the sale and transfer of stock and substitution of directors above provided for shall have been effected, and notice that this has been done shall have been given by said Winton to the Trustee, then and thereupon and not otherwise all of the terms and provisions of this agreement shall be and remain in full force and effect.
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Consolidated income-tax returns*1559 were filed by petitioner and the P. L. Howe Lumber Mills for all taxable periods from January 1, 1918, to June 30, 1923, inclusive.
For the fiscal year ended June 30, 1923, the petitioner's separate net taxable income computed under section 204(a) of the Revenue Act of 1921, before deductions for net losses of any prior period, was $86,624.57. During that year it received dividends in the amount of $11,560 and interest on United States obligations in the amount of $4.72. For the fiscal year ended June 30, 1924, it sustained an operating loss of $11,502.06, and for the fiscal year ended June 30, 1925, its separate net taxable income, before deductions for net losses of *237 any prior periods, was $93,164.92. The P. L. Howe Lumber Mills sustained an operating loss of $413,387.30 for the period from July 1, 1922, to December 1, 1922, when it was liquidated. The above figures do not include the loss of $264,900, alleged to have been sustained by petitioner from its investment in stock of the P. L. Howe Lumber Mills.
On December 1, 1922, all of the assets of the P. L. Howe Lumber Mills were sold to the Brooks-Scanlon Lumber Company, for a total consideration of $500,000, *1560 which amount was insufficient to satisfy the claims of creditors.
On May 1, 1922, and November 30, 1922, the total outstanding liabilities of the P. L. Howe Lumber Mills were substantially the same and amounted to approximately $1,100,000.
In closing its books on June 30, 1923, the petitioner charged off as a loss the amount of $264,900, which represented cost of its stock in the P. L. Howe Lumber Mills. The amount of such loss, however, was not taken into account on its income-tax return for the fiscal year ended June 30, 1923, or on any other income-tax return.
OPINION.
LANSDON: The respondent concedes that petitioner sustained a loss by reason of its ownership of stock in the P. L. Howe Lumber Mills, but contends that such loss occurred in the fiscal year ended June 30, 1922. The petitioner contends that the stock became worthless in the fiscal year ended June 30, 1923, and that it is entitled to carry forward the resulting net loss for the two succeeding taxable years. There is no controversy over the cost of the stock to petitioner or over the fact of its worthlessness.
The facts disclose that on May 1, 1922, the petitioner entered into an agreement with certain*1561 creditors of the P. L. Howe Lumber Mills providing for a future liquidation of that company. Liquidation, pursuant to the contract, was completed on December 1, 1922, when all the assets and business were sold to the Brooks-Scanlon Lumber Company for an amount insufficient to satisfy the claims of creditors. On May 1, 1922, it was certain that petitioner would sustain a loss on its investment in the stock of the P. L. Howe Lumber Mills, but we do not think it was certain that it would lose its entire investment. At that time the company was still a going concern, with a large plant and equipment, timber holdings and an inventory of finished goods. The respondent points to the agreement of May 1, 1922, where it is stated, "it has become manifest and is now conceded by all the parties hereto that the capital stock of the Lumber Company has no present or prospective value whatsoever except as a convenient means of holding its assets and liquidating its affairs"; and says that the petitioner, itself, recognized that the stock was worthless. It should *238 be noted, however, that in paragraph 8 the agreement provides that the balance, if any, remaining from the liquidation should*1562 be paid to the petitioner. We do not think the petitioner was obligated to write off the loss from its investment when it was first determined to liquidate the company. We think petitioner is entitled to take its loss after the liquidation was completed, when all the assets had been sold and nothing remained for the stockholders. It was then certain, for the first time that nothing would be realized from its investment. Cf. .
The respondent contends that the agreement of May 1, 1922, resulted in the transfer of the business and assets of the P. L. Howe Lumber Mills, which terminated the affiliation existing between petitioner and that corporation. He contends that the petitioner was required to file a consolidated return for the period up to May 1, 1922, and a separate return for the period May 1, 1922, to June 30, 1922. We do not agree with such a construction of the instrument. The petitioner continued to own its stock in the P. L. Howe Lumber Mills and any transfer was to give the creditors' committee power to liquidate the business. On December 1, 1922, all of the assets and business were sold and operations of the P. L. *1563 Howe Lumber Mills ceased. The affiliation between petitioner and its subsidiary was not terminated prior to that date.
The facts of this proceeding, with reference to whether a "net loss" may result from stock in a subsidiary corporation becoming worthless, are very similar to those in , where we allowed the petitioner to carry forward the amount of such a loss to the two succeeding taxable years. In accordance with our opinion in that case, we conclude that petitioner is entitled to carry forward the "net loss," if any, for the fiscal year ended June 30, 1923, to the two succeeding taxable years.
Decision will be entered under Rule 50.