*1112 Respondent's determination of the year in which stock in a corporation became worthless approved.
*176 The petitioner requests redetermination of a deficiency in income tax for the year 1927 amounting to $4,565.75. The question presented by the pleadings is whether or not certain stock owned by the petitioner became worthless in the year 1927.
FINDINGS OF FACT.
The petitioner is a resident of the City of New York and is engaged in the business of organizing and directing fund-raising campaigns for hospitals, churches, colleges, community chests and other institutions.
During the year 1925 the petitioner became interested in a corporation known as the Hurley Playing Card Company, which had been incorporated for the purpose of manufacturing playing cards by a patented "no-glare" process. In November, 1925, the petitioner bought some of the stock of that corporation. In the early part of 1926 the petitioner investigated the business prospects of the company and the value of the patents used by it and from the first of March, 1926, to the month*1113 of July, 1926, purchased sufficient additional stock to make his total holdings 325 shares of the preferred stock issued by the Hurley Playing Card Company and 325 shares of its common stock. He paid $100 a share for the preferred stock and $1 per share for the common stock, or a total of $32,825.
Before the date of the receivership hereinafter referred to the Hurley Playing Card Company had issued 2,604 shares of preferred stock of a par value of $100 per share and 7,604 shares of its common stock. About 2,600 shares of the common stock were sold for $1 per share and the remaining 5,000 issued shares were distributed among the organizers of the company and to one Hurley, who was the owner of the patents under which the company operated. The company had entered into an arrangement with Hurley *177 by which it acquired the right to use his patents as long as he remained in the company's employ.
The Hurley Playing Card Company factory was located in Carlstadt, New Jersey, near that Erie Railway station at that place, and consisted of a modern, suitably equipped plant for manufacturing playing cards. The plant was situated on the main highway leading to the George Washington*1114 Bridge site. The company also owned options to purchase property adjoining the plant.
In August, 1926, the petitioner and certain other stockholders became suspicious of the management of the Hurley Playing Card Company. Thereupon they engaged counsel and began an investigation of the company's affairs. As a result of this investigation the petitioner and the other investigating stockholders concluded that the officers of the company, especially its president, had committed irregularities in the company's finances, had made unauthorized payments of salary to the president, had altered the books of the company, and that there existed in favor of the company a claim against its president and Hurley amounting to approximately $40,000.
On November 1, 1926, meetings of the stockholders and directors of the company were held at which it was voted to oust the president of the company. At the same time and place the directors were served with notice of the appointment by the Court of Chancery of New Jersey of a custodial receiver for the company. The receiver was appointed on the application of Louis W. Myers, who was the ousted president of the Hurley Playing Card Company.
*1115 The order appointing the receiver recites, among other things, that the court was satisfied that the Hurley Playing Card Company had suspended its ordinary business for lack of funds to carry it on; that unless a custodial receiver was appointed at once there would be immediate and irreparable injury to the defendant corporation in that fire insurance policies to the amount of $100,000 either had been or were about to be canceled for nonpayment of premiums; that default was imminent under conditional sales agreements whereby the company might forfeit valuable machinery; and that the directors or officers were moving the corporation's books without the State of New Jersey.
On November 8, 1926, an order was filed in the chancery court whereby the custodial receiver was appointed statutory receiver of the corporation and of all its assets. This order recited, among other things, that the court was satisfied from the proof that the defendant corporation was "not able to resume its business within a short time with safety to the public and its stockholders." No opposition to this order was made by the petitioner, the stockholders, or the directors of the Hurley Playing Card Company.
*1116 *178 On November 10, 1926, a further order of the chancery court was filed, by which, among other things, the receiver was authorized and directed to continue the business of the corporation "for such time as may be necessary to fill all pending and unfinished contracts now on hand."
On December 6, 1926, under order of the court the receiver of the Hurley Playing Card Company, by public advertisement, offered for sale "the factory plant and equipment of the corporation with options for the purchase of adjoining property and with or without the right, title and interest of the receiver and of this corporation in certain patents or patent rights covering the no-glare process used in the manufacture of cards by this company."
The advertisement stated that all bids must be in the receiver's hands by 12 noon, December 27, 1926, and that the bids would be reported to the chancellor at the chancery chambers in Jersey City on the 4th day of January, 1927. The highest bid received as a result of this advertisement was the sum of $150,000, which amount was bid by the King Press Inc. The King Press Inc. defaulted in carrying out this bid, but thereafter made a new bid in the same*1117 total amount, namely, $150,000. This latter bid was approved by the court and thereafter, pursuant to an order of the court, filed on April 13, 1927, the receiver transferred to the King Press Inc. the plant and equipment of the Hurley Playing Card Company, its options for the purchase of adjoining property and all the right, title and interest of the receiver and of the Hurley Playing Card Company in the no-glare patents and patent rights used by the latter company in the manufacture of playing cards.
At the time the custodial receiver was appointed the debts of the Hurley Playing Card Company amounted approximately to the sum of $173,000.
In the month of February, 1927, the receiver filed an income tax return on behalf of the Hurley Playing Card Company for the fiscal year ended October 31, 1926. The company's balance sheet for that year as disclosed by the return is as follows:
| Assets | Liabilities | |||
| Cash | $1,665.06 | Notes payable | $40,467.73 | |
| Accounts receivable | 7,313.10 | Accounts payable | 34,960.39 | |
| Inventories | 30,000.00 | Salaries due officers | 13,290.37 | |
| Deferred charges | 25,243.18 | |||
| Wages and salaries due | 2,280.00 | |||
| Land, plant and equipment | 272,756.79 | Mortgages payable | 37,000.00 | |
| Patents | 1,016,489.72 | Contracts payable | 25,066.98 | |
| Deposit (electric) | 250.00 | Subscriptions for stock not issued | 5,365.00 | |
| Stock subscription | 1,110.00 | Capital stock: | ||
| Organization expense | 48,114.74 | Preferred stock | $260,400.00 | |
| Common stock | 760,400.00 | |||
| 1,020,800.00 | ||||
| Surplus | 223,712.12 | |||
| Total | 1,402,942.59 | Total | 1,402,942.59 |
*1118 *179 In the receiver's first and intermediate account filed in July, 1927, the receiver charged himself with gross receipts amounting to $217,076.57. This amount included, among other things, the sum of $811.58 stated as the total cash taken over from the Hurley Playing Card Company, $150,000 in full of the amount bid by the King Press Inc., as hereinbefore stated, and the sum of $61,122.68 stated as the gross amount received from operating the plant between November 1, 1926, and May 31, 1927.
The receiver was finally discharged by order of chancery court filed September 14, 1931. As a result of the receivership secured creditors of the Hurley Playing Card Company were paid in full and about 70 per cent of the total amount of approved unsecured claims was paid. The stockholders received nothing.
Between November 1, 1926, and April 1, 1927, various consultations were held between the petitioner and the parties in interest relative to the reorganization of the Hurley Playing Card Company.
During the month of November, 1926, the petitioner wrote several letters concerning the affairs of the Hurley Playing Card Company. On November 1, 1926, he addressed a letter to*1119 one Arthur Hudson Marks, which reads in part as follows:
I have just come in from a stockholders' meeting of the Hurley Playing Card Company, called in pursuance of a directors' meeting ten days ago. At this meeting Scott Hurley presented to the stockholders the financial condition of the Company - namely, that its liabilities are about $173,000 and its assets what you know. No plan for refinancing or carrying on the Company was suggested by any of those present, including Mr. Myers and his attorneys. The directors then met and resigned in a body, with the exception of Mr. Myers. This unquestionably means that the Company will soon be thrown into bankruptcy, but we all agreed that this is the only step to be taken.
On November 16, 1926, the petitioner wrote to Marks in part as follows:
It has been an instructive episode, but too expensive for my taste. Not only have I lost my own investment, as we all have, but I have financed the entire investigation which brought things to a head. * * *
If there had been anything worth saving (as we all thought there was up to the last minute), this investigation would have meant the difference between saving and losing of the money*1120 of the stockholders. As it was, we were too late, and its only constructive result was to prevent some of the stockholders from putting more money into the Company and new investors from being fleeced.
The petitioner deducted the total cost of his preferred and common stock of the Hurley Playing Card Company from his gross income for the calendar year 1927. The respondent disallowed this deduction, holding that the stock became worthless in 1926.
*180 OPINION.
VAN FOSSAN: Section 214(a)(5) of the Revenue Act of 1926 provides that in computing net income there shall be allowed as deductions losses sustained during the taxable year and not compensated for by insurance, or otherwise, if incurred in any transaction entered into for profit, though not connected with the taxpayer's trade or business.
The petitioner contends that the loss of his investment in the stock of the Hurley Playing Card Company was sustained in 1927, when the transfer of that corporation's plant, equipment and other assets to the King Press Inc. was made by the receiver. Respondent disallowed the deduction for the year 1927.
The facts disclose that the petitioner and some of his fellow stockholders*1121 of the Hurley Playing Card Company, suspecting mismanagement of the company, proceeded in August, 1926, to investigate its affairs and that as a result of the investigation the stockholders and directors of the company held meetings on November 1, 1926, at which the president was ousted from office. It was charged by the petitioner at the hearing that the president of the company had made unauthorized payments of the company's funds and had altered its books of account. It appears that on November 1, 1926, the company had insufficient cash on hand to meet pressing liabilities and was threatened with serious injury by default in the payment of insurance premiums and inability to meet payments on some of its machinery which had been purchased under conditional-sale contracts. A custodial receiver was, therefore, appointed on that day by the Chancery Court of New Jersey. Shortly thereafter a statutory receiver was appointed, the order of appointment stating, among other things, that the court was satisfied from the proof that the Hurley Playing Card Company had suspended ordinary business operations and would not be able to resume business in a short time with safety to the public*1122 or its stockholders.
In the month of November, 1926, the petitioner wrote the letters referred to in the findings of fact. These letters furnish evidence contemporaneous with the appointment of the receiver of the conclusions to which the petitioner's investigation of the company had brought him and the other investigating stockholders. These letters, written in 1926, certainly imply that from facts within the knowledge of the petitioner and the other investigating stockholders the petitioner considered that he and they had lost their investment in the stock of the company and that there was nothing in the company worth saving. Although, in accordance with the terms of the statute, it is not the time of the ascertainment, but the actual sustaining of the loss which is controlling (; Jessie*181 ), nevertheless, the fact that the petitioner concluded in 1926 he had lost his investment and there was nothing in the company to save argues persuasively against petitioner's present contention that the stock of the company did not become worthless until 1927. *1123 A study of the financial condition of the company leads to a similar conclusion.
The petitioner contends that the assets of the company were fairly valued in its balance sheet stating the financial condition of the company as of October 21, 1926, the day before the custodial receiver was appointed, and that this balance sheet shows that the company was solvent at that time. In our opinion the evidence is to the contrary. In the balance sheet the patents used by the company are valued in the sum of $1,016,489, although the Hurley Playing Card Company did not own them and the company's right to use them was absolutely contingent on the continuance of the patentee, Hurley, in the employment of the company. When the statutory receiver was appointed in November, 1926, the continuance of the employment of Hurley, the patentee, by the company was entirely problematical. Equally uncertain was his future employment in the event of the reorganization and refinancing of the company. The record contains no evidence as to the real value of these rights, if any such existed.
The land, plant and equipment of the company were valued in the balance sheet in the sum of $272,756.79. However, *1124 when the receiver offered the entire plant for sale in December, 1926, he received a bid of $150,000 for the factory, plant and equipment, with options to purchase adjoining property and with the right, title and interest of the receiver and of the corporation in the patents and patent rights. A separate bid of $46,000 was made by another party for the factory premises free and clear of all encumbrances. No appraisal or other persuasive testimony of the real value of these or any of the other assets was produced. It follows that the petitioner, on whom rested the burden of proof, has not proved the value of the assets at the time the receiver took charge.
The petitioner contends there was no certainty at any time in 1926 that the company would not be reorganized and that the possibility of reorganization continued until April, 1927, when the plant, equipment and rights of the receiver were transferred to the King Press Inc. The petitioner, therefore, argues that it can not be said that the stock of the Hurley Playing Card Company became worthless until after the possibility of reorganization had terminated. Though there is some evidence that the petitioner and other stockholders*1125 talked with each other about possible reorganization of the company, the record discloses that no actual or tentative plan of refinancing or reorganizing the company was adopted by the parties in interest *182 either in 1926 or at any other time. Nor would it follow that a reorganization, if carried out, would establish petitioner's contention that the stock of the old company was not worthless in 1926. A contrary inference would be more reasonable.
Though the receivership continued until September, 1931, it is well settled that the loss of the investment in the stock of a corporation should be deducted in the year in which the stock becomes worthless, without waiting until the corporation has been wholly liquidated through a receivership or otherwise. ; ; .
Upon consideration of all the evidence, we hold that the petitioner has not proven that respondent erred in his determination that the petitioner's investment in the stock of the Hurley Playing Card Company became worthless in the year 1926.
Reviewed*1126 by the Board.
Decision will be entered for the respondent.
LANSDON dissents.