*2058 1. In 1920, the petitioner purchased shares of stock in a corporation, which stock became utterly worthless in 1923. Held, that the petitioner's investment therein is a legal deduction from gross income of 1923 as a loss sustained in that year.
2. In 1920, 1921, 1922, and 1923, petitioner made advances to a corporation which became insolvent and voted to liquidate in 1923. Held, that the portion of the debt which was uncollectible at December 31, 1923, is a legal deduction from petitioner's gross income of 1923.
*828 This proceeding is for the redetermination of a deficiency in income tax asserted by the Commissioner for the calendar year 1923 in the amount of $2,094.35.
Petitioner assigns two errors:
(1) Respondent erred in refusing to allow petitioner to deduct the loss sustained by him upon his investment in the stock of the Basin Coal Company.
(2) Respondent erred in failing to allow petitioner a loss in the amount of $12,686.15 on account of advances made by petitioner to*2059 the Basin Coal Company.
FINDINGS OF FACT.
On or about November 27, 1920, petitioner purchased 1,580 shares of the capital stock of the Basin Coal Company, a West Virginia corporation, paying therefor the sum of $167,838.75. The shares purchased represented two-thirds of the outstanding capital stock of the corporation. The remaining one-third was owned by one guy Brown, of Uniontown, Pa. The stock ownerships of petitioner and of Brown remained the same until the dissolution of the corporation as hereinafter described.
Upon acquiring the stock the petitioner found that the Basin Coal Company was obligated to purchase certain coal lands from the Consolidation Coal Company and that it had no cash with which to make such purchases. The petitioner and Brown agreed to advance moneys to the corporation in accordance with their stockholdings for the purpose of carrying out the contract of the Basin Coal Company and for the purpose of putting it upon an operating basis. Its assets at the time consisted of approximately 142.2 acres of coal *829 land with certain equipment, ties, rails, etc., which had been brought upon the property. Between December 2, 1920, and September 26, 1922, petitioner*2060 advanced to the Basin Coal Company $21,543.42, in order that it might proceed with the development of its coal lands. Between July 8, 1921, and April 10, 1923, petitioner advanced to the company $112,208.59, which the company used to complete the purchase of the coal lands contracted for. Brown made advances at the same time and for the same purposes as those made by the petitioner and in an amount equal to one-half of the advances made by the petitioner.
The Basin Coal Company never passed the development stage and at no time reached a point where coal could be produced and sold, and never paid a dividend. A small amount of grading for a railroad was the only development that ever took place. On November 26, 1923, the petitioner and Brown being unable to make further advances to the company, and because of the "slumped conditions" and "depressed conditions" in the coal business, a stockholders' meeting of the Basin Coal Company was held and a resolution was adopted providing for the immediate discontinuance of the business of the corporation and the surrender of its charter and corporate franchises to the State of West Virginia. The resolution further provided that the board*2061 of directors should proceed to convert all corporate assets into cash, pay all debts and obligations, and divide any sum remaining among the stockholders in proportion to their stock ownership. Pursuant to this resolution, notice of dissolution was duly published in the month of December, 1923, in accordance with the laws of the State of West Virginia.
On November 26, 1923, when the above mentioned resolution was passed, the Basin Coal Company, in addition to 208 acres of coal lands, had certain personal property and a deposit of $4,000 with the Fairmont Electric Company. The above comprised all of its property. With the exception of the company's indebtedness to petitioner and to Brown and $1,590.96 for taxes, the Basin Coal Company owed no debts, the indebtedness to others having been paid out of advances made to the company by the petitioner and Brown. On November 27, 1923, the petitioner paid two-thirds of the aforesaid taxes by his check bearing that date in the amount of $1,060.64. In accordance with said resolution the deposit with the Fairmont Electric Company was divided between the petitioner and Brown either in 1923 or in the early part of 1924, in proportion to*2062 their advances to the company, the petitioner receiving therefor $2,700.
Pursuant to the resolution of November 26, 1923, the Basin Coal Company sold in the year 1923 all the personal property belonging to it, with the exception of a locomotive for the sum of $18,548.78. *830 The locomotive had a value of $3,000. It was immediately removed from West Virginia Into Pennsylvania and sold by the petitioner in 1924 for $3,000, the petitioner retaining two-thirds of the amount received.
During 1923 the sum of $18,548.78 received from the sale of equipment as aforesaid was paid over by the Basin Coal Company to petitioner and Brown in proportion to their respective stock interests and advances, petitioner receiving $12,365.86 thereof.
The board of directors of the Basin Coal Company endeavored to find a purchaser for its coal lands in 1923 but because of the depressed condition of the coal market no purchaser could be found. Petitioner and Brown therefore consented in 1923 to take over the aforesaid coal lands and accept a deed for the property in order that the liquidation of the corporation might be completed in accordance with the resolution of November 26, 1923. Due*2063 to the necessity of correcting errors contained in the deed as originally prepared, such deed was not actually executed and delivered until late in the year 1924.
The fair market value of the aforesaid coal lands of the Basin Coal Company during the year 1923 was not in excess of $750 per acre. At the close of 1923 the Basin Coal Company was indebted to the petitioner to the amount of $122,446.79. The petitioner's investment in the stock of that company was $167,838.75 additional. By reason of the petitioner's ownership of stock and of his agreement with Brown he was entitled to receive two-thirds of the assets of the Basin Coal Company. His two-thirds interest in these assets amounted to the following:
| Two-thirds interest in 208 acres of coal lands ($750 per acre) | $104,000 |
| Two-thirds interest in deposit with Electric Power Co | 2,700 |
| Two-thirds in locomotive | 2,000 |
| Total | 108,700 |
Petitioner's loss on December 31, 1923, on account of advances to the Basin Coal Company was at least $12,686.15, no part of which the petitioner has ever recovered.
The shares of stock of the Basin Coal Company at December 31, 1923, were absolutely worthless.
OPINION.
*2064 SMITH: In this proceeding the petitioner makes two contentions - first, that he is entitled to deduct from his gross income of 1923 the amount of his investment in the shares of stock of the Basin Coal Company, totaling $167,838.75; second, that he is entitled to deduct $12,686.15, representing the difference between a debt owed to him *831 by the Basin Coal Company, and the amount recoverable from that company.
Section 214(a) of the Revenue Act of 1921 provides that in computing net income of an individual 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 entered into for profit, though not connected with the trade or business; * * *
Article 144 of respondent's Regulations 45, promulgated under the provisions of the Revenue Act of 1921, provides, inter alia, as follows:
* * * A person possessing securities, such as stocks and bonds, can not deduct from gross income any amount claimed as a loss on account of the shrinkage*2065 in value of such securities through fluctuation of the market or otherwise. * * * However, if stock of a corporation becomes worthless, its cost or its fair market value as of March 1, 1913, if acquired prior thereto, may be deducted by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made as in the case of bad debts.
An analogous case to the proceeding at bar is that of , wherein we said:
Petitioner contends that it was not known and could not have been known in 1920 for what amount the remaining assets of the Integrity Oil Co. might be sold in 1921 and, therefore, he could not know in 1920 what loss he would sustain on his investment of $11,300 in the stock of the oil company.
It is true petitioner may not have known in 1920 what would be realized from the sale of the remaining assets of the oil company in 1921, but it is also true that it was known in 1920 that there were outstanding debts of the oil company amounting to $24,000 and that the assets sold in 1920 brought only $12,000.
* * *
*2066 * * * The value of the entire assets of the oil company was insufficient in either year to pay the outstanding indebtedness of $24,000, thus leaving nothing for the stockholders. The sustained loss and not his ascertainment is the statutory factor. ; .
In the instant proceeding it is evident that the principal and practically the only asset of the petitioner at the close of 1923 was 208 acres of coal lands. The evidence indicates that there was a marked shrinkage in the value of coal lands in West Virginia and Pennsylvania between 1920 and 1923; that the price of soft coal had slumped badly and that there was a great overproduction. Witnesses eminently qualified to place a value upon petitioner's coal lands testified that in their judgment the value of petitioner's *832 coal lands in 1923 was between $650 and $750 per acre. All of the evidence supports a value not in excess of the last-named amount. The witnesses testified that the location of the land, its distance from the railroad, and many other factors must be taken into consideration in the valuing of coal lands and that*2067 they had taken these factors into consideration in making their estimates. We are satisfied from the evidence that the coal lands did not have a value in excess of $750 per acre, and by giving the lands such value the Basin Coal Company was not in possession of assets with which to repay to the petitioner and Brown the full amount of the advances which they had made to the company from November 27, 1920, to December 31, 1923. We have no question that the stock was absolutely worthless at the close of 1923. The contention of the petitioner that he sustained a loss in 1923 of his investment of $167,838.75 in the stock of the Basin Coal Company is sustained. Cf. ; (affd., ); ; ; ; C. p. ; .
The petitioner further claims the right to deduct from gross income $12,686.15 representing the difference between the amount owed to him by the Basin Coal*2068 Company and the amount recoverable from that company. At the close of 1923, the Basin Coal Company was indebted to the petitioner in the amount of $122,446.79 and the fair market value of the petitioner's interest in the assets of the company at that date was only $108,700. The difference of $13,746.79 would appear to be a debt ascertained to be worthless in 1923. The record does not show, however, that the amount was charged off as a bad debt in the petitioner's books in that year, nor does it appear whether he kept any books. Neither does the evidence show that it was charged off on the petitioner's income tax return.
This case is analogous to . In that case the taxpayer's debtor had gone into the hands of a receiver. The taxpayer in September, 1920, after investigating the condition of the receivership, in good faith concluded that the debt was worthless and charged it off its books of account and claimed the deduction in its income tax return for the fiscal year 1920. In auditing its return the Commissioner concluded that the debt was worthless only in part and surcharged the return with the full amount*2069 of the debt. The deficiency thus created was confirmed by this Board in , but this decision was reversed by the Circuit Court of Appeals, Second Circuit. The Court took the position that there was no question but that a loss had been sustained and *833 it held that in the circumstances of the case the difference between the amount of the debt and the amount recoverable could be deducted as a loss in the petitioner's income tax return even if it could not be deducted as a debt ascertained to be worthless and charged off. We are of the opinion that the same principle is applicable in the proceeding at bar. The petitioner had advanced cash to the Basin Coal Company and was owed by it at the end of 1923 the full amount of $122,446.79. The petitioner's share of the assets of the company at the close of that year amounted to only $108,700. Clearly the petitioner had sustained a loss at the close of 1923 of the difference between those two amounts or $13,740.79. We are of the opinion that that amount is a legal deduction from the gross income of that year as a loss sustained in 1923.
Reviewed by the Board.
Judgment will be entered under Rule*2070 50.
MURDOCK concurs in the result only.
LOVE dissents.