*1003 Claimed loss deduction disallowed (1) where the stock did not become worthless in the taxable year and (2) where it was not established that it became certain in the taxable year that the stock which had been loaned by petitioner and used by the borrower as collateral would never be returned to the taxpayer.
*642 The respondent determined an income tax deficiency of $10,869.74 against petitioners' decedent for the year 1933.
Petitioners assign error in the respondent's disallowance of a deduction of $118,400 claimed on the decedent's return for 1933 as a loss sustained in that year, based upon respondent's determination (1) that 3,200 shares of class A common stock of the United States*643 Dairy Products Corporation owned by decedent did not become worthless in 1933 and (2) that such shares were not irrecoverably lost in 1933 since it was not definitely established in 1933 that such shares, which had been loaned by decedent for another's use as collateral, would never be returned to decedent.
FINDINGS OF FACT.
*1004 The petitioners are the duly named and qualified executors of the estate of C. C. Burdan, deceased, with post office addresses at Pottstown, Pennsylvania.
Prior to 1932, and at a cost of $118,400, C. C. Burdan acquired 3,200 shares of class A common stock of the United States Dairy Products Corporation (hereinafter referred to as Products Corporation), of which he was director and vice president.
C. C. Burdan was a director and officer of the Dairy Operators Co., a corporation (hereinafter referred to as Operators Co.), which in 1932 had outstanding $1,979,000, 6 percent gold notes secured by class A and class B common stock of the Products Corporation deposited as collateral with the Tradesmen's National Bank & Trust Co., trustee under a certain indenture. The Operators Co. was in 1932 further indebted to certain banks and brokers for loans in the amount of approximately $850,000, which loans were secured by certain collateral, including 15,000 shares of class A common stock of the Products Corporation that had been loaned the Operators Co. for that purpose, by certain of its directors and stockholders under an agreement that the shares should be returned in kind. Of these*1005 15,000 shares C. C. Burdan and his wife, Elsie S. Burdan, loaned 10,000 shares, including the above mentioned 3,200 shares acquired by C. C. Burdan at a cost of $118,400.
Due to financial difficulties of the Operators Co. there was adopted, on or about July 30, 1932, a plan of reorganization whereby all of its assets, including unpaid subscriptions to its capital stock and gold notes, were acquired and its liabilities assumed by the Products Corporation. These unpaid subscriptions for stock and gold notes of Operators Co. were converted into subscriptions for stock of the Products Corporation, which agreed to apply all moneys received by it from such subscriptions to the payment of its assumed obligation of $850,000 to bankers and brokers on account of their loans to the Operators Co. Under the plan of reorganization and under its agreement with Burdan, the Products Corporation agreed that, upon the repayment in full of the bankers' and brokers' loans and further the repayment of a $300,000 loan made by C. C. Burdan to the Products Corporation, it would return to the owners thereof the 15,000 shares of stock theretofore loaned to Operators Co. and pledged by it as collateral for*1006 the loans of the bankers and brokers. It was *644 further agreed that in the meantime the Products Corporation would pay to the owners of such pledged shares the dividends declared thereon, except that, if after a three-year period the collections from the subscriptions were insufficient to repay the above mentioned loans, the payment of such dividends should cease and such pledged shares of stock should remain as security to the Products Corporation for any deficiency.
The Products Corporation's assumed liability of $850,000 on account of bankers' and brokers' loans was reduced by the $300,000 loan made it by C. C. Burdan. This liability was further reduced by payments made out of collections on the above mentioned subscriptions of approximately $275,000 by the end of 1932 and $180,000 by the end of 1933, leaving a balance of approximately $97,000 of the liability outstanding on December 31, 1933. At the close of the year 1933 the subscriptions remaining unpaid amounted to approximately $719,000, but during 1933 there had been a sharp decline in the collection thereof. The subscriptions were made largely by customers and employees of the Products Corporation and its*1007 subsidiaries and during 1933 some of them were difficult and some impossible to collect.
For the years 1932 and 1933 the Products Corporation had the following approximate amounts of sales and profit or loss:
| 1932 | 1933 | |
| Net sales | $21,318,000 | $16,497,000 |
| Operating profit | 1,960,000 | 1,131,000 |
| Net income or loss to surplus account, after deductions for interest, charges, taxes, dividends on subsidiary companies' preferred stocks, depreciation, etc | 100,000 | (loss) 602,000 |
On December 31, 1932, the Products Corporation's assets amounted to $28,401,076.55, including $8,064,942.56 good will, "(principally representing the purchase price of milk and ice cream routes acquired)", and its liabilities amounted to $28,401,076.55, including capital of $11,690,687.53 and surplus, appropriated and unappropriated, of $5,113,097.89. On December 31, 1933, the Products Corporation's assets amounted to $25,766,579.11, including $7,488,938.41 good will, "(principally representing the purchase price of milk and ice cream routes acquired)", and its liabilities amounted to $25,766,579.11, including capital of $12,610,640.65 and surplus, appropriated and unappropriated, of*1008 $4,671,011.98. All the above figures are shown on the Products Corporation's balance sheet for each of those years as incorporated in its report to its stockholders. These balance sheets show the Products Corporation to have been solvent at the end of 1932 and 1933 and the asset values shown thereon represent fair values on a "going concern" basis.
The Products Corporation did not pay dividends on its common stock during 1933. Interest on its debenture notes was paid during *645 1933, but a sinking fund of $75,000 for that year was not provided for and under the terms of the debenture notes failure to make such provision constituted a default. Also, after July 1, 1933, demand was made upon the Products Corporation, as guarantor, for the payment of stock dividends due from and unpaid by certain of its subsidiaries. The Products Corporation was a going concern at the close of the year 1933 and at that time its common stock was traded in on the Philadelphia Exchange and the New York Curb Exchange at or about $2 per share, but apparently the trading was not very active.
The 3,200 shares of class A common stock of Products Corporation owned by C. C. Burdan did not become*1009 worthless during 1933.
At the end of the year 1933 it was impossible for C. C. Burdan to secure the return of the 3,200 shares of class A common stock of the Products Corporation which had been pledged as collateral, because under his agreement with the Products Corporation and under the plan of reorganization, the shares were not to be returned to him until after the Products Corporation had liquidated its obligations to repay the above mentioned loans of bankers and brokers and C. C. Burdan, and this had not been done.
During 1933 C. C. Burdan, as vice president and director of the Products Corporation, was familiar with the financial affairs of that company and participated in discussions which were had during the latter part of 1933 as to a possible reorganization of that corporation.
The Products Corporation continued in operation until all of its assets were transferred to the Philadelphia Dairy Products Co. as of February 1936, pursuant to a plan of reorganization dated July 1, 1935. When the details of that plan were being formulated it became known that there would be no provision made for the return of the shares of Products Corporation stock loaned by C. C. Burdan*1010 and others and such shares have never been returned to them.
During 1933 it was not established that C. C. Burdan's 3,200 shares of Products Corporation stock would never be returned to him.
In 1933 C. C. Burdan and his tax advisers concluded that the 3,200 shares of Products Corporation stock would never be returned to him and, also, that such shares became worthless in 1933. On his tax return for 1933 C. C. Burdan claimed a deduction listed under item 16, "Bad Debts", but explained as "3,200 shares U.S. Dairy Products stocks loaned as collateral and lost - loss $118,400." The respondent disallowed the deduction based upon his determination as set forth in petitioner's assignment of error.
OPINION.
TYSON: The question to be decided is whether C. C. Burdan actually sustained in 1933 a loss of $118,400, the cost to him of 3,200 shares *646 of class A common stock of the Products Corporation. Petitioners contend that the loss was sustained by reason of the fact either (1) that said shares became worthless in that year, or (2) that it became certain in 1933 that those shares, which had been pledged as collateral, would never be returned to him and that as a consequence*1011 his entire investment therein then became lost.
A loss upon worthless stock is deductible only in the year in which the stock actually becomes worthless, and the burden is upon the petitioners to establish by reasonably convincing evidence that the claimed loss herein was sustained in the taxable year of 1933. ; ; .
In this proceeding the evidence establishes that, while the Products Corporation was experiencing some financial difficulties during 1933, the extent of which is not fully disclosed, it was a going concern which had sales in excess of $16,000,000 during that year and had assets in excess of $25,000,000 at the close of 1933, valued on a going concern basis. There is no evidence of insolvency of the Products Corporation during 1933 even though it did sustain an operating loss of approximately $602,000 during that year and experienced difficulty in the collection of the subscriptions made under the 1932 plan of reorganization of the Operators Co. During 1933*1012 the Products Corporation collected approximately $180,000 of such subscriptions and there is no evidence of what portion, if any, of the unpaid subscriptions, amounting to approximately $719,000, carried as an asset at the end of 1933, was definitely uncollectible. The fact that there had been a shrinkage in the value of the Products Corporation common stock owned by C. C. Burdan and that the conditions existing at the end of 1933 may have been such as to lead him to his conclusion that, without a change for the better, he probably would sustain a loss on his investment in such stock, is not sufficient to establish actual worthlessness in that year. Upon this record we conclude that the class A common stock of the Products Corporation did not actually become worthless in 1933. Cf. ; appeal dismissed February 11, 1938; ; .
The 3,200 shares of class A common stock of the Products Corporation which C. C. Burdan loaned to the Operators Co. in the spring of 1932, for the latter's use as collateral, were to be returned to him in kind. Under the 1932 plan*1013 of reorganization the Products Corporation assumed the obligation to return such shares in kind after its repayment of the bankers', brokers', and Burdan's loans out of collections on the subscriptions made under the plan of reorganization, but it was further provided that, if after three years such collections *647 were insufficient to reimburse the Products Corporation to the extent of its obligation to repay those loans, then such shares were to stand as security to the Products Corporation for any deficiency.
At the close of the year 1933 the loans on which C. C. Burdan's shares had been pledged as collateral had not been fully repaid and accordingly he was not then entitled to have his shares returned to him. During the year 1933 the Products Corporation had collected approximately $180,000 on the subscriptions and had reduced the loans by that amount. The record discloses that there was a decline in the amount of subscriptions collected, but there is no evidence establishing the fact that as of the close of the year 1933 future collections on such subscriptions would be wholly insufficient to repay the loans.
The testimony of a witness to the effect that he believed*1014 that in 1933 the stock had been transferred to the name of a bank as trustee is too vague and indefinite to constitute any proof that the stock had been appropriated or converted by the Products Corporation. Consequently there is no proof of the creation of a debt due Burdan, in any amount, on account of an appropriation or conversion of his 3,200 shares of Products Corporation stock in 1933. However, petitioners do not press a claim for a deduction of any amount as a worthless debt. The petitioners' effort to establish that the stock had been appropriated in 1933 was made in support of their contention that Burdan sustained a loss of his entire investment of $118,400 in the 3,200 shares of Products Corporation stock, because it became certain in 1933 that the stock would never be returned to him.
Upon this record we conclude that in 1933 it was not established that C. C. Burdan's 3,200 shares of class A common stock of the Products Corporation would never be returned to him by the parties to whom it had been loaned. Therefore, there is no basis in fact to support the claimed loss of $118,400 on that ground.
Decision will be entered for the respondent.