*2438 Losses from dealings in grain futures held to have been sustained in a prior year and not deductible in the taxable year ended July 31, 1920.
*1188 This proceeding involves a deficiency for the fiscal year ended July 31, 1920, in the amount of $19,477.44. The petition also alleges error with respect to the year ended July 31, 1919, for which the respondent has not determined any deficiency. At the hearing counsel agreed that the Board was without jurisdiction as to that year. With respect to the taxable year 1920 the petitioner has alleged that the respondent erred in disallowing the deduction of a loss of $51,385.01, resulting from dealings in grain futures, and in refusing to compute its tax under the special assessment provisions of the statute. The latter assignment of error was waived by the petitioner at the hearing.
FINDINGS OF FACT.
The petitioner is a corporation, with its principal place of business at Chicago, Ill. It was organized in August, 1917. During its entire existence all of its*2439 outstanding capital stock, except qualifying *1189 shares, has been owned by M. A. Mummert, who has also been president of the company since its incorporation.
Up to the fall of 1918 the petitioner was engaged exclusively in the lumber brokerage business. It bought and sold lumber for both present and future delivery. It had no inventories and its entire assets consisted of office furniture and bank accounts.
During the latter part of the year 1918 the petitioner began to deal in grain futures. These transactions were handled through several brokerage concerns in Chicago. The petitioner would make its check to Mummert, its president, who would endorse the check to the brokers, or would deposit it in his personal account and issue his personal check to the brokers. This method of handling the transactions was necessary because the brokers objected to dealing with a corporation and required the account to be carried in the name of an individual. The grain futures transactions were known to the petitioner at the time when made and were considered the petitioner's by all interested parties. A complete record of such transactions was kept in the petitioner's books under*2440 an account entitled "Investment Account." This account shows withdrawals between January 14 and June 30, 1919, amounting to $64,500.
From time to time during the period January 14 to June 30, 1919, the petitioner had been notified by the brokers of losses resulting from fluctuations of the grain market and had been required to advance additional amounts to protect its investments. At July 31, 1919, the investment account showed a debit balance of $51,385.01.
Prior to July 31, 1919, Mummert, on returning to his office from a vacation, was informed that there had been a reversal of the grain market and that all of the petitioner's grain futures accounts had been closed out by the brokers; that the entire investments were lost.
In June, 1919, the petitioner discovered certain irregularities on the part of some of its brokers in connection with the handling of its grain futures accounts and thereupon ceased its grain futures transactions. The petitioner consulted its attorneys about the matter and was advised by them, after an investigation had been made, that a part or all of its investments might be recovered from the brokers. The attorneys were instructed by the petitioner*2441 to press the claims against the brokers. Subsequently, in August, 1919, one of the brokers, with whom the petitioner had invested $9,614.99, offered to pay $3,300 in settlement, which was accepted by the petitioner at a directors' meeting held August 26, 1919. It was known by the petitioner prior to July 31, 1919, that a recovery of this amount would be made and the amount was credited to the profit and loss account for the year ended July 31, 1919. The petitioner *1190 expected other recoveries to be made and for that reason kept the other accounts open and carried them over into the fiscal year ended July 31, 1920.
In June, 1920, the petitioner, on the advice of its attorneys that efforts by it to make any further recovery from the brokers would probably not be successful and might jeopardize its credit and otherwise injure its business, decided to charge the balance of the accounts to profit and loss. The investment account in the petitioner's books was credited with the loss of $51,385.01 as of July 31, 1920. This amount was claimed as a deductible loss in the petitioner's return for the fiscal year ended July 31, 1920, and was denied by the respondent.
OPINION.
*2442 SMITH: The respondent contends (1) that the loss in question is not properly allocable to the taxable year ended July 31, 1920, but occurred in the prior taxable year; and (2) that in any event the loss was sustained by M. A. Mummert, individually, and is not deductible by the petitioner. We are of the opinion that the respondent's first contention must prevail. The evidence shows that all of the investments from which the loss in question resulted were made prior to July 31, 1919, and were so entered in the petitioner's books. The evidence further shows that the petitioner or its president, M. A. Mummert, was informed prior to July 31, 1919, that all of its grain futures accounts had been closed out due to a reversal of the grain market and that it had lost the entire amount of its investments. This is not denied by the petitioner. The petitioner contends, however, that because of the discovery of irregularities on the part of the brokers in handling the accounts there was a reasonable expectancy at July 31, 1919, of recovering the investments in whole or in part and that the loss therefore could not be determined until a subsequent year. We do not think that this possibility*2443 of recovery was sufficient to postpone the determination of the loss. Clearly, the loss on the investments was sustained during the year ended July 31, 1919, and should have been reflected in the accounts of that year. The statute allows a taxpayer no option in this respect but requires that the deduction be taken in the year when the loss occurs.
The evidence is entirely lacking of any explanation of the nature of the irregularities charged against the brokers. If there was an embezzlement of the petitioner's funds the petitioner is in no better position since the loss on account of such embezzlement would necessarily fall within the year 1919 and would be deductible in that year only.
*1191 Under these circumstances it is unnecessary to consider the further question of whether the loss is deductible by the petitioner or whether it was the loss of the petitioner's president, individually.
Judgment will be entered for the respondent.