*752 1. The taxpayer, an individual, sold stock to a corporation of which he was the sole stockholder, at the market prices and was paid therefor with money which he had loaned to the corporation. Held, the sales were bona fide and losses resulting therefrom were deductible.
2. The taxpayer advanced money for a scientific expedition, receiving notes as security and a promise of a share in the profits. There were no profits, the money was not repaid, and the amount thereof was written off, by taxpayer, on his books in 1926, except for $1. Held, the amount of the advance was not deductible in 1930.
*223 The respondent determined deficiencies in income taxes agaist the petitioner for the calendar years 1930 and 1931 in the respective amounts of $99,945.42 and $28,579.26.
Petitioner contends that the respondent erred (1) in failing to allow as a deduction for the year 1930 losses in the amount of $310,893.45 sustained on the sale to the Saint Amour Co. of securities held for less than two years, and losses in the*753 amount of $71,834.25 on the sale to the Saint Amour Co. of securities held for more than two years; (2) in failing to allow a deduction for the year 1930 of $31,392 as a debt ascertained to be worthless and charged off in that year; and (3) in failing to allow as a deduction for the year 1931 a loss in the amount of $504,639.71 sustained upon and as a result of the dissolution and liquidation of the Saint Amour Co.
*224 FINDINGS OF FACT.
The facts were stipulated in part, the stipulation of the parties being as follows:
(1) The petitioner is an individual, resident of Wilmington, Delaware. For the calendar years 1930 and 1931 he kept his books and made his Federal income tax returns on a cash receipt and payment basis, and filed said income tax returns with the Collector of Internal Revenue for the district of Delaware within the time required by law.
(2) The Saint Amour Company, a corporation, was incorporated under the laws of the State of Delaware in the year 1923, and was dissolved December 28, 1931, and at that time all of the assets were paid over to the petitioner in retirement of its capital stock and in liquidation of loans which he had theretofore made*754 to it.
(3) On September 6, 1923, the petitioner transferred to the Saint Amour Company, for all of its issued and outstanding capital stock, securities which he had previously acquired at a cost to him of $1,633,869.53 and which are described as follows:
| Securities paid for in stock September 6, 1923 | ||
| Shares | Cost | |
| 332 | American Railways common | $1,327.60 |
| 2,000 | Baldwin Locomotive Works | 253,925.00 |
| 500 | Bethlehem Steel | 36,329.43 |
| 500 | Chatham Phoenix National Bank | 90,000.00 |
| 23 | Cherry Boom and Lumber Company | 4,100.00 |
| 1,500 | Cuba Cane Sugar common | 13,125.00 |
| 10,367 | Delaware Land and Improvement Company | 518,350.00 |
| 1,500 | Erie Railroad common | 21,662.50 |
| 2,500 | Goodyear Tire and Rubber Company | 32,062.50 |
| 29 | First National Bank, Scranton, Pennsylvania | 9,280.00 |
| 510 | General Electric | 61,925.00 |
| 1,000 | Kennecott Copper | 17,150.00 |
| 270 | Natrona Alkali | 2,805.00 |
| 3,000 | Southern Railway common | 70,200.00 |
| 500 | Scranton Lace Debenture | 44,000.00 |
| 1,600 | U. S. Rubber common | 92,652.50 |
| 4,500 | U. S. Steel common | 364,975.00 |
| Total cost | $1,633,869.53 |
(4) At all times during the period of the existence of The Saint Amour Company, the petitioner*755 owned all of its issued and outstanding capital stock.
(5) During its existence, The Saint Amour Company was engaged in the business of buying, selling, owning and holding for and on its own account securities issued by other corporations, and beginning in the year 1927, it also owned and operated the Buck and Doe Run Valley Farms located in the State of Pennsylvania and containing about 3,300 acres.
(6) The petitioner advanced to The Saint Amour Company, on open account, without interest, such funds as it was required to borrow for use in its business, and it made payments on those advances from time to time as is shown by the account on the books of The Saint Amour Company, a true copy of which is attached hereto as Exhibit "A" and made a part hereof.
*225 (7) More than two years prior to December 6, 1930, the petitioner acquired 3,812 shares of the common stock of Phillips Petroleum Company at a cost of $139,973.73 and during the years 1929 and 1930, within two years of December 6, 1930, the petitioner acquired 16,188 shares of the common stock of Phillips Petroleum Company at a cost of $537,176.75. On December 6, 1930, the market value of the 3,812 shares of Phillips*756 Petroleum Company was $68,139.50 and the market value of the 16,188 shares of that company on that date was $289,360.50.
(8) Within two years prior to December 17, 1930, the petitioner acquired 2,000 shares of the common stock of Warner Brothers Pictures Company at a cost of $50,150.00 and the market price of that stock on that date was $26,020.00.
(9) Within two years prior to December 17, 1930, the petitioner acquired 1,000 shares of the common stock of Atlas Powder Company at a cost of $65,062.50 and the market price of that stock on that date was $45,435.00.
(10) Within two years of December 17, 1930, the petitioner acquired 900 shares of the common stock of E. I. du Pont de Nemours Company at a cost of $93,395.00 and that date the market value of that stock was $74,075.30.
(11) The petitioner claimed as a loss in his Federal income tax return for the year 1930, the difference between the cost of the securities described in paragraphs 7, 8, 9 and 10 herein, and the market value thereof. The petitioner claimed $310,893.45 thereof as a loss on the sale of securities held for less than two years prior to sale, and $71,834.25 thereof as a loss on the sale of securities*757 held for a period of more than two years prior to sale. The petitioner claimed these losses on alleged sales of the aforesaid securities to The Saint Amour Company, which losses the respondent disallowed in the deficiency notice and which are in issue in this proceeding.
(12) If the determination of the respondent is sustained for the year 1930 as to the alleged losses of $310,893.45 and $71,834.25, the disallowance of the deduction of $504,639.71 for the year 1931 on account of bad debts is correct. If the Board sustains the contentions of the petitioner and allows the aforesaid losses for the year 1930 claimed on the alleged sale of securities to The Saint Amour Company, the amount of $504,639.71 constitutes an allowable deduction from the income for the year 1931. Should the aforesaid losses in issue for the year 1930 be allowed in part and disallowed in part, proper adjustmnts shall be made therefor by recomputation of the tax under Rule 50.
Exhibit "A" referred to in the above stipulation is incorporated herein by reference, but for purposes of brevity is not set forth. It shows that the balance owing to the petitioner on December 31, 1931, was over $4,000,000.
The*758 following facts we have found from the testimony at the hearing: He decided all questions of investment of the company's stocks and securities. His original object in organizing the company in 1923 was to avoid death duties in respect of stocks and securities issued by corporations foreign in Delaware and also to avoid possible legal difficulties for his executors in effecting the transfer of such intangible property at his death. The company held securities of a few *226 Delaware corporations, but those of foreign corporations were in the great majority. Since, by 1931, the burden of taxation sought to be avoided through the corporation had been removed by changes in the law, petitioner saw no further object in extending the corporation's life, and so dissolved it.
The Saint Amour Co. paid to petitioner as an annual dividend substantially all its earnings, not including, however, capital gains made in trading. It never borrowed money from any one else than petitioner. Its purchases, in 1930, on the open market with money lent by petitioner, constituted a very large part of its total purchases; it bought only occasionally from petitioner. In 1930 the company bought*759 from petitioner the stocks, the sale of which is here in controversy, with money lent by the petitioner. All these stocks were listed on the New York Stock Exchange and were sold by petitioner to the company through brokers, except the 20,000 shares of Phillips Petroleum which were sold directly to the company. They were all delivered, their transfer was recorded by the issuing corporation, and they were then deposited in a safe deposit box. Petitioner made sales of stocks to other buyers in 1930 and 1931.
Petitioner had no agreement with the company, nor any intention, either at the time of the sale of these stocks to the company, in 1930, or later, to repurchase these particular stocks, nor did he intend to reacquire them through the dissolution of the company.
2. From 1924 to 1930 petitioner made certain advances to one R. O. Marsh, more fully set out below, which he claims in part as a debt ascertained to be bad in 1930.
The petitioner had known Marsh for a number of years, as they both belonged to the same college fraternity at the Massachusetts Institute of Technology. They were strong personal friends. About January 1924 Marsh told petitioner that on a previous*760 expedition to Panama in search of rubber he had seen so-called "white Indians", and proposed that petitioner finance an expedition to establish the truth of this fact. Petitioner doubted the probability of Marsh finding such Indians and was not himself interested in the scientific results of such an expedition, but as Marsh was a personal friend and seemed competent to explore the country, and as there was a possibility of Marsh making a profit, in which petitioner would share, if the project should prove successful, he agreed to Marsh's proposal. Petitioner's expectation of profit rested on the possibility that Marsh would discover "white Indians" and he did not expect that Marsh would discover any "white Indians." Marsh was at that time about 39 years old, and had hitherto been able to make a living for himself, his wife and two or three children, but had *227 accumulated no property. Nor did he have any money to contribute to the proposed expedition.
In the years 1924 and 1925 petitioner advanced to Marsh $31,392; and took back promissory notes, and between 1926 and 1931 petitioner made further advances either to Marsh or to his family, of about $15,000 more, on open*761 account. The serious purpose and financial hopes of the expedition, as well as the acknowledgment of an early cash advance, are set out clearly in the following letter:
WILMINGTON, DELAWARE, January 8, 1924.
Mr. LAMMOT DU PONT,
Wilmington, Delaware.
DEAR SIR: In consideration of your financing the Marsh-Darien Expedition into the interior of the Chucunaque Valley, Darien, Panama, for an amount not to exceed $15,000, I hereby make the following agreement:
The expedition is being conducted primarily for scientific research of an ethnological, archaeological and anthropological purpose. The Smithsonian Institute and National Museum of Washington, D.C. have designated Dr. J. L. Baer of their scientific staff as representing their combined institutions to accompany the party. The American Museum of Natural History of New York have assigned Dr. C. Breder of their scientific personnel as their representative. The University of Rochester has designated their Professor Emeritus, Herman L. Fairchild as their representative. The Pathe Motion Picture Company has given me a contract, paying me $1.00 per foot for all film used in their News Service, and one-half of all net*762 profits that may accrue from a motion picture production of the expedition. The Rochester Times-Union newspaper, associated with a large group of the better type American newspapers, has given me a contract paying me one-half the net returns of all syndicated publicity of the expedition. Both the above are sending representatives along.
In addition, I am working in conjunction with, and with the approval of, the Department of Commerce in Washington and the American Association of Rubber Manufacturers to contribute in the official investigation and endeavor to secure an independent production of crude rubber under American control.
I hereby pledge all returns from the moving picture and newspaper syndicate to you, until the money furnished by you shall be repaid, after which I agree to turn over to you one-half of all additional returns from the above or any other sources whatever resulting from this expedition, including, specifically, a one-half interest in whatever rights or profits I may secure in the rubber investigation and development. It is agreed and understood that you shall in no way be held responsible or liable for any claims whatsoever that may arise from injury, *763 death or loss to myself or any other member of the party.
I acknowledge receipt of $15,000 this day, January eighth.
Yours very truly,
[Signed] R. O. MARSH.
Witness:
[Signed] MACMILLAN HOOPES.
The expedition was, in a measure, successful; Marsh brought back photographs and also several of the "white Indians" themselves, *228 which gave rise to a controversy as to whether they were representatives of a white race or were merely albinos. The Indians remained in America for several months, one boy being in school here for several years, before returning to Panama. Smithsonian Institution ethnologists examined them. In the meantime, Marsh delivered lectures and wrote newspaper articles and books on the question which he tried to get published. However, no profits were realized.
In 1926 petitioner wrote down to $1 on his books the amounts, totaling $31,392, which he had lent to Marsh up to that time. It was his custom to "write down" to a nominal figure the value of assets on which he thought there was a very small probability of recovering, but as to which he had not fully given up hope. No evidence appears of any later charge-off. Petitioner did not*764 consider suing Marsh, as he knew that Marsh had no property. No part of these advances was repaid to petitioner.
After 1926 petitioner continued to make advances to Marsh until 1930 to aid him in reaping some financial benefit from the expedition, and to Marsh's family for its support as late as 1931. Petitioner's 1930 he gave up this hope on learning that Marsh had, at some time prior to 1930, used some of the money lent for an improper purpose. His advances to Marsh then stopped altogether.
Petitioner claimed a deduction in his income tax return for 1930 of $31,392, representing advances to Marsh in 1924 and 1925, as a debt ascertained to be worthless and charged off in 1930. No claim of deduction was made in respect of the later advances.
OPINION.
MILLER: The first question for determination is whether the petitioner established deductible losses in 1930 by selling certain stock to a corporation of which he was the sole stockholder. The answer turns on whether the sales were bona fide. The respondent does not charge fraud, but contends that petitioner did not give up control of the securities or effectively part with title thereto.
We find that the sales were*765 bona fide. They were made at the market prices and petitioner was paid therefor. He had no agreement or preconceived plan to reacquire the securities from the corporation. It was customary for petitioner to lend money to the corporation for the purpose of buying securities and the particular stocks involved in this case were purchased by the corporation with money so loaned. This is not sufficient to prevent the sales from being bona fide. See .
*229 This case is governed by the decisions in ; ; and , affirming . , relied upon by respondent, is clearly distinguishable. That case involved the corporate reorganization provisions of the Revenue Act of 1928. There it was held that no real reorganization took place, and that a new corporate structure was set up solely for the purpose of evading taxes. We have no such question here. *766 In the instant proceeding the corporation had been in existence for several years and was created for a valid purpose. There is no reason for disregarding the fact that petitioner and the corporation were separate and distinct entities. In accordance with the facts disclosed in the stipulation, therefore, we hold that the petitioner in 1930 sustained a capital net loss of $71,834.25, and an ordinary loss of $310,893.45 upon the sales of stocks in question.
Moreover, in accordance with the following stipulation:
If the Board sustains the contentions of the petitioner and allows the aforesaid losses for the year 1930 claimed on the alleged sale of securities to The Saint Amour Company, the amount of $504,639.71 constitutes an allowable deduction from the income for the year 1931. the amount specified therein will be allowed as a deduction for the year 1931.
The next question presented is whether the respondent erred in failing to allow, as a deduction for the year 1930, sums theretofore advanced to Marsh in the amount of $46,392. There are set forth in the margin applicable provisions of the Revenue Act of 1928. 1
*767 The determination of the respondent is favored with a presumption of correctness and the burden is upon the petitioner to show that it is erroneous. . Here, upon a consideration of all the evidence, we hold that petitioner has not met his burden.
The facts presented leave us in doubt as to the nature of the loss claimed by petitioner on account of advances made to Marsh for financing and furthering the expedition. Are they to be regarded *230 as loans or as investments in a joint venture? The testimony shows that Marsh gave petitioner notes representing the $31,392. There is other evidence showing that the advances were to be repaid out of the profits, if any, from the expedition, and that any excess profit over the amount of the advances was to be divided equally between petitioner and Marsh. The evidence is clear, however, that petitioner had very little hope of profit.
If we assume that the advances are to be considered as loans, then subdivision (j) of section 23 is applicable, which provides that debts are deductible in the year in which ascertained to be worthless and charged off. The evidence shows*768 that the petitioner charged off all of the $31,392, except $1 at the end of the year 1926. This evidence, far from supporting petitioner's contention, tends to sustain the Commissioner's determination that this debt was ascertained to be worthless and charged off in 1926. This determination is further supported by the fact that thereafter Marsh had no gainful employment or any property, and that this fact was known to the petitioner. The statute does not allow the taxpayer to select the year of deduction of a debt which he has known for some time to be worthless. , and cases there cited.
If the advances were considered as investments in a joint venture, then any deduction to be allowable as a loss must come under subdivision (e)(2) of section 23. Under that section losses are deductible in the year in which sustained, irrespective of when the taxpayer ascertains his loss. In 1930 the petitioner was informed by Marsh that he had misappropriated some of the money advanced by petitioner. Any loss sustained by petitioner from such embezzlement or misappropriation was sustained in the year it occurred, *769 . Yet we are not informed as to the amount of such misappropriation or as to the time thereof. We are, therefore, not able to determine when the petitioner's loss by this means occurred. Since we do not know the amount thereof, we can not determine the amount of any remaining loss which might otherwise be deductible in 1930. Moreover, as petitioner has failed to establish the date of such embezzlements - except that they occurred prior to 1930 - they certainly can not be urged as an event occurring in 1930 which established a loss for that year.
Disallowance of the claimed deduction of $46,392 is approved.
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. S.E.C. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(e) Losses by individuals. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -
* * *
(2) If incurred in any transaction entered into for profit, though not connected with the trade or business; or
* * *
(j) Bad debts.↩ - Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.