*81 Decision will be entered under Rule 50.
1. Petitioner, on January 1, 1941, delivered demand promissory notes to its president as compensation for services rendered during 1940. Held, such compensation was not "paid" within the meaning of section 24 (c) (1) of the Internal Revenue Code and is not deductible as a business expense by petitioner for 1940.
2. Determined that stock of X Co. did not become worthless in 1940.
3. Value of the stock of certain corporations paid petitioner for construction work determined.
*729 Respondent determined a deficiency in petitioner's income tax liability for the calendar year 1940 in the amount of $ 57,322.68. Respondent also determined a deficiency in petitioner's excess profits tax liability in the amount of $ 39,623.88 for the same year.
The questions involved are as follows:
1. Whether section 24 (c) of the Internal Revenue Code prohibits petitioner from deducting certain expenses in 1940.
2. Whether the common stock of Chelsea Housing Corporation became worthless during 1940.
3. What was the fair market value of Chelsea Housing Corporation common stock received by petitioner in 1940 as compensation for services rendered?
4. What was the fair market value of Ogontz Housing Corporation common stock received by petitioner in 1940 as compensation for services rendered?
*84 5. What was the fair market value of Foster Park Housing Corporation common stock received by petitioner in 1940 as compensation for services rendered?
Petitioner filed its income and excess profits tax return for 1940 with the collector of internal revenue for the first district of New Jersey.
The case was submitted on a stipulation of facts, oral testimony, and exhibits. The facts stipulated are so found. Other facts are found from the evidence.
FINDINGS OF FACT.
Compensation Issue.
Petitioner is a corporation engaged in the building and construction business, with its principal offices located at 3333 Arctic Avenue, Atlantic City, New Jersey.
*730 Anthony P. Miller, petitioner's president and chief executive, was 49 years old at the time of the hearing. He has worked for a living for 33 years. From 1916 to 1926 he was employed by James Ferry Co., foundation engineers. Since 1927 he has been in the construction and engineering business for himself, first, individually; later, through the Atlantic Construction Co., which he organized and controlled; and, finally, through petitioner, into which Atlantic Construction was merged. Miller organized petitioner and is the*85 controlling owner of its stock.
Miller's knowledge of engineering and construction was derived principally from his practical experience in these fields rather than from formal or academic training. He holds 10 patents on special foundations which he designed. Several buildings in Atlantic City are supported by Miller's patented foundations.
As president of petitioner, Miller's general duties are those of obtaining construction contracts, planning, arranging financing, designing, and supervising construction projects.
Petitioner's operations in 1940 were the largest in five years. In 1936 petitioner had a $ 2,000,000 contract. During 1940 petitioner had six construction projects in progress totaling over $ 3,000,000. The increased volume of petitioner's operations in 1940 imposed an additional burden on Miller.
Miller, in 1940, obtained a $ 400,000 loan for the benefit of petitioner. To obtain this loan he and his wife put up about $ 500,000 worth of collateral and security.
Also during 1940 petitioner unsuccessfully bid on approximately $ 25,000,000 worth of contracts. Miller was assisted in making the estimates for these bids by a small office staff, but was required to spend*86 considerable time himself in their preparation and submission.
About 75 per cent of petitioner's construction work in progress during 1940 was being done by subcontractors. Miller acted as general field superintendent and engineer for petitioner in supervising the work of those subcontractors. It was necessary for him to travel from project to project to fulfill his supervisory functions. Difficulties were encountered with subcontractors who required financing and it was necessary in several instances for petitioner to finish work which certain subcontractors were unable to accomplish.
Miller's supervisory activities kept him away from Atlantic City almost five days a week. He kept in touch with his office by telephone and was required to do most of his office work at night and on week ends. Petitioner's office staff consisted of a bookkeeper, an office engineer, a secretary, and two clerks. The salaries of this staff ranged from $ 30 to $ 75 a week. Miller did not hire additional help for petitioner as his experience in the past with field superintendents and engineers had been unsatisfactory.
*731 In each of the years 1936 and 1937 Miller received as compensation $ 20,000, *87 of which one-half was paid by the Atlantic Construction Co. and one-half was paid by petitioner. In 1938, 1939, and 1941 he was paid a basic salary of $ 12,000 a year without any bonus. For his services during 1940 he received as compensation a basic salary of $ 12,000 plus a bonus of $ 30,000, or a total compensation of $ 42,000. As controlling stockholder, Miller determined the amount of salary and bonus he was to receive.
Miller's total compensation of $ 42,000 for 1940 was accrued on petitioner's books in that year. On January 1, 1941, petitioner delivered to him two promissory notes payable to him on demand. One such note, dated December 30, 1940, was in the amount of $ 30,000, representing his bonus for 1940. The other note, dated January 1, 1941, was in the amount of $ 20,940, which included, among other items not here pertinent, his basic salary of $ 12,000 for 1940. Petitioner was financially able to pay these notes at all times material herein. According to petitioner's bookkeeper, current assets exceeded current liabilities as of December 31, 1940, by some $ 88,000. According to respondent's reconstruction of petitioner's balance sheet as of December 31, 1940, *88 total assets exceeded total liabilities by over $ 130,000. Petitioner had sufficient credit at the end of 1940 to have borrowed $ 42,000, if necessary. Miller did not present these notes for payment until December 31, 1942, at which time they were paid in full. Petitioner deducted for Federal tax purposes the amount of $ 42,000 representing Miller's compensation for 1940 as a business expense in that year. He included this amount for Federal tax purposes as part of his 1940 income.
Respondent determined that petitioner was not entitled to deduct the sum of $ 42,000 representing compensation for Miller's services during 1940. In the statement attached to the notice of deficiency, respondent stated in part as follows:
You contend that in the determination of your net income for 1940 you should be allowed a deduction for compensation of Anthony P. Miller based upon the sums of * * * $ 42,000 in 1940. It has been determined that a reasonable basis for compensation of Anthony P. Miller is * * * $ 25,000 for 1940. * * * It has also been determined that no amount is allowable in respect to the 1940 compensation since no payment was made within two and one-half months after the close*89 of the taxable year as provided by section 24 (c) of the Internal Revenue Code.
The amount of $ 25,000 constitutes a reasonable allowance for compensation to Miller for his services to petitioner during 1940.
Chelsea Housing Corporation Stock Issue.
In 1938 a group of labor union representatives, acting under the name of Providence Housing Corporation, were unsuccessfully attempting to persuade the Federal Housing Administration (hereinafter *732 referred to as FHA) to insure a mortgage on a housing project in Atlantic City, New Jersey. Providence Housing Corporation appealed to petitioner for help. After preliminary discussions, petitioner agreed to lend its assistance in sponsoring the project. After negotiations, an arrangement was agreed to by FHA, the Irving Trust Co. of New York, and petitioner. Under this arrangement the Irving Trust Co. agreed to place the mortgage on the project and FHA agreed to insure such mortgage, provided, however, that petitioner raised the necessary junior capital.
This arrangement was carried into effect. The mortgage obtained from the Irving Trust Co. was in the principal amount of $ 875,000. The mortgage ran for 28 years, commencing*90 May 1, 1939. Interest was at the rate of 4 1/2 per cent per annum. Interest alone was payable on the first day of August 1939, and quarter-annually thereafter up to and including the first day of November 1940. Thereafter, commencing on the first day of February 1941, quarter-annual installments of interest and principal were to be paid in the sum of $ 14,218.75 each, such payments to continue quarter-annually thereafter on the first day of May, August, November, and February until the entire debt was paid. The whole balance of principal, if any, remaining unpaid, plus interest accrued, was due and payable on the first day of May 1967.
Pursuant to this arrangement, petitioner caused to be organized the Chelsea Housing Corporation (hereinafter referred to as Chelsea), which was to own and operate the proposed project. Petitioner's president, Miller, was made president of Chelsea. Petitioner, in fulfillment of its agreement with FHA and the Irving Trust Co. furnished capital to Chelsea in the amount of $ 100,000 cash in return for 1,000 shares of Chelsea no par common stock. Petitioner also conveyed to Chelsea certain land which cost petitioner $ 79,287.97. Petitioner received*91 958 shares of Chelsea no par common stock in return for this conveyance.
Petitioner was engaged to construct the proposed project for a cash consideration of $ 897,783, plus 390 shares of Chelsea no par common stock. Construction of the project commenced in May 1939. Completion was anticipated by October 1939, but, due to material shortages and unseasonable weather conditions, the project was not completed until July 1940.
The project was known as Chelsea Village Apartments and was located about one mile from Atlantic City's downtown business district. It was a low rental project consisting of four main buildings with a total of 261 family units. Due to the delay in completing the project, advantage could not be taken of the 1939 fall and 1940 spring seasons, which are the customary rental seasons in Atlantic City. Rental conditions in general in Atlantic City in 1940 were depressed. *733 There had been an exodus from Atlantic City to other areas where more lucrative war jobs were available. Competition in the housing field was keen and rentals consequently were down. Chelsea obtained permission from FHA in June 1940 to reduce rents for Chelsea Village Apartments. The*92 reduction in rental rates resulted in a total reduction in anticipated income of $ 9,870 a year.
Although Chelsea Village Apartments was not entirely completed until July 1940, it was possible to make certain units available as early as March 1940. The following schedule shows how many of the 261 units were occupied from March 1940 to October 1941, inclusive:
| 1940 | 1941 | ||
| Month | Units | Month | Units |
| Mar | 15 | Jan | 212 |
| Apr | 19 | Feb | 221 |
| May | 36 | Mar | 226 |
| June | 56 | Apr | 233 |
| July | 74 | May | 237 |
| Aug | 81 | June | 248 |
| Sept | 92 | July | 253 |
| Oct | 136 | Aug | 253 |
| Nov | 171 | Sept | 249 |
| Dec | 209 | Oct | 237 |
Throughout 1940 Chelsea Village Apartments had financial difficulties. Partially due to the delay in completing the project and the resulting loss of rent the mortgage was in default early in that year. The project was also constantly behind in paying its current expenses and could obtain no further credit. Operating expenses were running higher than expected and the project needed additional working funds. Rents could not be raised for competitive reasons and the Irving Trust Co. refused to modify the terms of the mortgage.
Under these unfavorable circumstances Miller, as president of Chelsea*93 and of petitioner, was considering abandoning the project. However, Thomas D. Wootton, rental manager of the project, persuaded him to continue in control. At Wootton's suggestion Miller, acting for petitioner, made financial arrangements to meet the installment due on the mortgage in November 1940. Miller obtained a loan on behalf of Chelsea for $ 10,000 from the Mainland Bank, Atlantic City. He also guaranteed the project's accounts payable.
In the third week in November 1940 the project was informally notified that it had been assessed for local tax purposes at a value of $ 850,000. This assessment was made as a basis for taxes to be levied for 1941. At the rate of $ 6 per $ 100 value, the rate in effect in 1940, the assessment indicated a local tax for 1941 of over $ 50,000. Under local tax procedure formal notification of the assessment was not made until January 1941 and the rate of the tax on the assessed value was not determined until July 1941. The prospect of a possible $ 50,000 *734 local tax expense in 1941 was discouraging to the sponsors of the project in November 1940, when they informally learned of it. In 1939 when petitioner was negotiating with the*94 Irving Trust Co. and FHA it had an understanding with the then mayor of Atlantic City that local taxes on the proposed project would not exceed $ 18,000. This understanding was in the nature of a gentleman's agreement and was known to be legally unenforceable. A new mayor came into office in May 1940, who did not feel bound by his predecessor's commitment. Consequently the $ 850,000 value assessment made in November 1940 and the anticipated tax levy thereon of over $ 50,000 in 1941 came as an unexpected increase in prospective expenses of the project.
Miller, acting for petitioner, was persuaded to make further advances to the project in 1941. These advances were used principally to meet current operating expenses. Wootton, the project rental manager, advised petitioner to make such advances in order to retain control of the project until sufficient rentals could be received to recover these and prior advances.
FHA assumed possession and control of the project on August 27, 1941, because of the continued mortgage defaults. Under FHA management the local tax assessment made in November 1940 was appealed and heard in the fall of 1941. As a result of this appeal the project was*95 reassessed at $ 500,000, which reduced the local tax levy for 1941 to approximately $ 30,000.
On September 15, 1942, the mortgage was foreclosed. At the foreclosure sale the mortgagee, the only bidder present, bought the property at a nominal price. Pursuant to the terms of the mortgage-insurance contract, title was conveyed to FHA by the mortgagee in return for FHA bonds.
In April 1943 FHA sold the project to agents of a later formed corporation entitled "Chelsea Village, Incorporated." The sale price was $ 875,000, of which $ 30,000 was paid in cash. The unpaid balance of the purchase price was secured by a mortgage bearing interest at 3 per cent per annum.
Chelsea Housing Corporation kept its books on an accrual method of accounting and on the basis of a fiscal year ending March 31. As of March 31, 1940, this corporation's balance sheet showed current assets of $ 46,200.11, current liabilities of $ 132,725.51, total assets of $ 1,058,820.84, total liabilities of $ 894,620.84, and a net worth of $ 224,200. As of March 31, 1941, its balance sheet showed current assets of $ 11,922.78, current liabilities of $ 49,543.85, total assets of $ 1,130,098.97, total liabilities of $ 922,467.19, *96 and a total net worth of $ 207,631.78. The corporation's profit and loss statement for the fiscal year ended March 31, 1941, showed a net loss for the year of $ 60,468.22.
During 1940 Miller, in an attempt to raise money for petitioner to finance its multiple construction projects, offered Chelsea stock as collateral. *735 Several private banks and other agencies refused to accept such stock as security for any proposed loan to be made by them.
Petitioner, in its original income tax return for 1940, did not claim any deduction for loss arising from Chelsea's stock becoming worthless. On brief petitioner explains that such deduction was not claimed in its original return for 1940 for the reason that the return showed no taxable income and, therefore, there was no advantage in taking further deductions. Respondent, after making certain adjustments not here material, determined that petitioner did have taxable income in 1940. Petitioner then claimed a deduction for the alleged loss sustained as a result of Chelsea's stock becoming worthless. Petitioner now claims a deduction of $ 179,000 as a loss resulting from the worthlessness of the 1,958 shares of Chelsea stock it received*97 in return for its furnishing $ 100,000 cash and conveying land costing some $ 79,000. These 1,958 shares were received by petitioner on May 3, 1939. Petitioner further claims that the 390 shares of Chelsea stock which it received on July 5, 1940, in partial payment for constructing the project, are not includible as income in 1940, since such stock became worthless in that year. Alternatively, petitioner claims that if the 390 shares be included in its income at $ 100 a share, as respondent determined, then petitioner claims a further deduction of $ 39,000 representing a loss resulting from this stock becoming worthless in 1940. In other words, petitioner now claims a loss of $ 218,000 if the 390 shares are included as income; otherwise, it is claiming a loss of $ 179,000.
Respondent determined that Chelsea stock did not become worthless in 1940 and that, therefore, no loss was sustained or is deductible by petitioner on account of such stock. Respondent further determined that the 390 shares of Chelsea stock received by petitioner in 1940 had a fair market value of $ 39,000 and are, therefore, includible in petitioner's income to that extent.
Ogontz Housing Corporation Stock*98 Issue.
Petitioner received on or about August 24, 1940, 449.6 shares of no par common stock of Ogontz Housing Corporation, hereinafter referred to as Ogontz. These shares were received by petitioner in partial compensation for its services as general contractor in connection with the construction of Ogontz Manor Apartments located in Philadelphia, Pennsylvania. This project consisted of 3 7-story brick buildings containing a total of 203 apartments. FHA was insurer of the project's mortgage of $ 875,000, and Thomas D. Wootton was rental manager.
The project was completed in July 1940. Its operations for the fiscal year ended March 31, 1941, showed a net loss of $ 51,015.58. The *736 mortgage has been in default since the first payment was due, but has not been foreclosed. The project is still in the hands of Ogontz.
George S. Idell 1 was the project's architect. He received 350.4 shares of Ogontz no par common stock in part payment for his services. He received some of this stock in 1939 and some in 1940. As a condition to Idell's accepting this stock in partial payment, it was arranged that petitioner would relieve Idell of certain shares of this stock for cash. *99 Pursuant to this arrangement Idell transferred to petitioner 116.4 shares, receiving in return $ 8,270 in cash. This transfer occurred in 1939.
During 1939 and 1940 Idell offered to sell other shares of Ogontz stock at 25 cents on the dollar to various individuals, including petitioner and Wootton, without success. It was refused by a bank as collateral. Idell attempted selling through a broker specializing in unlisted securities. This broker unsuccessfully attempted to sell this stock in 1939 and 1940. Idell instructed the broker to get whatever price he could. Petitioner, in 1940, offered shares of Ogontz stock as collateral without success.
A summary of Ogontz's balance sheet as of March 31, 1941, shows the following:
| Assets | |||
| Current assets | $ 5,733.28 | ||
| Prepaid expenses | 1,343.01 | ||
| Fixed assets | 1,114,470.00 | ||
| Organization expense | 2,523.66 | ||
| Total assets | 1,124,069.95 | ||
| Liabilities | |||
| Current liabilities | $ 42,807.89 | ||
| Prepaid income | 2,801.43 | ||
| Fixed liabilities | 864,376.21 | ||
| Total liabilities | 909,985.53 | ||
| Net Worth | |||
| Preferred stock | $ 100.00 | ||
| Common stock, no par, 2,650 shares outstanding | 6,625.00 | ||
| Paid-in surplus | $ 258,375.00 | ||
| Less, net loss for year | 51,015.58 | ||
| 207,359.42 | |||
| Total net worth | 214,084.42 | ||
| Total liabilities and net worth | 1,124,069.95 |
*100 *737 A summary of this corporation's profit and loss statement for the fiscal year ended March 31, 1941, shows the following:
| Income | |
| Rent income | $ 64,264.81 |
| Expense | |
| Renting expense | $ 3,320.35 |
| Administrative expense | 10,370.19 |
| Operating expense | 21,510.98 |
| Maintenance expense | 5,020.01 |
| Depreciation | 21,236.57 |
| Taxes and insurance | 19,386.23 |
| Financial expense | 34,456.06 |
| Total expense | 115,280.39 |
| Net loss for year | 51,015.58 |
Petitioner, on the theory that the 449.6 shares of Ogontz stock had no value when received, did not include them on its 1940 return as income. Respondent determined that these shares constituted income to petitioner to the extent of $ 44,960. Respondent explained this determination in the statement attached to the notice of deficiency as follows:
It has been determined that the 449.6 shares of stock of Ogontz Housing Corporation which you received pursuant to contract in 1940, had a fair market value at the time received of $ 44,960.00 and that amount has been included in your income.
This adjustment was explained in the agent's report as follows:
In the matter of the Ogontz Manor Apartments contract, taxpayer received in addition*101 to cash of $ 917,968.00 also 449.6 shares of the common stock (no par) of the Ogontz Housing Corporation, the owner for whom the apartments were being built. Inasmuch as taxpayer, Anthony P. Miller, Inc. had purchased 1000 shares from the Ogontz Housing Corporation at a price of $ 100.00 per share, the agent set a value of $ 100.00 per share on those 449.6 shares that were received by taxpayer in the contract of building those Ogontz Manor Apartments. There was no other information available to give a fair determination of the stock value.
The 449.6 shares of Ogontz common stock when received by petitioner in 1940 had a fair value of $ 71 a share.
Foster Park Housing Corporation Stock Issue.
Foster Park Apartments, located in Wilmington, Delaware, is a project owned and operated by Foster Park Housing Corporation, hereinafter referred to as Foster. The project was completed in December 1940, at which time tenants first began occupancy. The project was subject to a $ 340,000 mortgage insured by FHA.
*738 Petitioner was the general contractor for the construction of this project. On February 5, 1940, petitioner contributed $ 30,000 to Foster in return for 300 shares of*102 Foster no par common stock. Petitioner sometime in 1940 received 67.64 shares of Foster stock in partial payment for services rendered.
Morton Keast was architect of the project. He received 177.37 shares of Foster stock in 1940 as partial payment for his services. Keast included these shares in his income for 1940 in the amount of $ 7,480. The inclusion of these shares at such value in Keast's 1940 income has never been questioned by the Commissioner. In 1941 Keast obtained a loan in an unspecified amount from a bank using Foster stock as collateral.
Foster's balance sheet as of December 31, 1941, shows current assets of $ 17,648.46, current liabilities of $ 967.27, and a total net worth of $ 101,938.80. Foster's profit and loss statement in the year ended December 31, 1941, shows a net profit of $ 3,638.80.
Petitioner, on the theory that the stock was worthless when received, did not include the 67.64 shares of Foster stock in its income for 1940. Respondent determined that these shares constituted income to petitioner in 1940 at $ 100 a share, or in the total amount of $ 6,764.
OPINION.
Compensation Issue.
Respondent contends that the provisions of section 24 (c) of *103 the Internal Revenue Code operate to prevent petitioner from deducting as a business expense the amount of $ 42,000, bonus and salary, received by Miller for his services during 1940. Section 24 (c) provides as follows:
SEC. 24. ITEMS NOT DEDUCTIBLE.
* * * *
(c) Unpaid Expenses and Interest. -- In computing net income no deduction shall be allowed under section 23 (a), relating to expenses incurred, or under section 23 (b), relating to interest accrued --
(1) If such expenses or interest are not paid within the taxable year or within two and one half months after the close thereof; and
(2) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and
(3) If, at the close of the taxable year of the taxpayer or at any time within two and one half months thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom losses would be disallowed under section 24 (b).
*739 Section 24 (b), referred to in subsection (3) of the above quotation, *104 is set out, as here material, in the margin. 2
The three conditions specified by section 24 (c) must coexist to prevent a deduction*105 otherwise allowable under section 23. Michael Flynn Manufacturing Co., 3 T. C. 932.
The record establishes that Miller and his family were the controlling stockholders of petitioner. We are not told the value of such stock or the distribution thereof. In the absence of any positive showing to the contrary, we assume that subsection (3) of section 24 (c) applies in the instant case. The respondent so determined and petitioner does not contend otherwise.
We also think that subsection (2) of section 24 (c) is here applicable. The fact that Miller included such compensation in his income tax return for 1940 does not affect the merits of the controversy before us. Within the meaning of section 24 (c), deductibility by petitioner of the item in question is not determinable by what Miller may or may not have done in respect of reporting such item for income tax purposes. The application of section 24 (c) (2) depends solely upon whether the item sought to be deducted by petitioner was includible for tax purposes in Miller's income for the year of its deduction. J. H. Martinus & Sons v. Commissioner, 116 Fed. (2d) 732,*106 and McDuff Turner, 5 T. C. 1261. From the record it appears that Miller, on behalf of petitioner, determined the amount of his compensation for 1940 and that such amount was accrued on petitioner's books in that year. However, we are given no detailed information with regard to the manner in which the compensation was authorized. No corporate resolutions, minutes, memoranda, or records are in evidence to show that such compensation was unconditionally authorized and made available to Miller under circumstances which would have required him to include such compensation in his income for 1940. There is nothing in the record to justify our assuming that the amount accrued on petitioner's books was credited to Miller's account rather than *740 merely debited to some expense account. The notes, one dated December 30, 1940, and the other January 1, 1941, were not delivered to Miller until January 1, 1941, and were paid December 31, 1942. The note transactions indicate an understanding which negatives constructive receipt. Under these circumstances it can not be held that such compensation was constructively received by Miller in 1940 and, hence, *107 includible in his income for that year.
Believing as we do that subsections (2) and (3) of section 24 (c) apply in the instant case, we are presented with the single question of whether subsection (1) applies. Respondent contends that subsection (1) applies. Respondent argues that the compensation was not "paid" by petitioner within the meaning of subsection (1) by the execution and delivery to Miller of notes therefor. Petitioner contends that the delivery of the notes on January 1, 1941, constituted payment, citing Musselman-Hub-Brake Co. v. Commissioner, 139 Fed. (2d) 65, and other similar cases. It is not contended that there was payment otherwise.
With due respect to the Circuit Court of Appeals for the Sixth Circuit, which decided the Musselman case, we believe its interpretation of section 24 (c) as therein given does not reflect the intent of Congress and we here respectfully record our disagreement with the holding that the facts in that case constituted payment within the meaning of such section.
The applicability of subsection (1) depends on whether the compensation involved was "paid" within the meaning of such subsection by giving*108 Miller the notes on January 1, 1941.
Section 24 (c) was first enacted in the Revenue Act of 1937. The principal purpose of adding this section is evident from its legislative history. 3 Deductions were being taken by certain classes of debtors using the accrual method of accounting. These debtors took the deductions in the years of accrual. The amount of the deduction would not be includible in the cash basis creditor's income until actually received. When the creditor bore a certain relationship to the debtor, control and abusive manipulation of the time of receipt, if ever, by such creditor was possible and frequently exercised. Thus, the Government was in the position of permitting deductions to debtors for accrued items on which income tax was avoided altogether by the cash creditor or postponed to a taxable year selected by the creditor as being most advantageous to him taxwise. It was thought that section 24 (c):
* * * should serve to stimulate reasonably prompt payment of such accrued expenses in order that the debtor may secure the allowance of the deduction. *741 No hardship should result from the requirement that the amount be paid within 2 1/2 months after*109 the close of the year of accrual since expenses of this nature usually should be paid within that time in the ordinary course of business. While this restriction would be applicable only to individuals and corporations in relationships covered by section 24 (a) (6), this class represents the worst offenders in the use of this loophole.
Report of Joint Committee on Tax Evasion and Avoidance, supra (footnote 3), p. 16.
It is our view that the word "paid" as used in section 24 (c) (1) means paid in actuality in cash or its equivalent and that the giving of one's own note for one's obligation is not such payment. Giving a note is not the equivalent of payment in cash, nor is it constructive payment. The word "paid" has an accepted and customary*110 meaning of paid in cash or its equivalent, and we have no doubt that such was the meaning of its employment in the enactment of section 24 (c) (1), since such meaning appears necessary to effectuate the purposes and objectives of that enactment.
We consider it important to point out a distinction between the requirements of subsection (1) and subsection (2). In determining that section 24 (c) (2) applies to a taxpayer on the accrual basis, constructive receipt by a creditor on the cash basis of the amount of an accrued obligation of such taxpayer in the year of its accrual is an important factor, but actual or constructive payment is not essential. For the determination that section 24 (c) (1) applies, however, it is not enough that there was constructive receipt by the taxpayer. Even if constructive payment were considered as within the meaning of "paid" as used in subsection (1), constructive receipt by the taxpayer would not be determinative of constructive payment. As we said in P. G. Lake, Inc., 4 T. C. 1; affd., 148 Fed. (2d) 898:
Petitioner, arguing from the Michael Flynn Manufacturing Co. case, contends that*111 the amount here in question was constructively received prior to March 15, 1940, wherefore, it must be held to have been likewise paid within that period. However, the fact that an amount is deemed to have been constructively received does not compel the conclusion that it was also "paid" within the meaning of the statute. Cox Motor Sales Co., 42 B. T. A. 192. Nor does the Michael Flynn Manufacturing Co. case suggest that an amount includible in gross income under subdivision (2) is to be considered "paid" under subdivision (1). * * * [Emphasis supplied.]
In the administration of the revenue acts payment (constructive or otherwise) is not the legal corollary of constructive receipt. In other words, for the purposes of the revenue acts, payment is not established merely by the establishment of constructive receipt. There are valid reasons why payment as the basis of a deduction does not follow from the holding that the item sought to be deducted was constructively received by an obligee. Deductions are available only if authorized by legislation and then upon the conditions prescribed. On the other *742 hand, it is mandatory*112 that a taxpayer on the cash basis of accounting report his taxable income for the year received, and for tax purposes income is held to have been received when its receipt has been made unrestrictedly available to him. In Cox Motor Sales Co., 42 B. T. A. 192, involving dividends paid credit, we said:
Even if we assume in petitioner's favor, however, that the Commissioner should have taxed to the shareholders the dividends as constructively received in 1936, it does not follow as a matter of law, however inevitable the conclusion of the syllogism would be in logic, that within the meaning of section 27 the dividends should be considered "paid" in the earlier year by the corporation. See Black Motor Co., 41 B. T. A. 300, 305. The asymmetry of the taxing statutes has been the subject of frequent comment by the courts. See Helvering v. City Bank Farmers' Trust Co., 296 U.S. 85. However desirable it may be thought on logical grounds that constructive receipt by the stockholder should imply its correlative, constructive payment by the corporation, see Paul and Mertens, 1 Law of Federal Income*113 Taxation, 1939 Supp., § 32A.24, we are not at liberty on that account to construe the section before us in a way that would obviously pervert the intent of Congress that actual payments should be made by the corporation to justify the deduction of the dividend claimed.
See also Mertens, Law of Federal Income Taxation, §§ 10.18, 11.30, and 39.17, and I. T. 3242, C. B. 1939-1 (Part 1), p. 172. 4
But aside *114 from the fact that constructive receipt does not necessarily involve constructive payment, in any event we see no justification in the language of subsection (1) for resorting to the theory of constructive payment. As we said in the Lake case, supra:
Further, the facts of this case do not warrant the application of the doctrine of constructive payment, were such considered to be a sufficient compliance with the statute: "Constructive payment is a fiction applied only under unusual circumstances * * *." Fincher Motors, Inc., supra. * * *
In affirming the case just cited the Circuit Court of Appeals for the Fifth Circuit, in P. G. Lake, Inc. v. Commissioner, supra, said in this connection:
Where, as here, the definite word "paid" is used in the statute we are not permitted by the theory of fiction to give to that word an indefinite meaning as taxpayer would have us do by ingrafting on the statute the word "constructively." Mass. Mutual Life Ins. Company v. United States, 288 U.S. 269, 270, 275 * * *. The ordinary and usual meaning of "paid" is to liquidate a liability in cash. Helvering v. Price, 309 U.S. 409, 413*115 * * *; Echert [sic] v. Burnet, 283 U.S. 140, 141, 142 * * *; Quinn v. Commissioner, 111 F. (2d) 372 * * *. [Emphasis supplied.]
*743 In Sanford Corporation v. Commissioner, 106 Fed. (2d) 882 (certiorari denied), involving a personal holding company dividend paid credit, the court said:
It will be observed that in both the undistributed profits surtax act and the one under consideration, the dividends credit provision employs the word "paid". To relieve from tax under the circumstances of the case at bar, it is necessary to interpret the verb against its literal meaning by adding thereto the adverb constructively. Generally speaking, any extension of the unreal doctrine of attaching consequences by the fiction of a constructive something or other * * * is embarrassing to a proper development of the law. * * *
In view of the above discussion we are forced to the conclusion that "paid," as used in subsection (1), means paid in cash or its equivalent. The practical effect of this construction of subsection (1) is to place the debtor on a cash method of accounting with *116 respect to the deductible item during the two and one-half month period of grace. Concluding, as we do, that section 24 (c) (1) requires cash payment, or its equivalent, we think it is clear that execution and delivery of a promissory note do not satisfy this requirement.
The notes herein were promises to pay compensation for Miller's services. They evidenced and promised to pay the same obligation that was accrued on petitioner's books in the taxable year. No new obligation arose by the notes transaction and no debt was paid thereby. The notes were not paid within 2 1/2 months after the close of the taxable year. In Eckert v. Commissioner, 45 Fed. (2d) 158 (C. C. A., 2d Cir.); affd., 283 U.S. 140, the taxpayer on the cash basis gave his note to a bank in settlement of his guaranty of a corporation's note to the bank. Taxpayer claimed a deduction for a loss in the amount of the note he gave the bank in the year given. The note was not paid in that year. The Circuit Court said:
On this basis, petitioner did not lose by reason of his endorsement or assumption of a corporation's obligation to the bank by issuing his*117 own note. His liability on the corporation's note arose by reason of the endorsement and, when he sustains a loss, it must be attributable to that alone * * *. The giving of a note does not constitute a cash payment.
In Helvering v. Price, 309 U.S. 409, the question decided and the holding of the Court are correctly set forth in the syllabus as follows:
Where taxpayer whose accounts were kept on cash basis executed and delivered to bank in 1931 notes under guaranty agreement, and in 1932 taxpayer executed to bank in settlement of taxpayer's liability a note secured by collateral, taxpayer who did not pay the note in 1932 was not entitled to income tax deduction in 1932 on the ground that he sustained "loss" in that year as result of guaranty agreement, the mere giving of the note and collateral not constituting a "payment in cash or its equivalent."
This holding was made under provisions of section 23 (e) of the Revenue Act of 1932. In that case the Supreme Court quoted the following from its decision in the Eckert case, supra:
*744 * * * As happily stated by the Board of Tax Appeals the petitioner "merely exchanged his note under*118 which he was primarily liable for the corporation's notes under which he was secondarily liable, without any outlay of cash or property having a cash value." A deduction may be permissible in the taxable year in which the petitioner pays cash. The petitioner says that it was definitely ascertained in 1925 that the petitioner would sustain the losses in question. So it was, if the petitioner ultimately pays his note.
In Quinn v. Commissioner, 111 Fed. (2d) 372 (C. C. A., 5th Cir.), the taxpayer on a cash basis gave his note for $ 3,000 to an accounting firm in full payment of a business expense, under agreement with the firm and a bank that the latter was to accept the note as credit on the firm's debt to it and charge same to taxpayer's account. The note was not paid in the taxable year. Taxpayer sought to deduct it in that year. It was held that, since "at no time during the taxable year did Salisbury pay any cash with respect to the accounting obligation," he was not entitled to the deduction. In its opinion the court quoted from Helvering v. Price, supra, as follows:
As the return was on the cash basis, *119 there could be no deduction in the year 1932, unless the substitution of respondent's note in that year constituted a payment in cash or its equivalent. There was no cash payment and under the doctrine of the Eckert case * * * the giving of the taxpayer's own note was not the equivalent of cash to entitle the taxpayer to the deduction.
See also Massachusetts Mutual Life Ins. Co. v. United States, 288 U.S. 269; Hart v. Commissioner, 54 Fed. (2d) 848; Sanford Corporation v. Commissioner, supra;John C. Cleaver, 6 T. C. 452. Mertens, Law of Federal Income Taxation, vol. 4, § 26.02, note 17, states in this connection:
It seems unlikely that payment of the items by a promissory note, alleged to be received in complete satisfaction, would be an effective technique of securing a deduction without an actual transfer of cash. To effectuate the purposes of the amendment, the courts would probably place a restrictive interpretation upon the word "paid" and deny the deduction in such a case. * * *
In Schlemmer v. United States, 94 Fed. (2d) 77,*120 the court, speaking through Judge Learned Hand, said:
* * * Indeed, it is not at all clear that it (the obligor's note) would have been a cash item, even if it had in fact been taken as payment. It did not change the substance of the debt -- not being endorsed or secured -- and although it was more readily disposable, that single incident was scarcely enough. There must be more than difference in the mere form of property to justify a charge of income. * * *
To interpret "paid" as paid in cash or its equivalent, is not a restricted interpretation, since that is its usual and customary meaning. We see no necessity or warrant for extending the usual and accepted meaning of "paid" to include "constructively paid" or to include a promise to pay, particularly when such an expanded and unnatural construction breeds confusion, uncertainty, administrative difficulties, *745 and a meaning subversive of the apparent purpose of the statute. Accordingly, we hold that the deduction for compensation to Miller was properly disallowed under the provisions of section 24 (c).
Chelsea Housing Corporation Stock Issue.
Petitioner contends that the 1,958 shares of Chelsea stock which it received*121 in May 1939 in return for capital contributions became worthless in the calendar year 1940. Petitioner relies on certain facts and circumstances, which will presently be considered, as establishing the worthlessness of the stock as of 1940.
Respondent contends that this stock did not become worthless in 1940. Respondent argues that petitioner has failed to sustain its burden of proving the necessary elements to establish worthlessness in 1940. We think respondent must be sustained.
Petitioner offered the testimony of expert witnesses to show that the book value attributed to Chelsea's assets in 1940 was greatly in excess of its actual value. The values determined by these witnesses varied from approximately $ 800,000 to $ 300,000, depending on various assumptions. Petitioner argues from this line of testimony that the value of Chelsea's assets was such in 1940 as to render its stock without liquidating value, but lack of liquidating value of and by itself does not conclusively establish the worthlessness of stock for income tax purposes. Iron Fireman Mfg. Co., 5 T. C. 452, 460; Cooley Butler, 45 B. T. A. 593, 601.*122 Despite current lack of liquidating value, stock may have prospective value. The question of the prospective value of the stock in question will be considered herein in due course. Secondly, petitioner has failed to prove that the lower asset value contended for was not also a fact in 1939 or some other year. In other words, petitioner has not shown, even assuming the validity of the values contended for, that the stock became worthless in 1940 rather than in 1939 or some other year. As we held in Roosevelt Investment Corporation, 45 B. T. A. 440, 456:
We are of the opinion that the petitioner has failed to prove an essential fact necessary for a finding by us that the stock became worthless in the taxable year, namely, that the stock had value at the beginning of the taxable year. Frank C. Rand, 40 B. T. A. 233. Unless the stock had value at some time in the taxable year there could be no loss sustained due to the stock becoming worthless in that year. For failure of petitioner First Realty to sustain the burden of proof in this matter we uphold respondent on this issue.
We think this reasoning is applicable*123 to the instant case. San Joaquin Brick Co. v. Commissioner, 130 Fed. (2d) 229; Hull's Estate v. Commissioner, 124 Fed. (2d) 503; certiorari denied, 316 U.S. 690; Alvin J. Spring, 4 T. C. 248; Dudley R. Parsons, 4 T. C. 525.
Petitioner places great reliance on the local tax assessment made in November 1940 as an identifiable event signaling the destruction of the *746 stock's value. Petitioner argues that news of this assessment came as a culmination to a chain of adverse circumstances and constituted the death rattle of Chelsea. We are not persuaded by this argument. In the first place the assessment valued Chelsea's assets at $ 850,000, which can not be considered confiscatory in view of the $ 875,000 mortgage. In the second place, the assessment was made as a basis for local taxes to be levied, not in 1940, but in 1941. The rate of taxation on the assessed value was not known or determined in 1940. In 1940 there was the possibility of appealing such assessment. This was in fact done with success. In no event *124 could the assessment result in any direct financial injury to Chelsea in 1940. We do not think that a prospective and contingent expense can be considered an event establishing worthlessness. As said in New York Water Service Corporation v. Hoey (U. S. Dist. Ct., S. Dist., N. Y., 4/6/43):
* * * An event which indicates the imminence of loss but not the present fact of loss does not meet the test enunciated by the cited authorities. Burdan v. Commissioner, 106 Fed. (2d) 207.
What we said in Daniel J. Ryan, 19 B. T. A. 52, is equally applicable to petitioner's argument in this connection in the instant case. "In any event, this argument, founded on prospective losses which are based on future contingencies, seems to us to be purely speculative." For these reasons we conclude that the local tax assessment can not be considered as an event establishing the worthlessness of the stock in question in 1940.
Petitioner argues that the refusal of certain banks and lending agencies to accept Chelsea stock as collateral in 1940 is indicative of the stock's worthlessness in that year. Nonacceptance of stock as collateral*125 has been held as not conclusive of worthlessness. Royal Packing Co. v. Lucas, 38 Fed. (2d) 180. There are many considerations, other than worthlessness, which might prompt conservative business minds to refuse a given stock as collateral. Chelsea's balance sheets for the fiscal years ended March 31, 1940 and 1941, show an excess of current liabilities over current assets. This unfavorable current ratio might well constitute grounds for refusing such stock as collateral, although total assets exceeded total liabilities, indicating a net worth. But even if nonacceptance as collateral were considered as indicative of worthlessness, petitioner has again failed in its proof to confine such worthlessness to 1940. We are not shown whether such stock had collateral value, for instance, in 1939. Consequently, we find the same difficulty in this connection as we found with respect to petitioner's argument that the stock had no liquidating value in 1940. In both instances petitioner has failed to identify the process of becoming worthless with the year 1940.
*747 Petitioner's remaining arguments to establish the stock's worthlessness in 1940 involve*126 and rely in general upon the financial difficulties of Chelsea during 1940 and the depressed rental market in that year. Petitioner, in argument, recites that Chelsea was in default on its mortgage, behind on its accounts payable, operating at a loss, and facing poor business conditions in general. It can not be denied that these facts and circumstances present an unfavorable situation. Financial difficulties and depressed business conditions, however, though no doubt discouraging, fall short of establishing the worthlessness of the stock involved. Few are the enterprises which at some time or other do not face difficulties and discouragement. It has frequently been held that such factors as deficits, operating losses, lack of working funds, poor business conditions, and similar circumstances are insufficient in themselves to establish the worthlessness of stock. Hull's Estate v. Commissioner, supra;Coleman v. Commissioner, 81 Fed. (2d) 455; Deeds v. Commissioner, 47 Fed. (2d) 695; Charles O. Middleton, 25 B. T. A. 484, 487; Elliott R. Corbett, 28 B. T. A. 46, 51.*127
The inconclusiveness of much of petitioner's proof is traceable to its failure to dissipate the possible element of prospective value for the stock. Petitioner's arguments based on the alleged lack of liquidating and collateral value of the stock and its argument depending on financial difficulties just discussed are inconclusive as a result of this failure. The principle is now well settled that in cases such as the instant one the taxpayer to prevail must show that the stock in question had no potential or prospective value. In Sterling Morton, 38 B. T. A. 1270, at 1278, we said:
The ultimate value of stock, and conversely its worthlessness, will depend not only on its current liquidating value, but also on what value it may acquire in the future through the foreseeable operations of the corporation. Both factors of value must be wiped out before we can definitely fix the loss. If the assets of the corporation exceed its liabilities, the stock has a liquidating value. If its assets are less than its liabilities but there is a reasonable hope and expectation that the assets will exceed the liabilities of the corporation in the future, its stock, *128 while having no liquidating value, has a potential value and can not be said to be worthless. The loss of potential value, if it exists, can be established ordinarily with satisfaction only by some "identifiable event" in the corporation's life which puts an end to such hope and expectation.
The present record, in our opinion, fails to point out an identifiable event or any other circumstance which persuasively negatives the possibility of potential value. The project was not completed until July 1940. From July to December 1940, inclusive, the number of occupied units rose from 74 to 209 out of a total number of 261 units. In other words, 6 months after completion the project had achieved 80 per cent occupancy in difficult times. Since the project, during 1940, was in such early stages of its operations, we think it incumbent *748 on petitioner to point to an identifiable event which clearly signals a destruction of prospective or potential value. In our opinion, petitioner has not succeeded in doing this. Failure to make such showing is particularly damaging to petitioner's case in view of the fact that FHA, as insurer of the mortgage, did not consider it necessary to*129 assume possession and control until August 1941. It is also significant that the mortgagee did not foreclose until 1942. Petitioner has shown that serious financial difficulties obtained in 1940, but this falls short of establishing the elements necessary to prove worthlessness. Hull's Estate v. Commissioner, supra;Bullard v. United States, 146 Fed. (2d) 386; Cooley Butler, supra;Walter H. Goodrich & Co., 40 B. T. A. 960; Sterling Morton, supra.We hold that petitioner has failed to sustain its burden of proving that this stock became worthless in 1940. It follows that respondent correctly disallowed the deduction.
There remains the question involving the 390 shares of Chelsea common no par stock which petitioner received on July 5, 1940, in partial payment on its construction contract. Respondent contends that this stock is includible in petitioner's 1940 income at $ 100 a share. Petitioner contends that this stock was either worthless when received, and could not therefore constitute income, or became worthless during *130 1940 and, if included as income, increases petitioner's loss pro tanto. We have decided that this stock was not worthless during 1940. It follows that the value of the 390 shares received as partial compensation constitutes taxable income to petitioner. Respondent has determined the value of such shares when received by petitioner at $ 100 each. This valuation is based on the price paid by petitioner for the 1,958 shares in 1939. This is also the value at which this stock was carried on Chelsea's books. On the record before us we are unable to say that respondent's valuation is incorrect. The evidence presented by petitioner on this issue has not only failed to establish worthlessness, but has also failed to furnish us with any fact which would justify or enable us to determine a lesser value with any reasonable assurance. We consequently hold respondent's valuation as correct.
Ogontz Housing Corporation Stock Issue.
Petitioner contends that the 449.6 shares of Ogontz stock did not have any market value when received in August 1940 and, therefore, did not constitute income for that year. Respondent has determined that these shares were worth $ 100 each when received. *131 After carefully considering all the evidence presented, we have found as a fact that this stock was worth $ 71 a share when received by petitioner.
Respondent's determination is prima facie correct and petitioner has the burden of proving such determination erroneous. We think there *749 is sufficient evidence in the record to overcome the prima facie correctness of respondent's valuation.
While the evidence available does not, in our opinion, sustain petitioner's contention that the stock had no market value when received, it does, we think, succeed in overcoming the presumptive correctness of respondent's determination. Petitioner's witness, Idell, testified that he unsuccessfully attempted at various times during 1939 and 1940 to sell his shares of Ogontz stock. Idell testified that a broker dealing in unlisted securities was unable to sell these shares at any price. Petitioner, in argument, relies heavily on this evidence of nonsalability as proving no market value. While we do not think this line of testimony is without significance, we think it falls short of establishing a total lack of value for income tax purposes.
In the first place, nonsalability does not necessarily*132 indicate lack of market value. Crowell v. Commissioner, 62 Fed. (2d) 51; Old Colony Trust Co. v. Commissioner, 59 Fed. (2d) 168; Nolting v. Tait, 3 Fed. Supp. 686; Mathilde B. Hooper, Administratrix, 41 B. T. A. 114, 129. This is particularly true with respect to unlisted stock of a closely held corporation, especially when such corporation is a new enterprise. In the second place value in terms of marketability is of less significance in determining the value of stock received as compensation than it is in other situations, such as, for instance, determining gain or loss from exchanges of property. Nolting v. Tait, supra.
Petitioner's witnesses, Wootton and Mae Hale, valued the physical assets of Ogontz at $ 508,484 and $ 700,000, respectively, as of December 31, 1940. If either of these valuations were substituted for the $ 1,114,470 value appearing in the balance sheet of Ogontz as of March 31, 1941, a deficit would result, with no liquidating value attributable to the common stock. Petitioner argues from*133 this line of testimony that the stock had no market value because of the insufficiency of the underlying assets. We do not, however, feel bound by the opinions of these witnesses, particularly in view of the fact that the bases of their opinions were outlined only in generalities. Furthermore, as we said concerning the Chelsea stock, lack of liquidating value of itself does not necessarily establish worthlessness. Iron Fireman Mfg. Co., supra;Cooley Butler, supra.
Idell, on direct examination and cross-examination, testified that in 1939 petitioner, represented by Miller, paid $ 8,270 in return for 116.4 shares of Ogontz common stock, or approximately $ 71 a share. Idell's testimony explains that this arrangement was agreed to as a result of negotiations concerning the terms of Idell's compensation for his services as architect. We have based our finding of value to a considerable degree upon this transaction. We recognize that this transaction does *750 not represent and is not equivalent to an unfettered sale on an open market. But we do consider this transaction as embodying the essential features of a payment*134 of stock for services at a stipulated price. Section 19.22 (a)-3 of Regulations 103 provides, inter alia, that "If the services were rendered at a stipulated price, in the absence of evidence to the contrary such price will be presumed to be the fair value of the compensation received." Under this regulation, in the absence of contrary evidence, stock accepted in satisfaction of a stipulated compensation would be presumed to be equivalent in value to the stipulated compensation. The presumption is based on the apparent agreement of the parties on the stock's value. In the instant case, in our opinion, there exists this same basis for presumption. It is true that Idell's stipulated compensation is not known, but we do know the value of the stock agreed on by the parties with respect to such compensation. Consequently, we think that the transaction between Idell and Miller furnished essentially the same basis for presuming value which the quoted regulation indicates as proper in the absence of contrary evidence. Crowell v. Commissioner, supra;Old Colony Trust Co. v. Commissioner, supra;Nolting v. Tait, supra.*135
In cases such as this, where there have been no sales, and the enterprise is new and lacks any pattern of earnings or dividends, the determination of stock value is extremely difficult. This difficulty, however, does not warrant a finding of no value or justify a random finding of high value based on subscription prices. We have concluded that the transaction between Idell and Miller, which, although occurring prior to 1940, is closer in time to 1940 than the subscription payment, constitutes the most satisfactory evidence of value contained in this record. This transaction, we think, furnishes a criterion of value approved by the regulations for situations wherein market value is obscure for lack of sales. This value roughly approximates the stock's liquidating value based on assets and liabilities reflected in the balance sheet as of March 31, 1941. After carefully weighing all the available evidence bearing on the value of the stock when received by petitioner, we have concluded and found as a fact that $ 71 a share best represents the value as indicated by the record before us. We hold, therefore, that the 449.6 shares received by petitioner in 1940 are includible in its*136 taxable income for that year at $ 71 a share.
Foster Park Housing Corporation Stock Issue.
Petitioner contends that the 67.64 shares of Foster stock received by it in 1940 were worthless when received and did not therefore constitute income in that year. Respondent contends that these shares were includible in petitioner's 1940 income at $ 100 a share.
Respondent's determination is prima facie correct and petitioner has the burden of proving such determination erroneous. We think *751 petitioner has failed to meet its burden of proof on this issue. Petitioner's principal witness on this issue was Morton Keast, the project's architect. He testified that the stock was worthless in 1940. Keast's reason for considering the stock worthless in 1940 was:
Because it was a corporation that was not getting any income. The tenants had just been placed in December. There was no income for the year. Until there is a sufficient income to offset the expense, the stock couldn't have any value.
Since the project was not completed until December 1940, it is understandable that no income was realized in that year. The fact that a corporation has not yet commenced business operations*137 is hardly an argument for the worthlessness of its stock. In 1941, the first year of operations, profits were made and a net worth indicated.
Keast further testified that he returned the 177.37 shares of Foster stock received by him as income in 1940 in the amount of $ 7,480, or approximately at $ 42 a share. When asked how he reconciled this inclusion in income with his statement that the stock was worthless, Keast answered:
The reason this was done in this manner, is: In our banking statement which covers our loans as we go along, from time to time, the value of $ 7,480 that I put in then was the value I expected it to be worth within a year or two; and that was the reason it was put in at that time.
This explanation we find confusing and unsatisfactory. We do not consider such testimony as proving no value or even as proving a value of $ 42 a share.
Keast also testified that in 1941 he obtained a loan from a bank, using Foster stock as collateral. Keast testified that such loan was granted "* * * by reason of a letter in which a purchaser agreed to take it over for a small amount; the amount of the loan." We are not told the terms or amount of the loan and consequently we learn*138 little from such testimony which would enable a determination of the stock's value.
Probably because the project was not completed until December 1940, there is no balance sheet or profit and loss statement for that year in evidence. The balance sheet in evidence showing Foster's financial condition as of December 31, 1941, shows a net worth of $ 101,938.80, but we are not told how many shares of stock of Foster were issued and outstanding. It is impossible for us therefore to determine a liquidating value. For the same reason we can not capitalize the earnings shown in the profit and loss statement for the year ended December 31, 1941.
On this state of the record, we are unable to conclude that respondent's evaluation at $ 100 a share is erroneous. We, therefore, hold that petitioner has failed to sustain its burden of proving respondent's determination erroneous. It follows that respondent correctly included in petitioner's 1940 income the 67.64 shares of Foster stock at $ 100 a share.
*752 Respondent, at the hearing and by omission on brief, has apparently conceded that petitioner is entitled to carry forward as a deduction from its 1940 income certain net operating losses*139 from 1939. We so hold.
Decision will be entered under Rule 50.
Black, J., dissenting: The majority opinion declines to follow the decision of the Sixth Circuit in Musselman Hub-Brake Co. v. Commissioner, 139 Fed. (2d) 65. With respect to that case the majority opinion says:
With due respect to the Circuit Court of Appeals for the Sixth Circuit, which decided the Musselman case, we believe its interpretation of section 24 (c) as therein given does not reflect the intent of Congress and we here respectfully record our disagreement with the holding that the facts in that case constituted payment within the meaning of such section.
I do not agree that the Musselman case was wrongly decided by the Sixth Circuit. On the contrary, it is my view that it was correctly decided and should be followed in the instant case because it is precisely in point. It seems clear that when Congress enacted section 24 (c) of the Internal Revenue Code it was endeavoring to correct an abuse which had grown up where corporations which were family corporations within the definition of 24 (b) frequently accrued certain liabilities such as compensation*140 and interest as being owed to their stockholders, took deductions therefor, and never paid such liabilites, and, therefore, the stockholders on the cash basis never returned such amounts as taxable income.
That situation is not present in the instant case. It is true, of course, that the corporation is a family corporation within the definition of 24 (b) and therefore section 24 (c) (3) is applicable. It may also be assumed, as the majority report holds, that the compensation was not unconditionally credited to the account of Anthony P. Miller in 1940 so as to make the amounts taxable to him in that year under the doctrine of constructive receipt. See Michael Flynn Manufacturing Co., 3 T. C. 932. It is true that the facts show that Anthony P. Miller did actually return for taxation in 1940 the amounts of his compensation which had been accrued as a liability by the petitioner corporation. I am willing to assume, however, that the amounts of this compensation had not been unconditionally credited to Anthony P. Miller in 1940 in such a manner as to make applicable the doctrine of constructive receipt and that his return of the income in that year for*141 taxation was error.
I, therefore, agree that section 24 (c) (2) is applicable, as the majority opinion holds. I do not agree, however, that section 24 (c) (1)*753 is applicable to exclude the deduction, as the majority opinion holds.
The findings of fact show that on January 1, 1941, petitioner executed its demand notes payable to Anthony P. Miller for the full amounts of the compensation which had been accrued by the corporation in 1940 as a liability to him. The corporation was in ample funds to pay these notes any time Anthony P. Miller should have demanded their payment and undoubtedly as to him the compensation was paid on January 1, 1941, in property which was the equivalent of cash and he was taxable on these amounts in 1941. As the court said in the Musselman case:
* * * Likewise, notes or other evidences of indebtedness received for services, rents, interest or royalties constitute income to the amount of their fair market value. Helvering v. Bruun, 309 U.S. 461 * * *; Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462, * * *
Therefore, if the receipt of promissory notes payable*142 to petitioner on demand, which were worth their face value, constituted taxable income to him when received January 1, 1941, I see no reason why the amounts represented by these notes should not be considered as "paid" by petitioner "within two and one half months" after the close of the taxable year 1940 within the meaning of section 24 (c) (1). As said by the court in the Musselman case:
To construe the word "paid" to mean that the payment must be in cash, is to distort the statute. The statute here in question is not for the purpose of classifying taxpayers but is for the purpose of bringing about uniformity among taxpayers in the matter of allowable deductions.
* * * *
As we view the applicability of the statute to the facts here, it is unnecessary to place a restrictive interpretation upon the word "paid." Clearly under the rule of constructive payment, the notes with a readily realizable value of par were more than a mere accural of indebtedness on the books of petitioner.
There is nothing in the views herein expressed which is contrary to our decision in P. G. Lake, Inc., 4 T. C. 1; affd., 148 Fed. (2d) 898.*143 In the Lake case the corporation owed to its stockholder, P. G. Lake, a large sum of money. In 1939 it accrued on its books as a liability the amount of interest on this indebtedness and took a deduction for such accruals on its 1939 return. The corporation did not, however, unconditionally credit the amount of this interest to P. G. Lake's account in 1939 so as to make it taxable to him under the doctrine of "constructive receipt," nor did it, prior to March 15, 1940, execute promissory notes worth their face value payable to him. It actually paid such interest to Lake on May 17, 1940, by check, which was after the date required by section 24 (c) (1). We held that under those circumstances the corporation taxpayer was not entitled to a deduction for the accrual of interest in 1939. In that case we were careful to point out the distinction in its facts from those which were present in the Musselman case. In pointing out such distinction we said:
*754 * * * Here there is nothing more than a mere accrual of the amount due upon the books of the corporation. The amount was not ordered to be paid, nor was it credited to Lake on the books of the petitioner, nor was there*144 any other manifestation of intention on the part of petitioner to put the amount beyond its control and within the control of Lake. It may be noted that the Circuit Court of Appeals for the Sixth Circuit in the Musselman Hub-Brake case was careful to point out that "the notes with a readily realizable value of par were more than a mere accrual of indebtedness on the books of petitioner."
I may further say that if an unconditional crediting, within the taxable year by the corporation, of the accrued salary to the one who is to draw it so that all he has to do is to demand the money, as in the Michael Flynn case, prevents section 24 (c) (2) from applying because of the doctrine of "constructive receipt," although no actual cash has passed between the parties, I see no reason why section 24 (c) (1) should not also be prevented from applying under the doctrine of the Musselman case when, as here, the taxpaying corporation prior to March 15 of the following year executed its "on demand" promissory notes to its officer to whom the compensation was due, and all that he had to do to get the money was to demand it. Because the majority opinion holds to the contrary, I respectfully*145 dissent.
Another reason for my dissent to the majority opinion is because it holds that petitioner is taxable on $ 39,000 by reason of the receipt on July 5, 1940, of 390 shares of the capital stock of Chelsea Housing Corporation. Petitioner is claiming a deduction for $ 179,000 which it invested in a prior year in 1,958 shares of the Chelsea Housing Corporation stock because such stock became worthless in 1940. It also claims that it is not taxable on the 390 shares of the same stock which it received in 1940 as part of the compensation on its building contract with the corporation because such stock had no fair market value at the time it was received. The majority opinion holds that petitioner has not proved that this stock became entirely worthless in 1940, but on the contrary the evidence shows that the Chelsea Housing Corporation did not surrender possession of its property until 1941 and the mortgage on the property was not foreclosed until 1942. On these facts I am willing to go along with the majority opinion in its holding that the stock of the Chelsea Housing Corporation did not become entirely worthless in 1940. Therefore, petitioner's claim of a deduction of $ 179,000*146 for worthless stock should be disallowed. Perhaps the stock did have some potential value at the end of 1940, though I think from the evidence that value must have been very small and uncertain. However, while willing to agree to the holding of the majority that petitioner is not entitled to take a deduction of $ 179,000 in 1940 because of 1,958 shares of Chelsea Housing Corporation stock becoming worthless in that year, I am unwilling to agree to the majority holding that petitioner should be taxed on $ 39,000 as income received in 1940, *755 represented by 390 shares of the Chelsea Housing Corporation stock at $ 100 per share, received July 5, 1940. Respondent's own revenue agent, reporting on the value of this stock, had this to say:
It may be noted that also in the contract by taxpayer for the construction of the Chelsea Village apartments, taxpayer received in addition to the cash consideration of $ 897,783.00, Common stock of the Chelsea Housing Corp. (which owns the Chelsea Village), in the amount of 390 shares. However in this instance, the examining agent holds that the stock had no value, since this development was a failure, and as a matter of fact was foreclosed*147 upon in 1942 by the sheriff, and as early as 1941, a voluntary Trusteeship was created to try to work out the situation, but failed.
I agree, of course, that petitioner could not prevail in this case against respondent's determination on this issue by merely introducing the revenue agent's report. Petitioner makes no such contention. Petitioner has introduced much evidence, as shown by the findings of fact in the majority opinion bearing upon the value of this Chelsea Housing Corporation stock in 1940. It would make this dissenting opinion too long to discuss these facts in detail and I shall not do so. Suffice it to say that I think these facts clearly show that this Chelsea Housing Corporation stock had no such value as $ 100 per share or any value near that amount when petitioner received the 390 shares on July 5, 1940. The majority opinion, as I construe it, does not affirmatively hold that the stock had a value of $ 100 per share in 1940 when it was received. The majority opinion in the concluding part of its discussion of this point says:
* * * On the record before us we are unable to say that respondent's valuation is incorrect. The evidence presented by petitioner on*148 this issue has not only failed to establish worthlessness, but has also failed to furnish us with any fact which would justify or enable us to determine a lesser value with any reasonable assurance. We consequently hold respondent's valuation as correct.
I am unable to agree with this conclusion at all. I think this is no lack of evidence case. Petitioner has introduced much evidence which I think bears upon the valuation of this stock when petitioner received it in 1940 and that this evidence shows clearly that the determination of the Commissioner that the stock had a value of $ 100 per share on the basic date is wrong. We, therefore, should not sustain it. Cf. Helvering v. Taylor, 293 U.S. 507. From the facts given in the majority report I should say that the shares of stock in question had a value of only a small fraction of the $ 39,000 which the Commissioner has determined and we should find a value much less than the $ 100 per share which the Commissioner has determined.
I respectfully dissent.
Footnotes
1. George S. Idell is petitioner in Docket No. 7652, now pending in this Court. This pending case involves the stock received by Idell, as recited in the instant findings.↩
2. (b) Losses From Sales or Exchanges of Property. --
(1) Losses disallowed. -- In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly --
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(B) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
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(2) Stock ownership, family, and partnership rule. -- For the purposes of determining, in applying paragraph (1), the ownership of stock --
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(B) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;
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(D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; * * *↩
3. See Report of Joint Committee on Tax Evasion and Avoidance, House Document 337, 75th Cong., 1st sess., p. 15; Report of Committee on Ways and Means, House Report 1546, 75th Cong., 1st sess., p. 29; Report of Finance Committee, Senate Report 1242, 75th Cong., 1st sess., p. 31.↩
4. I. T. 3242 indicates that includibility does not constitute payment within the meaning of section 24 (c) (1). This ruling held that certain salary expenses which were includible in the creditors' income were deductible by the debtor because section 24 (c) (2) did not apply. Despite the includibility of the item involved the question is stated as follows: "The question is presented whether * * * the entire amount * * * should be allowed * * * as a business expense even though the entire amount was not paid during that taxable year or within two and one-half months thereafter↩. * * *" [Emphasis supplied.]