*648 1. Petitioner held stock in a corporation, all the assets of which were sold in a foreclosure proceeding instituted by the bondholders in 1932, and the corporation's charter was allowed to lapse. Held, under the facts, the stock became worthless in 1932 and the petitioner was entitled to take the resulting loss in that year.
2. In December 1932, after the stock had become worthless, petitioner sought to establish a loss for tax purposes by a sale of 100 shares of the stock which he owned. Held, the sale, after the stock had become worthless, was not effective to establish a loss; held, further, that a sale of an additional 100 shares in 1933 did not establish a deductible loss in 1933, the stock having become worthless in 1932.
3. Fraud must be proved by clear and convincing evidence and this burden rests upon the respondent. Under the facts here, in the absence of other clear and convincing evidence, the imposition of the additional tax provided by the statute in case of fraud is not justified.
*833 *649 The Commissioner determined a deficiency in income taxes for the calendar year 1932 of $1,064.72 and a fraud penalty of $532.36 (Docket No. 81179) and a deficiency for the calendar year 1933 in the amount of $1,089.60 and a fraud penalty of $544.80 (Docket No. 81997). The petitioner brings this proceeding for a redetermination of his tax liability. The two proceedings were consolidated for decision.
The petitioner alleges that the respondent erred (a) in refusing to allow a loss in both the taxable years on a sale of preferred stock of the Mayfair Investment Co.; (b) in adding to income additional salary in the amount of $3,000, which represented the fair value of living expenses furnished to the petitioner and his family by the Mayfair Hotel in addition to his salary paid in money; and (c) in adding a fraud penalty of 50 percent for each of the taxable years in question.
FINDINGS OF FACT.
Petitioner is an individual, residing at the Mayfair Hotel, St. Louis, Missouri. He was general manager of the hotel during the taxable years.
*834 The Mayfair Hotel was owned and operated by the Mayfair Investment Co., of which petitioner was president and a stockholder. In*650 1932 the Mayfair Investment Co. had outstanding $1,430,000 of first mortgage bonds bearing an interest rate of 6 1/2 percent. There was also outstanding capital stock of the corporation consisting of 6,000 shares of common stock of no par value and 2,888 shares of preferred stock of a par value of $100 per share. Petitioner originally purchased 500 shares of the preferred stock, for which he paid $100 per share, or $50,000. In 1931 the hotel was operating under a trusteeship the better part of the year, the trustees having taken over the hotel because of defaults on principal and interest payments on the first mortgage bonds.
The Mayfair first mortgage bondholders' committee was constituted under a deposit agreement dated June 22, 1931. This agreement authorized the committee to enter into a plan or plans of reorganization.
As of May 25, 1932, the Mayfair Investment Co., by Charles Heiss, its president, addressed a communication to the bondholders' committee, setting forth a plan of reorganization. It recited that it was apparent that the income of the Mayfair Investment Co. was insufficient to meet the payments of the principal and interest due from time to time under the*651 provisions of the trust deed and, therefore, the reorganization and refinancing of the property were necessary.
In 1932 there was a reorganization and foreclosure sale. The charter of the Mayfair Investment Co. was allowed to lapse at the close of the year. A new corporation was organized August 1, 1932, and new stock was issued which was to be deposited with the trustees and voting trust certificates issued therefor. The plan of reorganization provided that these certificates representing common stock of the new corporation were to be divided, one-third to the holders of "the present first mortgage bonds who deposit the same and approve of the plan of reorganization" and two-thirds to the former equity owners of the Mayfair Investment Co. In the event that the interest was not paid upon the outstanding 5 percent bonds for a period of five years, the voting trust certificates and the stock represented by such certificates were to be canceled. About $200,000 additional for reorganization and other necessary expenses was to have priority over the new bonds to be issued to take up the outstanding bonds of the old company.
In case the interest at 5 percent for a period of five*652 years was paid by the corporation, or the holders of the voting trust certificates within 30 days after the expiration of the five-year period paid the trustees the difference between the amount of interest at 5 percent and the amount of interest actually paid, new voting trust certificates *835 which would not be subject to restrictions would be issued to the holders of the voting certificates or to persons making such payment. If and when the aggregate amount of the fixed rate first mortgage bonds should be reduced to $800,000 the voting trust would terminate and the stock would be distributed to the persons entitled.
Prior to December 29, 1932, petitioner talked with one Theodore H. Wigge about selling some of his preferred stock in the Mayfair Investment Co. for the purpose of establishing a tax loss. He told Wigge that the stock was not worth anything, but that it might be worth something in the future. The stock had no market value at that time. Petitioner did not think it had any great potential value.
Wigge owned 175 shares of the common stock of the Mayfair Investment Co. and had been secretary and treasurer of the corporation since 1924. During the conversation*653 with petitioner Wigge indicated that he might buy the stock, but only at a nominal price, and that he would not be a party to any agreement to resell the stock to him. No such agreement was made. The transaction was made through a broker. On or before December 29, 1932, petitioner turned 100 shares of the preferred stock of the Mayfair Investment Co., which had cost him $100 a share, over to Benjamin Hill & Co., brokers, to be sold. At the same time he submitted to the brokers a list of stockholders of the corporation. He offered to sell at $1 a share. The broker contacted Wigge, who purchased the 100 shares of stock about December 29, 1932, at $1 per share plus buying commissions, giving his check for $105. He was never reimbursed for the amount paid. Petitioner received for the stock, after selling commission was paid, $81. In his tax return for 1932 he claimed loss of $9,919 on the sale of the stock. This deduction was denied by the respondent.
At the time the stock was sold it was deposited as collateral with the Mercantile Trust Co. along with other collateral of petitioner, who was asked by the vice president if the purchaser would leave it with the bank as collateral. *654 When the stock was delivered to Wigge, petitioner informed him of the request of the bank and petitioner endorsed his new certificate in blank and deposited it with the bank early in 1933. Wigge had no immediate use for the stock. He bought it as a speculation on what he considered brighter prospects for the hotel business. Wigge had no agreement with petitioner prior to the sale that the stock was to continue as collateral for petitioner's loan. The stock was subsequently returned to Wigge by the bank and he has kept it in his possession since that time.
During the years 1932 and 1933 petitioner and his family, consisting of his wife and two children, lived at the Mayfair Hotel. The living quarters and meals were furnished by the hotel. Petitioner *836 now concedes that the reasonable value of such living quarters and meals for himself and family is $3,000, which was additional compensation for the years in question, and agrees that that amount may be included in his gross income for each of the years.
Petitioner did not indicate any amount as representing the living expenses furnished by the hotel in his income tax return for 1932 or 1933. He testified he did*655 not know he was required to do so and had never been told that it was necessary. He was assisted in making out his income tax return by a firm of accountants who did not suggest that the value of the living quarters furnished should be included.
About December 15, 1933, petitioner sold for $1 per share 100 shares of the preferred stock of the Mayfair Investment Co. which had cost him $100 per share. After deducting the selling commission, he received the net sum of $83.50 for the stock. The sale was made through Joseph H. Preiss & Co., brokers, to John J. Wagner, petitioner's father-in-law. Petitioner gave the stock to Preiss & Co. to sell and at the same time gave them a list of the stockholders of the Mayfair Investment Co. Wagner and some of his family were small stockholders in the company. Preiss called Wagner on the telephone and offered to sell him the stock for $1 per share. Wagner purchased the stock and paid for it. He was at that time employed at the Lenox Hotel at $20 a week. He had other income in the amount of about $175 a year. Petitioner was manager of the Lenox Hotel. Wagner did not know Preiss personally and had no other stock transactions in 1933. Wagner*656 thought it a good chance to make some money if the hotel business improved. He did not discuss the transaction with other members of his family or with his son-in-law. There was no agreement between petitioner and Wagner and no discussion of the transaction prior to the stock being offered to him by Preiss & Co.
At the time of the transfer the Mayfair Investment Co. had ceased to exist. The stock transferred was endorsed in blank by petitioner and a receipt of notice of the assignment was endorsed on the back of the certificate by the directors of the Mayfair Investment Co. acting as trustees, signed by Theo. H. Wigge. There was no new certificate issued to Wagner due to the fact that the corporation had ceased to exist. Wagner paid for the stock with his own money. He did not borrow it from petitioner. There was no agreement to resell any of the 100 shares to petitioner. Wagner has never been reimbursed by anybody for the purchase price of the stock. He has had possession of the stock since the purchase.
Nothing occurred between December 29, 1932, and December 15, 1933, to materially affect the value of the preferred stock of the Mayfair Investment Co.
*837 *657 In his income tax return for 1933 petitioner claimed a loss on the sale of the 100 shares of preferred stock in the amount of $9,916.50. The deduction was denied by the respondent.
OPINION.
ARNOLD: The petitioner contends as to the first issue that the sales of the preferred stock of the Mayfair Investment Co. in December of 1932 and 1933 were bona fide, and that the stock had some value in those years. The respondent contends that the sales were not bona fide and that the stock became worthless prior to 1932.
The first issue to be determined is whether the stock was worthless and, if so, when it finally became worthless, because a taxpayer may not continue to hold worthless stock and establish a deductible loss by sales thereafter. Cf. ; affd., ; certiorari denied, ; ; . Cf. .
In 1931 a bondholders' committee had been formed and authorized to enter into a plan of reorganization. In 1932 it was apparent that the income*658 of the Mayfair Investment Co. was not sufficient to meet the payments of principal and interest on their bonds. There was a foreclosure sale of the property and a reorganization. The charter of the company was allowed to expire. A new corporation was organized August 1, 1932, and new stock was issued, which was held in escrow. Owing to the fact that under certain conditions a part of the stock of the new corporation might eventually be given to the holders of stock in the old corporation, there was a possibility that in the future the stock of the old corporation might have some exchange value, but at the time of the sale it was merely the stock of a defunct corporation, the assets of which had been sold in the process of reorganization, and nothing remained in the stockholders except the hope that the hotel would for the next five years be able to so increase its business as to earn the interest on the corporation's bonds or reduce its bonded indebtedness. This is not a sufficient basis upon which to determine a value in 1932. Cf. *659 ; .
The evidence shows the stock was not worthless in 1931. It is true that the corporation was in default on its interest payments and a reorganization was being considered by the bondholders' committee, but it was not until 1932 that its assets were sold, its charter forfeited, the reorganization effected, and the new corporation organized to take the place of the old. Thereupon, we think the stock became worthless and had no more than a nominal value thereafter. The *838 parties themselves so considered it in their dealing. The stock having become worthless in 1932, the petitioners had the right to deduct the loss sustained thereby in that year. The sale thereafter of 100 shares in 1932 was a useless gesture and ineffective to establish a loss already sustained. ;; , *660 .
The stock having become worthless in 1932, the deduction of the loss claimed on the sale in 1933 is denied, and the respondent's determination as to this issue for that year is sustained. On recomputation under Rule 50 the entire stock loss should be allowed petitioner in 1932. The amount received by petitioner from the sales in both 1932 and 1933 was income in the respective years.
The respondent has affirmatively pled that the returns of petitioner for 1932 and 1933 were false and fraudulent with intent to evade tax, and has assessed a fraud penalty as to each year. Fraud is never presumed, see , and must be proved by convincing evidence. Cf. ; ; affd., .
On the whole record the respondent has not convinced us that petitioner's returns were false and fraudulent with intent to evade tax. The addition to the tax provided by statute where fraud is shown, therefore, may not be imposed.
In recomputation, $3,000*661 as the reasonable value of the living quarters and meals for each of the years before us will be included as income to petitioner, as agreed upon.
Reviewed by the Board.
Decision will be entered under Rule 50.