*1981 1. When a taxpayer claims a deductible loss resulting from the sale of stock he must show ownership, cost, sale and selling price thereof. On the facts of record herein the petitioner has failed to prove any deductible loss from the disposition of certain stock of which he surrendered custody in the taxable year.
2. When notes are received as part payment for property sold and the vendor at once disposes of such notes at a discount, only the proceeds thereof should be included in the computation of gross income.
*1254 The respondent has asserted a deficiency for the year 1924 in the amount of $11,819.61, based on a finding that the petitioner, in his income tax return for that year, failed to include profit in the amount of $94,556.90 realized from the sale of real estate. Petitioner admits profit from such transaction in an amount somewhat less, but now contends that he sustained a deductible loss in the taxable year in the amount of $98,003.04.
FINDINGS OF FACT.
The petitioner is an individual residing at Chattanooga, Tenn. He is a*1982 manufacturers' representative on a commission basis and is engaged in business at Chattanooga, Chicago, and several other places throughout the United States.
*1255 The Jackson County Savings and Loan Association of Kansas City, Mo., hereinafter designated the Association, is a bank. One Rey O. Douglass was a stockholder and director thereof and its secretary until some time in 1922. Early in that year it was discovered that he had embezzled the funds of the Association at least to the amount of $460,000. The money taken by Douglass was used in part by the Fidelity Auto Supply Company, hereinafter designated the Supply Company, of which he was an officer, for the purchase of merchandise and for the purchase of real estate of the approximate value of $150,000.
Shortly after the peculations of Douglass were discovered, a receiver for the Association undertook to recover the funds that had been embezzled. To this end he asserted a lien on the assets of the Supply Company and the real estate owned by Douglass, on the theory that such property, having been purchased with funds of the Association, was impressed with a trust in its favor.
The Supply Company was a Missouri*1983 corporation with its principal place of business at Kansas City. It was engaged in the purchase, manufacture, and sale to the trade of various automobile accessories. Its authorized capital was 100,000 shares of the par value of $1 each, of which only 70,000 had been issued, largely to Douglass and close associates. It conducted an auxiliary business under the trade name of Douglass-Dahlin Company, through which it handled for the most part bushings and bearings for automobiles.
The receiver of the Association and all the interested parties entered into an agreement on May 27, 1922. The primary purpose of such agreement was to recover the stolen funds of the Association through the liquidation of the assets of the Supply Company and the real estate which had been purchased by Douglass. At about this time the petitioner appeared in Kansas City, and, under the agreement, became the liquidating agent of the Supply Company, but had nothing to do with the real estate involved, the disposition of which is not material to the issues of this proceeding.
The agreement of May 27, 1922, is a very long and involved instrument, but the provisions material here may be briefly summarized*1984 as follows:
Douglass agreed to assign to the Association real estate of the aggregate value of $150,000. The petitioner undertook to make up the remainder of the defalcation. The agreement provides for separating the assets of the Supply Company into two groups. The bushings, bearings and other merchandise stock, certain equipment and furniture and all accounts receivable appertaining to that branch of the business known as the Douglass-Dahlin Company were to be released by the Association to a corporation to be founded *1256 by the petitioner, who agreed to purchase 2,000 shares of the capital stock thereof at $100 par value for $150,000. Payment was to be made by three promissory notes in favor of the Association, secured by attaching to them all the certificates of issued capital stock of the Supply Company and of the new concern, which was duly organized as the Douglass-Dahlin Company, Inc., and hereinafter will be designated the new corporation. The agreement also provided that the petitioner should further secure his notes by the execution of a mortgage in favor of the Association on certain real estate which he then owned in Chicago. Nothing in the record indicates*1985 even approximately the value of the assets thus to be acquired by the new corporation, but it is certain that they were worth considerably in excess of $200,000. Petitioner also undertook to liquidate the remaining assets of the Supply Company, which had book values slightly in excess of $180,000, and guaranteed the Association the receipt of $160,000 from such liquidation within six months from the date of the agreement.
The obligations of the petitioner under the agreement of May 27, 1922, were all discharged, but at dates somewhat later than therein specified. The assets of the Supply Company, exclusive of the merchandise stock turned in to the new corporation, were liquidated in 1922 for $61,996.96, all of which was paid to the Association. In 1923 the petitioner completed his payments under his guaranty and for that purpose used his own funds in the amount of $98,003.04. In 1924 he paid his three notes of $50,000 each given for all the issued capital stock of the new corporation and at that date the Association turned over to him all the issued stock of the two corporations here involved. On October 27, 1924, he delivered all the issued capital stock of the Supply Company*1986 to Royal B. Douglass, Ralph D. Gleason, and Alice B. Douglass, in consideration for indemnification against any loss or damage "that may be incurred by Sanford in the assertion of whatever claim, if any, of whatever nature, kind or description that may be advanced by anyone of the following persons: E. O. Sellers, H. A. Dahlin, Inez P. Ross, M. A. Gleason, Edward Schneider and R. N. Worline." The record fails to disclose the nature or extent of the claims for which the petitioner was to be held harmless or indemnified. The agreement to surrender the stock recites that petitioner "has in his custody 70,000 shares, being the total outstanding capital stock of the Fidelity Auto Supply Co., duly endorsed in blank," but nowhere specifies that he is the owner of such stock.
The petitioner in 1922 owned a parcel of real estate in Chicago. In conformity with the agreement of May 27, 1922, he and his wife executed a mortgage on that property in favor of the Association *1257 in an amount not disclosed by the record. In 1924 that property was sold for $148,387.80, and as part payment the petitioner took 6 per cent purchase money notes of the face value of $87,500. All the proceeds*1987 of this sale were turned over to the Association in satisfaction of the mortgage made to it by petitioner and his wife as part of his security for notes for $150,000 representing the cost to him of the stock of the new corporation. The Association required 8 per cent interest on loans to its customers and accepted the note for $87,000, but discounted it to an 8 per cent basis, thereby reducing credit to the petitioner in the amount of $7,727.10. The respondent has determined, and the petitioner admits, a profit from the sale of the Chicago property in the amount of $94,556.90, but such profit includes the purchase money notes at their face value. He has not included the amount of $7,727.10 in his computation of the deficiency here involved either as a deduction from the sale price of the property or as interest paid by petitioner in the taxable year.
The petitioner's connection with the Supply Company was terminated on October 27, 1924, when he surrendered the stock then in his custody and turned over its remaining assets to Royal B. Douglass, Ralph Gleason, and Alice B. Douglass. Thereafter, at some date not in the record, that company was liquidated. The assets of the Douglas-Dahlin*1988 Company were sold to a Detroit concern in September, 1924, and some time in 1926 that concern was liquidated.
During the year 1924 the petitioner paid interest to the Association in the amount of $10,154 and turned in to it the purchase-money note received as part payment for his Chicago property at a discount of $7,727.10.
The petitioner keeps his accounts and makes his income tax return on the cash basis.
Upon audit of petitioner's income tax return for 1924, the respondent added to the gross income reported the amount of $94,556.90 as gain realized from the sale of capital assets and determined the deficiency here in controversy.
OPINION.
LANSDON: The deficiency here is based on the respondent's determination that petitioner failed to include in his gross income for the taxable year the amount of $94,556.90, representing profit realized from the sale of real estate located in Chicago. The only dispute over this item is whether it should be reduced by the amount of $7,727.10. On this issue the contention of the petitioner is right. Whether such amount represents a discount on purchase money notes received in payment for the Chicago property, reducing them to *1258 *1989 market or actual cash value, or was interest paid the Association, it is perfectly clear it should not be included in petitioner's gross income in the taxable year.
Admitting a gain from the sale of real estate in the amount of $94,556.90, less discount as set out above, the petitioner now contends that he suffered a loss of $98,003.04 resulting from the discharge of his obligations under the agreement of May 27, 1922. The amount of the alleged loss is the difference between the petitioner's guaranty to the Association of $160,000 and the total receipts from the liquidation of the assets of the Supply Company that remained after the organization of the new corporation. If the petitioner bases his claim for a deduction from gross income in 1924 on the loss sustained in making good his guaranty to the Association, it must be disallowed. The record discloses that the assets in question were all sold in 1922 and that final payment under the guaranty was made in 1923. If any loss resulted from petitioner's guaranty, it was sustained in 1923 at the latest.
The alternative theory and the one most strongly urged by counsel is that petitioner acquired the stock of the Supply Company*1990 under the agreement of May 27, 1922, at a cost of $160,000 and disposed of it on October 27, 1924, for a consideration of no money value and, therefore, at that date sustained a loss in the disposition of such stock measured by the difference between $160,000, the cost thereof, and $61,996.96, the amount realized from the sale of the assets of the Supply Company. To establish this contention the petitioner must show that he bought the stock and its cost, as well as the amount realized by disposition thereof. His burden is no more than the proof of three plain facts - cost, disposition, and loss. He has not sustained that burden. The evidence that the petitioner ever owned the stock of the Supply Company is at best extremely weak. It is true that the certificates thereof were attached to his notes given in payment for the stock of the new corporation, but it seems quite clear that the Association imposed that condition and permitted the stock upon which it had asserted a lien to be so used for its own protection. It is also true that such certificates were in some way turned over to the petitioner after he completed the payments due under his guaranty, but the agreement under*1991 which he surrendered them to Royal B. Douglass, Gleason, and Alice B. Douglass at October 27, 1924, recites only that they were all in the custody of the petitioner. There is not a word about ownership and it is a perfectly proper inference that in fact petitioner merely returned the stock to its actual owners under the agreement which counsel argues is evidence of disposition without consideration.
*1259 Even if the petitioner was the owner of the stock of the Supply Company at October 27, 1924, there is no evidence that establishes the amount of loss, if any, sustained by his disposition of the certificates at that date on the terms and conditions set out in the agreement between himself, Royal B. Douglass, Gleason, and Alice B. Douglass. Under the terms of that agreement the petitioner received consideration in the form of release from certain liabilities and indemnification against loss or damage incident to his liquidation of the assets of the Supply Company under the agreement of May 27, 1922. These considerations must have had some value and in the absence of evidence it is presumed that such value was at least equal to that of the stock certificates surrendered. *1992 On the petitioner's own theory of loss through ownership and disposition of the stock of the Supply Company, the evidence does not overcome the presumption that the determination of the respondent is correct.
The petitioner claims that respondent has failed to allow any deduction from income in the taxable year on account of interest paid to the Association. The record shows that he paid such interest in the amount of $10,154 and that respondent has allowed a deduction for interest in excess thereof. On this issue the contention of the petitioner is denied. Since respondent, at or before the hearing, did not move to increase the deficiency, no adjustment of this item under Rule 50 is necessary. Petitioner's contention in respect of discount has been disposed of above in this opinion.
Decision will be entered under Rule 50.