*779 1. Claimed deduction for stock loss in 1928 disallowed, the evidence showing that the stock became worthless prior to that year and that the transfer of certificates in the taxable year was not a bona fide sale.
2. Respondent's fraud penalty sustained.
*45 The petitioner asks a redetermination of deficiencies in income tax determined by the respondent for the years 1928 and 1932 in the respective amounts of $49,007.48 and $16,285.07, and a 50 percent fraud penalty for 1928 in the amount of $24,503.74. At the close of the hearing counsel for the parties stipulated that the correct deficiency for 1932 is $8,613.37. The issues for 1928 are whether or not the petitioner is entitled to a loss deduction on stock claimed to have been sold in that year and whether or not the fraud penalty is properly asserted. In the absence of fraud the statute of limitations bars assessment and collection for 1928.
FINDINGS OF FACT.
The petitioner is a resident of Chicago, Illinois. Over a period of years*780 he has been engaged in a number of businesses, some of which he conducted simultaneously. He has dealt extensively in real estate and in securities; he has engaged in the oil business and roofing business; he has developed and bought and sold patents; he has owned theatres; for a number of years he has been president of a hair pin company.
About 1918 the petitioner met the inventor of a successful process for retreading automobile tires. The inventor had a patent pending but lacked the funds to make it commercially successful. The petitioner bought the patent and proceeded to develop it. The inventor retreaded but one tire at a time; the petitioner developed a vulcanizing oven in which eighteen tires could be retreaded at one time. In 1919 he granted rights under his patents to a number of operators retaining a royalty of $1 per tire retreaded. In the same year, 1919, he sold his retreading patents and equipment to an individual for an agreed price of $2,500,000 plus a royalty to the petitioner. The purchaser paid some seven or eight hundred thousand dollars in cash and two hundred thousand in Liberty bonds in 1919 and defaulted on the remainder of the purchase price. The*781 purchaser and others associated with him, one of whom was a stock broker, organized two corporations, to which they apparently transferred the retreading patents. One corporation was organized under the laws of Delaware and was called the Savold Tire Corporation. The other was a New York corporation, called "New York Savold Tire Co., Inc." The organizers used the corporations as stock selling schemes rather than as means to commercially exploit the patents. Little, if anything, was done to utilize the patents. The stock of the two corporations was listed on the New York Curb Exchange.
Petitioner dealt in the stocks of the two Savold companies extensively in the year 1919. He bought on margin and during the *46 year he paid his brokers at least $456,134.46 on account of purchases. Prices varied greatly. The high point was a price of $72 per share for the Delaware Savold stock and $52 per share for the New York Savold stock on August 5, 1919. Petitioner sold 1,000 shares of Delaware Savold at $72 and 300 New York Savold at $52 on that date. Later in that month he sold Delaware Savold at $36 and New York Savold at $30. By the end of 1919 stocks of both companies were*782 being offered at $1 per share, with no purchasers. The charter of the Delaware Savold corporation was revoked by the State of Delaware on March 22, 1922, for nonpayment of taxes.
Part of the petitioner's purchases of Savold stock were made because he believed the companies would be financially successful in operating under the retreading patents. He did not know at that time that the promoters intended to use the companies purely for the purpose of selling stock. A substantial amount of his purchases represented stock taken over by him which others had contracted to buy on margin and were unable to pay for when the stock went down. During his absence from Chicago a number of employees of the bank where petitioner did his banking formed a pool and bought Savold stock on margin, largely because they knew that the petitioner was buying. When the stock dropped in price and the brokers called for more margin a number of these purchasers were unable to meet the calls and some of them stood to lose everything they had. Some of them sought to blame the petitioner for their plight. He did not want to see them lose and so he paid up at least some of their brokerage accounts, and took*783 over some of the stock. In 1919 petitioner sold 6,800 shares of Delaware Savold stock and 300 shares of New York Savold, which shares were part of the pool purchases. The selling price of these shares was $431,986.00, and cost was $289,219.97, resulting in a profit of $142,766.03. Out of this profit some of the pool members received $90,531.50 and withdrew. The petitioner's part of the cost of the stock held after the withdrawal of some of the pool members, as nearly as can be determined, was $172,500. The cost to the members who remained in the pool was $24,575. Thus petitioner's share in the transaction, as figured by him and later by a revenue agent, was as 172,500 is to 197,075. The petitioner reported in his 1919 return as his share of profit on the sales the amount of $45,705.21, that amount being 172,500/197,075 of the total reported profit of $52,234.53 remaining after the payments to withdrawing members.
In petitioner's 1919 return he claimed as a deduction on schedule I-5, headed "Bad debts and other deductions", the amount of $673,625.78. *47 In a supporting schedule this deduction is explained as follows:
| Loss | ||
| Advances made on behalf of Savold Tire Company | $181,965.73 | |
| Less: 1500 Shares of Company taken in satisfaction of this debt. (Valued at Market Value at time of receipt) | 1,500.00 | |
| $180,465.73 | ||
| Purchases made through Retread Equipment Company | $143,842.01 | |
| Less: Inventory of same at 12/31/19 | 64,900.00 | |
| 78,942.01 | ||
| Cost of Savold Tire Co., Stock held personally | 38,500.00 | |
| Cost of Savold Tire Company Stock Purchased during 1919 belonging to Pool (11914 shares) still held | $429,392.04 | |
| This Company is practically bankrupt and no return is expected. Balance Sheets of the Company are not available but may be furnished on request. | ||
| No bidders on Stock Exchange. | ||
| Shares are considered worthless, Mr. Goldberg's proportion of loss, 172500/197075 or | 375,718.04 | |
| $673,625.78 |
*784 In 1921 a revenue agent made an investigation covering petitioner's tax liability for 1919 and prior years. The agent proposed to disallow the claimed loss on the Savold shares on the ground that there was a market for the shares at the end of the year and therefore they were not worthless. The petitioner protested the proposed disallowance and asked for a conference on the matter. His request was granted and a conference was held in the office of the internal revenue agent in charge at Chicago. The agent in charge advised the petitioner that it would be necessary for him to submit further proof to substantiate his claim for a deduction. The petitioner thereupon procured the affidavits of several brokers to the effect that the Savold stocks were worthless. He secured a letter from the Secretary of State of New York stating that the New York Savold company had filed no annual reports and that the financial standing of the company was not a matter of record in the Secretary's office. He secured a letter from the Secretary of State of Delaware giving the names of the officers of the Delaware Savold company and stating that the company had not filed its annual report for 1920. *785 He procured the affidavit of his then attorney, who, it appears had attempted to collect some of the advances made by the petitioner to or for the Savold companies and had also attempted to dispose of several thousand shares of petitioner's Savold stock. The attorney found, according to his affidavit, that as the result of *48 an exhaustive investigation the stock "has absolutely no value; and had absolutely no value in November, 1919 and that said stock could not at that time or any time since have been sold to anybody for any price, same having been offered and refused." These several affidavits the petitioner filed with the revenue agent, who thereupon recommended the allowance of the claimed deduction, with minor adjustments which increased the amount deducted. A copy of the agent's report was sent to and received by the petitioner. The Commissioner approved the agent's recommendations and found an overassessment of $2,037.41.
In 1928 David Wiener, a brother-on-law of petitioner's wife, was in the business of buying and selling securities in New York City. Petitioner inquired of Wiener whether he could dispose of some Savold stock. After making some inquiries Wiener*786 reported that he thought he could sell the stock. Petitioner, on December 22, 1928, mailed to Wiener certificates for 8,508 shares of Delaware Savold stock and 4,400 shares of New York Savold stock, a total of 12,908 shares, and in his letter of transmittal asked Wiener to send his check for $1,290.80. Wiener has never disposed of the stock and has never paid to the petitioner the amount of $1,290.80. Since 1928 Wiener has borrowed in excess of $20,000 from the petitioner, for which he has given his notes. He has not given a note for the amount of $1,290.80, but two notes given in 1932 are for amounts larger than that and may include that amount.
Petitioner filed an income tax return for 1928 on March 13, 1929. On the face of the return he reported $26,420.26 as "Profit from Sale of Real Estate, Stocks, Bonds, etc." In the supporting schedule on the reverse side the following items were reported:
| Kind of property | Date acquired | Amount realized | Cost | Net profit |
| Colorado Fuel & Iron Co. stock | 1928 | $32,492.50 | $31,975.00 | $517.50 |
| McCrory Corporation stock | 11,612.80 | 10,000.00 | 1,612.80 | |
| Gasoline-Savold stock | 487,364.42 | 462,134.46 | 25,229.96 | |
| Studebaker Corp. stock | 80,760.00 | 81,700.00 | [red] 940.00 | |
| Total | 612,229.72 | 585,809.46 | 26,420.26 |
*787 In March 1930 a revenue agent examined petitioner's records and reported that "Taxpayer maintains a complete set of personal records. All items were verified and found to be correct. * * * It is recommended the return [for 1928] as filed be accepted as correct." In the early part of 1933 another investigation was made by another revenue agent. It was then discovered that the amount of $25,229.96 shown as profit on "Gasoline-Savold" stock was the result of combining two transactions, one in stock of the Gasoline Products Corporation and the other in stock of the Savold companies. The *49 separate computations as made by petitioner's bookkeeper on the retained copy of the return were as follows:
| Amount received | Cost | Net gain or loss | |
| Gasoline Products | $486,073.62 | $75,000.00 | $411,073.62 |
| Savold Co | 1,290.80 | 387,134.46 | [loss] 385,843.66 |
| 25,229.96 |
The agent reported, in part, as follows:
The loss of $385,924.66 on the sale of stock of the Savold Tire Corporation should have been disallowed before the statute of limitations had expired for the reason that the stock was worthless prior to 1928; in fact the stock was ruled*788 off the New York Curb in 1920 and the last quotations are to the effect that 33,327 shares were sold by R. L. Day & Co., brokers of Boston, at auotion on Dec. 31, 1921 for $500.00 for the lot. The company ceased operations and cannot be located. Inasmuch as this loss was disclosed on the original return which was accepted after an original examination no question of attempted evasion or fraud would stand.
The agent making the above report was not aware of the fact that the petitioner had claimed and had been allowed a deduction for worthlessness of Savold stock for the year 1919.
The amount of $387,134.46 set up as cost of the Savold stocks in petitioner's retained copy of his return was computed by petitioner's bookkeeper from a ledger sheet in petitioner's books showing payments on margin accounts. The ledger sheet does not purport to record all of petitioner's transactions in the Savold stock. It contains on the debit side 15 items representing payments to brokers on margin accounts in 1919 and one in 1921, and on the credit side are 9 items in 1919 and one in 1921. The bookkeeper testified that it was only when he drew a check to the brokers, and in one instance a note*789 for $50,000, that he made debit entries. The 16 debit items amounted to $522,134.46; the 10 credit items total $124,448. Other transactions, if any, are not recorded. The ledger record does not in any way show the number of shares purchased, sold or owned. When the bookkeeper was preparing petitioner's 1928 return he added together 5 of the items on the debit side of the ledger sheet aggregating $131,000 and made a pencil notation that that sum was cost of 4,408 shares of Delaware Savold stock; he added together 7 more debit items aggregating $256,134.46 and made a notation to the effect that that sum was the cost of 4,100 shares of Delaware Savold and 4,400 shares of New York Savold shares. The other debit items and the credit items were not taken into account.
The respondent disallowed the alleged loss on the Savold stocks and asserted a penalty of 50 percent of the resulting deficiency.
The shares of the Savold companies were worthless prior to 1928 and were known by petitioner to be worthless prior to that year.
*50 Petitioner's return for 1928 was false and fraudulent and part of the deficiency for that year is due to fraud with intent to evade tax.
OPINION.
*790 ARUNDELL: The respondent bases his claim of fraud on three grounds. First, the petitioner's attempted concealment of the improper deduction on Savold stocks by combining it with the Gasoline Products transaction. Second, that petitioner knew the Savold stocks had become worthless long prior to 1928. Third, that the shares claimed to be worthless in the 1919 return were to a large extent the same shares on which a loss was claimed in the 1928 return. The petitioner denies fraud and alleges error in the disallowance of the claimed loss deduction on the Savold stocks.
We shall first consider the question of whether a loss deduction on the Savold stock is allowable for the year 1928. The petitioner alleges that "in 1928 said stock became worthless and was sold or otherwise disposed of." In his reply to the Commissioner's answer he says that in 1928 he knew or suspected the stock had become worthless and void and that in the hope of securing some salvage he turned the stock over to Wiener and agreed to give Wiener all that he could get over $1,290.80. At the hearing the petitioner insisted that the transaction with Wiener was a sale of the stocks.
*791 We are of the opinion that no loss was sustained in 1928 on the Savold stocks and hold that the claimed deduction is not allowable. The Commissioner's disallowance of the deduction "presumably rests upon a correct determination of the facts." . Not only does the evidence in this case fail to overcome this presumption, but it affirmatively convinced us that the Commissioner was right. Stock losses are allowable in the year they are sustained. The loss may be sustained on a bona fide sale or on the worthlessness of the stock. If it arises out of worthlessness, the deduction therefor is to be taken in the year that worthlessness occurs, and it may not be taken in a later year on a sale for a nominal amount. ; ; ; ; affd., . The petitioner in this case was at one time very definitely of the opinion that the Savold shares were worthless prior to the year 1928 in which he now seeks*792 to take a deduction. For the year 1919 he claimed a deduction of $38,500 for Savold stock held personally and $375,718.04 for his interest in stock of the so-called pool. He represented in his return that "this company is practically bankrupt and no return is expected. * * * No bidders on stock exchange. Shares are considered *51 worthless." When the matter was questioned by the Government, he procured sworn statements from brokers and from his then attorney to the effect that the stock was worthless. These he filed with the Government officers. His representations convinced the Commissioner and his claim for a loss on the ground of worthlessness was allowed. In addition to the petitioner's representations there is other convincing evidence that the stock was worthless prior to 1928. Whether worthlessness occurred in 1919 need not be decided. The principal company, Delaware Savold, had its charter revoked by the State of Delaware by proclamation issued in January 1923, which declared that the corporation became "inoperative and void" on March 22, 1922, for nonpayment of taxes. An affidavit of petitioner's former attorney, dated in May 1921, reports the result of his*793 investigation and an interview with the president of the Delaware Savold Co., and concludes "that the stock in the said Savold Tire Corporation and its subsidiary corporations has absolutely no value; and had absolutely no value in November, 1919 * * *." A revenue agent who examined petitioner's records for 1919 and prior years and who made an investigation as to the value of the stock reported in 1921 that both the Savold companies had proved absolute failures, that they were defunct, and that there were no assets remaining. These several declarations of worthlessness prior to 1928 are contradicted only by petitioner's claim that he thought the shares had value after 1919 because of the valuable patents that the companies owned. But there is no proof that the patents had value other than petitioner's testimony of their potential value if licensed under a method that he had in mind. Moreover, while it may be assumed that the Savold companies, owned the patents, there is no proof of it. The evidence is that petitioner sold the patents to an individual, who, with associates, organized the corporations. In view of the evidence establishing worthlessness prior to 1928, we hold that*794 the respondent rightly disallowed the deduction claimed for that year based on the transaction with Wiener. , and
Aside from the worthlessness of the shares prior to 1928, and for other reasons, we are of the opinion that the transaction with Wiener was not a bona fide sale. The parties to that transaction are not in agreement as to what it was, nor are they consistent in their views. Petitioner's testimony is to the effect that it was a sale. In his reply to the Commissioner's answer the petitioner describes the transaction as one wherein "he turned the stock over to David Wiener and agreed to give said Wiener all that he could get over $1,290.80 for said stock." From this it would appear that Wiener was acting as a broker rather than being a purchaser. Wiener likewise appears to *52 have some doubt as to what the transaction really was. While he speaks of "buying" the shares, he couples with that the understanding that he was to sell them and get the benefit of anything realized over 10 cents per share. Of course, if the transaction had been an outright sale there would have*795 been no occasion for an agreement that Wiener was to retain any part of the proceeds of sales. Both parties to the transaction seem to have treated the recited consideration rather lightly. Wiener apparently had funds at or after the time of the transaction for he testified that earlier in 1928 he borrowed $25,000 from the petitioner which he has repaid. The petitioner testified that he awaits Wiener's convenience in paying the $1,290.80. In 1930, and 1932 Wiener gave petitioner his notes covering loans aggregating some $30,000. Wiener's testimony is that to the best of his recollection the $1,290.80 was included in one of the notes given to the petitioner. This is the nearest approach to any recognition of the alleged consideration for the shares. Upon consideration of all the evidence we do not believe that the transaction was a bona fide sale.
Considerable time at the trial and numerous pages in the briefs were directed to the question of whether the shares on which a loss was claimed in 1919 were the same shares as those on which a loss was again claimed in 1928. We find it impossible to say whether they were or were not the same. The petitioner did not keep records*796 complete enough to permit of an identification of shares by certificates or otherwise. His brokerage records are incomplete as to both sales and purchases. Neither side seemed to know the total holdings of petitioner at any time. However, it does not seem to us to be of any particular importance, either on the loss or the fraud question, whether or not the shares were identical. Of course, it would strengthen the respondent's position somewhat if it could be shown that two deductions are claimed for the identical shares. But if they were different blocks of stock a deduction would not be allowable on one in 1919 and on the other in 1928 under the circumstances present in this case. The 1919 deduction was claimed with respect to 13,364 shares, of which 1,450 shares were owned by petitioner individually and 11,914 shares were in the "pool" accounts. If those 13,364 shares were worthless in 1919, as petitioner then vigorously insisted they were, then clearly his other shares were equally worthless at that time, and under the cases above cited the petitioner could not carry over a block of the shares to a subsequent year and take a loss deduction.
Perhaps a word ought to be said*797 at this point as to the so-called ?pool." Petitioner claimed a loss in 1919 on Savold shares in a "pool." He now insists that he was not in a pool. He says that he simply paid up some of the margin accounts of employees of a bank. *53 It appears, though this is not clear, that upon payment petitioner acquired the stock in the account. His return would indicate that he acquired interests to the extent of his payments and the bank employees retained interests corresponding to their payments. However this may be, it is not of importance here to determine whether or not the petitioner was "in a pool." What is of importance is that he claimed ownership of the so-called pool stock to the extent of an interest of 172,500/197,075 and that interest was recognized by the Commissioner and a loss allowed to the petitioner.
We also sustain the respondent on the fraud issue. We have above referred to the statements made in petitioner's 1919 return which indicated worthlessness at that time. If he had any doubt about it then that doubt must have been dispelled in 1921 when he procured and filed sworn statements from brokers and his attorney which unanimously declared the stcok worthless. *798 Still later, in 1922 and 1923, he had occasion to inquire into the status of the Savold companies. In his 1922 return he took a deduction of $33,216.56 listed as part payment of a judgment and attorneys' fees and costs growing out of "Savold Tire Corp. affairs." In his 1923 return he claimed a similar deduction of $32,811.25. In view of petitioner's knowledge of the worthlessness of the shares prior to 1928 he can not successfully maintain that he sustained a loss in that year through the pretended sale to Wiener. That transaction was entered into, we are convinced, solely for the purpose of supporting a loss claim which the petitioner knew he was not entitled to take.
When the petitioner came to make a report of the transaction with Wiener he did not make the adequate disclosure that an honest intent would require. The combining of the Gasoline Products and Savold transactions was not a disclosure; it was a concealment. In dollars these two items are the largest on the return and they are the only two that are combined. The excuse offered is that there were five items to be reported in schedule C and only four lines on which to report them so that two items had to be combined. *799 The petitioner was not ignorant of the common practice of attaching separate schedules to returns when the space on the return is inadequate. Several of his returns covering earlier years in evidence have separate schedules attached. We are satisfied that he adopted the method of reporting that he did for the purpose of concealing the true facts covering the transaction with Wiener in Savold shares and thereby fasely and fraudulently understating his income. Cf. . We do not accept the testimony of petitioner's bookkeeper Lang that this manner of reporting was solely his own idea.
Reviewed by the Board.
Decision will be entered under Rule 50.