*2456 The trust company of which petitioner was a stockholder was closed by order of the Commissioner of Banks in September, 1920, and its assets and liabilities were taken over by trustees for liquidation in 1921. The petitioner and other stockholders in the year 1921 voluntarily subscribed to a guaranty fund to be used by the trustees in case the assets failed to satisfy the obligations of the trust company of which the petitioner was a stockholder. The assets held by the trustees plus the guaranty fund were less than the amount necessary to satisfy the obligations of the defunct trust company. Held, upon the evidence that no part of the amounts paid to the trustees by the petitioner upon his guaranty constitute legal deductions from the gross income of the petitioner for the taxable year ended June 30, 1925.
*135 The respondent has determined a deficiency in income tax against the petitioner for the fiscal year ended June 30, 1925, of $1,721.59. The petitioner alleges numerous errors on the part of the respondent, all of which relate to the disallowance*2457 of a deduction from gross income on account of payments made by the petitioner under a guaranty agreement entered into by him in connection with the liquidation of a trust company of which he was a stockholder.
FINDINGS OF FACT.
The petitioner during the year 1920 was a stockholder and director of the Fidelity Trust Co., of Boston, Mass. He was the owner of 367 shares of stock of the Fidelity Trust Co., which he had purchased at a cost of $44,040.
On September 28, 1920, the Commissioner of Banks for the Commonwealth of Massachusetts took possession of the property and business of the Fidelity Trust Co. and proceeded to liquidate its affairs. After partially liquidating the assets of the Fidelity Trust Co., the Commissioner of Banks received an offer from the Liberty Trust Co., a banking corporation of Boston, Mass., to purchase all the assets and property of the Fidelity Trust Co. of every nature in his hands, not, however, including its franchise or any right possessed by him to enforce individual liability of its stockholders and, as a consideration therefor, to take over, assume, and pay forthwith in full all the known obligations of the Fidelity Trust Co. The offer*2458 also included the making of an agreement for the benefit of the stockholders of the Fidelity Trust Co. to the effect that the liquidation of a certain portion of the assets purchased should be in the hands of the board of trustees and if the total amount realized from the assets purchased should exceed the obligations and liabilities assumed by the Liberty Trust Co., such excess would be distributed pro rata among the stockholders of the Fidelity Trust Co. The offer further included that at or before the transfer, conveyance, assignment and delivery of the assets of the Fidelity Trust Co. to the *136 Liberty Trust Co. there should be paid to the aforesaid board of trustees by certain stockholders of the Fidelity Trust Co. the sum of $400,000 in cash or securities satisfactory to the Liberty Trust Co.
The Commissioner of Banks accepted the offer of the Liberty Trust Co., subject to the approval of the Supreme Judicial Court of Massachusetts, and the complete details of the sale and transfer were set forth in a written agreement with the Liberty Trust Co., dated March 26, 1921, continuing for a term of three years, and a written agreement and declaration of trust with three*2459 trustees dated March 26, 1921, also continuing for a term of three trustees dated March above written agreements are in evidence.
The assets that were to be transferred to the trustees and designated in said agreement marked "Exhibit A" as "Schedule D" were to be liquidated and sold and to be used or distributed according to the provisions of the agreement and declaration of trust marked "Exhibit B" and the fund of $400,000 was to be deposited with the trustees and to be used under the conditions set forth in each of the said agreements.
The fund of $400,000 above referred to was raised among the stockholders of the Fidelity Trust Co. under a subscription agreement providing that if the full amount was not obtained and placed in the hands of the trustees at or about the date of the written agreements, to wit, March 26, 1921, then no subscriber would be bound. According to the provisions of the said agreements no part of this fund was to be used until all the assets of the Fidelity Trust Co. had been wholly liquidated and sold.
The conditions of the offer of the Liberty Trust Co. and the acceptance by the Commissioner of Banks being apparently complied with and the trustees*2460 under their agreement acknowledging the receipt of the said $400,000, the Supreme Judicial Court of Massachusetts approved the sale and transfer of the assets of the Fidelity Trust Co. to the Liberty Trust Co. and trustees under the said written agreements by a decree entered April 7, 1921, and the transfer was made on April 16, 1921, when the Liberty Trust Co. and the trustees assumed full control.
Upon the termination of the three-year period, as designated in the written agreements marked "Exhibit A" and "Exhibit B," the Liberty Trust Co. sued Abel S. Price, one of the subscribers to the guaranty fund, upon his promissory note for $10,000 that he had made at the request of the Liberty Trust Co. and delivered to the trustees as a part of said fund for $400,000 but upon demand Price had refused to pay his note at the end of the three-year period, as aforesaid, on the ground that he had made the said note for the accommodation of the Liberty Trust Co., and that all the assets of the *137 Fidelity Trust Co. had not been liquidated and that the said Liberty Trust Co. refused to give him an accounting showing the liquidation of the assets of the Fidelity Trust Co. and the claims*2461 that had been assumed and paid by the Liberty Trust Co. This case came on for trial in the Suffolk Superior Court of Massachusetts before a jury during the month of April, 1925, and after hearing the evidence on behalf of the Liberty Trust Co. the case was taken from the jury and referred to an auditor to find the facts and report the same to the court. The auditor, after several hearings during the month of May, 1925, filed his report on June 23, 1925, and thereafter the case was tried before a jury. The court rendered its decision therein on May 21, 1927, holding the defendant liable upon his note. See ; .
Up to the time of the trial of the above referred to case the petitioner had hopes that the assets of the Fidelity Trust Co. would be liquidated by the Liberty Trust Co. at an amount which would enable the trustees to refund to the subscribers to the guaranty fund a portion of the amount of their subscriptions. This was in spite of the fact that after the liquidation of the assets of the Fidelity Trust Co. had proceeded for two and one-half years and Allen H. Sturges, treasurer of the*2462 Liberty Trust Co., brought to the attention of the trustees and of the protective committee, of which the petitioner was one, that it appeared there would be a deficit in the liquidation of the Fidelity Trust Co. assets and in his opinion their portion of the so-called guaranty fund would have to be used to make up such deficit according to the agreement; that it would take a long time to liquidate the remainder of the Fidelity Trust Co. assets and, in order to discontinue the expenses of the trusteeship, that it would be better to have the full amount of the guaranty fund paid to the Liberty Trust Co. and that thereafter, upon the liquidation of the remaining assets of the Fidelity Trust Co., and if sufficient funds were received, then the subscribers would be reimbursed wholly or partially according to their respective interests. Nearly all the subscribers paid in their subscriptions or a part of the same. The petitioner, who had pledged $30,000 to the guaranty fund, paid $5,000 of his pledge in cash and gave as security for the balance his promissory notes, one for $8,000, unsecured, and another for $17,000, secured. The petitioner made payments of cash on his pledge according*2463 to the following schedule:
| Oct. 12, 1923 - cash a/c secured note | $425.39 |
| Oct. 19, 1923 - cash and Liberty bonds | 5,000.00 |
| Apr. 15, 1924 - cash a/c unsecured note | 8,000.00 |
| Apr. 17, 1924 - cash a/c secured note | 71.61 |
| Oct. 15, 1924 - cash a/c secured note | 4,503.00 |
| Nov. 5, 1924 - cash a/c secured note | $1,025.31 |
| Jan. 14, 1925 - cash a/c secured note | 1,000.00 |
| Apr. 16, 1925 - cash a/c secured note | 32.01 |
| Total payments to June 30, 1925 | 20,057.32 |
| Total interest payments 1924-1925 | 877.95 |
| Total payments, principal and interest, to June 30, 1925 | 20,935.27 |
After the trial of the case of , and after the auditor had submitted his report on June 23, 1925, the petitioner plainly saw that his entire subscription to the guaranty fund was a total loss.
On his income-tax return for the fiscal year ended June 30, 1924, the petitioner claimed as a deduction from gross income $18,000 representing his loss on 150 shares of the stock of the Fidelity Trust Co. This deduction was allowed by the Commissioner. On his tax return for the fiscal year ended June 30, 1925, the petitioner claimed*2464 as a deduction from gross income on account of bad debts ascertained to be worthless and charged off during the taxable year the balance of his original investment in the stock of the Fidelity Trust Co., namely, $26,040. The Commissioner disallowed this deduction upon the ground that the total loss of the petitioner in respect of his investment in the stock of the Fidelity Trust Co. and of his subscription to the guaranty fund, was a loss in the fiscal year ended June 30, 1924.
OPINION.
SMITH: In this proceeding the petitioner claims the right to deduct from gross income for the taxable year ended June 30, 1925, $20,935.27 representing payments made by him during that and prior years to the trustees under a declaration of trust dated March 26, 1921. The deduction is claimed under section 214(a)(7) of the Revenue Act of 1924, which permits an individual to deduct from gross income in computing net income:
Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be*2465 charged off in part.
He contends that prior to the beginning of his taxable year he had a hope and an expectation that a part of the amount paid by him to the trustees under the agreement and declaration of trust, above referred to, would be returned to him and that it was not until May or June of 1925, that he actually ascertained that no part of the $30,000 which he had obligated himself to pay under the agreement or declaration of trust would ever be refunded to him.
The respondent contends that any loss which the petitioner sustained with respect to his subscription to the guaranty fund was a *139 loss in the fiscal year ended June 30, 1924, and that no part of that loss may be allowed either as a bad debt deduction or as a loss in the fiscal year ended June 30, 1925.
The first question to be decided is whether the trustees were debtors to the petitioner. If a debtor-creditor relationship did not exist between the trustees and the petitioner, the petitioner is not entitled to claim the amount as a bad debt deduction in the fiscal year ended June 30, 1925.
We think that no such debtor-creditor relationship existed. *2466 The only obligation of the trustees to refund to the petitioner any portion of the amounts which he paid or should pay under his guaranty pertained to the excess of the amount paid over the amount which would be required to make whole the Liberty Trust Co. upon its undertaking to pay the debts of the Fidelity Trust Co. There never was any such excess. The assets of the Liberty Trust Co., plus the guaranty fund of $400,000, were not sufficient to make whole the Liberty Trust Co. upon its undertaking. This was the determination of the Commissioner and it is supported by the finding of the court in , wherein the court stated:
At the end of the three-year period (April 1, 1924) the trustees had liquidated the assets in schedule (d) so far as possible; and it appeared that the entire guaranty fund would have to be paid over to the plaintiff, and that after such payment there would be a loss to the plaintiff of at least $179,500. * * *
There was no absolute liability on the part of the trustees to pay to the petitioner any part of the $30,000 subscribed by him to the guaranty fund. we therefore think that*2467 there was no debt ascertained to be worthless by the petitioner from the trustees in the fiscal year ended June 30, 1925, for the good and sufficient reason that the trustees in the circumstances of this case were not liable as debtors to the petitioner.
Section 214(a)(5) of the Revenue Act of 1924 permits an individual to deduct from gross income in his income-tax return:
Losses sustained during the taxable year and not compensated for by insurance or otherwise. * * *
The respondent has determined that the petitioner sustained no loss upon this transaction in the fiscal year ended June 30, 1925. The petitioner has adduced evidence to the effect that he had not ascertained that he had sustained a loss in respect of his subscription to the guaranty fund until May or June, 1925. But an ascertainment of a loss within a taxable year is not the criterion imposed by the statute for a loss deduction. Losses are deductible under the statute only in the year when sustained. The evidence here does not show, *140 in the language of the Supreme Court in *2468 , the occurrence in the fiscal year ended June 30, 1925, of any "identifiable event" which fixed a loss deductible from gross income. If the evidence showed the liquidation by the Liberty Trust Co. or of the trustees of the assets of the Fidelity Trust Co. taken over and a deficiency resulting from that liquidation in the taxable year under review, it might be that the loss suffered by the petitioner would thereby be identified as a loss sustained in the taxable year. But the respondent has determined that the loss was sustained in a prior taxable year. The evidence offered does not prove or tend to prove error on the part of the respondent in making such determination. The contention of the respondent is therefore sustained.
Reviewed by the Board.
Judgment will be entered for the respondent.