*3193 The Commissioner's action in disallowing as a deduction for 1923 a loss alleged to have been sustained by reason of the sale of certain stock in that year is, under the circumstances herein, approved.
*713 The Commissioner determined a deficiency in income tax of $1,251.96 for 1923. The question is whether, under the circumstances and conditions hereinafter described, the petitioner in 1923 sustained a loss of $25,198.30 on the sale of 900 shares of the common stock of the Goodyear Tire & Rubber Co., which amount the Commissioner disallowed as a deduction for that year.
FINDINGS OF FACT.
Petitioner is a resident of Los Angeles, Calif.
During 1920 and 1921 he borrowed from C. W. Seiberling, then vice president of the Goodyear Tire & Rubber Co., of Akron, Ohio, *714 5,707 shares of the common stock of the Goodyear Tire & Rubber Co., which stock was to be used and was used by petitioner as additional collateral for his various loans with the full knowledge and consent of Seiberling. The 5,707 shares so loaned to petitioner by*3194 Seiberling had a fair market value at the time loaned to the petitioner of $36.80 a share.
It was agreed between petitioner and Seiberling at the time that petitioner would return the original shares of stock so borrowed, or, if he were unable to do so, he would return to Seiberling either cash or property in an amount equal to the fair market value of said stock at the dates of receipt of 1920 and 1921 by the petitioner, to wit, $36.80 a share.
The common stock of the Goodyear Tire & Rubber Co. declined in value and because of the inability of petitioner to pay his loans to the various banks and of his inability to furnish additional collateral, the National City Bank of Chicago sold 700 shares of the stock during 1923 which had been loaned to petitioner by Seiberling. During the same year, 1923, the Security Trust & Savings Bank of Los Angeles sold 200 shares of the stock which had been loaned to petitioner by Seiberling. The sales were made by the banks to enable them to liquidate in part the petitioner's indebtedness to them and the petitioner was not the purchaser of any of the stock so sold.
The National City Bank of Chicago and the Security Trust & Savings Bank of*3195 Los Angeles received during the year 1923, $7,928 from the sale of 900 shares of the common stock of the Goodyear Tire & Rubber Co. above referred to, which amount was credited to the indebtedness due said banks from the petitioner.
The petitioner did not repay to Seiberling during the year 1923 the cost of the 900 shares of the Goodyear Tire & Rubber Co. stock which had been loaned to the petitioner by Seiberling in 1920 and 1921, and which at said dates had and average fair market value of $33,126.30.
During the year 1923 petitioner kept his accounts on the basis of cash received and disbursed.
In determining his taxable income for the year 1923 petitioner deducted as a loss the amount of $25,198.30, being the difference between the amount of $7,928, credited to his accounts by the National City Bank of Chicago and the Security Trust & Savings Bank of Los Angeles, and the average fair market value of the said stock as of 1920 and 1921. Upon audit of the return the Commissioner disallowed the deduction.
OPINION.
LITTLETON: It is the petitioner's contention that, by reason of the sale in 1923 of the 900 shares of stock in question, he sustained a *715 loss in*3196 the amount of $25,198.30, which is deductible from gross income.
In support of this contention petitioner argues that he acquired title to the stock at the time Seiberling turned it over to him and that the subsequent sale thereof constituted a completed transaction, resulting in the loss which he seeks to deduct in the year 1923.
The Commissioner, on the other hand, takes the position that, the petitioner being on a cash receipts and disbursements basis, a loss was not substained in 1923 and the transaction could not be closed and did not, therefore, result in a loss until petitioner paid Seiberling for the stock which was sold by the banks in 1923.
We think that it is unnecessary to pass upon the question as to whether the title to the stock in question passed to petitioner at the time Seiberling turned it over to him for the reason that, under the facts herein, assuming such to be the case, petitioner has not fulfilled the equirements of the statute with respect to the deduction of losses.
Section 214(a)(4) of the Revenue Act of 1921 authorizes as deductions in computing net income, "Losses sustained during the taxable year and not compensated for by insurance or otherwise. *3197 " The question that confronts us, therefore, is did petitioner sustain the alleged loss in the year 1923 within the meaning of the Revenue Act of 1921? The answer to the question, of course, depends on the meaning of the word "sustain."
In , we stated, in considering the identical language employed in the 1918 Act, that:
The statute provides for a deduction on account of losses sustained during the taxable year. The expression "loss sustained" means actual losses and not paper losses * * *.
In , we said:
The statute does not permit the deduction of doubtful debts partly written off, , nor of possible or probable losses. The loss must be actually sustained in the taxable year to be deductible * * *. On the other hand, claiming a loss he must prove as a fact that it was actually sustained within that year. The sustained loss and not the ascertainment is the statutory factor * * *.
It is true that in 1923 upon the sale of the stock petitioner became legally liable to Seiberling for the payment of a definitely ascertainable*3198 amount, because he could not return the stock unless he purchased it. However, petitioner did not in 1923 pay out anything and consequently the potential loss was not made effective. . Until petitioner pays Seiberling the amount of the debt owing to him only a potential loss exists which, it is clear, can not be actually sustained, and, consequently, deductible under the statute, until payment has been made, thereby *716 making the loss real and actual as distinguished from potential. .
The petitioner, however, calls attention to the decision of the Board in , and insists that our holding therein constitutes authority for the deduction sought in this proceeding.
In that proceeding the Board held that in order properly to reflect income attributable to the year 1919, goods actually bought and sold during that year should be added to purchases, whether fully paid for or not, even if the taxpayer was on the cash receipts and disbursements basis. Thus it will be observed that the material facts are somewhat different in the McGinnis*3199 proceeding and our holding therein was confined to the acquisition and disposition of goods within a particular year in the usual course of business. It is our opinion, therefore, that the instant proceeding is not controlled by the McGinnis case supra.
Accordingly, the Commissioner's action in disallowing the claimed loss for 1923 is approved.
Reviewed by the Board.
Judgment will be entered for the respondent.
PHILLIPS dissents.