*1353 The Commissioner determined a deficiency in income tax of $6,883.38 for the year 1920. Petitioner claims that the Commissioner erred in refusing to allow a deduction of $30,000 in 1920 representing certain stock purchased in 1919 which became worthless in 1920.
FINDINGS OF FACT.
Petitioner, a resident of Reading, Pa., purchased in December, 1919, at par, $30,000 of the preferred stock of the Luster Machinery Co., a corporation of the Commonwealth of Pennsylvania with its place of business at Philadelphia, where it was engaged in buying and selling new and secondhand machinery. This corporation had been previously incorporated under the laws of Delaware, but needing new capital, the new corporation was organized and its entire issue of preferred stock was sold to petitioner, for which he paid $30,000.
*1354 Petitioner's son, Henry G. Hodges, took charge of the investment and became treasurer of the company. He went from his home in Reading to the company's office to look after its affairs, twice during the*4229 month of January, 1920, and twice a week thereafter during the life of the company.
When Henry G. Hodges investigated the books of the Luster Machinery Co. for the first time in January, 1920, it became evident to him that the representations made to his father on which he purchased the preferred stock were incorrect, and that at that time the company was insolvent. In February, 1920, he placed one of his own accountants to work on the books of the corporation and the audit made by the accountant confirmed the fact that the company was insolvent. At that time petitioner was on a trip to China. On his return his son communicated the state of the company's affairs to him and both of them at that time reached the conclusion that the $30,000 of preferred stock was worthless.
On August 23, 1920, a sale, negotiated by Fred G. Hodges, was consummated, under the terms of which Fairbanks, Morse & Co. took over all the assets of the Luster Machinery Co. except its stock in the Eastern Foundry & Machine Co., agreeing to pay the company's liabilities and, within 90 days after September 12, 1920, to pay it $5,000, if such sum was not exhausted in payment of such liabilities. Within less*4230 than 60 days after September 12, 1920, Fairbanks, Morse & Co. found and so reported to the petitioner and his son, that the assets would not pay the liabilities and that the $5,000 consideration above mentioned would be applied to the payment of liabilities and this was done. No money was paid the Luster Machinery Co. under said agreement, and prior to December 12, 1920, it was known to petitioner and his son that it would not receive anything for its property.
The Eastern Foundry & Machine Co. stock, which was the only asset of the Luster Machinery Co. not sold to Fairbanks, Morse & Co., was sold out and liquidated prior to October, 1920. This stock of the Eastern Foundry & Machine Co. was wholly worthless at and prior to the date stated.
Although the stock of the Luster Machinery Co. was wholly worthless and was so determined by the petitioner and his son prior to December 12, 1920, they were advised by an accountant that to establish the loss for income-tax purposes there should be a public sale of the stock. As a result of this advice, petitioner had the stock sold at public auction by the Security and Realty Exchange of Reading, Pa. This organization advertised the stock*4231 for sale in newspapers and by circularizing its customers. On December 31, 1920, the stock was put up for sale at public outcry. *1355 There was but one bid. Henry G. Hodges, son of petitioner, bid $4,500. No other bid was made and the stock was declared sold to Hodges. He never paid for it and it was understood between him and his father that he was not to pay for it. The stock was never transferred to him. Henry G. Hodges bid the amount of $4,500 rather than a nominal amount because he hoped some other bidder, knowing his reputation as a successful trader in securities, would be tempted to make a slightly higher bid in the belief that Hodges was buying a bargain, and that thereby his father would be saved a portion of the loss.
The Commissioner refused to allow the deduction of any part of the cost of the stock in 1920 and allowed the whole amount of $30,000 as a deduction in 1921.
OPINION.
LITTLETON: The undisputed testimony of the witnesses is that all the company's assets were sold in August, 1920, at which time it was known that all it could possibly receive for such assets was $5,000 and that prior to December 12, 1920, the $5,000 was applied by the purchaser*4232 of its assets to the payment of liabilities, so that prior to December 12, 1920, it was definitely and clearly known that the company had no assets and would not receive anything from the purchaser. The Luster Machinery Co. was, therefore, prior to December 12, 1920, a completely liquidated company wholly without assets. The stock owned by the petitioner was worthless at the end of 1920 and the cost of $30,000 thereof to the petitioner was a proper deduction by him from his gross income for the year 1920.
Judgment will be entered on 10 days' notice, under Rule 50.