*2981 1. Conclusion reached in the case of R. V. Board,14 B.T.A. 374">14 B.T.A. 374, with respect to the profit realized on a certain lease-acquisition transaction followed for the purpose of determining the profit to the petitioner from this same transaction.
2. Basis used in V. J. Bulleit,3 B.T.A. 631">3 B.T.A. 631, in determining the profit realized by Bulleit as a member of a syndicate which undertook the sale of certain stock, modified in the case of the petitioner, who was a member of the same syndicate and with respect to whom additional evidence was here presented.
3. Evidence held insufficient to establish that certain stock received by petitioner as compensation for services rendered had no market value when received. Commissioner's valuation affirmed.
4. Deductions claimed for a debt which became worthless denied because of lack of proof as to when the worthlessness was ascertained.
5. The more fact that it is shown that certain stock became worthless is insufficient to warrant a deduction on account thereof when we do not know the year in which the stock became worthless.
6. An affirmative allegation on the part of the Commissioner that an amount*2982 received by the petitioner constitutes taxable income is not established by a showing that the amount alleged was received and that it would not have been received, but for certain services rendered by the petitioner.
*394 This proceeding involves deficiencies in income tax determined by the Commissioner as follows: 1919, $8,697.33; 1920, $1,637.85, and 1921, $172.97. In addition, the Commissioner asked for an increase in the deficiency for 1919 on account of the profit alleged to have been realized by the petitioner in a transaction with respect to certain oil leases which were acquired by the Old Dominion Oil Co. The Commissioner also asked for an increase in the deficiency for 1921 on account of certain alleged income not reported and that the fraud penalty be asserted on account thereof.
FINDINGS OF FACT.
Petitioner is a resident of Louisville, Ky. During 1918, 1919, and 1920, he was a stockholder in the Old Dominion Oil Co. (hereinafter sometimes referred to as the Dominion Company), a Kentucky corporation, organized December 31, 1917.
*2983 Prior to August 5, 1918, the directors of the Dominion Company had been conducting negotiations for the purchase of certain oil leases owned by the Southwestern Petroleum Co. and the Cliff Petroleum Co., and by August 2, 1918, the negotiations had progressed to the extent that a stockholders' meeting was called by the Dominion Company for August 5, 1918, for the purpose of explaining the proposed transaction to the stockholders. At this meeting the directors described the nature of the properties to be purchased and the benefits which would flow to the stockholders as the result of their acquisition. In addition, the directors stated the consideration which was to be paid for the properties and outlined plans by which the project might be financed. At the conclusion of the explanation, a resolution was adopted confirming the actions of the directors in these negotiations and authorizing them to complete the negotiations and sign the contract. At the same meeting a further resolution looking to the financing of the transaction was adopted, which provides in part as follows:
RESOLVED: That for the benefit of the Old Dominion Oil Company two separate corporations be organized*2984 with a capital stock of $100,000.00 each under such names and titles as may hereafter be selected by the Board of Directors, the Executive Committee or officers of said corporation, and that the stockholders of the Old Dominion Oil Company be given the privilege of subscribing to the capital stock of said corporations not in excess of 20% of their present holdings in the Old Dominion Oil Company to each of the said foregoing corporations. That said corporations be conducted until such time as in the wisdom and prudence of the Executive Committee or officers of said Old Dominion Oil Company sufficient payments can be made upon the foregoing contracts with the Southwestern Petroleum Company and others that the property of said corporations can be deeded to, merged with, or consolidated with the Old Dominion Oil Company and said transfer to the Old Dominion Oil Company of said properties shall be for the consideration of the return to each of the stockholders *395 investing in either or both of the foregoing corporations to be organized, the sum or sums of money invested therein, or its equivalent and a like amount of stock in the Old Dominion Oil Company. And the directors and*2985 officers of said corporation, Old Dominion Oil Company, are now and hereby authorized to take such steps, sign such amended articles, affix their signatures to such necessary contracts, papers, leases and assignment of leases as may be required to contract with either or both of the foregoing corporations to be organized, and to transfer all of said property to the Old Dominion Oil Company hereafter when in the judgment of said directors and officers the conditions of said transfer may be made to the benefit of said Old Dominion Oil Company, the purpose being to organize and carry on the foregoing two corporations solely for the use and benefit of the Old Dominion Oil Company, and not otherwise, And to effectually carry out said purposes, said officers and directors are now and hereby ordered and directed to do any and all necessary and proper things to be done and to sign any and all papers, contracts, leases, transfers of leases and otherwise.
The "two separate corporations" referred to in the foregoing resolution were not organized, but the contract in question for the acquisition of the oil leases was entered into on August 12, 1918, and approved at a meeting of the board of*2986 directors of the Dominion Company on August 16, 1918. This contract set out that the consideration to be paid for the leases was $400,000, of which $200,000 was to be paid in cash and $200,000 in the following manner:
One-half of the working interest in the oil produced on said leases and each of them (and by the use of the expression "working interest" is meant the gross production, less the royalty interest or oil reserved by the landowner or other person heretofore interested in the oil and gas or oil and gas rights in said premises) shall be the property of the Petroleum Companies as soon as and when produced, until the sum received from the sale of said one-half of said working interest shall amount to the sum of Two Hundred Thousand Dollars, ($200,000.00).
At a meeting of the stockholders of the Dominion Company, held on August 17, 1918, the following resolutions were adopted:
RESOLVED: That the contract made by the officers and directors of this Company with the Southwestern Petroleum Company and the Cliff Petroleum Company, as shown by the minutes of the meeting of directors of this company, held August 16, 1918, be and the same is now and hereby in all things, confirmed*2987 and ratified, and that the officers and directors be further advised to pay the sum of Thirty Thousand ($30,000.00) to M. C. Clay and W. J. Flesher and be authorized and directed to accept Six Thousand ($6,000.00) Dollars rebate on some of the cash payments mentioned in said contract by reason of the royalties being somewhat higher than the original negotiations on the M. J. Brandenburg lease of 19.25 acres.
Said resolution so offered was unanimously carried, there being no stockholder voting in the negative, and it was so ordered.
Whereupon the following resolution was offered by Charles W. Schindler, and seconded by Michael Zier, both stockholders of record, and personally in attendance at said stockholders' meeting:
*396 RESOLVED: That the officers and directors be and they are now and hereby authorized and directed to amend the Articles of Incorporation of the Old Dominion Oil Company, increasing the authorized capital stock from Five Hundred Thousand ($500,000.00) Dollars to Seven Hundred and Fifty ($750,000.00) Thousand Dollars, and that the president and a majority of the Board of Directors be authorized and directed to execute such amended Articles of Incorporation, *2988 and record the same and file the same with the Secretary of State of the Commonwealth of Kentucky, in order to effect such increase, and that the officers and directors of said corporation be authorized and directed to do any and all other necessary and proper things to be done and sign all other necessary and proper papers to be signed, in order to effectually carry out this resolution and amend said Articles of Incorporation, increasing the capital stock from Five Hundred Thousand ($500,000.00) Dollars to Seven Hundred and Fifty Thousand ($750,000.00) Dollars.
After a full discussion the motion was unanimously carried and the following amended articles of incorporation were presented. [Form of such amended articles was omitted.]
After which your committee reported, which report was unanimously adopted, that the Old Dominion Oil Company's contract with the Southwestern Petroleum Company and the Cliff Petroleum Company be sold and assigned to and assumed by each of the stockholders of the Old Dominion Oil Company agreeing thereto equally and ratably, in proportion to their present holdings of stock in the Old Dominion Oil Company; and that each agreeing stockholder furnish*2989 the necessary sums of money required of him to pay the gross sum of $200,000.00 in cash to the Southwestern Petroleum Company and the Cliff Petroleum Company, as provided in and by the contract of August 12th, 1918.
There being $500,000.00 of outstanding capital stock of the Old Dominion Oil Company, this will require a payment by each of said stockholders of forty per cent of their present holding of stock in the Old Dominion Oil Company.
That when each of said stockholders have paid said sums of money equivalent to forty per cent of their present stockholdings in the Old Dominion Oil Company, aggregating a total of $200,000.00, that they and each of them making such payments be the owners of all of the right, title and interest in and to the aforesaid contract of August 12th, 1918, in proportion to their said respective payments; and that the officers of the Old Dominion Oil Company be required to and keep a record of all said payments so made by each of its said several stockholders, with a contract running to each of them individually, which likewise shall run to all of them jointly and severally, to pay to them out of the oil-runs from the property purchased in and by the*2990 said contract of August 12th, 1918, the full sum of $200,000.00 in cash, without interest, along with and at the times that the $200,000.00 in oil mentioned in said contract of August 12th, 1918, is paid to the Southwestern Petroleum Company and the Cliff Petroleum Company.
That further, when each of said payments have been fully made out of the oil-runs from said properties, namely, $200,000.00 to the Southwestern Petroleum Company and the Cliff Petroleum Company, and $200,000.00 to the stockholders furnishing the aforesaid $200,000.00 in cash, as shown by the books of the company, then that there be immediately purchased from said parties said contract by issuing to each party this company's stock at par value equal to the amount of money paid by him. That is to say, when the properties purchased by and as the result of the oil-runs under said contract of August *397 12th, 1918, has paid for itself in full, then and not until then shall stock be issued to each of the parties furnishing aforesaid funds. The consideration being that the furnishing of said $200,000.00 in cash without interest, for the period necessary and proper that may be required to secure all of said*2991 money from the production of oil-runs on the property so purchased enables said Old Dominion Oil Company to own the property purchased in and by the contract of the 12th day of August, 1918, without paying for it out of its own resources, and without being at any expenditure whatever on account of the purchase price of the property, or any other sum than the amounts required to drill in and operate said property. It is understood that the sums mentioned herein to be paid are to be produced from said properties out of the net working interest after the payment of all royalties, and that one-half of said net working interest is to go to the Southwestern Petroleum Company and the Cliff Petroleum Company, and the other half of said net working interest is to be credited and ultimately paid to the parties furnishing the said $200,000.00, as shown by the books of the corporation, and as mentioned herein; and that the stock issue following thereafter is to be paid to the same parties furnishing said funds in the exact proportion to the amount of money so furnished by them.
And further, that when each of said parties so furnishing said $200,000.00 have been fully paid, as mentioned herein, *2992 without interest, and stock issued to them, as mentioned herein, and the Southwestern Petroleum Company and the Cliff Petroleum Company have likewise been paid the $200,000.00 mentioned in the contract of August 12th, 1918, then the property is to become the sole and absolute property of the Old Dominion Oil Company, and all the rights, interest and privileges mentioned in the contract of August 12th, 1918, shall automatically revert to and become the absolute property of the said Old Dominion Oil Company.
The plan of financing referred to in the minutes of August 15, 1918, was not carried out, but subscription blanks were prepared, which showed the names of the proposed companies and read as follows:
We, the undersigned, hereby subscribe to shares of the capital stock of the Cave Fork Oil Company, a corporation to be organized under the laws of the State of Kentucky, with an authorized capital of $100,000.00, for the use and benefit of the stockholders of the Old Dominion Oil Company, as more fully set forth in the statement from the meetings of the Board of Directors and stockholders. And we hereby subscribe a like amount to the capital stock of the Bald Rock Oil Company, a*2993 corporation to be organized under the laws of the State of Kentucky with an authorized capital of $100,000.00 for the same purpose.
We now and hereby attach our check for the sum of $ , and agree to pay on the 1st day of September, 1918, $ , and on the 1st day of October, 1918, $ , with the understanding that when the net amount of $100,000.00 worth of oil has been run by each of said corporations, the sum so subscribed by us is to be repaid to us in cash by the Old Dominion Oil Company and a like amount of the stock of the Old Dominion Oil Company set aside and issued to us at said time without the payment of any other or further sum of money than the payments now and hereby made by us; it being understood and agreed that this subscription to these separate corporations is made for the profit, use and *398 benefit of each of us as stockholders of the Old Dominion Oil Company, and that this subscription is made in several duplicates, each one of which may be treated as an original, and an exact copy of which is retained by me.
These subscription blanks were signed by substantially all of the stockholders, but in those instances where stockholders did not assume these obligations, *2994 they were assumed by other stockholders. The subscriptions were paid and the cash was used by the Dominion Company to pay the amount required in cash on the purchase price of the leases here in question.
The leases were operated by the Dominion Company. The oil was transported through the pipe line of the Cumberland Pipe Line Co., which company delivered one-half to the Southwestern Petroleum Co. and Cliff Petroleum Co. until the payments called for in oil were satisfied. The Dominion Company received the amounts on account of the other half of oil produced. The cash so received by the Dominion Company from this oil production was not accumulated in a separate fund, but was included in the general receipts of the Dominion Company. No fund was accumulated and set aside for the specific purpose of paying to the stockholders $200,000 on account of this amount of cash so paid by them.
At the time the contract for the acquisition of the leases in question was entered into, the petitioner held 75 shares of stock in the Dominion Company of a par value of $7,500, and paid on account thereof $3,000 in cash (40 per cent of $7,500). As a result, the petitioner became entitled to receive*2995 30 shares of Dominion Company stock under the agreement with respect to the purchase of the leases and otherwise participate in the distribution which was to be made on the fulfillment of the agreement.
The par value of the capital stock of the Dominion Company was $100 a share at the time of the acquisition of the leases and so remained until July 31, 1919, when the par value was changed to $1 a share, 100 shares being issued for each share previously held. At this time, July 31, 1919, a consolidation was effected between the Dominion Company, the Belle Point Oil Co. and the Sinking Springs Oil Co., the stock of the Dominion Company being increased at this time to 5,000,000 shares of a par value of $5,000,000.
On July 31, 1919, there were issued to the petitioner 3,000 shares of stock of the Dominion Company on account of the 30 rights (changed to a basis of 3,000 in the reduction of the par value of the stock) to stock under the lease-acquisition agreement, and 3,000 shares in lieu of the cash or equivalent which was referred to in the resolution of the stockholders of August 17, 1918, the stockholders electing to take stock instead of cash. The petitioner reported no taxable*2996 income on account of this transaction on the ground that the funds furnished, *399 or payments made, were contributions of capital. The respondent contends that a taxable profit resulted to the petitioner of the difference between the amount invested and the market value of the stock received.
On February 21, 1919, V. J. Bulleit, in his own name, but acting for a syndicate composed of the petitioner and James R. Duffin and himself, entered into a contract with the Hopewell Petroleum Co. to purchase all of its capital stock, or, if all of the stockholders would not assent, then to purchase all of the assets of that company, and to pay therefor:
| Cash | $200,000 |
| 200,000 shares of the capital stock of a company to be organized, at 50 cents a share | 100,000 |
| From oil production | 60,000 |
| Total | 360,000 |
The syndicate then organized a company, known as the Belle Point Oil Co., under the laws of Delaware, having an authorized capital stock of 1,000,000 shares of the par value of $1 each. The certificate of incorporation, dated February 27, 1919, provided in part as follows:
The total authorized capital stock is ONE MILLION DOLLARS ($1,000,000), divided into one*2997 million (1,000,000) shares of the par value of One Dollar ($1.00) each.
Of the One Million Dollars authorized capital stock Nine Hundred Thousand ($900,000.00) Dollars shall be fully paid up and non-assessable and delivered to V. J. Bulleit, or upon his order to such other persons as he may request, in the transfer and delivery to this corporation of the following leases, bearing a royalty to the lessors of one-eighth (1/8th), together with such subleases as have been made with and to others for the active drilling of said leases.
The properties referred to were all previously owned by the Hope-well Petroleum Co. and were included within the transfer covered by the contract with the taxpayer hereinbefore referred to.
The certificate of incorporation further provided:
And the $100,000 shall be sold for cash at par. By "cash" it is meant herein that the subscriptions to said stock shall be paid in cash within a reasonable time, which shall be construed to mean from one to four months.
The syndicate then transferred to the Belle Point Oil Co. all of the property previously owned by the Hopewell Petroleum Co. The syndicate received in its own right 900,000 shares of the*2998 capital stock of the Belle Point Oil Co., and the latter assumed the liability of the syndicate to pay the $60,000 in oil produced; the syndicate also obligated itself to sell the $100,000 of treasury stock retained by the Belle Point Oil Co. at $1 a share, so that the corporation would have $100,000 of cash in its treasury for development purposes.
*400 The syndicate took subscriptions for stock in the Belle Point Oil Co. under the following stock subscription blank:
I hereby subscribe to the capital stock of the Belle Point Oil Company, a corporation being organized under the laws of the State of Delaware, at an authorized capital of one million shares of the par value of one dollar each, with the understanding that 900,000 dollars of said capital stock is being sold at fifty cents per share of its par value, and $100,000 is being sold at one hundred per cent of its par value, and that each subscriber to the fifty per cent stock is required to subscribe for fifteen per cent of the par value of the stock.
The syndicate made sales of stock in blocks of 1,150 shares for $650,500 shares at 50 cents per share and 150 shares at $1 per share. The stock-selling campaign began*2999 in May or June, 1919, and continued until shortly before, or until the consolidation of the Belle Point Oil Co. and the Old Dominion Oil Co. on July 31, 1919. The syndicate members subscribed and paid for stock on the same basis as other subscribers. Out of the total of 700,000 shares (1,000,000 authorized less 200,000 which were to be delivered to the Hopewell Petroleum Co. and also less 100,000 which were to be sold by the syndicate at $1 a share for the purpose of producing a fund of $100,000 to be turned over to the Belle Point Oil Co. for development purposes), the syndicate had, on or before July 31, 1919, sold approximately 547,000 shares at 50 cents a share, thus leaving approximately 153,000 shares unsold in the hands of the syndicate. At the time the sale of stock was discontinued, the syndicate members contributed $9,180 in order to make up the amount which was to be received by the Belle Point Oil Co. for development purposes. The syndicate delivered to the stockholders of the Hopewell Petroleum Co. the 200,000 shares called for under the syndicate agreement and also paid to the same stockholders the $200,000 in cash specified in said agreement to be paid to them. To*3000 the extent to which payments had not been made on account of the $60,000 from oil production, this obligation was assumed by the Belle Point Oil Co. at the close of the syndicate operations.
Upon the completion of the syndicate operations the petitioner received, as his part of the cash remaining after discharging the obligations under the syndicate agreement, $49,266.66. In addition he received 50,561 shares of stock of the Belle Point Oil Co. The petitioner had paid in to the syndicate $34,866.51 in cash. In submitting his return for 1919, petitioner reported as taxable income from this transaction the difference between the cash received and cash paid in, or $14,400.15, thus leaving out of account the stock received in addition to cash.
On July 31, 1919, the Belle Point Oil Co. consolidated with the Old Dominion Oil Co., each stockholder in the Belle Point Oil Co. *401 receiving one share of stock in the Old Dominion Oil Co., whose stock was at this time increased, for each four shares of stock held in the Belle Point Oil Co.
In 1920 the petitioner received from the Curd-Blakemore Co. 250 shares of stock of the Marden, Orth, Hastings Co. in consideration for*3001 certain services rendered by him to the former company. The respondent valued this stock at $15 a share and accordingly increased petitioner's taxable income to the extent of $3,750. Petitioner contends that the stock had no market value.
In 1920 petitioner made the following advances to Edward Moore, of the Moore Manufacturing Co., a partnership, of Brooklyn, N.Y., which was engaged in the manufacture of certain paper novelties:
| June 18, 1920 | $2,000 |
| July 16, 1920 | 1,250 |
| August 13, 1920 | 1,000 |
| September 16, 1920 | 2,000 |
| Total | 6,250 |
Notes were executed for these advances, due four months after date in each instance. The notes were secured by accounts receivable which were assigned as collateral. The petitioner discounted the notes at a bank. When the notes came due, they were renewed, or at least some of them. When the accounts receivable which were assigned, were collected, Moore appropriated the amount collected to his own use. Ultimately petitioner was required to pay the entire amount of the notes, and no recovery was ever had by the petitioner from Moore. The Moore Manufacturing Co. continued in business until 1924, when its assets were disposed*3002 of.
Prior to 1921 petitioner invested $500 in the Sandow Oil Co. In 1921 the Stark Development Co. was formed to take over the assets of the Sandow Oil Co. and at that time stock of the new company was issued to the petitioner for his investment in the old company. Petitioner also invested $500 additional in the new company, for which and the investment in the old company, he was issued 20 shares of stock in the new company. Either in 1921 or subsequent thereto the new company ceased drilling oil wells, allowed its leases to lapse, abandoned its property and went out of business. The petitioner realized nothing from this investment.
In 1918 the petitioner invested $500 in the stock of the Royhome Oil Co. Later the corporation liquidated and paid to the petitioner $315 on account of his investment.
In 1921 one D. C. Clarke, doing business under the name of the Louisville Real Estate & Development Co., desired to obtain a contract from the United States Government to sell Camp Taylor at public auction. While Clarke was having difficulty in meeting the *402 necessary parties in Washington to negotiate the contract, Clarke asked one E. V. Knight to assist him. Knight, *3003 in turn, who was a close personal friend of the petitioner and who knew that petitioner was acquainted with the persons whom he thought would be helpful in the undertaking, asked the petitioner to give him an introduction to the party or parties whom he desired to meet, which request was complied with. Clarke met the necessary parties, secured the desired contract and, after the transaction was completed, gave to Knight a check for $20,000. Knight, who had had expense of approximately $500, deducted this amount from the $20,000 and gave to petitioner one-half of the remainder, or $9,750. The petitioner did not report this amount as taxable income on the ground that he considered it a gift.
OPINION.
LITTLETON: The first issue is whether taxable profit was realized by petitioner, a stockholder of the Old Dominion Oil Co., and, if so, how much, in the transactions in which oil leases were acquired from the Cliff Petroleum Co. and the Southwestern Petroleum Co., under an arrangement in which funds were furnished by stockholders of the Dominion Company for the purchase of the leases and later stock was issued by the Dominion Company to these stockholders on account of the funds*3004 so furnished. This same transaction was before the Board in . On the evidence there presented, we held that the transaction amounted to an investement on the part of the stockholders when the funds were furnished or invested for the acquisition of the leases and that taxable profit arose at the time the stock was issued to the stockholders, the amount of the taxable profit being the difference between the amount invested and the market value of the stock received.
The additional contentions raised and evidence presented which were not before us in the Bullcit case were considered by us in the case of R. V. Board, another party to the same transaction, which was decided today. On the bais thereof, we affirm our former conclusion that this was a transaction which gave rise to profit and that the fair market value of the stock received was $1.75 a share. This petitioner paid in $3,000 and received on account thereof 6,000 shares of stock. His profit was accordingly $7,500 - $10,500 (6,000 shares at $1.75) less $3,000.
The transaction relative to the profit realized by the petitioner in the syndicate operations with respect*3005 to the acquisition of the assets of the Hopewell Petroleum Co. by the Belle Point Oil Co. and the sale of the latter corporation's stock by the syndicate was likewise before the Board in , a case involving the *403 profit to be accounted for by V. J. Bulleit as a member of this same syndicate. We there held that the profit to the syndicate was the difference between the cash received by the syndicate in the sale of the stock and the amount paid out of such receipts on account of the obligations assumed under the syndicate agreement plus the value of the stock which the syndicate members had upon the termination of the syndicate operations, such stock being valued at 50 cents a share. In this proceeding, the principal contentions advanced by the petitioner are that the Board was in error in assigning a value of 50 cents a share to the stock which was left in the hands of the members of the syndicate and that the Board should now find that the stock had no market value. While much that appears in the record is confusing and difficult of reconcilement, the parties appear to be in agreement that the petitioner paid in, on account of*3006 this transaction, $34,866.51 and received in cash at the end of the syndicate operations, $49,266.66, or a difference of $14,400.15. The petitioner also received as his part of the stock left unsold 50,561 shares. This difference in cash of $14,400.15 was reported as taxable income. In the Bulleit case, in determining the total profit to the syndicate, we gave credit for the syndicate expense as well as the amount paid by the syndicate members to make up the $100,000 to be paid to the Belle Point Oil Co., but, seemingly, the parties have agreed on the net results of the transaction, from a cash standpoint, in so far as the petitioner is concerned, and, consequently, have left for our consideration the one question as to the extent to which the profit should be increased on account of the 50,561 shares of Belle Point Oil Co. Stock received.
In the Bulleit appeal, we found a fair market value for this stock of 50 cents a share. At that time the principal evidence presented was the sales of stock by the syndicate, which, admittedly, may not be a true measure of market value. In this proceeding, additional evidence has been introduced, but much of it is so contradictory*3007 and indefinite that it aids us little in arriving at a solution to our problem. Bulleit, the party whose appeal we referred to above, and who was a party to the transaction, testified that the stock had no market value; that "The fair market value of this stock in my judgment, without fixing the number of shares but just in general, was 56 cents per share; that is what it was being sold for;" and that "If we had attempted to sell the stock received, I do not suppose its value would have been 25 cents per share." In his appeal Bulleit alleged that the stock had a fair market value of 40 cents a share. Likewise, his testimony as to the market value of the assets back of the stock is far from conclusive, stating on the one hand that the physical properties did not have a "market value in this section" and on the other hand that "We (the *404 purchasers) figured (after some investigation) that the property was worth the price we were paying for it." The price here referred to was $200,000 in cash, 200,000 shares of this stock at a "trading value" of 50 cents a share and $60,000 in cash to be derived from oil produced on the properties. The testimony of Balthis, president of the*3008 Dominion Company when the Belle Point Oil Co. was taken over, was to the effect that the physical properties had a fair market value not in excess of $100,000, but he testified not only as a lay witness and one who was opposed to the transaction when effected, but also gave little information as to the basis for his valuation. Finally, we have the testimony of the petitioner that the stock was probably worth 20 or 25 cents a share. We also have the fact that when the Belle Point Oil Co. was consolidated, on July 31, 1919, with the Old Dominion Oil Co., four shares of the former were given for one of the latter, and, in disposing of another issue raised in this case, we fixed a value for the Dominion stock of $1.75 a share.
When all of the foregoing factors are taken into consideration, together with the sales of 547,000 shares of stock by the syndicate at 50 cents, to which we referred in the Bulleit appeal, we have no difficulty in reaching the conclusion that the petitioner's contention to the effect that the stock had no market value can not be sustained. On the other hand, while reasonable men might well differ as to the market value when we have no sales of stock, other*3009 than made by the syndicate, and when such a variety of opinions are offered, we are of the opinion that when all evidence is considered, a value of 43.75 cents is fair and reasonable. This is consistent with the value fixed for the Dominion stock, though all evidence presented necessarily was considered in arriving at this figure. This valuation is made on the basis of the value of the stock at the close of the syndicate operations, though we are of the opinion that the results would not have been different had we followed the petitioner's theory and valued the stock as of February, 1919, when the syndicate operations began. We accordingly find that the petitioner's taxable profit in this transaction was $22,159.81 (50,651 shares at 43.75 cents) plus $14,400.15 (excess of cash received over that contributed), or a total of $36,559.96.
While errors were assigned in the petition with respect to the dividends received by the petitioner from the Old Dominion Oil Co. and the Pyramid Oil Co., both issues are easily disposed of for the reason that the Commissioner has admitted error in taxing the dividends received from the Old Dominion Oil Co., and the petitioner has admitted that, *3010 because of his failure to introduce the requisite evidence as to the other dividends, this error must be abandoned. Adjustment should be made accordingly.
*405 With respect to the error assigned on account of the alleged failure of the Commissioner to allow a deduction for $62.50 paid to J. A. Woolfolk, Agent, in 1919, in connection with the sale of the Hopewell Petroleum Co., there now seems to be no disagreement that this is an allowable deduction, but we are unable to say, from the record, whether the petitioner has already had the benefit of the deduction. In his brief the petitioner makes the following statements:
* * * The failure to allow this deduction is set up as an error in the petition but it developed in the hearing that this sum had been allowed by the Commissioner. The error is now abandoned.
On the other hand, the Commissioner disposes of the issue in his brief as follows:
The evidence shows that appellant in 1919 paid $62.50 to J. A. Woolfolk. It also shows that this was an ordinary business expense. Accordingly, appellant is entitled to the deduction.
In this state of agreement as to the deductibility of the item and since the record is not*3011 sufficiently complete to enable us to determine what action was taken by the Commissioner, we can merely say that in the determination of the deficiency, this deduction should be allowed, provided the allowance has not already been made.
The only question at issue with respect to the 250 shares of Marden, Orth, Hastings Co. stock which were received by the petitioner as compensation for services rendered by him to the Curd-Blakemore Co. is the value of the stock at the time it was received, the Commissioner having fixed a value of $15 a share whereas the petitioner contends that it had no market value. The only evidence presented on this point was the testimony of the petitioner, who stated that in his opinion, based on investigations which he had made, the stock had only a nominal value; that it might have been a few dollars a share or it might have been $12 or $15 a share; and that the value was probably $5 to $10 a share.
Taking into consideration this entire testimony, we are of the opinion that it does not establish that this stock had no market value, and also that it does not establish a satisfactory basis upon which we might fix a value for this stock. The Commissioner's*3012 determination must accordingly be sustained.
As to the deductions claimed on account of the advance made to Moore, our difficulty lies in determining when these debts, in fact, became worthless. The contention made by the petitioner that the debts were ascertained to be worthless in 1920 and 1921, because it was then that the collateral was appropriated by Moore to his own use, would not be conclusive of their worthlessness, even if proved to have occurred in 1920 and 1921, for the reason that apparently *406 the maker or makers of the notes were liable in their individual capacity for the notes and we have no evidence of their insolvency or inability to pay in 1920 or 1921. The partnership continued in existence until 1924, and as late as 1923 the petitioner wrote a letter to Moore from which it appeared that petitioner expected soon to receive payment. In the absence, therefore, of more convincing evidence as to when the debts were ascertained to be worthless, the Commissioner's determination will not be disturbed.
With respect to the error assigned on account of the failure of the petitioner to report rent received from the Gwin Motor Sales Co. in 1920 in the amount*3013 of $3,200, the Commissioner admits, and the evidence establishes, that no such amount was received. The petitioner's contention on this point is accordingly sustained. Similarly, the Commissioner admits, and the evidence establishes, that the deduction claimed in 1920 on account of advances of $1,250 made in 1919 to the Emmett Blevins Co., determined to be uncollectible in 1920, should be allowed.
As to the loss claimed on account of the investment in the Stark Development Co., our difficulty is that the evidence does not show whether the loss occurred in 1921 or a later year. On direct examination, the petitioner stated that cessation of operations and abandonment of the properties occurred in 1921, but on cross-examination he stated that he could not say definitely the year when these events occurred. In the absence of more convincing evidence, we can not grant the allowance. Similarly, the evidence is far from conclusive as to the year in which the loss was sustained on account of the investment in the Royhome Oil Co., the petitioner stating that he thought it occurred in 1921, though he could not be positive of the date.
The final issue in this case is whether the amount*3014 of $9,750 received by the petitioner from E. V. Knight is to be considered taxable income to him. At the outset, it should be observed that this involves an affirmative allegation on the part of the Commissioner and, therefore, the burden of proving that this is taxable income rests on him. While the testimony shows that petitioner would not have been paid this amount had he not performed the service of securing the introduction of Clarke to certain government officials, there is nothing to show that because petitioner did this act he had any right to demand of Knight the amount paid, or any other amount. In fact, the testimony of Knight is that there was no understanding that anything was to be paid. Petitioner and Knight had been personal and business friends for many years, and Knight stated that when he received the money from Clarke, he felt that in view of the act done by petitioner, he should share the gift with him. But certainly, there is nothing in the evidence to establish that there was any contract, express *407 or implied, under which the payment was made, or that this was more than a gratuitous payment. Payments gratuitously made, though on account of some*3015 past act or service, do not constitute taxable income. . We are of the opinion that the Commissioner has not sustained the burden imposed upon him of showing that this amount represents taxable income, and, accordingly, his contention can not be sustained.
Judgment will be entered under Rule 50.