*736 1. In 1936 taxpayers transferred bonds of X corporation to Y corporation and received in exchange, pursuant to an option agreement, certain shares of X corporation's stock held by Y, which stock taxpayers claim was worthless at all times during 1936. Held, that taxpayers realized no deductible loss thereby in 1936.
2. In 1937 X corporation canceled the bonds received from Y corporation, thus relieving certain lands held by X of a trust lien. Corporation Z had an agreement with X to purchase these lands for a sum certain. Taxpayers were sole stockholders of corporation Z. Held, taxpayers did not realize any taxable gain in 1937 by virtue of the lands being relieved of the trust lien.
3. Certain deductions claimed as traveling expenses for the years 1936 and 1937 disallowed for failure of reasonable proof in substantiation thereof.
*68 These proceedings involve deficiencies in income taxes due from the petitioners for the years 1936 and 1937 in the following amounts, as determined by the respondent:
| Petitioner | Year | Asserted deficiency |
| 1936 | $577.70 | |
| L. J. Miller | 1937 | 7,236.73 |
| 1936 | 660.10 | |
| Estate of L. G. Monroe | 1937 | 6,570.43 |
*737 The issues in respect to both petitioners are identical, the only variance being the amounts in controversy. The three issues involved are as follows: (1) whether respondent erred in disallowing each petitioner a loss deduction in the amount of $2,447.50 in the year 1936; (2) whether respondent erred in determining that each petitioner realized a gain of $33,110 in 1937 from the disposition of certain bonds (respondent put $8,190 of this amount in controversy for the first time by an amended answer filed at the hearing in these proceedings); and (3) whether respondent erred in disallowing in part certain deductions claimed by each petitioner for traveling expenses for the years 1936 and 1937. In each of the years involved respondent *69 disallowed $1,920 of the amount claimed by Miller; while respondent disallowed the claims of Monroe, now deceased, in the amounts of $1,920 and $900, respectively.
Subsequent to the filing of petitions and hearings in these proceedings, L. G. Monroe died and it was accordingly ordered that the administrator of his estate be substituted as petitioner in his stead. These proceedings were consolidated for all purposes and solely for purposes*738 of hearing were also consolidated with the cases of , and , and the findings of this Board in these proceedings are incorporated by reference in our findings of fact in these proceedings as hereinafter set forth.
FINDINGS OF FACT.
L. J. Miller and L. G. Monroe, the latter now deceased, were in the taxable years here involved interested in numerous corporate ventures, some of which play a material part in the present controversy. For the years 1936 and 1937 both individuals made out individual income tax returns on a cash receipts and disbursements basis and filed such returns with the collector of internal revenue at San Francisco, California. During both years Miller and Monroe were residents of Aptos, California.
Miller and Monroe were engaged in the subdivision and sale of real estate. Their principal business in 1928 was carried on through a corporation known then as Monroe, Lyon & Miller, Inc. Monroe and Miller each owned one-third of the stock in this corporation. In 1927 the corporation acquired a large estate near Aptos, in Santa Cruz County, California, *739 hereinafter referred to as the Rio Del Mar tract. The purpose of the acquisition of this tract was to subdivide the realty and resell it as residential land. In order to finance the undertaking various steps were taken. The first of these was the incorporation of the Peninsula Properties Co., later called Peninsula Properties Co., Ltd., and hereinafter sometimes referred to as "Penproco." To Penproco was transferred the Rio Del Mar tract, and in addition all the assets of two other corporations, the Belmont Country Club, Inc., and the Los Altos Country Club, Inc. Monroe, Lyon & Miller, Inc., owned all the stock in these two corporations. In exchange for these properties Penproco issued substantially all its capital stock to the three corporations in proportion to the assets received from each. Although the manner in which any individuals other than Monroe and Miller ever acquired any of this Penproco stock was not shown, there were also about a dozen minority stockholders. Having acquired the assets, Penproco, on November 1, 1927, floated a $1,500,000 6 1/2 percent bond issue, secured by a first lien on the properties.
*70 In 1930, or thereabouts, Santa Cruz County*740 undertook some improvements in the Rio Del Mar area under an improvement bond act. An assessment district was formed and on March 25, 1930, a bond issue in the approximate amount of $317,157 was put on the market. All the property in the district was thereafter proportionately assessed to pay off the bond issue.
Because of the business depression in the early thirties Penproco was not making the volume of sales anticipated when it had issued its bonds. In order to continue in business and prevent a foreclosure, the corporation sought and obtained on March 15, 1932, an agreement of readjustment with its bondholders. As a condition to this agreement, however, a committee representing the bondholders forced the corporation to agree to allow any bondholder to turn in his bonds in exchange for lands owned by the company. The land was to be evaluated according to a certain appraisal, known as the Underhill appraisal, for purposes of such exchanges. Some bondholders availed themselves of this right of exchange and Monroe and Miller commenced buying in Penproco bonds, of which the individuals were able to acquire a large number at an average price of 11 cents on the dollar.
In*741 addition to difficulty in meeting its bonds, Penproco was also having difficulty meeting the assessments imposed on its lands to pay off the county improvement bonds. On December 29, 1934, Penproco offered to transfer title to all its assessable property to an escrow agent who should use 10 percent of the proceeds of all sales of such properties for the payment of taxes and assessments. It was also provided that all improvement bonds acquired and turned in by Penproco for cancellation should be accepted in payment of all required assessments against any specific properties held by the escrow agent, provided the proportionate amounts assessable against that certain property should not exceed the amounts of the bonds. Penproco was to designate the properties to be released from escrow. This offer was accepted and on January 3, 1935, was put in agreement form and executed. The Santa Cruz Land & Title Co. was selected as escrow agent. Petitioner then deeded the Rio Del Mar properties to the escrow agent in accordance with the agreement.
Monroe and Miller bought in these improvement bonds from a financial house. The total face value of such bonds, plus accrued interest, on January 5, 1935, was*742 $182,188.06. The two individuals then transferred these improvement bonds to Penproco and received therefor a credit on the company's books as of January 31, 1935, in a like amount. This enabled Penproco to turn in the improvement bonds whenever it desired to free any of its lands from escrow.
Several years prior to 1935 Penproco had caused the incorporation of the Peninsula Properties Improvement Co. (hereinafter sometimes *71 referred to as Impco), a Nevada corporation. The purpose of this act was the further improvement of certain of the Rio Del Mar property. Penproco had transferred to Impco certain realty and had received in exchange all of Impco's capital stock. Impco then had secured a loan of $200,000, using the acquired properties as security for the payment thereof. The borrowed funds were used for the erection of a main clubhouse on the newly acquired property. This clubhouse had been run as a hotel by Impco for several years prior to 1935. From time to time Penproco had advanced money to Impco for maintenance and operation until on May 1, 1935, Impco was indebted to Penproco in an amount in excess of $175,000. On this date Penproco liquidated Impco, took*743 over its assets and assumed its liabilities.
Penproco's next step was to incorporate the Aptos Land & Water Co. (hereinafter referred to as Aptos) which it did on the day following the liquidation of Impco. To this new corporation it transferred the properties formerly held by Impco and three other parcels of land in the Rio Del Mar tract and received in exchange all Aptos' capital stock, 500 shares. By various transactions set forth in greater detail in our findings in , and , Aptos turned over the recreational properties to another corporation in return for the latter's stock. Penproco transferred the stock of Aptos to Monroe and Miller in part payment of the obligation to the two individuals which had arisen as the result of the acquisition of the improvement bonds. For sake of brevity, we herein incorporate by reference our findings in the two cited cases.
On June 15, 1935, Penproco informed the escrow agent that it had sold all its Rio Del Mar holdings to Aptos, and that thereafter the escrow agent should be authorized to execute deeds for the sale of the*744 properties on the order of Aptos. This sale by Penproco to Aptos was entirely a book transaction, Aptos tendered no payment for the land prior to June 15, 1935, and the land remained in escrow and was still subject to a lien imposed by the 6 1/2 percent corporate bonds of Penproco.
The usual method of selling this land was as follows: Monroe and Miller, as individuals, would transfer some of their Penproco bonds to Aptos. Aptos would credit them in the amount of 70 percent of the value of the bonds. Having purchased the bonds at 11 percent, the two individuals would report the difference as income to themselves. Then Aptos would turn in the bonds to Penproco and receive full value therefor, which was applied against the cost price of certain of the lands which Penproco had already agreed to sell Aptos at cost. Penproco then would retire the bonds received, thus releasing the land from the lien imposed by the corporate bonds. *72 Aptos had the option of paying for the lands in cash or by turning in bonds. Thus the land title was sufficiently cleared so that Aptos could sell the land to the public. The record does not disclose when Penproco turned in the improvement*745 bonds to free the lands from escrow; but, since Aptos conveyed some of the lands with clear title in the fiscal year 1937, we must assume that the lands were freed from escrow prior to this date.
On May 15, 1936, Miller and Monroe, jointly, entered into an option agreement with Monroe & Miller, Ltd. Monroe & Miller, Ltd., was a continuation of Monroe, Lyon & Miller, Inc., under a new name. In 1930 or 1931 Lyon sold his one-third interest in the corporation to a bond house and withdrew from the corporation. His name was withdrawn from the corporate title. The option agreement provided that, whereas Monroe & Miller, Ltd., held certain shares of Penproco stock, and, whereas the two individuals held certain 6 1/2 percent Penproco bonds, and, whereas the parties desired to exchange stock for bonds and vice versa, Monroe & Miller, Ltd., gave a three-year option to the individuals to turn over bonds for stock and agreed to turn over the stock to the individuals when they became entitled thereto by turning over the bonds. The bonds were to be accepted at face value plus accrued interest and the stock was to be accepted at $4.56 per share in exchange.
At various times between June*746 1 and December 31, 1936, the two individuals jointly transferred to Monroe & Miller, Ltd., 44 1/2 Penproco bonds having a total face value of $44,500, and entitling the holder thereof to accrued interest in the amount of $13,016.25. Between January 1 and April 31, 1937, the two individuals transferred to Monroe & Miller, Ltd., 11 1/2 more bonds having a total face value of $11,500 and entitling the holder thereof to accrued interest in the amount of $3,363.75. The total cost to each of the two individuals of these 56 bonds had been $3,080, each bond having been purchased at the same price.
Monroe & Miller, Ltd., turned in these bonds to Penproco when received and received credit therefor on a running account in the full amount of the face value plus accrued interest on the bonds. These bonds were retired by Penproco prior to May 1, 1937.
No payment pursuant to the option agreement was made to the two individuals by Monroe & Miller, Ltd., until April 30, 1937, when a transfer of 15,873 shares of Penproco stock was made to the joint account of the two individuals on Monroe & Miller, Ltd.'s books.
In their individual income tax returns for 1936 both Miller and Monroe claimed*747 losses of $2,447.50 as the result of worthless stock received in exchange for the 44 1/2 bonds transferred. Respondent disallowed both deductions. In addition respondent has asserted that *73 both individuals in 1937 realized unreported taxable income in the full amount of the face value of the 56 bonds plus accrued interest less the original cost of the bonds.
During the years 1936 and 1937 Miller was required to take certain trips within the State of California in connection with the business of the various corporations referred to above. He was almost always away from home on business about three days a week and went from his home to San Francisco and Los Angeles. He kept no records of his expenditures on such trips, although he had a few canceled checks. When in San Francisco and Los Angeles he stayed at hotels and usually entertained prospective purchasers and others, although often when in San Francisco he stayed at his mother's home as a nonpaying guest. Miller always traveled by automobile.
Both Miller and Monroe listed on their 1936 income tax returns the following deductible expenses: automobile expense, $2,400; entertainment expense, $1,800; traveling*748 expense, $3,120. Respondent disallowed part of this last item in each case, allowing only $1,200 to each petitioner. In his 1937 return Miller again deducted $3,120 for traveling expenses, Respondent again disallowed all but $1,200 of this figure. Monroe, on his 1937 return, deducted $2,100 for traveling expenses, and respondent disallowed all but $1,200 of this figure also.
OPINION.
KERN: The first issue for our consideration is whether respondent rightly disallowed loss deductions in the amounts of $2,447.50 on the individual 1936 income tax returns of L. J. Miller and of L. G. Monroe, now deceased. Petitioners now concede that 40 percent of those amounts is not a proper deduction in any event, inasmuch as there is no showing when the bonds were acquired and from the record it appears that they could not have been held more than five years prior to the transfer to Monroe & Miller, Ltd. Petitioners' theory underlying the deductions appears to be that petitioners realized a total loss upon the sale of 44 1/2 bonds in 1936 and are entitled to a deduction of 60 percent thereof.
Miller, one of the petitioners herein, testified that he and Monroe considered the Peninsula*749 Properties stock worthless at the time they turned over the bonds to Monroe & Miller, Ltd., but wanted the stock because of the control it evidenced. However, Miller and Monroe as individuals already controlled Monroe & Miller, Ltd., and that corporation controlled Penproco. We therefore regard this testimony as to motive incredible. We consider petitioners' theory, therefore, to be that they transferred to Monroe & Miller, Ltd., certain valuable bonds in return for stock known by them to be *74 worthless. Even on petitioners' theory it appears that petitioners could not have realized a deductible loss, inasmuch as, in transferring the bonds to Monroe & Miller, Ltd., in exchange for the Peninsula Properties stock, petitioners could not be considered as entering into a transaction with a profit intent or motive. Petitioners both knew, according to this testimony, that they were giving up something of value and were going to receive something devoid of value. Such a transaction, if we accept the hypothesis that the stock was worthless, must be considered as an additional contribution by petitioners to the capital of Monroe & Miller, Ltd., and not a sale or exchange upon*750 which a deductible loss is recognizable.
If, on the other hand, the stock could be said to have had value at the time of the transaction, petitioners have failed to show that the value was less than the value of the 44 1/2 bonds turned over to Monroe & Miller, Ltd., and, assuming that the stock was not worthless in 1936, we would be forced to uphold the Commissioner's determination for lack of proof on petitioners' behalf.
The testimony presented in this proceeding is not satisfactory with regard to the question of insolvency of the Peninsula Properties Co. and the consequent worth or worthlessness of its stock. Miller testified that at the close of the fiscal year 1936 the corporation's assets were worth $976,994.78, in contrast to liabilities of $1,313,444.78; and that at the close of the fiscal year 1937 the assets had dropped to $884,668.48 and the liabilities to $1,179,965.52. But this calculation was admittedly based upon the 1927 cost of the assets held. While Miller testified that, in his opinion, the original cost prices actually exceeded the 1936 and 1937 fair market values of the assets, this testimony is refuted by evidence in the record showing huge profits in*751 1937 realized by Aptos on sales of properties transferred by Peninsula Properties to Aptos. No evidence was ever presented to show what comprised the assets of Peninsula Properties Co. at the close of the two fiscal years. There is testimony of a sale of all the Rio Del Mar property by Peninsula Properties Co. to Aptos in 1935, but it appears that this was no more than a book transaction. Aptos did not pay anything to Peninsula Properties Co. at the time of the alleged sale and Aptos received no land titles at that time, since they were all held in escrow. The only exhibit dealing with the alleged sale was a letter to the escrow agent informing it that such a sale had taken place. It would seem more practical to say that no sales actually took place until Aptos paid for the lands alleged to be the subject of the sales. This Aptos did only when Aptos had engineered a sale to the public of the properties involved. Therefore, if the assets of the Peninsula Properties Co. at the close of the fiscal years 1936 and 1937 be considered to include all lands not paid for by Aptos, there would be good reason to conclude that *75 Peninsula Properties was solvent, since the fair market*752 value of these lands, as shown by actual sales, was on the average at least 90 percent greater than the 1927 cost, and therefore its stock would have value.
On this issue we decide in favor of respondent.
The second issue deals with the same bond transaction, but has to do with the issue raised in respondent's amended answer to the effect that the transfer of the 44 1/2 bonds in 1936 and the 11 1/2 bonds in 1937 resulted in taxable income to petitioners in 1937 in the full face value of the bonds plus all accrued interest. Respondent's contention appears to be that Aptos received a benefit in this amount and that, since petitioners own all Aptos' stock, they may not avail themselves of a roundabout reflection of income to escape taxation thereon. We fail to see how Aptos received any income, however. It is true that cancellation of the bonds by the Peninsula Properties Co. released certain properties from the trust lien; but Aptos still had to pay the Peninsula Properties Co. the agreed price for the property. If the lien had not already been lifted from the property purchased by Aptos, it would be lifted as the result of Aptos' payment of the purchase price, which was generally*753 done by Aptos turning bonds in to Peninsula Properties Co. However, if the property was already freed from the lien, Aptos was still obligated to pay the price for it called for by its contract with Penproco, even if by a medium other than Penproco's bonds. We fail to see how the petitioners diverted income to any of the corporations in which they had an interest.
The final issue for our consideration relates to certain deductions for traveling expenditures. Both Miller and Monroe listed on their 1936 income tax returns the following deductions: automobile expense, $2,400; entertainment expense, $1,800; traveling expense, $3,120. Respondent allowed only $1,200 of this last item, and disallowed the balance of $1,920 in each case, due to lack of evidence to support the deduction thereof. In his 1937 return Miller again deducted $3,120 for traveling expenses. Respondent again disallowed $1,920 of this amount. In his 1937 return Monroe deducted $2,100 for traveling expenses. Respondent $900disallowed of this amount.
At the hearing no evidence whatsoever was offered to substantiate these deductions on behalf of Monroe and we, accordingly, sustain respondent's determination*754 as applied to Monroe.
Miller admitted that he had insufficient records and memoranda to substantiate the deductions claimed by him. He testified that he was generally away from home on business about three days a week and had to stay at hotels in San Francisco or Los Angeles. Often, when in San Francisco, however, he stayed at the home of his mother as a guest. Miller claimed that, being in the real estate business, he was obliged to spend money for the entertainment of customers and *76 that such expenditures are included within the $3,120 deducted by him as traveling expenses. He further testified that, although he had no records to prove the deductions, he knew of his own knowledge that he had actually deducted less than he had spent. This assertion, in terms of generalities, without any corroboration other than a few isolated checks, amounts to little more than a reassertion of the allegation of error in Miller's petition. The amount claimed by Miller amounts to an average weekly expenditure of $60. Respondent has allowed expenses which would average approximately $23 a week. Considering all the evidence on this issue in the light of general experience, and making*755 allowance for amounts representing fair and reasonable expenses in the circumstances of Miller's business, ; and bearing in mind that the necessity for approximation may properly bear heavily against the taxpayer whose inexactitude is of his own making, , we conclude that petitioners have not sustained their burden of proving error in respondent's determination and therefore we decide the issues concerning traveling expenses for 1936 and 1937 in favor of respondent.
Decision will be entered under Rule 50.