*2663 Action of Commissioner in denying a deduction of a loss on certain debenture notes sustained.
*62 The Commissioner determined a deficiency of $8,795.86 for 1919. The issue relates to a deduction as a loss on certain debenture notes.
FINDINGS OF FACT.
Prior to 1918, the Borderland Sugar Corporation (hereinafter referred to as the Sugar Corporation) acquired a sugar mill and 50 acres of land located in Texas on the Rio Grande River. The petitioner, in addition to being a stockholder in this corporation, owned during 1919, $17,500 par value of its debenture notes which had been purchased by him during 1915 and 1916.
The Sugar Corporation was not successful. About the end of 1916, one Gifford, president of the corporation and the man upon whom the corporation relied for technical direction, died, and the petitioner, a member of the New York Stock Exchange and a man without technical knowledge of the sugar business, became its president.
During 1917 and 1918 manufacturers of sugar machinery were engaged in*2664 war work and consequently sugar plants then in existence were in demand. During this period attempts were made to dispose of the Sugar Corporation's plant, but, for various reasons, particularly the location of the plant, these were unsuccessful. When the Armistice was signed in November, 1918, manufacturers of sugar machinery resumed their former work, whereupon the demand for secondhand sugar machinery diminished.
In the meantime, the Sugar Corporation was becoming seriously embarrassed financially on account of failure to pay rentals on approximately 7,000 acres of land being used by it and on account of taxes and other expenses. Upon ascertaining this situation, the majority stockholders became unwilling to make further advances and finally decided to dispose of the property by accepting an offer of $175,000 which had been made therefor. A meeting of the stockholders was called about December 17, 1919, for this purpose, but at the meeting a strong minority objected to such action and contended *63 that the plant should be sold to a Boston concern for approximately $500,000. The meeting was then adjourned until December 22, 1919, in order to give the minority an opportunity*2665 to effect the sale to which they referred, but they were unsuccessful. On December 22, 1919, a second meeting was held, at which the following resolution was adopted:
RESOLVED, that the Stockholders of the Borderland Sugar Corporation at a special meeting duly assembled for the purpose of considering the offer of the Technical Products Company, Incorporated for the purchase of the property of this Company, do hereby approved all the acts of the Company's agent and attorney-in-fact, Mr. James B. Lowell, leading up to said offer, as well as the provisional acceptance thereof by the Disposal Committee appointed by Mr. Lowell to assist him in the negotiations for the sale of this property;
RESOLVED FURTHER, that the offer of the Technical Product Company, Incorporated for the purchase of the mill property at San Benito, Texas, be and the same is hereby accepted, and the officers of the Company be and they are hereby authorized, empowered and directed as follows:
1. To formally notify the Technical Products Company, Incorporated of the acceptance of its offer by the Borderland Sugar Corporation and the approval by the stockholders thereof of said offer, as well as of the provisional*2666 acceptance thereof by the Disposal Committee;
2. That the President and Counsel of this Company forthwith proceed to the formulation of a formal contract of sale between this Company and the Technical Products Company, Incorporated, embodying said offer and acceptance, including such terms and provisions and conditions as may, in their judgment, be to the interest of this Company and to facilitate the carrying out of said contract of sale.
3. That the President and Treasurer of this Company, without further action by the Board of Directors or the stockholders, be and they are hereby directed to sign, execute and deliver said formal contract, when approved by the President and Counsel of the Company, for and on behalf of this Company and as its act and deed, and to accept on behalf of this Company the cash payments required by said contract from time to time.
4. The President and Treasurer, out of the cash proceeds of said contract, be and they are hereby directed to satisfy and discharge the claim of W. R. Taylor, of New Orleans, for brokerage on said sale, as well as to pay and discharge the obligations of this Company (not including, however, the debenture notes), and*2667 to procure releases and satisfactions of any chattel mortgage or conditional sales recorded against the property of the Company, and particularly to pay the Hooven, Owens, Rentschler Company the balance due it, with interest and costs, on the lease contract of record at San Benito, Texas, and to procure a bill of sale of the machinery covered by said lease contract, and also to satisfy and discharge all claims of the State of Delaware, the State of Texas and the Federal Government against this Company for taxes, as well as all merchandise claims, using their discretion as to the priority as to which such payments should be made; and to pay all expenses in connection with said sale and in connection with clearing the title to the property sold, including revenue stamps.
RESOLVED FURTHER, that after the payment of all claims, the President be and he is hereby directed to call a meeting of the Stockholders of this Company, and the Treasurer is hereby directed to prepare and at such meeting present a statement of the unpaid outstanding debenture notes of this Company, *64 showing the amount thereof, the name of the holder, and the amount of interest due on each of said notes, *2668 and a statement of the moneys then remaining on hand, for further disposition by the Company.
The sale was consummated in 1920. In July, 1920, a composition agreement was entered into by the Sugar Corporation and a creditors' committee which had been selected to arrange for the final liquidation of claims against the corporation in accordance with the resolution of December 22, 1919. The funds received from the sale of the property were distributed and in the latter part of 1920 the corporation was dissolved.
OPINION.
LITTLETON: The petitioner contends that he is entitled to a deduction in 1919 of a loss sustained in that year of one-half the value of the debenture notes of the Sugar Corporation then held by him and, apparently, at the hearing abandoned the claim that a deduction could be allowed on account of a debt which had been determined to be worthless in part. Whether the deduction properly comes under the bad debt provision or the loss provision, it becomes unnecessary to consider in this instance, since it appears that under neither provision is the petitioner entitled to the deduction claimed.
Even if we should consider that the evidence were sufficient to*2669 establish the extent to which the debenture notes, which are evidences of indebtedness and represent debts owing by the Sugar Corporation to the petitioner, were worthless, a deduction on account thereof could not be allowed since it is admitted on all sides that the entire debt was not determined to be worthless in 1919, and the revenue acts prior to the Revenue Act of 1921 make no provision for allowing a deduction of a part of a debt. .
With respect to the claim that a loss was sustained in 1919, the evidence is wholly insufficient to justify the conclusion that a loss was sustained in that year. The evidence shows that the Sugar Corporation was in financial difficulties, not only in 1919, but also long prior thereto, but there was no act done in 1919 which would fix the loss as occurring in that year. The most that can be said is that at a meeting of the stockholders held on December 22, 1919, the stockholders voted to accept an offer for the purchase of the corporation's properties. The sale was finally consummated in 1920. The resolution of December, 1919, authorizing the sale of the property, specifically*2670 provided that certain classes of claims should be paid from the proceeds of the sale price, but that the debenture notes should not be paid until after another meeting of the stockholders, at which time the extent to which the holders of debentures would share in the funds yet remaining would be determined. No evidence *65 has been presented as to the subsequent stockholders' meeting, but we do find that a composition agreement was signed in July, 1920, which set out the manner in which the various interested parties should share in the proceeds of the sale which had been consummated. In 1920 the moneys were distributed and the Sugar Corporation dissolved.
We are of the opinion that the foregoing is insufficient to establish a loss as having been sustained in 1919 and, accordingly, the action of the Commissioner in disallowing a loss in that year is sustained.
Some evidence was introduced as to $5,000 which the petitioner advanced on behalf of the Sugar Corporation, but not at the request of said corporation, to pay certain rentals. This amount was included in the amount disallowed by the respondent in determining the deficiency, but the petition puts in issue only*2671 the claimed loss of $8,750 on account of the debenture notes, and no amendment was later made which would permit us to consider this issue. .
Judgment will be entered for the respondent.
Considered by TRUSSELL, SMITH, and LOVE.