*2816 1. Petitioner transferred certain securities to a bank of which he was president and a stockholder, the capital of the bank having been impaired. Held, that the loss, if any, which the petitioner sustained would not be measured by the value of the securities transferred but by their cost.
2. The computation of a net loss, under section 206(a) of the Revenue Act of 1924, differs radically from the computation of income or loss upon the annual return. The amount of such a net loss is not established by showing the loss disclosed on the tax return for the prior year.
3. The Board will not pass upon a question of law where the facts proven are insufficient to permit it to dispose of the issue raised.
*596 The Commissioner determined a deficiency of $441.45 in income tax for 1923. The petitioner instituted a proceeding bearing docket number 34193, for a redetermination thereof, alleging the following error:
The Commissioner of Internal Revenue has erroneously disallowed as a deduction from gross income the amount of $63,336.00, losses*2817 sustained during the year 1923.
The respondent denied that any such error had been made, although admitting that the petitioner had deducted the amount of $63,336 in *597 his income-tax return for 1923 and that such deduction was disallowed by the Commissioner.
The Commissioner determined a deficiency of $154.50 in income tax for 1924. The petitioner instituted a proceeding, bearing docket number 19601, for a redetermination thereof, alleging that the Commissioner erred:
(1) In the disallowance of an item of $42,356.95 claimed by the taxpayer's original return as a deduction from gross income as a loss sustained in 1923, a part of which is applicable to the taxpayer's income of 1924; this item being disallowed upon the ground that such loss does not constitute a net loss as contemplated by section 206(a) of the Revenue Act of 1924 and as defined by article 1621 of Regulations 65.
(2) In that it was held that the loss was incurred in connection with stockholdings and hence could not be allowed, whereas the facts in the case disclose that this loss had no connection whatever with stockholdings or any assessment to make stock good.
The respondent denied that any*2818 such error had been committed. The deficiency notice which serves as the basis for the petition advises the petitioner that the deduction claimed on his return for a loss sustained in 1923 does not constitute a net loss as contemplated by section 206(a) of the Revenue Act of 1924. The proceedings were submitted upon the pleadings and a stipulation of facts.
FINDINGS OF FACT.
The petitioner is, and was during the years 1923 and 1924, an officer, director and stockholder in the following named banking institutions, viz:
(a) President and the owner of 202 shares of the capital stock of the First National Bank of Lexington, Virginia, during the year 1923. The authorized capital stock of the First National Bank of Lexington during the year 1923 was 500 shares of the par value of $100 per share. During the year 1924 the authorized capital of the First National Bank of Lexington was increased from $50,000 to $100,000, and petitioner subscribed and paid for 236 shares of the new stock at the rate of $100 per share. During the year 1924 petitioner sold 20 shares of his said stock, and at the close of the year 1924, his stockholdings in the First National Bank of Lexington were*2819 418 shares.
(b) President, director and owner of 280 shares of stock of the Staunton National Bank, Staunton, Virginia.
(c) President, director and owner of 254 shares of stock of the First National Bank of Buena Vista, Buena Vista, Virginia.
(d) President, director and owner of 50 shares of stock of the Bank of Glasgow, Glasgow, Virginia.
The entire time and attention of the petitioner during the year 1923, and years subsequent thereto, was and is devoted to the management of the banking institutions aforesaid.
*598 During the year 1923 it was discovered that the assets of the First National Bank of Lexington had been appropriated by one Leo G. Sheridan, its assistant cashier, to his personal use, to the extent of $278,336. The First National Bank of Lexington, Va., was advised by representatives of the office of the Comptroller of the Currency that the defalcation of Sheridan had wiped out the capital, surplus and undivided profits of the First National Bank of Lexington and that the liabilities of the bank exceeded the assets by the amount of $113,336; that unless the amount of $113,336 was paid into the bank forthwith the bank would not be permitted to reopen*2820 for business the next day.
The losses of the First National Bank of Lexington occasioned by the default of said Sheridan were made up so as to enable the bank to continue under the National Bank Law as follows:
| Claims on surety bonds | $ 20,000 |
| Real estate of Sheridan | 20,000 |
| Credit balance of Donald & Co., alleged to be part of the | |
| funds embezzled | 20,000 |
| Securities contributed by B. Estes Vaughan | 63,336 |
| Increase in building account, due to reappraisal | 41,400 |
| Assessment against stockholders | 40,000 |
| 204,736 |
The securities which the petitioner transferred to the First National Bank of Lexington were of a cash value of $63,336. The petitioner received no capital stock of the bank nor any other security in consideration of the transfer of such securities. Such transfer was not made in payment of any existing liability of petitioner to such bank.
Under date of January 17, 1924, the First National Bank of Lexington published in local newspapers the following statement:
When Mr. Sheridan's defalcation was checked up and the amount ascertained, the Government authorities suggested that we refrain from making public any specific figures until the trial*2821 was over. Now we feel at liberty to make a complete statement of the whole affair and the adjustments made, viz:
| Total amount of defalcation | $278,336.00 | |
| Provided for as follows: | ||
| Amount standing to credit of Sheridan's accounts | ||
| applicable to this shortage | $20,000.00 | |
| Official security bonds | 20,000.00 | |
| Real estate - turned over - (this is the only asset | ||
| of Sheridan taken over by the bank) | 20,000.00 | |
| Amount contributed by B. E. Vaughan personally from | ||
| his private funds | 63,336.00 | |
| 123,336.00 | ||
| Amount of net loss to the Bank | 155,000.00 | |
| Financed as follows: | ||
| Capital Stock | $50,000.00 | |
| Surplus Fund | 100,000.00 | |
| Net Undivided Profits | 18,500.08 | |
| Increase in value of Banking House | 26,400.00 | |
| Increase in value of Vaults, Furniture and Fixtures | 15,000.00 | |
| Eighty per cent (80%) Assessment on Stockholders of | ||
| Bank | 40,000.00 | |
| Balance remaining for the benefit of the Bank's | ||
| stockholders 1 | $94,900.08 | |
| 249,900.08 | 249,900.08 |
*599 On December 20, 1923, after*2822 the application of the amounts recovered from Sheridan and his sureties, and after the application against the defalcation of the amount paid into the bank by the transfer of securities by the petitioner referred to above, the acting Comptroller of the Currency issued a formal notice of impairment of capital of the First National Bank of Lexington in the amount of $40,000, with instructions to make the deficiency good by an 80 per cent assessment on the stock as required by law. The assessment was made and the petitioner paid $16,160, representing his share of the total assessment. This payment was not deducted from income in the return of the petitioner for 1923 or 1924.
The petitioner deducted the amount of $63,336 in his income-tax return for the year 1923 and this deduction was disallowed by the Commissioner.
The disallowance by the Commissioner of the amount of $63,336 converted the net loss of $42,356.95 reported on the return of the petitioner to a net income of $20,979.05, the tax upon which constitutes the deficiency for the year 1923, as proposed by the Commissioner.
The petitioner's taxable net income for the year 1924 was determined by the Commissioner to be*2823 the amount of $15,609.70. In the computation of said income for the year 1924 the Commissioner did not deduct any part of the amount of $42,356.95, reported as a net loss by the petitioner on his return for the year 1923 and deducted by the petitioner on his return for the year 1924.
OPINION.
PHILLIPS: The petitioner claims that he sustained a deductible loss of $63,336 in 1923 when he contributed to the First National Bank*600 of Lexington, Va., securities having a value of $63,336, and that there also resulted a net loss in that year which he may carry forward to the following year. Section 206(a), Revenue Act of 1924.
It is sufficient to dispose of the first contention to point out that if any deductible loss were sustained, it would be measured by the cost to petitioner of the securities transferred to the bank and not by their value when transferred and that neither the stipulation nor the pleadings show this cost. So far as the second contention is concerned, there is no basis on which the net loss could be computed. The petitioner reported a net loss of $42,356.95 on his return for 1923. But the computation of income or loss on the return is based on income*2824 and deductions which do not enter into the computation of net losses as defined in section 206. . The income or loss is computed on the return for 1923 under sections 212, 213, and 214 of the Revenue Act of 1921. The net loss for 1924 is not computed under those sections but under section 206 of the Revenue Act of 1924. The two are radically different.
The statute requires the Board to determine the amount of the deficiency. It has consistently refused to pass upon questions of law where the facts are insufficient to permit it to dispose of the issues raised. If the Board were to decide in this case that a deductible loss was sustained by reason of the contribution to the bank and that this loss might serve as one of the elements in computing a net loss, we should still be without evidence on which to base findings of fact as to the amount thereof. The situation presented is not one of those contemplated by Rule 50 for the recomputation of the deficiency; it is a vital defect, since the amount of the loss and of the net loss, if any, must be proven before we can determine the issues which are framed by the pleadings.
Decision*2825 will be entered for the respondent.
Footnotes
1. This balance disposed of as follows:
↩
Placed to Capital Stock Account $50,000.00 Placed to Surplus Fund 40,000.00 Placed to Undivided Profits 4,900.08 Total 94,900.08