*2223 Certain stock owned by petitioner was worthless in 1925, and the cost thereof was a proper deduction from gross income as a loss sustained in that year.
*1271 This proceeding is for the redetermination of a deficiency in income tax for the year 1925 in the amount of $3,944.88, resulting from the disallowance of a deduction of $38,750 claimed as a loss sustained on 31,000 shares of stock.
FINDINGS OF FACT.
Prior to January 1, 1925, but subsequent to March 1, 1913, petitioner acquired 31,000 shares of the corporate stock of the Columbia Motors Co. at a cost of $38,750. Petitioner continued to own these shares throughout the year 1925.
During the year 1924 the Columbia Motors Co. became financially involved and in August, 1924, the company was adjudged a bankrupt. A statement purporting to show the assets and liabilities of the Columbia Motors Co. as of August 1, 1924, was sent of the creditors of the company. On September 19, 1924, the Security Trust Co. was appointed trustee in bankruptcy for the Columbia *1272 Motors Co. At the time*2224 the trustee was appointed there were certain contingent claims against the Columbia Motors Co. which later materialized into liabilities of the company but could not be definitely estimated in 1924, and which do not appear on the statement sent to creditors.
In October, 1924, certain machinery, tools, parts, and other merchandise of the Columbia Motors Co. were sold. The major portion of the assets of the company, including the real estate and buildings, was not sold until in February, 1925.
Throughout the year 1924 the trustees and its attorneys had under consideration the institution of certain claims against the directors of the company on account of the payment of a stock dividend which was declared prior to 1924 out of surplus created by the capitalization of the company's good will, its purchase contracts, and its sales contracts. Had the prosecution of these proposed claims been successful, a very large sum, amounting to more than a million dollars, would have been recovered. A great deal of work was done by the attorneys, but it was finally decided not to institute proceedings and the matter was dropped.
Petitioner was a vice president of the Columbia Motors Co. *2225 and had personal knowledge of the business conditions of the company. After the company went into bankruptcy consideration was given to a plan for reorganizing the company. After the sale in 1925 of the company's plant there was no probability of reorganization. A dividend of about 15 per cent has been paid to the creditors.
In his income tax return for the year 1925, petitioner claimed the purchase price of the stock as a loss. The Commissioner disallowed the deduction in 1925 on the ground that any loss incurred was sustained in the year 1924.
OPINION.
MATTHEWS: To be entitled to a deduction for a loss in a specified year in the amount of the purchase price of stock owned by him a taxpayer must prove that the stock became worthless in that year. Until it is clearly shown that there is no probability that any portion of the investment will ever be recovered, no deductible loss under the statute has been sustained. .
It is apparent from the facts found that the loss sustained by petitioner on account of his investment in the corporate stock of the Columbia Motors Co. was not incurred in 1924. Although bankruptcy proceedings*2226 were begun in that year, there was under consideration a plan to reorganize the corporation. There was also being considered the advisability of instituting proceedings to establish a large claim against the directors of the company. The principal *1273 assets of the company had not been liquidated in 1924 and it can not be said that the stock was valueless in that year.
Subsequent to December 31, 1924, it was decided not to proceed against the directors of the corporation and the plan for reorganization was abandoned. The vice president of the Security Trust Co., trustee in bankruptcy for the Columbia Motors Co., who was in direct charge of the affairs of the bankrupt corporation, testified that in his opinion there was a possibility of reorganizing the company up until February, 1925, when its major assets were sold. He stated that he had had a great deal of experience in handling bankrupt and receivership cases and that often a company which has been adjudicated a bankrupt makes a composition with its creditors and continues in business but that, generally, when the home of the bankrupt company is disposed of and its place for doing business is gone its life is ended.
*2227 The record is silent as to the amount realized from the sale of the assets of the company. Certain personal property was sold in October, 1924, but the real estate and the buildings were not sold until in February, 1925. There is nothing in the record to indicate that the stockholders, since 1925, have had any hope of receiving any return upon their investment. It has not been shown that the receivership has ever been terminated. The petitioner, who was a vice president of the Columbia Motors Co., testified that the creditors received about 15 per cent. Counsel for the respondent has stated in his brief that a liquidating dividend of 15 per cent was eventually paid to the stockholders, but reference to the testimony relied upon in support of that statement shows that it was the creditors who received a 15 per cent dividend and not the stockholders.
Although it does not relieve the petitioner of the burden of proving that the stock became worthless in 1925, it may be noted that the respondent has allowed the loss in question for the year 1924 on the theory that the investment was determined to be worthless in that year. No deficiency was asserted for 1924 and the*2228 petitioner's tax liability for that year is not before us.
We have found that there was no probability of reorganizing the Columbia Motors Co. after the sale of the company's plant in February, 1925. Although there is no evidence with respect to the company's total liabilities in that year we believe it is apparent that they far exceeded the amount realized from the sale of its assets and that the company was hopelessly insolvent in 1925. As stated above, a plan for the reorganization of the corporation had been under consideration, but after it was decided not to institute proceedings against the directors and the company's plant was sold, the stockholders had no reasonable grounds to believe that they would realize anything on their investment. The stock was worthless at the *1274 close of 1925 and the cost thereof should be deducted from petitioner's gross income for that year. ; ; .
Judgment will be entered for the petitioner.