*2187 The disallowance by the respondent of a deduction taken by the petitioner for the year 1922, on account of a debt claimed to have been ascertained to be worthless and charged off in that year, sustained.
*171 This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent in the amount of $37,144.60 for the year 1922. The deficiency arises from the disallowance of a deduction of $62,252.04 taken by the petitioner in computing his net income for 1922 on account of a debt claimed to have been ascertained to be worthless and charged off in that year.
FINDINGS OF FACT.
The petitioner is an individual residing at Houston, Tex.
Prior to the year 1922 the petitioner acquired 6,053 shares of the common stock of no par value and 30,184 shares of the second preferred stock, par value $10 per share, of the Bennett Petroleum Corporation, at a total cost of $137,742.39. The outstanding stock of the Bennett Petroleum Corporation consisted of 10,000 shares of common stock and 75,000 shares of*2188 second preferred stock. This company, the Prime Oil & Refining Co., and the Swiftsure Petroleum Co., were known as "Mills Bennett companies." The treasurer of the three companies was one Charles R. Ogilvie, who was employed by the petitioner to look after his corporate interests.
The assets of the Bennett Petroleum Corporation on December 31, 1922, and their values, as shown by the books of the corporation, were as follows:
| Cash | $ 158.35 |
| Prime Oil & Refining Co., stock | 122,675.00 |
| Swiftsure Petroleum Co. stock | 85,168.43 |
| Drilling rig and equipment | 4,888.52 |
| Accounts receivable | 393.83 |
| McClung royalty | 191,290.00 |
The values at which the stocks and royalty were carried on the books were their cost to the Bennett Petroleum Corporation.
The shares of the capital stock of the Prime Oil & Refining Co. were worthless in 1922. The drilling rig and equipment had little or no value on December 31, 1922, and they were sold on March 31, 1923, for $10. The McClung Royalty was a 5/96 interest in approximately *172 511 acres in the Homer Field in Louisiana. Its earnings during the years 1921 to 1925, inclusive, were as follows:
| 1921 | $1,133.52 |
| 1922 | 201.24 |
| 1923 | 48.30 |
| 1924 | 46.53 |
| 1925 | 37.21 |
*2189 No effort was made to sell the royalty after 1921. The accounts receivable were worth their face value.
The assets and liabilities of the Swiftsure Petroleum Co. as of December 31, 1922, as shown by its books and as amended by a revenue agent, were as follows:
| ASSETS | |||
| Items | Per books | Debit | Credit |
| Cash | $ 58,257.62 | ||
| Notes receivable | 29,619.34 | ||
| Accounts receivable | 109,687.34 | (a) $ 90.00 | |
| Inventory | 116,382.48 | ||
| Stock-Term Oil & Refg. Co | 115,000.00 | ||
| Furniture and fixtures | 3,336.98 | ||
| Autos | 3,381.11 | ||
| Texas City property | 200,000.00 | (b) 114,832.57 | |
| Aransas Pass property | 98,346.18 | ||
| A.P. Loading Rack | 629.45 | ||
| B.H. Pipe Line | 36,489.93 | ||
| B.H. tanks | 7,300.00 | ||
| B.H. right of way | 135.00 | ||
| Other Texas City property | |||
| Tanks 3 and 4 | 33,548.48 | ||
| Tanks 5 and 6 | 31,684.98 | ||
| Pipe lines to 3 and 4 and terminal | 26,880.00 | ||
| Steam lines to 1 and 2 | 429.91 | ||
| Steam lines to 3 and 4 | 894.74 | ||
| Unloading line | 805.65 | ||
| Boiler and pump station | 5,773.36 | ||
| Electric and telephone lines | 318.64 | ||
| Miscellaneous equipment | 631.09 | ||
| Trucking and freight | 877.77 | ||
| Office building | 750.07 | ||
| Steel loading rack | 2,828.77 | ||
| New roads | 1,173.57 | ||
| Trackage | 2,442.33 | ||
| Tanks 107 and 108 | 1,203.25 | ||
| Furniture and fixtures | 143.55 | ||
| Employees dwellings | 6,134.17 | ||
| Land for dwellings | 2,900.00 | ||
| Pipes and fittings | 5,845.73 | ||
| Insurance deposit | 100.00 | ||
| Deferred charges | 2,963.37 | ||
| Unamortized I. & G.N. Ry. contracts | 31,128.40 | (c) 16,180.27 | |
| 938,023.26 | 90.00 | 131,012.84 |
| ASSETS | |
| Items | Amended |
| Cash | $58,257.62 |
| Notes receivable | 29,619.34 |
| Accounts receivable | 109,777.34 |
| Inventory | 116,382.48 |
| Stock-Term Oil & Refg. Co | 115,000.00 |
| Furniture and fixtures | 3,336.98 |
| Autos | 3,381.11 |
| Texas City property | 85,167.43 |
| Aransas Pass property | 98,346.18 |
| A.P. Loading Rack | 629.45 |
| B.H. Pipe Line | 36,489.93 |
| B.H. tanks | 7,300.00 |
| B.H. right of way | 135.00 |
| Other Texas City property | |
| Tanks 3 and 4 | 33,548.48 |
| Tanks 5 and 6 | 31,684.98 |
| Pipe lines to 3 and 4 and terminal | 26,880.00 |
| Steam lines to 1 and 2 | 429.91 |
| Steam lines to 3 and 4 | 894.74 |
| Unloading line | 805.65 |
| Boiler and pump station | 5,773.36 |
| Electric and telephone lines | 318.64 |
| Miscellaneous equipment | 631.09 |
| Trucking and freight | 877.77 |
| Office building | 750.07 |
| Steel loading rack | 2,828.77 |
| New roads | 1,173.57 |
| Trackage | 2,442.33 |
| Tanks 107 and 108 | 1,203.25 |
| Furniture and fixtures | 143.55 |
| Employees dwellings | 6,134.17 |
| Land for dwellings | 2,900.00 |
| Pipes and fittings | 5,845.73 |
| Insurance deposit | 100.00 |
| Deferred charges | 2,963.37 |
| Unamortized I. & G.N. Ry. contracts | 14,948,13 |
| 807,100.42 |
| LIABILITIES | ||||
| Items | Per books | Debit | Credit | Amended |
| Notes payable | $66,000.00 | $66,000.00 | ||
| Accounts payable | 118,191.19 | (d) $551.77 | 118,742.96 | |
| Accrued interest | 80.00 | 80.00 | ||
| Reserve for depreciation | 33,387.06 | (e) $8,257.61 | 25,129.45 | |
| Reserve for income tax | 7,832.95 | 7,832.95 | ||
| Capital stock | 650,000.00 | 650,000.00 | ||
| Surplus | 62,532.06 | 123,217.00 | (60,684.94) | |
| 938,023.26 | 551.77 | 131,474.61 | 807,100.42 |
*2191 *173 The Swiftsure Petroleum Co. was a marketing company, buying and selling oil. It made a profit of $55,945.54 in 1922, its principal source of income being from the sale of fuel oil under a contract with the I. & G. N. Railway Co. It lost $257,724.11 in 1923 due to the decline in the oil market and to the fact that its contract with the I. & G. N. Railway was completed in that year. It went into the hands of a receiver in August, 1928. The company had outstanding 65,000 shares of stock of the par value of $10 per share, of which 35,000 shares were owned by the Bennett Petroleum Corporation.
The Bennett Petroleum Corporation sustained losses of $133,874.14 in 1921 and $21,350.37 in 1922. Its credit was not good in those years and it was customary for the petitioner to guarantee it. The company has not been active since 1922. On February 1, 1921, the collector of internal revenue at Austin, Tex., sold at public auction 3,532 shares of the second preferred stock of the company for $441.50. Said stock had been seized by the collector under a warrant of distraint for the purpose of satisfying taxes due from a certain taxpayer who owned the stock.
In 1922 the Bennett*2192 Petroleum Corporation was indebted to the petitioner in the amount of $62,252.04. The petitioner did not take any action to collect the debt because he considered that if he had to compel payment the Bennett Petroleum Corporation would be forced to sell some of its assets to meet the debt, and that such a course would in the end result in a greater loss to him as a stockholder of the Bennett Petroleum Corporation. He, therefore, in 1922 charged said debt off his books as worthless and deducted it in computing his net income for that year. The respondent disallowed the deduction.
OPINION.
MARQUETTE: This proceeding presents the single issue of whether the petitioner, in computing his net income for 1922, is entitled to deduct as a debt ascertained to be worthless and charged off in the taxable year, the amount of $62,252.04 due him from the Bennett Petroleum Corporation. The record clearly establishes the existence of the debt and that the petitioner charged it off and deducted it on his return for 1922. The issue, therefore, turns on the question of whether the debt was in fact ascertained to be worthless.
The evidence shows that in 1922 the credit of the Bennett Petroleum*2193 Corporation was not good and that it did not have sufficient cash or other quick assets to pay its debts to the petitioner. But it had other assets of sufficient value which, so far as we are informed, could have been disposed of for an amount sufficient to satisfy the debt in question. However, the petitioner did not desire to enforce *174 collection for the reason that to do so would compel the Bennett Petroleum Corporation to dispose of its assets, in part at least, which the petitioner feared would eventually result in a loss to him on his stock of the Bennett Petroleum Corporation greater than the amount of the debt. While this course may have been expedient from the petitioner's business standpoint, it did not render the debt worthless. The petitioner's relations to the Bennett Petroleum Corporation were as a creditor and as a stockholder, and the rights of the former status were superior to the rights of the latter. As a creditor he was entitled to have the entire assets of the corporation subject to the payment of his claim before he could participate in these assets as a stockholder, and under these circumstances we are of the opinion that he should not be permitted*2194 to charge off as worthless and deduct from income his superior claim and retain the inferior one.
The petitioner has cited a number of cases, including . The facts in these cases are, however, easily distinguishable from the facts of this one and the decisions are not applicable here.
Judgment will be entered for the respondent.