*1059 1. Where taxpayer, having purchased stock in a bank which later closed, voluntarily paid $5,000, because of his ownership thereof, though no assessment thereon was ever made, and then, during the tax year, made or attempted to make a gift of the stock, which was not worthless at the close of the year, held, taxpayer sustained no deductible loss.
2. Where, during the tax year, taxpayer received a part of his bank deposit in cash and, in lieu of the balance thereof, accepted a note of a subsidiary of the bank, in the face amount of that balance, but the market value of which was then, and throughout the year, less than its face amount, held, such transaction was not an "* * * exchange of a capital asset" within section 117(a) of the Revenue Act of 1934, and the difference between the face amount of the note and its market value is deductible, in full, as a bad debt then ascertained to be worthless. Hale v. Helvering, 85 Fed.(2d) 819, followed.
*185 On December 8, 1938, this Board promulgated an opinion herein, *1060 38 B.T.A. 1361">38 B.T.A. 1361. On December 8, 1938, the decision of the Board was entered pursuant to that opinion.
For the reason set out in the following opinion, this opinion is substituted for the opinion of the Board promulgated December 8, 1938, which latter opinion, and the decision entered thereon, are hereby vacated.
This is a proceeding to redetermine a deficiency of $2,204.21 in petitioner's income tax for the calendar year 1934. The first issue is whether petitioner sustained a deductible loss by reason of certain bank stock becoming worthless in that year. The second issue is whether a voluntary payment of $5,000, made by petitioner to the bank to protect himself against a possible assessment of double liability on his stock, is a deductible loss. The final issue is whether the petitioner may deduct, as a bad debt, the full amount of the difference between the face amount and the actual value of a note received by him in lieu of the unpaid portion of his deposit in the bank.
FINDINGS OF FACT.
In 1934, petitioner owned 50 shares of the capital stock of the First Trust & Savings Bank of Canton, Ohio, hereinafter called the Bank. He was also a director of the*1061 Bank, had acquired this stock at various times at a total cost of $7,970, and had held it continuously. The Bank *186 was closed when the "bank holiday" of March 4, 1933, was declared and had not been permitted to reopen thereafter. It was placed in charge of a conservator on April 10, 1933. Neither the assets nor liabilities of the Bank as of any time are disclosed.
On April 19, 1934, petitioner's stock in the Bank was worthless. At that time, a plan of the Bank "for obtaining license to resume normal operations" was announced. Inter alia, that plan provided that a subsidiary corporation, to be named "The Court Square Mortgage-Loan Company", hereinafter called the Loan Co., was to be formed, to which were to be transferred the ineligible assets of the Bank and such other assets as the new corporation might need to secure a loan from the Reconstruction Finance Corporation to provide cash for the resuming Bank to do business. In consideration of this transfer, the Loan Co. was to issue all its stock to the Bank, to turn over to the Bank the proceeds of its loans from the Reconstruction Finance Corporation, and to issue negotiable notes (junior to the obligations*1062 of the Loan Co. to the Reconstruction Finance Corporation) to the depositors for the restricted unpaid portion of their deposits, which constituted 60 percent thereof. The present stockholders were to deposit their shares under an escrow agreement providing that they should be held for a period of 7 1/2 years after the resumption of business by the Bank, as collateral security for the loan of the Loan Co. from the Reconstruction Finance Corporation, and the negotiable notes issued by the Bank to the depositors. During the period of 7 1/2 years, all dividends from the escrowed stock were to be applied to the payment of these obligations in their stated priority. Any stockholder could release the stock from this escrow by the payment to the escrow agent of $100 per share, prior to the licensing of the Bank to resume. But such release would not affect the application of dividends thereon to the foregoing obligation of the Bank. The capital of the Bank was to be reduced from $250,000 to $200,000 and the par value of its 2,500 shares of capital stock correspondingly reduced from $100 a share to $80 a share, but the double liability in respect of each such share was to be continued*1063 at $100.
The petitioner was dissatisfied with the management and operation of the Bank, and decided to sever all connection therewith. Accordingly, on June 26, 1934, he paid to the Bank "as trustee" the sum of $5,000, which was to be held in trust and paid over to the Bank when, under the stated plan, the sum of $95,000 had been paid in to the Bank and the Bank had resumed business under that plan. The trust agreement under which this payment by the petitioner was made, among other things, provided that said payment was to be construed "as a payment of $100.00 per share on said Charles T. Carlson's stock *187 in said bank under said reopening plan hereinbefore referred to * * *" and that if the Bank failed to reopen, then this $5,000 was to be returned to the petitioner. Shortly after the last mentioned date, at the insistence of those interested in the Bank, and to assist in the consummation of the plan to reopen the Bank, the petitioner endorsed his stock in blank, writing across the back of the certificate: "This stock is of no value to me - do whatever you want with it", and turned it in to the Bank. But he refused to consent to the plan to reopen the Bank except*1064 as to the arrangement to take care of the deposits.
Following this, on August 31, 1934, the Bank was thrown into liquidation for the purpose of consummating the plan. The Bank was not liquidated, but on or about September 18, 1934, the plan to resume business was consummated and the same Bank was licensed to reopen by the Superintendent of Banks of Ohio, but did not actually resume until December 31, 1934, at which time its stock was worth approximately its then par value. After the petitioner endorsed his stock certificate, as indicated, and delivered it to the Bank, the president of the Bank had a certificate for the stock issued in his name and, before the close of the year 1934, exchanged such stock for the new par value stock in the resuming Bank. At the death of the then president of the Bank, the stock passed to members of his family, where it remains. Neither the petitioner nor the Bank received anything for this stock.
On December 31, 1934, when the Bank resumed business, the petitioner was offered and refused his 50 shares of stock on the ground that it was worthless and that he desired to sever all connections with the Bank.
There never was an assessment of*1065 double liability against the stockholders of the Bank. During the year 1935, the Bank, as trustee, paid the $5,000 received, as such trustee, from the petitioner, to the Bank.
When the Bank closed for the "bank holiday" petitioner had on deposit the sum of $4,486.80. Thereafter, during the calendar year 1934, under the plan for reopening the Bank, petitioner withdrew therefrom the unrestricted 40 percent thereof, totaling $1,794.72, in cash, and received the negotiable note of the Loan Co. in the face value of $2,692.08, which had a value then and at the close of 1934 of $942.23.
OPINION.
LEECH: The first two issues will be considered together. Is petitioner entitled to deduct any loss for 1934 on his stock in the Bank or because of his payment of $5,000 as the owner of such stock? *188 Revenue Act of 1934, sec. 23(e)(2). 1 Petitioner contends he is so entitled on the ground that the stock became worthless and was relinquished by him during that year.
*1066 Assuming the stock did become worthless during the tax year, it was not worthless at the close of that year. The Bank was not liquidated but resumed business December 31, 1934. If, at that time, petitioner still retained the right to repossess the stock - and we are not convinced that he does not yet have that right - of course he sustained no deductible loss on the stock during that year. On the other hand, if he actually relinquished his stock in June 1934, when he gave it to the Bank, endorsed in blank with the comment "This stock is of no value to me - do whatever you want with it", or on December 31 of that year, when he refused to accept his 50 shares in the resuming Bank, it is unquestionably true that such relinquishment was wholly voluntary and not compulsory. Cf. Commissioner v. Wright, 47 Fed.(2d) 871; Peabody Coal Co. v. United States,8 Fed.Supp. 845. Petitioner was dissatisfied with the management and operation of the Bank. That he considered the stock worthless is beside the point. Deliberately and entirely of his own volition, he severed, or at least attempted to sever, all his connection with the Bank as a stockholder. *1067 If successful, he thus gave up any rights he might have had to the return of his stock without any further payment on his part if and when, under the plan, the obligations the stock was deposited to secure were paid. Cf. Estate of C. T. Grant,36 B.T.A. 1233">36 B.T.A. 1233. But, petitioner had more than that right. Although no stock assessment was made, he had, likewise voluntarily, paid $5,000 to the Bank, in trust, "* * * as a payment of $100.00 per share on said Charles T. Carlson's stock in said bank under said reopening plan hereinbefore referred to * * *" with the understanding that if the Bank failed to resume, then the $5,000 thus paid was to be returned to the petitioner.
We pass the obvious difficulty to petitioner that this money was not actually transferred from the trust to the Bank, as such, until 1935. We assume that the conditions of the trust, under which this transfer was to be made, existed prior to the close of the year 1934, and that petitioner thereafter had no right to this money. This payment, therefore, became an additional cost to petitioner of his stock in the Bank. *1068 In re Park Estate, 58 Fed.(2d) 965; certiorari *189 denied, 287 U.S. 646">287 U.S. 646; First National Bank in Wichita v. Commissioner, 46 Fed.(2d) 283.
Thus, at the end of 1934, except for the possible effect of his voluntary action, during that year, in relinquishing or attempting to relinquish his stock in the Bank, the petitioner would have owned stock in the same Bank of the reduced par value. Such stock was then worth approximately that reduced par. But, unless the stock became worthless during 1934 and was so when the petitioner's alleged relinquishment thereof occurred, no deductible loss was sustained in that year. See Bair v. United States,20 Fed.Supp. 191; Walter W. Moyer,35 B.T.A. 1155">35 B.T.A. 1155. Assuming the doubtful conclusion from this record that the stock became worthless in 1934, it certainly is not established that it was so either when petitioner endorsed it in blank and turned it in to the Bank, or when the stock was offered to him in December at the time the Bank reopened and he refused it. The stock was worth its then par at the latter date, as has been found as a fact, and it*1069 is little less clear, from the evidence, that the stock was not worthless on the earlier occasion, since, at that time, the plan to reopen the Bank, which had been promulgated in April, was apparently progressing favorably, and, only a month or two thereafter, its license to resume business was issued.
The conclusion is inescapable from this record that, if petitioner possessed no valuable rights in his stock in the Bank at the end of 1934, it was solely because he had made a complete gift of that stock during that year at a time when the stock was valuable or at least not shown to have been worthless. That gift does not support a deductible loss. Robinson v. Commissioner, 53 Fed.(2d) 810; Western Maryland Dairy Corporation,32 B.T.A. 769">32 B.T.A. 769; Mrs. R. B. Lawler, Executrix,17 B.T.A. 1083">17 B.T.A. 1083. Respondent is, therefore, sustained on the first two issues.
The last issue is whether petitioner may deduct, as a bad debt, the difference between the face amount and the actual value of the note received by him in lieu of the unpaid portion of his deposit in the Bank. Respondent has limited the deductibility of the admitted loss here, under*1070 the provisions of the Revenue Act of 1934, section 117(a). 2 The propriety of this action is determined by whether the acceptance of this note by petitioner in lieu of the balance on his deposit constituted the "sale or exchange of a capital asset."
*190 Respondent supports his action only on the ground that the transaction constituted an "exchange of a capital asset." Upon further consideration of the authorities, particularly that of the case of James R. Stewart,39 B.T.A. 87">39 B.T.A. 87, we disagree. What happened here was not the transfer of any asset from the petitioner to the Bank in exchange for the note of the subsidiary (cf. *1071 Harry Payne Bingham,38 B.T.A. 913">38 B.T.A. 913; Betty Rogers,37 B.T.A. 897">37 B.T.A. 897), but was simply a satisfaction of the Bank's debt to him by means of the note. Neither the Bank nor its subsidiary received any asset from the taxpayer. There was, therefore, no "exchange of a capital asset" within the statute. Hale v. Helvering, 85 Fed.(2d) 819; affirming 32 B.T.A. 356">32 B.T.A. 356. Accordingly, we hold petitioner is entitled to deduct as a bad debt the full amount of the difference between the face value and the actual value of the note given him by the Bank in satisfaction of his deposit.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(e) LOSSES BY INDIVIDUALS. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -
* * *
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business. ↩
2. SEC. 117. CAPITAL GAINS AND LOSSES.
(a) GENERAL RULE. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
* * *
80 per centum if the capital asset has been held for more than 1 year but not for more than 2 years;
* * * ↩