*2135 Deduction from income disallowed.
*366 The respondent asserts deficiencies in income taxes for the years 1922 and 1923, in the respective amounts of $30,059.90 and $5,122.59. For his causes of action the petitioner contends (1) that his income for 1922 was erroneously increased by the addition thereto of certain alleged dividends which, in fact, represented a return of capital, and (2) that the respondent has erroneously disallowed deductions from his gross income in each of the taxable years on account of debts ascertained to be worthless and charged off in such years. As an alternative he contends that one of the disallowed deductions represents a loss sustained in the taxable year.
FINDINGS OF FACT.
The petitioner is an individual who resides at Tulsa, Okla. In the taxable years he was an oil operator with his principal office at Okmulgee.
In the latter part of 1919, the petitioner and several associates incorporated the Independent Oil & Gas Company, hereafter referred to as the Company. *2136 Oil properties and cash were paid in for the capital stock which, prior to April 12, 1922, had been issued in the amount of more than 900,000 shares of the par value of $1 each. The petitioner was, at all times, the largest stockholder of the Company and was its president and general manager in the years under review.
The Company had some small oil production from the date of its organization. In addition to the properties paid in for stock it acquired other oil and gas leases for cash. In the latter part of 1921 it developed a property known as the Holmes lease and within five months had drilled in wells with a daily production of 13,000 or 14,000 barrels of oil, which at that time, was marketable at $2.25 per barrel.
The Company had about 175 stockholders but the bulk of the stock was held by the petitioner, E. T. Noble, D. M. Smith, J. H. Dollis, Wade H. James, Frank Charon, and J. L. Fugua. After oil was discovered on the Holmes lease and large returns from sales began to accumulate, some of the stockholders desired to realize from their *367 investment and proposed to sell their stock to outside interests. The petitioner, on the other hand, desired to hold his*2137 stock and continue the operation of the Company as an independent enterprise and for such reasons proposed to purchase for his own account a sufficient number of shares to enable him and those stockholders who agreed with his policy to remain in control and continue to operate the enterprise. Accordingly, at various dates, between January 1 and March 28, 1922, he purchased 147,873 shares from Noble, Smith, Dollis, James, Charon, Fugua and others and paid therefor at the rate of $2 per share. On April 12 he was the owner of record of the shares so purchased.
On April 12, 1922, the directors of the Company declared a dividend of 25 cents a share payable to stockholders on April 15. The petitioner received the amount of $36,968.25, which represented the dividend on 147,873 shares of stock which he had purchased in February and March.
It was generally known in and about Okmulgee early in 1922 that the Company was in position to pay a dividend and the stockholders and directors understood that a dividend in the amount of 25 cents a share would be declared and distributed as soon as the proceeds from oil sales were available in the necessary amount. Petitioner did not include the*2138 amount of $36,968.25 in his gross income in his income tax return for 1922. Upon audit the respondent added such amount thereto. The present deficiency arises in part from such increase in petitioner's gross income.
During several years prior to 1922 the petitioner advanced money to his brother, J. W. Moore, for use in the latter's business as an oil operator, in a total amount substantially in excess of $25,000. In 1922, J. W. Moore gave a promissory demand note to petitioner for $25,000 on account of such advances. This note was not paid within the taxable year.
On March 22, 1923, the petitioner endorsed his brother's note at the First National Bank of Okmulgee for the amount of $20,000. All the proceeds of the note were received by J. W. Moore. On September 28 of the same year the bank required the petitioner to pay the note with accrued interest.
During the years 1922 and 1923, a subordinate officer of the Company caused it to loan J. W. Moore the amount of $10,550. The petitioner settled this loan by a note dated October 29, 1923, which he paid on September 16, 1924.
In his income tax returns for 1922 and 1923, the petitioner deducted the amounts above set forth*2139 from his gross income in the respective years. Upon audit of such return the respondent disallowed the deductions claimed, made other adjustments not in controversy and asserted the deficiencies here involved.
*368 In the years 1922 and 1923, J. W. Moore was actively engaged in the oil business. He owned an interest in the Company, had several producing oil wells on his property, owned drilling equipment and material, and a house.
OPINION.
LANSDON: The petitioner's contention as to the first error alleged is that he purchased the stock of the Company, as set forth in our findings of fact, at $1.75 a share and that the additional 25 cents a share paid by him to the vendors at date of purchase was an advance by him representing dividends which all understood would soon be declared. In effect, he contends that he loaned the Company $36,968.25 with which to pay dividends yet to be declared and to that extent his receipt of dividends at April 15, 1922, was the repayment of such loan, or a return of capital and, therefore, not taxable. The facts of record as set out above do not sustain this contention. It is undisputed that the dividend of 25 cents a share was declared*2140 and paid after the petitioner became the owner of the stock. Undoubtedly the price paid for the stock was based upon the known or anticipated amount of earnings available or soon to be available for the payment of dividends, but this by no means establishes the contention of the petitioner. On this issue the determination of the respondent is affirmed. .
The claimed deduction for bad debts and/or loans relates to both taxable years involved but for convenience this issue as to 1923 will be first discussed and recorded. The loss claimed in the amount of $10,945 appears to represent petitioner's obligation as guarantor of his brother's debt to the Company. This obligation was assumed in 1923, but nothing was paid thereon until 1924, and therefore this loss, if any, was sustained in that year as the petitioner reported his income on a cash basis. The action of the respondent in disallowing this amount as a deduction from income in 1923 is affirmed. .
In 1922, petitioner accepted a demand note from his brother in the amount of $25,000 and as endorser or guarantor, paid another note*2141 given to the bank by his brother in the amount of $20,000. The first note was a direct promise to pay petitioner the amount thereof on demand. On the second transaction the petitioner contends that by the payment of the guaranteed note at the bank he became his brother's creditor by subrogation. This may be conceded without in any way affecting the issue. Two questions are involved here, viz.: (1) Were there any debts within the contemplation of law? (2) If the amounts petitioner advanced to his brother were debts, were such debts ascertained to be worthless in 1922? Transactions between persons closely related by blood should be scrutinized with *369 care, but we see nothing in this record that indicates that the petitioner's advances to his brother were gifts rather than loans. They were made for business purposes and in subsequent years some of them were settled. We are of the opinion that the amounts in question represented debts due the petitioner. The evidence that such debts were ascertained to be worthless in the taxable year is not convincing. J. W. Moore was engaged in a rather speculative business. *2142 Although he failed to make any profits in the year in question, the record discloses that shortly after he was able to pay a substantial part of his debts. Petitioner made no demand for the payment of either obligation, nor did he begin any suit at law or pursue any of the other remedies open to creditors for collecting from a debtor who is not without assets. . In the taxable year J. W. Moore owned interests in oil wells from which he received production of at least 100 barrels daily. The evidence indicates income from this source, after allowing for costs of lifting and marketing oil, of at least $150 per day. He also owned drilling outfits and other property. In these circumstances we think the petitioner has failed to overcome the presumption that the respondent's determination of deficiencies is correct.
Decision will be entered for the respondent.