*1313 1. Evidence does not establish petitioner's claim for deduction of certain alleged business expenses in the taxable years.
2. Advances to a corporation by its principal stockholder, represented by unpaid corporation notes, are in the nature of additional capital contributions to the extent of the amount of such notes unpaid at the date of their surrender and cancellation in consideration for stock, and their face value, representing the amount of such advances, is the cost of the stock issued thereor.
*751 This appeal, which is prosecuted by the executors of L. W. Mallory, deceased, seeks to review the respondent's action in asserting income tax deficiencies of $1,458.77 and $3,822.48 against decedent's estate for the years 1923 and 1924, respectively. The petitioner alleges that respondent erred in his computation of the taxes in that he rejected as deductions from gross income certain amounts claimed as business expenses and losses sustained by the taxpayer in the years reviewed.
FINDING OF FACT.
For many years*1314 prior to and including the taxable years, L. W. Mallory was engaged in the wholesale grocery business at Sioux City, Iowa. In 1922 he voluntarily became the sole financial backer of a corporation known as the Homer Land and Cattle Company, which was organized by his son, L. C. Mallory, and two associates, C. J. O'Connor and T. L. Carrabine. The authorized capital stock of the corporation was $50,000 par value, of which $15,000 was paid in at the time of organization and stock issued to the three incorporators, 60 shares each going to L. C. Mallory and C. J. O'Connor, and 30 to T. L. Carrabine. The only cash paid by the incorporators was $2,500 by C. J. O'Connor. The balance of initial capital, to wit, $12,500, was borrowed from the Sioux City National Bank upon promissory notes which decedent guaranteed.
The Homer Land and Cattle Company began business in the fall of 1922. Its promoters realized early in the following year that losses were inevitable and that more capital would be required to carry it over into more favorable periods. In this situation O'Connor became dissatisfied and the decedent eliminated him by returning to him his cash investment of $2,500 and taking*1315 over his stock in the corporation. On August 24, 1923, upon call from the bank, the decedent paid notes given to it by the incorporators at the time of organization, amounting to $12,500, in virtue of which he became the sole owner of all the outstanding capital stock of the corporation. During 1923 the decedent advanced to the corporation money with which to buy feed, which in the aggregate amounted to $16,500, for which he held promissory notes of the corporation at the end of that year. In order to establish a deductible loss from shrinkage in value of his 150 shares of the corporation stock, the decedent, sometime in October, 1923, sold said shares to his son in consideration for the latter's demand promissory note for the sum of $1,500, secured by a pledge of the stock and other securities as *752 collateral. Some time in 1924 he accepted a payment of $300 on such note. On December 31, 1923, the decedent had issued to him by the corporation, 150 shares of its unissued stock, paid for by the cancellation of notes due him for loans previously made in the amount of $15,000.
During 1924 the decedent made further advances of money to the Homer Land and Cattle Company*1316 and took the notes of the corporation therefor. As business permitted the corporation made some payments on such notes, and from time to time the stock of the corporation was issued to him in consideration of the cancellation of unpaid notes. In this manner in the year 1924 the decedent acquired 350 shares of the corporation stock by the surrender and cancellation of notes of the face value of $35,000. On November 30, 1924, the decedent transferred this stock to his son in consideration for the latter's personal promissory note for $14,000, secured by a pledge of the stock certificates. No payment has ever been credited on such note.
In each of the sales of stock by the elder Mallory to his son, the price was based on the book value of such stock at the respective dates.
In his income tax returns for 1923 and 1924, the taxpayer deducted $13,500 and $21,000, respectively, from gross income for such years as losses sustained by him in sales of his stock in the Homer Land and Cattle Company, under the circumstances above stated. He also claimed $2,429.63 and $900, respectively, as deductions for traveling expenses in such years. The respondent, in his audit, disallowed all*1317 of these claims excepting the traveling expense item for 1923, which he allowed in part to the extent of $479.66.
OPINION.
LANSDON: No evidence was introduced at the trial of this cause to show that the items grouped as "traveling expenses" which petitioner claims were legal deductions from decedent's income in the years reviewed. Without some proof as to what these disbursements were for we are unable to hold that the respondent erred in rejecting them as legal deductions from income for the years to which they relate and his action in reference to them is therefore approved. ; ; ; and .
The petitioner's next claim is that the taxpayer sustained losses in the respective amounts of $13,500 and $21,000 in the years 1923 *753 and 1924, through the sale of capital stock in the Homer Land and Cattle Company. The record shows that the decedent was responsible for the organization of the Homer Land and Cattle Company, and that on August 24, 1923, he became the sole owner of its stock then*1318 outstanding. The corporation lost money from its beginning, and he paid its bills and loaned it money for which he was paid, in part, with stock at par, which he assigned to his son at book value, as set out in our findings of fact.
The evidence convinces us that the sales of stock made by decedent to his son in October, 1923, and November 1924, were bona fide transactions for adequate consideration and that after such dates the son was the owner of the stock in question. If the cost of the stock so disposed of is proved by the record, the petitioner is entitled to the deductions claimed. .
The record discloses that on August 24, 1923, the decedent became the sole owner of all the outstanding stock of the corporation, to which he thereafter loaned substantial sums of money, evidenced in all instances by the promissory notes of the borrower. To the extent of $15,000 in 1923 and $35,000 in 1924, such notes were surrendered and canceled in consideration of the issuance of unissued stock of the corporation to him in the respective quantities of 150 and 350 shares, so that at November 24, 1924, he was the owner of all the outstanding*1319 stock of the corporation, except as above set out. In these circumstances we think it is clear that all the advances represented by the unpaid promissory notes of the corporation must be regarded as capital contributions and, therefore, that the stock cost the decedent $100 per share. ; cf. .
The petitioner contends that all the transactions through which the decedent acquired the stock of the corporation were entered into for profit. The record discloses that the elder Mallory always took notes for advances to his son and to the corporation. The notes of the son were secured by collateral and one payment of $300 was made on that which was taken in 1923. The loans to the corporation were evidenced by promissory notes, some of which were paid in cash and the balance by the issuance of stock. Decedent was a successful business man, but like most such men he sometimes embarked on enterprises that were unprofitable. In our opinion the evidence clearly disproves that he had any intention of giving his son the various amounts which he advanced to acquire the stock*1320 of the corporation and finance its operations.
Respondent also argues that, in any event, Mallory's subsequent purchase of a like number of shares of the same stock from the corporation *754 at par, as shown in the record, brings the transactions within section 214(a)(5), which provides that no losses shall be recognized in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale the taxpayer has acquired substantially identical property, etc. The evidence shows that the purchases of additional stock here considered were not made within the thirty-day limit provided for in the section above cited. It is therefore clear that such provision does not affect the issues here involved. On this issue the determination of the respondent is reversed. The decedent was entitled to deduct the amounts of $13,500 and $21,000, respectively, from his gross income in his income tax returns for 1923 and 1924.
Decision will be entered under Rule 50.