*2040 Held, that petitioner received no income on the liquidation of a coal company.
*931 This proceeding was brought to redetermine a deficiency in income tax of the petitioner for the year 1921 in the sum of $25,994.34. Various allegations of error on the part of the respondent were asserted by the petitioner, but all were waived except the sole issue of whether or not the respondent erred in including in the gross income of the petitioner the sum of $75,097.57, representing an alleged profit to the petitioner on the liquidation of The C. R. Cummins Coal and Mining Company in 1921.
FINDINGS OF FACT.
The petitioner was engaged in the contracting business in Cleveland, Ohio, prior to and since 1920. He operated through a corporation, The C. R. Cummins Company (hereinafter called the contracting company) of whose capital stock he owned 148 out of 150 shares. During the year 1920 the petitioner organized a corporation, The C. R. Cummins Coal and Mining Company (hereinafter called the coal company) for the purpose of developing a coal *932 *2041 stripping operation in southern Indiana. He subscribed to the capital stock of the coal company, but paid nothing on his subscription and no stock was ever issued to him. A certain individual paid $2,500 for stock in the coal company, but none was issued to him and his money was returned. Only two shares of the capital stock of the coal company were ever outstanding, and they were sold in order to satisfy certain coal options. Upon the sale of the coal company's property the claims of the optionors were paid and they surrendered their stock certificates. The coal company kept no books. It was financed by the contracting company, which made appropriate entries on its own books.
In 1921 the coal company owned the coal-mining property in southern Indiana, purchased from funds advanced by the contracting company. In May of that year the coal company sold all of its property to George A. Enos for $250,000, of which $100,000 was paid in cash to the contracting company and the remainder in the following unsecured promissory notes executed by Enos:
| Payee | Date | Maturity | Amount |
| C. R. Cummins Co | May 1, 1921 | Aug. 1, 1921 | $25,000.00 |
| Clyde R. Cummins | May 1, 1921 | May 1, 1922 | 41,666.66 |
| Clyde R. Cummins | May 1, 1921 | May 1, 1923 | 41,666.67 |
| Clyde R. Cummins | May 1, 1921 | May 1, 1924 | 41,666.67 |
*2042 In the bill of sale it was stated that the three notes payable to C. R. Cummins "shall be known as Royalty Notes and shall designate Clyde R. Cummins as Payee." On the advice of his attorney, Cummins' notes were made payable to him individually, but they were held by him for the benefit of the contracting company and were endorsed by him to that company shortly after the sale and prior to September 9, 1921. Without his knowledge or authority his account with the contracting company was credited with the face value of the notes. The note of $25,000 to the contracting company was not paid at maturity and was renewed by the execution of two notes of $12,500 each, payable in 90 and 180 days, respectively. They, as well as the remaining three notes, aggregating $125,000, were thereupon endorsed on September 9, 1921, by the Enos Coal Mining Company as a condition to the renewal of the $25,000 note. The note payable to the petitioner, due May 1, 1922, was not paid at maturity, but it and the two remaining notes payable to the petitioner were satisfied on August 2, 1922, through an exchange for the bonds of the Enos Coal Company. The petitioner received none of the proceeds of the notes*2043 when they were eventually paid. A bank collected the notes for the benefit of the contracting company.
*933 At the time of the sale of the coal company property to Enos the contracting company was heavily obligated for money borrowed to finance the coal company's enterprise. Upon receipt of the notes of Enos payable to him, the petitioner attempted to discount them and to pledge them as collateral security for loans. He was wholly unable to do so because of the financial standing and condition of Enos. The three notes received by the petitioner in May, 1921, having an aggregate face value of $125,000, had no readily realizable or fair market value at that time. They had no greater or different value upon their endorsement by the Enos Coal Mining Company on September 9, 1921. The petitioner received no money or property of value as a liquidating dividend from the coal company during the year 1921 and no profit accrued to him by reason of his receipt of the said three notes executed by Enos on May 1, 1921.
The respondent included the sum of $75,097.57 in the gross income of the petitioner as representing a profit to him on the liquidation of the coal company. At the*2044 hearing, motion was made by the respondent that the alleged profit to the petitioner should be increased to $92,401 as the basis of the deficiency asserted by the respondent. The petitioner conceded that such amount was correct, provided he had received any profit at all from the liquidation of the coal company.
OPINION.
VAN FOSSAN: The only question at issue in this proceeding is whether or not in the year 1921 the petitioner received the profits of $92,401 through the liquidation of The C. R. Cummins Coal and Mining Company.
The coal company owned the coal mining operation in southern Indiana. It had no funds of its own with which to purchase the coal land or to operate the business, but had borrowed from the contracting company the entire amount required in the enterprise. The property mentioned constituted its entire assets. In May, 1921, the coal company sold the property to George A. Enos for $250,000, of which $100,000 was in cash and the remainder in notes. The cash payment was made directly to the contracting company. Likewise, the note for $25,000, due August 1, 1921, was payable to the contracting company. The three notes due in one, two and three years from*2045 date, respectively, and aggregating $125,000, were made payable to the petitioner. The designation of the petitioner as payee was made on the advice of his attorney, but for an unexplained reason. The petitioner received the three notes on behalf, and for the benefit of, the contracting company. He promptly endorsed them to the corporation and that company ultimately received the *934 proceeds thereof. Without the petitioner's knowledge or authority and under a misapprehension of fact the contracting company's bookkeeper credited his account on that company's books with the face value of the three notes payable to him.
We have determined that at the time of their execution and while they were in the possession of the petitioner the three unsecured notes in question had no readily realizable or fair market value. This conclusion is based both on the fact that petitioner unsuccessfully tried to discount the notes or to pledge them as collateral and on the unequivocal testimony of qualified witnesses. The situation is quite similar to that under consideration in *2046 , where we said:
The note in question was property received in exchange for other property within the meaning of the above statute, and it is to be treated as though it were cash "to the amount of its fair market value, if any." What, then, was the fair market value of the note? The evidence discloses that the holder of the note, as soon as it was received, tried repeatedly to sell it to banks and moneyed men in the locality, but could not obtain a purchaser. This appears to have been due to the fact that the makers of the notes were extensively engaged in speculative enterprise, and to the further fact that the banks were already carrying large amounts of other notes given by these same makers. Whether the note might have found a ready market at another time, under different conditions, it is unnecessary for us to decide. We are here considering a situation that arose, and conditions that existed, in 1920. It is sufficient that at that time and under those conditions the note was not salable to the banks and other purchasers of securities with whom the petitioner was in a position to deal and to whom the note was offered for purchase. *2047 . We are satisfied that within the meaning of the statute the note had no fair market value in 1920. And this conclusion is not affected by the probability that the amount of the note might have been collected, after maturity, by means of a lawsuit against one of the makers, for, as we interpret the statute, the "fair market value" of property at any given time is not to be based upon and fixed by the probable outcome, at some future time, of more or less lengthy legal proceedings. In our opinion the note in question did not constitute income for the year 1920 and should not have been so treated by the respondent.
In the instant case the facts were almost identical. The bankers who refused to discount the notes or accept them as collateral, even for a small proportion of their face, gave as their reasons the fact that the maker of the notes was heavily involved and that in 1921 the coal industry, in which he was engaged, was at a low ebb. They expressed the positive opinion that the notes at the time of receipt had no market value. Hence, the petitioner is not chargeable with taxable income by reason of their receipt*2048 in May, 1921, regardless of whether or not they constituted a liquidating dividend from the coal company. An erroneous bookkeeping entry can not create a value where none exists. The fact that the three notes were later endorsed by the Enos Coal Mining Company, on September 9, 1921, *935 has no bearing on the situation since the petitioner had endorsed the notes and delivered them to the contracting company some time prior to that date.
While it is not essential to decide the question directly, yet we may observe that the petitioner owned no stock in the coal company, the coal company had no assets of its own, and the proceeds of the sale to Enos were assigned to the contracting company because it had financed the purchase of the Indiana property. It would seem, therefore, that the petitioner had no personal interest in the sale to Enos, but was acting wholly on behalf of the contracting company. His designation, therefore, as the payee of the notes in question, was not made as a stockholder of the coal company, but rather as a representative of the contracting company.
Judgment will be entered under Rule 50.