*2376 1. Held that certain amounts representing cost to the petitioners of stock in a corporation constituted losses in 1922 and are deductible in that year.
2. Amounts paid in 1922 and 1923 as assessments on stock by the petitioners who were endorsers of the corporation's notes and guarantors of its indebtedness held deductible in the respective years.
3. An amount advanced in the form of a loan by one of the petitioners in 1922 to a corporation for paying interest on its indebtedness (which was in fact a portion of petitioner's liability as endorser or guarantor), held deductible in that year as a loss then sustained.
*17 These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income tax as follows:
| Docket No. | Year | Deficiency | |
| 1922 | $222.60 | ||
| Henry Adamson | 21860 | 1923 | 30.52 |
| 1922 | 701.17 | ||
| P. H. Penna | 21861 | 1923 | 336.47 |
| 1922 | 132.32 | ||
| Thomas P. Gallagher | 21862 | 1923 | 35.11 |
The matters in controversy are the respondent's*2377 action in disallowing as deductions (1) certain amounts claimed as losses resulting from investments in the stock of the Adamson Oil Corporation, (2) *18 certain other amounts representing assessments made to obtain funds to liquidate indebtedness of the corporation for which the petitioners were endorsers and (3) certain other amounts advanced by Penna to the corporation for making payment of interest on indebtedness of the corporation for which he was an endorser.
FINDINGS OF FACT.
The petitioners are individuals residing in Terre Haute, Ind. In 1918 Adamson held as trustee a lease on 190 acres of oil land in the Pine District of Louisiana near Shreveport. The lease had been acquired from J. W. Havens, Sam K. Baird, George O. Baird and J. F. Bollinger, who accepted a beneficial interest in the trust for the lease. Penna and Gallagher also held interests in the trust.
For the purpose of acquiring drilling equipment and developing the property, there was paid in to Adamson as trustee, during 1919, $4,000 by Penna, $2,000 by Adamson and $2,000 by Gallagher. Two wells were drilled and equipped, one in 1919 and another in 1920.
In July, 1920, a meeting of the beneficiaries*2378 of the trust was held and it was decided to incorporate. A corporation known as the Adamson Oil Corporation was formed under the laws of Indiana, with an authorized capital stock of $250,000 divided into 2,500 shares of a par value of $100 each. The trust property was transferred to the corporation in July, 1920, and the holders received stock in the corporation in proportion to their respective interests. The stock thus issued was fully paid and nonassessable. For his interest Penna received 143 3/4 shares and for their interests Adamson and Gallagher each received one-half of that amount.
About the time it was decided to form a corporation, it was agreed among certain of the holders of the beneficial interests in the trust property, including the petitioners, that they would borrow money to do certain development work, and that they would all endorse the notes. It was also agreed that the individual liability of each would be in proportion to the beneficial interest of each in the trust property or if a corporation were formed, then in proportion to the ownership of each in the corporation. At or about the time of incorporation certain of the stockholders, including the*2379 petitioners, signed a guarantee to a supply company in Shreveport in order to obtain the supplies that were bought for the oil wells.
During the course of operations the corporation borrowed money, some from banks and some from individual stockholders. On January 1, 1922, the amount owed as a result of borrowings was approximately $112,000. At a meeting of the stockholders of the corporation held on March 23, 1922, the financial condition of the corporation was considered. In order to make payment of a note for $10,000 due shortly thereafter, an assessment of $5 per share payable forthwith *19 was levied on each share of stock outstanding on that date. In 1922 there was paid on this assessment $718.75 by Penna, $359.37 by Adamson and $359.37 by Gallagher.
In April, 1922, the corporation was in need of $1,000 with which to pay interest. Penna volunteered to and did loan the corporation the $1,000 taking its note therefor. There was no material difference in the financial condition of the corporation at the time the loan was made and at the end of 1922, as the corporation was insolvent at both dates. The note was worthless at the time it was given and Penna knew that*2380 it was. In advancing the money Penna considered that he was making a partial payment of his losses.
At the meeting of the stockholders on March 23, 1922, the matter of the sale of the corporation's property was taken up and a committee of three stockholders was appointed to sell the property for an amount not less than $75,000. Sam K. Baird, the superintendent and manager of the property, who was present at the meeting, was instructed by the committee to return to Shreveport and not only to place the property on sale at $75,000 but to submit any offer that he could get. Correspondence between Baird and the corporation with reference to the sale of the property extended throughout the remainder of 1922, during which time he was unable to get an offer for the property at any price. Also, during this time no one on behalf of the corporation was able to obtain any offers for the purchase of the property. In April, 1923, one McCalley offered to purchase the property for $40,000. At a special meeting of the stockholders on May 16, 1923, a resolution was adopted accepting the offer. McCalley made a cash payment of $7,000 and deferred payments were arranged for the remainder. McCalley*2381 forfeited his contract and all that the corporation received from him was the $7,000 which was retained by it.
At the time of the stockholders' meeting on May 16, 1923, there was owing to banks in Terre Haute on notes the amount of $65,000, on notes to individual stockholders, $40,500, and on accounts payable approximately $14,000. It was realized that there would be a deficit of approximately $77,000 in event the total sale price of $40,000 was received for the property. Thereupon a resolution was adopted levying an assessment of $30 per share on the stock of the corporation, payable immediately. During 1923 Penna paid $3,000 on this assessment, Adamson paid $517.50, and Gallagher paid $517.50.
As McCalley forfeited his contract, the corporation, on the advice of Baird, the superintendent and an experienced oil man, operated the property until some time in 1925, when it was sold for $25,000. Operation of the property was continued to prevent salt water from taking it. Oil was produced by the corporation through all the years *20 up until the time the property was sold in 1925. However, the corporation was operating at a loss. In all, eight wells were drilled, seven*2382 of which were equipped. The oil produced was a heavy oil, and the production from all of the wells was not in excess of 50 barrels per day.
The amount of $25,000 received from the sale of the property was used to pay the corporation's debts and those stockholders who had endorsed its notes made additional payments of $7.20 per share in order to make a complete liquidation of the corporation's indebtedness. No dividends were ever paid by the corporation.
Six of the stockholders who had not endorsed the corporation's notes and who were advised that there was no liability on the assessments did not pay the assessments levied in 1922 and 1923 on their stock. Those stockholders, including the petitioners, who were endorsers on the notes and who did pay the assessments, considered that in so doing they were paying in installments the losses that they would eventually have to pay.
In determining the deficiencies here involved the respondent has refused to allow as deductions in 1922 to Adamson, Penna, and Gallagher the amounts of $2,000, $4,000, and $2,000, respectively, representing the cost to them of the stock in the Adamson Oil Corporation and the amounts of $359.37, $718.75, *2383 and $359.37, respectively, representing the assessments made on their stock in 1922. Respondent has refused to allow Penna as a deduction the amount of $1,000, representing the money loaned by him to the corporation in 1922. For 1923 the respondent also refused to allow as deductions to Adamson, Penna, and Gallagher the amounts of $517.50, $3,000, and $517.50, respectively, representing the assessments paid on their stock in that year.
OPINION.
TRAMMELL: The petitioners contend that for 1922 they were entitled to deduct as losses sustained during that year the cost to them of the stock of the Adamson Oil Corporation. The amount of the loss is not in dispute, but the controversy is as to when the loss is deductible.
In support of their contention the petitioners urge that, since the stockholders at a meeting in March 1, 1922, determined that a loss had been incurred and authorized the sale of the property at a price much insufficient to pay the corporation's indebtedness, they had the right to treat their stock as worthless at that time and charge off as a loss their investment in the stock.
At the beginning of 1922 the corporation had notes outstanding in the amount*2384 of approximately $112,000. Of that amount $10,000 *21 was paid during the year by means of an assessment against the stockholders. At the end of 1922 the corporation owed in excess of $100,000. In March, 1922, the stockholders had voted to sell the corporate assets for not less than $75,000. However, during that year the corporation was unable to obtain an offer to purchase the assets at any price. It was not until April, 1923, that an offer was obtained. This offer, the terms of which were never carried out, was for $40,000 and resulted in a cash payment of only $7,000. Although the corporation continued to operate the property, it did so at a loss. From the facts we think that the financial position of the corporation was hopeless in 1922 and that its stock was valueless. . Although the property was not finally disposed of until 1925, and operations were continued until that time, we do not think under the facts here presented that this indicates that the stock was not valueless in 1922. Events occurring subsequent to 1922 merely confirm the worthlessness of the stock in that year. We therefore are*2385 of the opinion that this contention of the petitioners is correct. ; ; .
With respect to the assessments made on the stock of the Adamson Oil Corporation and the amounts paid thereon by the petitioners in 1922 and 1923, the petitioners contend that by making the assessments a convenient plan was being made use of to collect from those who were endorsers on the corporation's notes and guarantors of its accounts; that the assessment were for the purpose of discharging their liability on notes of the corporation on which they were endorsers; that the money was used for that purpose and that in making such payments they were paying and discharging by installments a portion of their losses.
While such assessments represented additional cost of the stock, they were also only additional losses, as the stock had then become worthless. .
In April, 1922, Penna loaned the corporation $1,000 with which to pay interest taking the corporation's note therefor. While he knew that the corporation was insolvent*2386 and that the note was worthless at the time it was given, yet he was an endorser on notes and a guarantor of accounts of the corporation, and the amount in fact constituted a partial payment of his losses. Under the circumstances, we are of the opinion that the amount here involved constitutes an allowable deduction to him for 1922 as a loss then sustained.
Judgment will be entered for the petitioners.