1928 BTA LEXIS 3279">*3279 1. A taxpayer who entered into a transaction prior to March 1, 1913, by which he acquired certain rights at a certain cost, but who offers no proof of the March 1, 1913, value of the rights or of its comparison with cost has not established the basis for a loss on the final disposition of those rights in 1920 or 1921 for a certain amount.
2. The Commissioner may in his discretion reconsider any taxpayer's liability to income and profits taxes originally decided by him at any time within the period of the statute of limitations, subject only to the provisions of sections 1309 and 1312 of the Revenue Act of 1921 and corresponding sections of subsequent revenue acts as the same may be applicable.
13 B.T.A. 279">*279 The Commissioner determined deficiencies as follows:
| Name | Year | Amount of deficiency |
| Bayard Henry | 1921 | $2,891.56 |
| Samuel F. Houston | 1920 | 191,830.53 |
| Sallie H. Henry | 1921 | 100,870.29 |
| William W. Porter | 1921 | 7,268.60 |
13 B.T.A. 279">*280 1928 BTA LEXIS 3279">*3280 Each petitioner alleges that the Commissioner erroneously failed to allow as a deduction a loss sustained, arising out of the failure of the Real Estate Trust Co. of Philadelphia.
In the case of Samuel F. Houston the loss was alleged to have been sustained in the year 1920, and in the case of each of the other petitioners the loss was alleged to have been sustained in the year 1921. In the case of William W. Porter, an additional error was alleged as follows:
The Commissioner of Internal Revenue having approved ruling of the Solicitor of Internal Revenue upon a point of law under date of August 21, 1923, wherein the deduction heretofore claimed was allowed, and having made a refund to the taxpayer of the amount of the deficiency herein, is not authorized to review and annul said ruling in the absence of fraud or mistake.
J. I. R. Henry, Executrix, has been substituted as the petitioner in place of Bayard Henry, deceased.
The cases were consolidated.
FINDINGS OF FACT.
The petitioners, Samuel F. Houston, Sallie H. Henry, and William W. Porter, are individuals, residing at Philadelphia, Pa.
Bayard Henry was an individual residing at Germantown, Philadelphia, Pa. He1928 BTA LEXIS 3279">*3281 died on September 17, 1926, and J. I. R. Henry is the duly constituted executrix of his estate.
The Real Estate Trust Co. of Philadelphia closed its doors in the year 1906, and on August 28 of that year George H. Earle, Jr., was appointed receiver for it by the Court of Common Pleas of Philadelphia County, Pennsylvania. The financial embarrassment of the Real Estate Trust Co. was brought about by the improper conduct of its affairs by its president, Frank Hipple. Hipple loaned excessive amounts to Adolph Segal and took therefor collateral which could not be easily liquidated, but which was not without value. He also wrongfully permitted Segal to withdraw certain of this collateral for the purpose of placing it as collateral for loans from other sources.
The receiver for the Real Estate Trust Co. proposed a plan of reorganization for that company which included as one of its provisions the creation of a fund of $2,500,000 from subscriptions by directors of the company to guarantee a value of $3,000,000 for the Segal collateral, designated in the plan "Segal Matters." The company was to be given the $2,500,000 outright and then was to have in addition the first $3,000,000 which1928 BTA LEXIS 3279">*3282 might be realized from the "Segal Matters." The subscribers were to be reimbursed, if at all, by all of the excess over $3,000,000 which might be realized from the "Segal Matters." This plan of reorganization became effective. It 13 B.T.A. 279">*281 provided in part that the subscribers to the $2,500,000 fund made such subscriptions with the understanding that if from the administration of the "Segal Matters" $3,000,000 should be realized the subscribers were to receive any excess over this amount which might be realized from the same. No restrictions or time limits were placed upon the Real Estate Trust Co. in regard to its administration and final disposition of the assets included in the "Segal Matters." The Real Estate Trust Co. resumed business on November 1, 1906, and thereafter and until December 30, 1920, the "Segal Matters" were administered exclusively by it under the direction of George H. Earle, Jr., formerly receiver and thereafter president of that company.
The following table shows the names of the directors of the Real Estate Trust Co. in 1906, the amount that each subscribed and paid to the guaranty fund, and the number of shares of stock in the company held by each at1928 BTA LEXIS 3279">*3283 that time:
| Name | Subscription | Number of shares |
| John H. Converse | $1,005,000 | 155 |
| Samuel F. Houston | 1 755,000 | 512 |
| John F. Betz | 153,375 | 75 |
| William A. Patton | 103,000 | 150 |
| R. Dale Benson | 100,625 | 230 |
| Bayard Henry | 92,500 | 375 |
| (Of this sum Bayard Henry personally | ||
| contributed $42,500, $50,000 being | ||
| furnished to him from other sources.) | ||
| Edward P. Borden | 77,000 | 45 |
| W. W. Porter | 75,000 | 175 |
| Frank C. Roberts | 75,000 | 175 |
| S. Wier Mitchell | 52,500 | 553 |
| Joseph de Forest Junkin | 11,000 | 450 |
1928 BTA LEXIS 3279">*3284 Sallie H. Henry was not a director, but owned 1,071 shares of stock in the company. She made her subscription upon the understanding that no personal responsibility to her was assumed by Samuel F. Houston, but that she was to look to the so-called "Segal Matters" as the source from which to realize upon her subscription. Throughout the transactions involved herein Samuel F. Houston acted as her agent.
Samuel F. Houston at the time he subscribed to the guaranty fund believed that the "Segal Matters" had considerable potential value which under Earle's administration could be converted into a sufficient amount of cash to repay the subscribers the amount of their subscription with interest and possibly some profit in addition. He explained the plan of reorganization to his sister and told her of 13 B.T.A. 279">*282 his beliefs in regard to the value and possibilities of the "Segal Matters."
At and before the time that the petitioners herein subscribed to the guaranty fund, George H. Earle, Jr., the receiver for the Real Estate Trust Co., had had conversations with the directors in which he expressed a belief that a sufficient amount might be realized from the "Segal Matters" to repay1928 BTA LEXIS 3279">*3285 to the subscribers the amount of their subscription with interest and possibly a profit.
Segal had secured a loan of $1,250,000 from Gustave E. Kissel. As collateral for this loan, Segal gave certain bonds and stock which had been deposited with the Real Estate Trust Co. as collateral security for loans made by it to Segal and which had been wrongfully withdrawn from the Real Estate Trust Co. by Segal with the permission of Hipple. Included in this collateral were certain bonds and shares of stock of the Pennsylvania Sugar Refining Co. and in connection with the loan it was agreed between Kissel and Segal that until the loan was repaid, Kissel, or some one to be named by him, should have the right to select four out of seven directors of the Pennsylvania Sugar Refining Co. and that the latter's refinery should not be operated.
At the time the subscriptions to the guaranty fund were made, a suit against the American Sugar Refining Co. under the Sherman Anti-Trust Act was contemplated on behalf of the Pennsylvania Sugar Refining Co. and the value of the "Segal Matters" depended to some extent upon the successful prosecution of such a suit.
Such a suit was brought in the United1928 BTA LEXIS 3279">*3286 States District Court for the Southern District of New York for $10,000,000 and another in the Court of Chancery in New Jersey, on the ground that Kissel, as agent for the American Sugar Refining Co., had made a contract in restraint of trade with Segal. In January, 1910, the pending litigation was compromised upon the delivery to the Real Estate Trust Co. by the American Sugar Refining Co. of certain bonds wrongfully withdrawn from the Real Estate Trust Co., among which were bonds of the Pennsylvania Sugar Refining Co. The Real Estate Trust Co. afterwards converted the latter bonds, through a foreclosure, into 7,268 shares of stock in the reorganized company, thereafter called Pennsylvania Sugar Co. This was on or before January 22, 1912.
The petitioners were thoroughly familiar with the progress of the liquidation of the "Segal Matters" under the administration of the Real Estate Trust Co. Some question arose between the parties in regard to the rights under the subscription agreement including rights to interest and on May 5, 1916, a supplemental agreement was entered into. At this time and for some time prior thereto the principal 13 B.T.A. 279">*283 unliquidated asset of the original1928 BTA LEXIS 3279">*3287 "Segal Matters" was the 7,268 shares of stock in the Pennsylvania Sugar Co. and under the supplemental agreement it was provided that when this stock was disposed of the contributors to the guaranty fund should receive one-fourth of the proceeds.
In the latter part of 1920, the parties concerned, after full investigation, concluded that the liquidation agreement had rendered its maximum of service and that the remaining Segal assets would not have any greater value during a substantial period of time in the future than they then had. Whereupon, the subscribers either individually or by their duly constituted representatives entered into separate agreements which as a group provided for complete liquidation of the "Segal Matters" by the Real Estate Trust Co. distributing one-fourth of the 7,268 shares of Pennsylvania Sugar Co. stock to the subscribers to the fund in proportion to the amount of their subscription in full satisfaction of all agreements of the parties pertaining thereto. The subscribers never received any other return on their subscriptions.
Samuel F. Houston entered into such an agreement on December 30, 1920, and on that date, in accordance with the terms of1928 BTA LEXIS 3279">*3288 the agreement, received 548.734 shares of Pennsylvania Sugar Co. stock. He, personally, was entitled to 222 of these shares. The remaining shares he received as agent for his sisters and others who had subscribed through him. These latter shares were later distributed to them by him, 158.61 shares being delivered to Sallie H. Henry in the early part of 1921.
Bayard Henry signed an agreement with the Real Estate Trust Co. and on January 21, 1921, received as his pro rata share 37 shares of Pennsylvania Sugar Co. stock.
William W. Porter signed such an agreement and on January 23, 1921, and received as his pro rata share 54 shares of Pennsylvania Sugar Co. stock.
Each share of Pennsylvania Sugar Co. stock received by the petitioners at the time received had a fair market value of $150.
At the end of 1920 Samuel F. Houston wrote off his books, as a loss, $271,700, computed by deducting the value of the stock which he received from $305,000, the amount of his subscription. In reporting income for 1920 he deducted this amount as a loss.
In reporting his income for the year 1921 William W. Porter deducted $66,900 as a loss, computed by deducting the value of the shares1928 BTA LEXIS 3279">*3289 he received from the amount of his subscription. He later paid tax under protest on his income increased by the amount of this alleged loss. He thereafter filed a claim for refund, whereupon the Commissioner advised him that the amount of the loss claimed had been allowed and enclosed a copy of a letter signed by the Solicitor 13 B.T.A. 279">*284 of Internal Revenue, dated August 21, 1923, stating that the alleged loss constituted an allowable deduction. The Commissioner refunded the difference in tax to the petitioner. Thereafter, on February 3, 1925, the Commissioner sent a deficiency notice to the petitioner, in which he stated in part as follows:
In a recent decision made by the Solicitor of Internal Revenue with respect to the Real Estate Trust Company transaction, it is held that no deductible loss was incurred by the directors of such company and the former ruling in your favor is revoked.
Sallie H. Henry and Bayard Henry on their 1921 returns deducted as losses the difference between the amount subscribed and the value of the shares received.
In the case of each petitioner the Commissioner has disallowed the deduction for the alleged loss resulting from the subscription1928 BTA LEXIS 3279">*3290 to the guaranty fund.
OPINION.
MURDOCK: With the exception of William W. Porter, none of the petitioners herein have pointed to any particular section of the Revenue Act as authority for the deduction claimed. They all contend, however, that the transaction was entered into for profit. William W. Porter claims the deduction under section 214(a)(5) of the Revenue Act of 1921. We will discuss the case as if each petitioner were claiming a loss under this section, or, in the case of Samuel F. Houston, the corresponding section of the Revenue Act of 1918, because we can think of no other section of these Revenue Acts which would give any more support to the petitioner's contentions. These sections provide for the deduction of "Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business * * *."
We need not discuss at length the question of whether or not the petitioners entered into this transaction for profit, since for another reason we can not allow the deductions which they claim.
In consideration of the money subscribed and paid to the1928 BTA LEXIS 3279">*3291 so-called guaranty fund, each subscriber thereto acquired certain rights which were thenceforth his property and which cost him the amount of his subscription. On March 1, 1913, each subscriber still had these same rights. If he disposed of them in 1920 or in 1921, then under section 202(a)(1) of the Revenue Act of 1918, as interpreted by the courts and by this Board, and under the express provisions of section 202(b), the loss, if any, from the disposition of those rights, the subject matter of the entire transaction, would be the difference between what was ultimately received for the rights and their cost, or March 1, 1913, value, whichever was lower. See the Acts referred to; 13 B.T.A. 279">*285 ; ; ; ; ; ; and also 1928 BTA LEXIS 3279">*3292 .
The subscribers to the so-called guaranty fund in accordance with their agreement paid to the Real Estate Trust Co. $2,505,000 in the year 1906. This money was thenceforth the property of the Real Estate Trust Co. and the subscribers to the fund were to look solely to the excess proceeds which the Real Estate Trust Co. might subsequently realize on certain assets which were called "Segal Matters." If and when the amount realized by the Real Estate Trust Co. from the administration of these "Segal Matters" amounted to $3,000,000, any additional amount which might thereafter be realized from the further administration or disposition of these assets was to belong to the subscribers to the fund. The subscribers could at no time withdraw their subscriptions, but if a purchaser could have been found they could at any time have sold their rights under the subscription agreement. The Real Estate Trust Co. was only required to use due diligence and reasonable judgment in the administration, disposition and final liquidation of the "Segal Matters." It began to administer these assets in 1906, and it had not completed its task at the end1928 BTA LEXIS 3279">*3293 of 1920. We know nothing of the amount realized by the company from any of these assets prior to December 30, 1920. The record in this case gives no basis for a conclusion that during all of this time the value of the rights which subscribers to the fund acquired in 1906 remained constant. No effort has been made to show us what the March 1, 1913, value of the rights in question were or whether indeed these rights had any value on that date. Consequently, we can not do otherwise than approve the determination of the Commissioner.
In addition, in the case of Sallie H. Henry, it clearly appears that her brother Samuel F. Houston, as her agent, received her share of the Pennsylvania Sugar Co. stock in the year 1920. The mere fact that he did not deliver the shares to her in person in the year 1920 would not delay the closing of the transaction for income-tax purposes or entitle her to deduct any resulting loss in 1921 rather than in 1920.
The petitioner William W. Porter has alleged an additional error as set out in our opening statement above. He admits that the decisions of this Board have been adverse to his contention, but calls our attention to the case of 1928 BTA LEXIS 3279">*3294 . A careful consideration of the latter case leads us to the conclusion that the decision therein was based upon facts substantially different from those involved in the present case and that the court in deciding the Kales case indicated that it did not intend to decide 13 B.T.A. 279">*286 such a case as is now before us. A case more nearly in point is the , and following that case we hold against the petitioner. See also , and .
Judgment will be entered for the respondent.
Footnotes
1. Samuel F. Houston, a director, subscribed $755,000 to the fund and when the plan became effective by the required consents of creditors, stockholders, and others, and the subscribers to this fund were called upon to make payment of their subscription, Houston found that a payment by him of the full amount of his subscription would necessitate a sacrifice of his securities and investments in the then existing market at considerable loss to him, and at his proposal his sisters and his mother took participating interests in his subcription. Houston actually contributed $305,000 to the fund and his sister, Sallie H. Henry, contributed $200,000 to the fund. ↩