*814 The International Match Corporation was adjudicated a bankrupt in April 1932. Subsequent investigations disclosed, by the end of the year, that it was insolvent and that there was no reasonable basis for an expectation that the holders of its participating preference stock would receive anything of value therefor. Held, that the preference stock became worthless in 1932 and that the petitioners are entitled to a deduction, in their return for that year, for a loss on certain shares of such stock.
*878 This proceeding seeks redetermination of a deficiency in income tax of $9,516.67 for the calendar year 1932. The only issue is whether 750 shares of participating preference stock in International Match Corporation, owned by Mrs. Marsh, became worthless in 1932. The proceeding was submitted upon stipulation of facts, together with certain documentary evidence.
FINDINGS OF FACT.
Petitioners are husband and wife and their business*815 address is 20 Exchange Place, New York, New York. For the calendar year 1932, they filed a joint Federal income tax return with the collector of internal revenue for the second collection district of New York.
In their return for 1932, petitioners deducted $33,625 as a loss sustained on 750 shares of participating preference stock in International Match Corporation which they claimed became worthless in that year. The stock had been purchased by Mrs. Marsh, prior to 1931, at a cost of $33,625. She continued to own it throughout 1932. In his determination of the deficiency respondent disallowed the deduction on the ground that it could not be determined that the stock became worthless in 1932.
The International Match Corporation, hereafter referred to as International, was incorporated under the laws of Delaware in June, 1923. It acquired, from the Swedish Match Co. and others, the greater part of the entire capital stocks of companies owning over 100 match manufacturing plants in Mexico, Norway, Denmark, Latvia, Finland, Poland, Austria, Hungary, Czechoslovakia, Jugoslavia, Esthonia, Philippine Islands, and Turkey, with a daily *879 capacity of more than two billion*816 finished matches, and also the entire capital stock of the Vulcan Match Co., which was the sales company for products of the Swedish Match Co. and its subsidiaries.
The original authorized capital stock of International consisted of 900,000 shares of participating preference stock of a par value of $35 each, hereafter referred to as preference stock, and 1,450,000 shares of common stock of no par value. In December, 1924; July, 1925; and October, 1926, issues of 450,000 shares, each, of the preference stock, which was entitled to cumulative dividends at the rate of $2.60 a share annually, and after the payment of a like amount on the common, was entitled to share equally with the common, were offered to the public through the firm of Lee, Higginson & Co. The issue of preference stock in December, 1924, was for the purpose of retiring an outstanding issue of debentures in the amount of $15,000,000. On December 17, 1924, and apparently in connection with the issuance of the preference stock in that month, the Swedish Match Co., which at that time was the owner of a majority of the outstanding shares of common stock in International, entered into two related agreements with International*817 and the holders of shares of the preference stock. The two agreements, together, provided:
1. As to Swedish Match Co.:
(1) That it would not, at any time, reduce the number of shares of common stock, owned by it in International, below a majority of the total number of such chares then outstanding unless it should first publish a notice stating its intention so to do and offering and agreeing to purchase, at not less than 120 percent of par value ($35 per share) plus accrued dividends, all shares of preference stock in International which might be presented to it for that purpose within a period of three months of the date of first giving notice;
(2) That it would, from time to time, upon the request of International endorse or cause to be endorsed upon the certificates of preference stock a notation duly executed by it (the Swedish Match Co.) evidencing the agreement referred to in (1) above;
(3) That, so long as it continued to own a majority of the outstanding shares of common stock in International it would not, in any year, pay dividends on any class of capital stock of the Swedish Match Co. in cash, stock or otherwise, at a rate in excess of 12 percent per annum unless*818 International had paid the full amount of the cumulative preference dividends at the rate of $2.60 per share per annum on its outstanding shares of preference stock for all previous years; that in case the full amount of these cumulative dividends had been paid by International, the Swedish Match Co. would not pay in any year dividends on any class of its capital stock in cash, stock or otherwise, at a rate in excess of 12 percent per annum except that *880 such rate of dividends on the capital stock of the Swedish Match Co. might be increased to a rate not in excess of the greater of the following two proportions:
(a) One and two-thirds times the rate of dividends actually paid during the preceding calendar year by International on its preference stock;
(b) One and two-thirds times the rate of dividends which the net earnings and income of International during such preceding calendar year, as shown by a consolidated income account of International and its subsidiary or controlled companies, would suffice to pay on the outstanding shares of preference stock, assuming that these net earnings and income were to be distributed and paid by International as dividends at the rate*819 of $2.60 per share on its outstanding preference stock and at the rate of $2.60 on its outstanding common stock and the balance distributed and paid equally by International share for share on its outstanding preference stock and common stock; and
(4) That, in event the net earnings and income of International for any two successive years as shown by the consolidated income account of International and of its subsidiary or controlled companies should be insufficient to pay the full cumulative dividends at the rate of $2.60 a share on International's preference stock, it (the Swedish Match Co.) would reduce the rate of dividends paid on its own capital stock during the next succeeding calendar year to 1 2/3 times the average rate of dividends actually paid by International on its preference stock during the two preceding years; and that the Swedish Match Co. would not thereafter increase the rate of its dividends on the outstanding shares of its capital stock except to the extent of the proportion set out in (3) above.
2. As to International:
That, as soon as practicable after the close of each calendar year, it would have a consolidated income account of itself and of its subsidiary*820 or controlled companies for the preceding calendar year prepared and mail a copy thereof to the Swedish Match Co. at Stockholm, Sweden, together with a statement signed by the president or vice president of International setting forth:
(1) The number of shares of preference stock and common stock International had outstanding at the beginning and at the end of the last preceding calendar year and of any changes in the amount of the shares of stock of either of said classes outstanding during such year;
(2) The rate of dividends International actually paid during such last preceding calendar year on its outstanding preference stock and common stock, and
(3) The rate of dividends which the net earnings and income of International during such last preceding calendar year, as shown *881 by the consolidated income account of International and its subsidiary or controlled companies, would suffice to pay on the outstanding shares of preference stock on the basis set forth in (3)(b) above among the provisions relating to the Swedish Match Co.
3 As to the holders of preference stock:
Every holder of preference stock, by accepting a certificate therefor, was to become a party*821 to the agreement and entitled to the benefits thereof with the same force and effect as if such holder had personally executed the agreement.
The recited consideration to the Swedish Match Co. for entering into the agreements was the agreements of the other parties and the benefits that would accrue to it as the owner of a majority of the outstanding common stock in International, from the sale by International of 450,000 shares of its preference stock to provide funds for the retirement by International of its outstanding 6 1/2 percent debentures issued about November 1923.
The foregoing agreements were signed for the Swedish Match Co. by Ivar Kreuger, as managing director, and, for International by F. Atterbert, as vice president.
The circulars issued by Lee, Higginson & Co. in connection with the offerings of the preference stock in 1924, 1925, and 1926 each contained a letter addressed by Kreuger to Lee, Higginson & Co. relative to the alleged business history and financial condition of International, as well as to the business history of the Swedish Match Co. The letter from Kreuger, written in connection with the issue offered in December 1924, contained the following*822 statement:
COVENANTS OF SWEDISH MATCH COMPANY
THE Swedish Match Company, which now owns a majority of the 1,000,000 outstanding shares of Common stock of the International Match Corporation agrees, that ( ) it will not reduce its ownership of said shares below a majority of the amount thereof at any time outstanding, without first publishing notice of its intention so to do and offering to purchase at not less than $42 a share and accrued dividends all Participating Preference Stock presented to it for that purpose within 3 months after the first publication of such notice; and (2) so long as it owns the majority of such outstanding shares of Common Stock, will pay no dividends upon its own capital stock at any higher rate relatively to the dividends then being paid on the Participating Preference Stock of the International Match Corporation than represented by the relation between the present rate of 12% per annum on the stock of the Swedish Match Company and the initial rate of $2.60 per annum on the Participating Preference Stock of the International Match Corporation, unless the Directors of the International Match Corporation, the earnings and income of that Corporation being*823 sufficient for the payment of dividends under this ratio, should for any reason fail to declare such dividends, in which case the Swedish Match Company is not to be restricted in its dividend policy.
*882 The letters written in connection with the issues offered in 1925 and 1926, while containing a statement respecting the Swedish Match Co.'s agreement to buy preference stock in International at a premium, contain no reference to an agreement restricting the Swedish Match Co. in its payment of dividends.
In January 1932, there were 12,834 separate holders of preference stock in International.
In April 1932 there were issued and outstanding approximately 1,350,000 shares of preference stock in International and 1,000,000 shares of common stock. The class of stock held by American investors, including Mas. Marsh, was preference stock. Almost all of the common stock was held by the Swedish Match Co., which was a subsidiary of A/B Kreuger & Toll. The affairs of International, prior to the death of Kreuger, were dominated by him. Kreuger shot himself and died on March 12, 1932.
On April 13, 1932, a creditor's bill in equity was filed in the District Court of the United*824 States for the Southern District of New York praying for the appointment of a receiver to conserve the assets of International in the interest of its creditors and stockholders. The corporation filed an answer admitting the allegations of the bill and consenting to the appointment of a receiver. The Irving Trust Co. was appointed receiver in equity on the same day and duly qualified. On April 19, 1932, International filed a voluntary petition in bankruptcy and on the same day was adjudicated a bankrupt by the District Court of the United States for the Southern District of New York. The case was referred to a referee in bankruptcy, Oscar W. Ehrhorn. At the time of the adjudication, the Irving Trust Co. was appointed receiver in bankruptcy. On June 1, 1932, it was elected by the creditors as trustee in bankruptcy and has since been acting in that capacity.
The first cash distribution made to the stockholders in International was paid on April 15, 1925, to the holders of preference stock, and the amounts of distributions paid per share on each class of stock for the respective years were as follows:
| Year | Preference ( $[*] par) | Common (no par) |
| 1925 | $2.10 | None |
| 1926 | 3.20 | None |
| 1927 | 3.20 | $1.60 |
| 1928 | 3.20 | 3.20 |
| 1929 | $3.20 | $3.20 |
| 1930-1931 | 4.00 | 4.00 |
| 1932 | 1.00 | 1.00 |
*825 The last cash distribution paid by International to its stockholders was on January 15, 1932, when $1 a share was paid on each class of stock. Since the corporation's adjudication as a bankrupt, no distributions *883 by was of dividends or otherwise have been made with respect to its preference stock.
The preference stock in International was listed and traded on the New York Stock Exchange upon and after the issuance thereof until it was struck off the list of the Exchange on May 19, 1932, because of the corporation's failure to maintain a transfer office in New York City. The price range per share of the stock on the New York Stock Exchange was as follows:
| Year | High | Low |
| 1925 | $60 7/8 | $56 5/8 |
| 1926 | 66 3/8 | 53 1/2 |
| 1927 | 95 1/2 | 62 |
| 1928 | 121 7/8 | 85 |
| 1929 | 102 1/2 | 47 |
| 1930 | 92 | 52 1/4 |
| 1931 | $73 1/4 | $11 |
| January 1932 | 24 3/8 | 15 3/4 |
| February 1932 | 24 1/2 | 16 3/4 |
| March 1932 | 21 1/4 | 3 1/2 |
| April 1932 | 4 5/8 | 3/8 |
| May 1932 | 3/8 | 1/4 |
On December 31, 1931, sales of 2,900 shares of the stock were made on the New York Stock Exchange, the high on that day being $18 7/8 and the low $16 1/2.
After May 1932, sales of the preference stock in International*826 were made through brokers "over the counter" at prices within the following price range per share:
| Year | High | Low |
| Cents | Cents | |
| 1932 | 62 1/2 | 12 1/2 |
| 1933 | 25 | 17 1/2 |
| 1934 | 16 1/2 | 10 1/2 |
| 1935 | 27 1/2 | 11 1/2 |
The following bid and asked prices per share were quoted on the preferences stock in International in "over the counter" transactions in New York City, Boston, and Philadelphia in November and December 1932 and January 1933:
| Date | Number of shares | Bid | Asked |
| Nov. 7, 1932 | 500 | $0.125 | |
| Nov. 9, 1932 | 25 | $0.50 | |
| Nov. 9, 1932 | (1) | .125 | .375 |
| Nov. 10, 1932 | 200 | .125 | |
| Nov. 11, 1932 | 500 | .375 | |
| Nov. 16, 1932 | 200 | .125 | |
| Nov. 16, 1932 | 200 | .25 | |
| Nov. 18, 1932 | 300 | .125 | |
| Dec. 5, 1932 | 100 | .0625 | .1875 |
| Dec. 7, 1932 | (1) | $0.0625 | $0.1875 |
| Dec. 8, 1932 | 600 | .25 | |
| Dec. 9, 1932 | 100 | .125 | .25 |
| Dec. 17, 1932 | (1) | .1875 | |
| Jan. 6, 1933 | (1) | .20 | .28 |
| Jan. 16, 1933 | 65 | .15 | |
| Jan. 19, 1933 | 400 | .20 | |
| Jan, 20, 1933 | 1,000 | .05 | |
| Jan. 23, 1933 | 500 | .0625 | .1875 |
The following sales of preference stock in International were made at auction on the indicated dates to the highest bidders through*827 Adrian H. Muller & Son, auctioneers in New York City, after at least *884 two advertisements of the proposed sales in the New York Herald Tribune and the Wall Street Journal, both being papers published in New York City:
Nov. 30, 1932, 361 shares at $10 for the entire lot.
Dec. 28, 1932, 100 shares at $3 for the entire lot.
Dec. 28, 1932, 25 shares at $6 for the entire lot.
The following sales of preference stock in International were made at auction to the highest bidders through R.L. Day & Co., auctioneers in Boston, on December 28, 1932:
100 shares at $1 for the entire lot.
500 shares at $3 for the entire lot.
35 shares at $1 for the entire lot.
50 shares at $1 for the entire lot.
100 shares at $3 for the entire lot.
The above quotations of bid, asked, and sales prices of shares of preference stock were before the deduction and payment of transfer taxes and commissions payable by the sellers. The Federal stock tax on the sale or transfer of each 100 shares of preference stock was $1.40 during 1932 and all other years here under consideration. The New York State stock transfer tax on the sale or transfer of 100 shares of such stock was $1.40 during*828 1932 and to June 1, 1933, and $3 at all subsequent times here pertinent.
After May 18, 1932, the usual brokerage commission on a sale of 100 shares of such stock "over the counter" was $2.50 and the cost of selling a like amount of such stock at auction, including the cost of advertising, was in excess of such "over the counter" brokerage commission.
In addition to the amount of the preference and common stocks outstanding on April 19, 1932, International had outstanding and unpaid on that date, two issues of debentures consisting of $47,430,500 20-year 5 percent sinking fund debentures, due November 1, 1947, and $48,979,000 10-year 5 percent convertible debentures, due January 15, 1941. It also had other outstanding indebtedness of a substantial amount.
Preliminary to the authorization of the issuance of the debentures due January 15, 1941, Kreuger, as president of International, under date of January 14, 1931, addressed a letter to its stockholders containing in part the following:
The consolidated net earnings of the Corporation and its subsidiaries, after depreciation, available for interest, for the 4 years ended December 31, 1929, averaged $20,124,377, or 4.09 times*829 the $4,912,050 annual interest requirement on total present funded debt including the proposed new issue. For the year 1929 alone, such net earnings were $24,135,266, or 4.91 times this requirement. Net *885 earnings available for dividends, for the year ended December 31, 1929 were $20,623.530, equivalent to $8.77 per share on the combined 1,350,000 shares of Participating Preference Stock and 1,000,000 shares of Common Stock now outstanding. Except in isolated cases, the match industry has not suffered from the current general business depression and the consumption of matches during the past year has maintained practically the same rate of increase as in previous years. While final figures for the year are not yet available, results of operations indicate that net earnings of the Corporation for 1930 will be somewhat in excess of those for 1929, even after making provision in 1930 for reducing book value of securities owned to a figure well below market value.
The two issues of debentures mentioned above were and are entitled to payment out of the assets of the corporation and its trustee in bankruptcy before any payment or distribution from that source is made to*830 the holders of the preference stock. The following claims of debenture holders were allowed without objection by the trustee in bankruptcy:
| 5% convertible debentures due Jan. 15, 1941 | $48,979,000.00 |
| Interest accrued at the date of bankruptcy | 635,656.42 |
| 5% sinking fund debentures due Nov. 1, 1947 | 47,430,500.00 |
| Interest accrued at the date of bankruptcy | 1,102,610.91 |
| Total | 98,147,767.33 |
The debentures of International were listed and dealt in on the New York Stock Exchange from the time of their issuance until November 1, 1932, when they were struck from the list of the Exchange because their maturity had been accelerated and there was some question about their negotiability. On November 1, 1932, the quotations on the Exchange per $1,000 face amount of the debentures due in 1947 were $65 bid and $102 asked, and for the same face amount of the debentures due in 1941 were $65 bid and $70 asked. On September 30, 1936, the quotations in New York City per $1,000 face amount of each class of debentures were $122 1/2 bid and $126 1/4 asked. The foregoing quotations were flat, that is, without the addition of accrued interest.
Immediately upon its appointment, *831 the receiver reduced to possession such assets of International as were within the jurisdiction of the United States District Court for the Southern District of New York and made arrangements to have such assets conserved so far as possible, pending the election of a trustee. It found that, in excess of 90 percent of the apparent assets consisted of bonds of foreign governments or investments in or advances to subsidiaries or affiliated companies conducting their business outside of the United States. Finding no adequate records of the affairs of such corporations available in the United States it endeavored, through representatives *886 abroad, to ascertain the actual condition of the affairs and assets of International. The Swedish Match Co., a Swedish corporation which owned almost all of the common stock of International, had and now has its principal place of business in Stockholm, Sweden. The Swedish Match Co. owned or controlled match factories throughout the world and was, in turn, controlled by A/B Kreuger & Toll. These three corporations represented a capital investment of approximately $1,000,000,000, over one-fourth of which was paid in by American investors. *832 Kreuger dominated all of the companies and their affairs were conducted under his direction. Following Kreuger's death, the Swedish Government appointed an investigating commission to probe into the affairs of the three corporations and their subsidiaries. The Swedish Commission retained as its accountants, Price, Waterhouse & Co., a firm of accountants of international reputation, which immediately began the preparation of a comprehensive report for the commission with respect to the corporations and their numerous and affiliated subsidiary companies. Immediately after its appointment, the receiver for International obtained court authorization for the fullest possible cooperation with the Swedish Commission and thereafter it cooperated fully with the commission and its accountants.
Under the provisions of the Bankruptcy Act, and in accordance with court authorization, the receiver conducted examinations of officers and directors of International and of other persons, firms and corporations with which International had had dealings. By May 13, 1932, when the receiver submitted its first tentative report to the court, it had learned that the affairs of International were in*833 an extremely complicated condition; that the administration of its estate would be difficult; that immediate and vigorous action by negotiation or by suit was necessary to protect its interests with respect to a number of its assets, as well as in other matters; that adequate legal and accounting representation abroad probably would be required and that certain subsidiary or debtor corporations appeared to have been used by Kreuger as conduits or vehicles for fictitious transactions.
As a part of its first tentative report, the receiver submitted the following statement of assets and liabilities of International, as of the close of business April 13, 1932, as disclosed by the unaudited books of account of the company:
| ASSETS | |||
| Cash: | |||
| Chase National Bank | $2,294.37 | ||
| Guaranty Trust Company | 20,676.69 | ||
| National City Bank | 168,330.06 | ||
| Lee, Higginson & Company | 1.42 | ||
| $191,302.54 | |||
| Sinking funds for Gold Debentures | 613.05 | ||
| Advances: | |||
| Continental Investment A/G | $74,739,582.91 | ||
| Vulcan Match Co., Inc | 6,878,424.72 | ||
| N. V. Financiele Maatschappij Garanta | $14,875,000.00 | ||
| Accrued interest | 841,166.66 | ||
| 15,716,166.66 | |||
| 97,334,174.29 | |||
| Investments in constituent companies | 35,103,048.10 | ||
| Investments in foreign Government loans (and accrued interest thereon): | |||
| German Reich 6% External Loan Bonds of 1980 | 46,500,000.00 | ||
| Accrued interest | 733,333.33 | ||
| 47,233,333.33 | |||
| Turkish Government 6 1/2% drafts ($1,500,000 not paid for; see contra) | 10,000,000.00 | ||
| Less amortization | 255,019.85 | ||
| 9,744,980.15 | |||
| Accrued interest | 161,464.14 | ||
| 9,906,444.29 | |||
| Republic of Guatemala 7% Bonds of 1960 | 2,238,550.60 | ||
| Less amortization | 24,115.00 | ||
| 2,214,435.60 | |||
| Accrued interest | 20,572.38 | ||
| 2,235,007.98 | |||
| 59,374,785.60 | |||
| Deferred charges and prepaid expenses: | |||
| Discount and commission on debentures, less amortization | 4,982,675.42 | ||
| Prepaid interest | 27,988.88 | ||
| 5,010,664.30 | |||
| Total Assets | 197,014,587.88 |
| LIABILITIES AND CAPITAL | |||
| Liabilities: | |||
| Compania Mexicana de Cerillos y Fosforos | $118,693.48 | ||
| Accounts payable | 28,052.69 | ||
| Accrued salaries | 967.78 | ||
| H. J. Graffman | 787.01 | ||
| Notes payable | 3,800,000.00 | ||
| Due to Government of Republic of Turkey (see contra) | 1,500,000.00 | ||
| Deferred liabilities | 692,500.00 | ||
| Polish Monopoly Co. (designated in books as "suspense") | 167,804.00 | ||
| Reserve for federal taxes | 1,053,303.42 | ||
| Ten-Year 5% Convertible Gold Debentures, due 1941 | $48,979,000.00 | ||
| Accrued interest | 598,632.23 | ||
| 49,577,632.23 | |||
| Twenty-Year 5% Sinking Fund Gold Debentures, due 1947 | 47,430,500.00 | ||
| Accrued interest | 1,073,773.82 | ||
| 48,504,273.82 | |||
| Total Liabilities | 105,444,014.43 | ||
| Capital: | |||
| Capital stock: | |||
| Participating preferred stock | 47,250,000.00 | ||
| Common stock | 30,000,000.00 | ||
| Surplus: | |||
| Paid-in surplus | 9,907,446.00 | ||
| Earned surplus: | |||
| Balance, January 1, 1932 | $4,017,279.58 | ||
| Net profit for the period from January 1, 1932, to April 13, 1932 (before income taxes) | 395,847.87 | ||
| 4,413,127.45 | |||
| Total Capital | 91,570,573.45 | ||
| Total Liabilities and Capital | $197,014,587.88 |
*888 Relative to the*835 asset item above, "N. V. Financiele Maatschappij Garanta $15,716,166.66", Kreuger owned all of the stock of this corporation, which was not organized for business purposes. It had no office or place of business and no assets except a small bank balance and a claim against Kreuger.
The receiver's report did not contain a list or schedule of the various securities constituting the item of "Investments in constituent companies $35,103,048.10." Apparently this item was composed of the following securities which were shown in International's unaudited balance sheet at March 31, 1932, as investment in subsidiary companies:
| Shares | Company | Amount |
| 120,000 | Continental Investment A/G | $21,489,422.16 |
| 2,400 | Handelskompagniet Hafnia A/S | 1,932,667.48 |
| 6,886 | Finska Elektrokemiska A/B | 1,844,772.53 |
| 10,000 | Vulcan Match Co., Inc | 400,000.00 |
| 1,000 | Bryn & Halden Taendstiksfabrikker A/S | 743,305.67 |
| 1,500 | Bryn-Halden & Nitedals Taendsticksfabrik A/S | 1,431,399.58 |
| 1,334 | Bjerneborgs Tandsticksfabriks A/B | 462,708.60 |
| 50,000 | Apolka Akcyjna do Eksploatacji Panstwowego Monopolu Zpalczanego w Polsce (Polish Match Monopoly Co.) | 2,579,000.00 |
| 30,000 | American Turkish Investment Corp | 3,000,000.00 |
| 133,598 | Drava Aundwarenfabrik A/G | 842,706.42 |
| 29,983 | Drvoresbarksa Twornica Vrbovsko | 206,133.88 |
| 540 | Philippine Match Co., Ltd | 170,931.78 |
| Total | 35,103,048.10 |
*836 *889 The unaudited balance sheet at March 31, 1932, of Continental Investment A/G, which appeared to be the largest debtor to International, as well as in which it had its largest investment, was as follows:
| ASSETS | ||
| Cash on deposit | $88,599.58 | |
| Spanish suspense | 27,830,600.00 | |
| Investment in and advances to subsidiary and affiliated companies: | ||
| Par or shares: | ||
| 1,000 Finska Tandsticksfabrik A/B | $2,314,169.88 | |
| 46,500 "Solo" Wien | 8,023,326.12 | |
| 16,620 "Cia." Arrendataria de Fosforos | 6,915,915.16 | |
| 58,792 "Solo" Prague | .19 | |
| 208,000 United Plywood & Timber Industries, Ltd | 2,045,740.56 | |
| 500 Aug. H. Soini O/Y | 10,670.00 | |
| 40,000 A/S Eesti Tulitikumonopol | 1,285,380.00 | |
| 789,000 "Hangya" bonds | 789,489.99 | |
| Pound 345,000.0.0 Roumanian Government 4% bonds | 263,676.60 | |
| Pound 21,000,000.0.0 "Italian" 6% bonds | 102,000,500.00 | |
| 1,180,850 Fabbriche Riunite de Fiammiferi | 43,235,182.10 | |
| O/Y Savo | 200,537.28 | |
| Bjorneborgs TandstickfabrikA/B | 286,394.54 | |
| Finska Elektrokemiska A/B | 268,536.71 | |
| Hungarian General Match Mfg. Co | 5,366,458.92 | |
| Lettlandische A/G der Zundholzwerke "Vulkan" | 103,972.49 | |
| 173,109,950.54 | ||
| STAB - "Spolka Dividend Account" | $223,880.00 | |
| S. A. France Afrique - "Spanish Dividend Account" | 94,647.27 | |
| Miscellaneous accounts | 25,487.39 | |
| Total assets | 201,373,164.78 |
| LIABILITIES AND CAPITAL | |
| Swedish Match Co | 26,367,149.66 |
| A/B Kreuger & Toll | 657,064.20 |
| Export A/B Norden | 324,236.69 |
| N. V. Financieele Maatschappij Kreuger & Toll | 1,519,816.37 |
| Szikra Ungarische Zundholzfabrik A/G | 9,126.89 |
| E. Hartman | 2,207.24 |
| International Match Corporation | 74,545,416.03 |
| Special reserve | 9,909,422.16 |
| Reserve for bond valuation | 5,000,000.00 |
| Capital stock | 11,580,000.00 |
| Surplus | 71,458,725.54 |
| Total liabilities and capital | 201,373,164.78 |
*890 The purported assets "Spanish suspense $27,830,600.00" and "Pound 21,000,000.0.0 Italian 6% bonds $102,000,500.00," appearing in the foregoing balance sheet, were wholly fictitious and nonexistent.
Poor's 1932 Industrial Volume, a well recognized financial trade journal, published, about the middle of 1932, an article on International, in which the preference stock as well as the debentures were rated as very speculative investments. In a letter dated October 7, 1932, from the chairman of the protective committee for the holders of preference stock the holders were informed that an investigation then being made by a firm of accountants of the affairs of International, A/B Kreuger & *838 Toll, and the Swedish Match Co. would probably show that the liabilities of International were substantially in excess of its assets.
The problem of the trustee in bankruptcy of International and its attorneys and accountants in gathering its assets, ascertaining its true financial condition, and otherwise administering the estate, was extremely difficult. International itself did not own or operate any manufacturing plants, but was a holding company. Its corporate structure involved more than 100 separate corporations scattered throughout the world. On the date of its receivership, its stated (but not actual) capital, bonded indebtedness, and surplus, together with the reported (but not actual) surplus of its subsidiaries constituted a capital structure (including surplus) of more than $260,000,000. International owned all the outstanding capital stock of its foreign subsidiary, Continental Investment A/G and a great many of its investments in foreign subsidiaries, as well as other reported foreign assets, were held by this subsidiary holding company. International's interests and operations were interlocked with those of A/B Kreuger & Toll and the Swedish Match Co., and the*839 three corporations had more than 250 subsidiary companies.
In its first and preliminary report to the court dated August 5, 1932, the trustee of International stated that the problems confronting *891 it were made infinitely more complicated because of the deliberate fraud and concealment practiced by Kreuger in connection with dealings between the numerous subsidiaries of the International-Swedish Match Co.-A/B Kreuger & Toll groups.
Investigations, made in 1932, demonstrated that the books of International gave a completely false picture of the actual worth of the bankrupt and that the assets, represented as being owned by it, included many fictitious and worthless items, as well as many assets whose value was greatly overstated. It was then further disclosed that assets in very large amounts, recorded in the books, were not in possession of the record holders and that recovery thereof, even where possible, would depend on the outcome of legal proceedings. No unified audit had ever been made of International and of its subsidiaries. The examination of the Kreuger group of companies, by Price, Waterhouse & Co., was begun a week after Kreuger shot himself and covered*840 the period from 1917 to March 31, 1932. The final report of the examination, comprising more than 50 volumes, was dated November 28, 1932, and showed that, of the $770,400,000 representing capital investments by the public and advances by banks to those companies, $179,100,000 had been paid out as interest on debentures and as dividends to stockholders; that $115,800,000 had been withdrawn and misappropriated by Kreuger; and that the balance had been invested in government and other securities, and in associated companies within the Kreuger group, as well as in monopoly concessions. The report further showed that, of the published consolidated or book earnings of $316,100,000, the approximate actual earnings were only $40,500,000, or an overstatement of $275,600,000. In addition to the investigation made by Price, Waterhouse & Co., police investigations were made in an effort to uncover assets of the Kreuger group.
On June 1, 1932, the Swedish Government granted a moratorium to the Swedish Match Co. for three months in respect of such of its debts as were due on that date, or which might become due during the period of the moratorium. At the same time, it was decreed that, during*841 the period of the moratorium, the company's affairs should be administered by appointees of the Swedish Government. The moratorium, subsequently, was extended and was in force through November 1932. Afterward, for an undisclosed period, the company was operated under a plan approved by its banking creditors. In 1932, A/B Kreuger & Toll was adjudicated a bankrupt in Sweden, where its affairs were administered by liquidators. It was also adjudicated a bankrupt by the United States District Court for the Southern District of New York on August 6, 1932, and a trustee was appointed for it in that proceeding. The estate of Kreuger was adjudicated bankrupt in Sweden and the public administrator *892 in the County of New York was appointed to administer any assets of Kreuger that were in New York State.
The second intermediate report of the trustee, dated February 8, 1933, shows that, by the end of 1932, the trustee of International had obtained possession of securities belonging to International and its subsidiaries, having a total cost of approximately $60,000,000, as shown by the books. On January 31, 1933, after the receipt of dividends, interest, etc., including $250,000*842 received from the sale of trustee's certificates to obtain funds for the administration of the estate and after the payment of various expenses, costs, fees, etc., the trustee had on hand approximately $1,700,000, of which about $1,380,000 had been received from the sale of certain shares of stock in the Diamond Match Co., which was held in a special fund pending final determination of the rights of various claimants in it. The 6 percent bonds of the German Reich, appearing on the books of International, had a par value of $50,000,000, and, after their purchase by International, had been placed in a bank in Berlin for safekeeping. In the fall of 1931, Kreuger, who was president of International, unlawfully removed and placed them with certain Swedish banks as security for his own indebtedness and/or that of A/B Kreuger & Toll and others and for his guarantees of indebtedness of the Swedish Match Co. and A/B Kreuger & Toll to those banks. Prior to January 31, 1933, a settlement of certain litigation involving ownership of the bonds, was concluded subject to court approval whereunder, the trustee would receive $21,000,000 par value of the bonds with July 15, 1932, and subsequent coupons*843 attached thereto. Prior to January 31, 1933, the trustee instituted the following suits: (1) against the directors of International for the recovery of $35,000,000 alleged to have been paid by them as dividends upon the corporation's stock; (2) against the directors of International for the recovery of approximately $100,000,000 for their negligent acts and conduct in connection with the affairs of the corporation; and (3) against four banks in the United States for the recovery of approximately $4,000,000, claimed by the trustees to have been received as a preference out of the proceeds from the sale of the stock in the Diamond Match Co. heretofore mentioned. The trustee was also considering the bringing of other suits involving various sums. The trustee also had filed claims for the refund of income taxes alleged to have been erroneously paid as follows: 1929, $1,091,108.37; 1930, $1,198,235.52; 1931, $2,500. In addition, a suit had been instituted for a small amount of taxes alleged to have been overpaid in earlier years and a suit instituted by International had *893 also been prosecuted. The trustee had been advised that the United States Government might propose an*844 additional income tax of about $1,000,000 for 1931 on the basis of International's books. This was subsequently done.
By January 31, 1933, more than 23,000 claims had been filed against the estate of International. The total face amount of the claims filed upon debentures alone was in excess of the face amount of its outstanding obligations as shown by the books. Among the claims that had been filed against the estate were the following: (1) Swedish bankruptcy liquidators of A/B Kreuger & Toll in the amount of $464,445,330.79; (2) American Trustee in Bankruptcy of A/B Kreuger & Toll, for a like amount; (3) Dutch Kreuger & Toll, $165,000,000; (4) Swedish Match Co. for $112,247,758.53, or a total of $1,206,138,420.11. The claims of these four parties were contested by the trustee, who was of the opinion that the estate of International was a substantial creditor of all four claimants.
In its report for the period to January 31, 1933, dated February 8, 1933, the trustee of International expressly refrained from expressing any opinion as to the ultimate value of the estate on the ground that in view of the complexities of the affairs of all of the companies within the Kreuger*845 group, any expression of value at that time would be premature. The trustee also refrained from expressing an opinion as to the value of International's assets in foreign countries on the ground that it might be misleading.
During the year 1936, the trustee effected the following: (1) a settlement of intercompany disputes with the Swedish Match Co. and a sale to it of the match properties of International and of Continental Investment A/G located in the Philippines and in Europe, with the exception of those in Turkey; (2) a settlement with the Swedish liquidators of A/B Kreuger & Toll and with the trustee in bankruptcy of the American estate of that company; (3) settlement of the suits against four banks involving stock in the Diamond Match Co.; and (4) settlement of the suits against the directors of International. During 1936, the last of the claims filed against the estate of International by the Swedish Match Co. and A/B Kreuger & Toll interests were withdrawn, thus reducing the claims against the estate to miscellaneous allowed claims in the amount of $12,380.11, disputed claims aggregating less than $100,000, and claims of debenture holders with interest ($200,000 face amount*846 of the debentures due in 1941 having been surrendered to the trustee and the claim upon them expunged by order of the court in connection with the settlement of the suit against the directors), amounting to $97,948,837.77.
*894 After the consummation of the sales to the Swedish Match Co., mentioned above, the principal assets of International at the end of 1936 were as follows:
Cash remaining after the payment to creditors of a first dividend of 5% and a second dividend of 10% and totaling $14,705,129.46, $6,907,355.27.
$2,460,484.01 face value Republic of Guatemala 7% bonds of 1960. (Interest in default $258,343.56, amortization in default $146,243.57).
$14,255,598 face value notes of the Turkish Republic maturing semiannually at the rate of $407,302.80 commencing July 1, 1938.
120,000 shares Continental Investment Aktiengesellschaft and account receivable from that company.
100 shares Vulcan Match Co. and account receivable from that company.
30,000 shares of American Turkish Investment Corporation.
Possible equity in fund of $175,000 arising from the sale of Diamond Match Co. stock which is subject to certain applications for compensation.
Special*847 account of $125,000 held subject to the order of the Court.
Possible equity in fund of $12,500 withheld by Swedish Match Co. for payment of Trustee's share (one-half) of taxes payable outside the United States on assets purchased by Swedish Match Co.
Claims filed in other bankruptcy proceedings:
Claim of $1,500,000 allowed in the American and Swedish Bankruptcy proceedings of A/B Kreuger & Toll, subject, in the Swedish proceeding, to a deduction of $185,996.25 from dividends paid.
Claim against the Estate of Krister Littorin, Stockholm, allowed at S. Kr. 18,000,000.
Claim for S. Kr. 325,000,000 allowed against the estate of Ivar Kreuger in Bankruptcy in Stockholm.
Claim for $402,416.35, allowed against the American estate of Ivar Kreuger.
Suit against the United States for refund of income taxes paid in the sum of $2,019,066.80.
The principal assets of Continental Investment A/G were as follows:
| Cash | $2,355,635.58 |
| Advances to American Turkish Investment Corporation | 100,000.00 |
| 899,877 shares Swedish Match Co. class B stock stated value | 4,499,385.00 |
| Deposit with Swedish Match Co. to cover certain taxes (recoverable portion, if any, unknown) | 10,000.00 |
| Total | 6,965,020.58 |
*848 A plan was prepared by the protective committee for the debenture holders of International and approved by the independent debenture holders' protective committee for the sale and liquidation of the remaining assets of International other than cash. Pursuant to that plan, a corporation known as "International Match Realization Company, Ltd.," hereafter referred to as the Realization Co., was organized and incorporated by act of the Legislature of Bermuda effective November 3, 1936, for the purpose of purchasing certain assets of the *895 bankrupt estate from the trustee in bankruptcy and realizing on them for the benefit of the debenture holders. The debenture holders, desiring to participate in the plan, were required to assign to the Realization Co., in exchange for voting certificates for shares of its stock, their debentures and all claims against the bankrupt estate of International represented thereby, the debentures to remain alive as assets of the Realization Co. The effect of such exchange was that the Realization Co. was substituted for the former debenture holders as the owner of such debentures and the claims represented thereby.
In July 1937 the following*849 assets of International were sold to the Realization Co. for $7,250,000:
| $2,460,484.01 | principal amount of the Republic of Guatemala 7% bonds of 1960 comprising 50 bonds each of the denomination of $50,000, numbered 1 to 50 inclusive with March 1, 1934, and subsequent coupons attached. |
| $36,900 | principal amount of Arrears Certificates of the Republic of Guatemala due October 1, 1934, issued in respect of the aforesaid bonds. |
| $14,255,598 | of notes of the Republic of Turkey comprising 35 notes, each having a face value of $407,302.80 maturing serially without interest semiannually, commencing July 1, 1938, and ending on July 1, 1955. |
| 30,000 | shares comprising all of the capital stock of American Turkish Investment Corporation, a Delaware corporation, and claims of the Trustee in Bankruptcy of International Match Corporation against American Turkish Investment Corporation, amounting to $186,740.36 on June 1, 1937. |
| 120,000 | shares comprising all of the capital stock of Continental Investment A.G., a Liechtenstein corporation and the claims of the Trustee in Bankruptcy of International Match Corporation against Continental Investment AG., in the amount of $69,087,906.22 and Swiss francs 138,493,417. |
*850 At the time of the foregoing sale, the cash item of $2,355,635.58, heretofore shown as among the principal assets of Continental Investment A/G at the end of 1936, apparently had been paid to the trustee of International on account of indebtedness owing to it since, at the time of the sale, the assets of Continental Investment A/G consisted of only 785,774 shares of class B stock in the Swedish Match Co. Of such shares, 310,774 were listed on the London Stock Exchange and deposited in escrow subject to sale at the direction of holders of participating certificates of Imco Participating Co., Ltd., as is explained more fully hereafter. The remaining 475,000 shares were not so deposited nor listed on the Exchange nor subject to sale, but the Swedish Match Co. had agreed to use its best efforts to obtain and maintain such listing at its own expense.
*896 Of the principal assets of International on hand at the end of 1936, there remained the following with their respective maximum realizable values after the above mentioned sale in July 1937:
| 100 shares of Vulcan Match Co. and accounts receivable from that company | $1,584,010.77 |
| Possible equity in fund of $175,000 arising from the sale of Diamond Match Co., subject to certain applications for compensation | 175,000.00 |
| Special account held subject to order of the court | 125,000.00 |
| Possible equity in fund of $12,500 held by Swedish Match Co. for payment of taxes outside of United States | 12,500.00 |
| Claim allowed in the American and Swedish Bankruptcy proceedings of A/B Kreuger & Toll | 1,314,003.75 |
| Claim allowed against the estate of Krister Littorin | 23,220.00 |
| Claim allowed against the estate of Ivar Kreuger in bankruptcy in Stockholm | 419,250.00 |
| Claim allowed against the American Estate of Ivar Kreuger | 2,012.08 |
| Suit against the United States for refund of income taxes paid | 2,019,066.80 |
| Total | 5,674,063.40 |
*851 By December 31, 1936, the trustee had received cash in the total amount of $23,631,410.79 (before the payment of administration, other expenses and the payment of dividends to creditors). This amount, plus receipts from the sale of assets to the Realization Co., the payment by Continental Investment A/G on its indebtedness and the maximum realizable value of remaining assets, totals $38,911,109.77 as the approximate aggregate value of the bankrupt's estate without deduction of $2,010,751.34, representing disbursements to the end of 1936 for administration expenses and other purposes except the payment of preferred claims and dividends to general creditors, or an approximate net value of $36,900,358.43. By subtracting the latter amount from the $97,948,837.77, the amount of allowed claims of debenture holders, a deficiency of $61,048,479.34 is disclosed in assets necessary to pay the allowed claims of creditors entitled to priority over the preference stock.
To February 17, 1938, the trustee of International had been authorized to and had paid to the debenture holders dividends as follows on each $1,000 face value of debentures: December 20, 1935, $50; October 20, 1936, $100; *852 July 16, 1937, $50; August 16, 1937, $74; or a total of $274. As a result of these payments there remains due and unpaid on each such $1,000 of debentures, the principal amount of $726, plus accrued interest.
The intrinsic value of the preference stock in International as distinguished from the price at which it was selling on the New York Stock Exchange was not greater through 1931 than it was in 1932.
Due to the unsatisfactory financial condition of International, and as a means of affording a medium through which the holders of the preference stock could unite and cooperate for the protection of their *897 mutual interests, a protective committee was formed with respect to such stock and a protective agreement was executed on April 15, 1932. In 1932, it had appeared to the protective committee that International would be unable to pay its creditors in full. For a year prior to June, 1936, the committee was engaged in negotiations with various persons interested in the affairs of International in an attempt to obtain something of value for the holders of the preference stock. Claims were asserted on behalf of the holders of such stock against the Swedish Match Co.*853 , by reason of the alleged rights accruing or that might accrue in the future to such stockholders under the two agreements of December 17, 1924, between the Swedish Match Co., International, and the holders of shares of preference stock in International and described above. The Swedish Match Co. contended that the agreements were entirely invalid and unenforceable.
In order to facilitate the settlement of the intercompany claims of International, the Swedish Match Co., A/B Kreuger & Toll and their subsidiaries, and the purchase by the Swedish Match Co. of the European and Philippine assets of International and Continental Investment A/G, heretofore referred to, the Swedish Match Co. offered to provide for settlement of the claims of holders of preference stock in International by making arrangements whereby an offer, which is set forth below, would be made to the holders of the preference stock by a corporation to be organized and to be known as "Imco Participating Company, Ltd.", hereafter referred to as Imco. On April 15, 1936, Imco was incorporated under the English Companies Act of 1929, with its principal place of business in London, England.
Pursuant to the efforts of*854 the protective committee for the holders of preference stock, and pursuant to the plan whereby Imco was formed, and by which the Swedish Match Co. offered to settle the claims against it on behalf of the preference stockholders, an escrow agreement was entered into between Imco, Continental Investment A/G, A/B Kreuger & Toll (Swedish estate in bankruptcy), and others with Lazard Brothers & Co., Ltd., of London, as escrow agent. In accordance with the terms of the escrow agreement, 675,000 shares of class B stock in the Swedish Match Co. (an amount equal to one-half of total number of outstanding shares of preference stock in International) were deposited with the escrow agent. Of the 675,000 shares, Continental Investment A/G deposited 425,000 shares, A/B Kreuger & Toll (Swedish estate in bankruptcy), 125,000 shares, and Swedish Match Co. caused the remaining 125,000 shares to be deposited. Title to all such shares so deposited remained in the persons depositing them until such shares were sold under the agreement. With respect to the shares deposited by Continental Investment A/G and A/B Kreuger *898 & Toll, which were of a new issue, the Swedish Match Co. agreed to apply*855 for and use its best efforts to obtain permission to deal and/or obtain an official quotation for such shares on the London Stock Exchange.
About July 1936, Imco made an offer to the holders of preference stock in International to exchange one of the participating certificates in Imco for each two outstanding shares of preference stock. As a part of the arrangement, the offer was made by Imco sending a copy thereof to all known holders of preference stock and by publishing a notice thereof in one newspaper of general circulation in each of the cities of New York, Boston, Philadelphia, Chicago, and San Francisco and in London once a week for two successive weeks. Imco was to keep the offer open for a period of 90 days and, with the consent of the Swedish Match Co., could keep it open for a further period, not exceeding 90 days. Within 30 days after termination of the offer, Imco was to deliver to the Swedish Match Co. certificates for all preference shares in International which it had received pursuant to the offer. The Swedish Match Co. was not to dispose of such certificates so received except to surrender them for cancellation or to destroy them. In the offer made by Imco*856 and in the plan whereby Imco was organized, it was provided that at any time and from time to time within the period commencing either on the date on which the 675,000 shares of class B stock in the Swedish Match Co. were deposited with the escrow agent, or on the date on which permission to deal in such shares on the London Stock Exchange was granted, whichever was the later date, and terminating on a date one year and 46 weeks after all the 675,000 shares of class B stock were deposited with the escrow agent, or on June 30, 1938, whichever was the later date (developments resulted in June 30, 1938, being the terminating date) each holder of preference stock, accepting the offer and surrendering such preference stock in exchange for participating certificates of Imco, should have the right to direct Imco to cause to be sold by the escrow agent such number of class B shares on deposit with the escrow agent as should equal one-half the number of preference shares surrendered in exchange for participating certificates in Imco. It was provided, however, that the escrow agent should not sell or cause to be sold in the United States any of the class B shares and that the escrow agent should*857 not sell any of the class B shares at a price per share less than the sterling equivalent at the London buying rate on the date of sale for 20 Swedish Kronor, plus all taxes or stamp duty payable on the share certificates and all commissions payable to the seller's broker and all other expenses of sale. It was also provided that, upon such sale, the escrow agent should pay out of the proceeds of sale, 20 Swedish Kronor, for each share sold, to the person or persons who deposited the share or shares *899 thus sold (that is Continental Investment A/G, Swedish March Co., or A/B Kreuger & Toll, Swedish estate in bankruptcy) and, after deducting the aforesaid taxes and expenses, the holder of the Imco participating certificate directing such sale, should receive the balance, if any, of the proceeds of sale. It was further provided that, upon the termination of the period within which the holders of shares in preference stock who had exchanged them for participating certificates could direct Imco to cause the sale of shares of class B stock, all rights of the holders of participating certificates should terminate.
The offer made by Imco provided that all actions or claims which*858 the holders of preference stock might then or thereafter have against International or its officers or directors, the trustee in bankruptcy of International, the Swedish Match Co., the persons, firms or corporation which had from time to time engaged in the sale of the preference stock, and any other person, firm or corporation, whether by reason of misrepresentations contained in circulars offering such stock for sale or otherwise, which were predicated upon the retention of such preference stock, would be lost upon acceptance of the exchange offer. In making this offer to the holders of preference stock, Imco stated that it made no representations as to the validity of the two agreements of December 17, 1924, between the Swedish Match Co. and International and the holders of preference stock in the latter, nor as to whether International and the Swedish Match Co. had performed the several covenants and claims contained in those two agreements, and stated that it was unable to obtain such information necessary to make such representation.
By a letter dated June 10, 1936, and by a newspaper advertisement published the following day in New York City, the holders of preference stock*859 were notified by the protective committee that arrangement has been made whereby the above described offer for the exchange of preference stock for participating certificates in Imco, was to be made. In these notices the committee stated that it had long been obvious that International could not satisfy even its creditors in full and that the arrangement respecting the exchange of preference stock for participating certificates in Imco could only be negotiated because of the existence of the agreements of the Swedish Match Co. of December 17, 1924, heretofore described. The committee also expressed the belief that the Imco arrangement was the best that could be made under the circumstances.
The holders of a total of 923,128 of the 1,350,000 outstanding shares of preference stock accepted the offer of Imco and surrendered such shares in exchange for Imco participating certificates. On or about July 8, 1936, Mrs. Marsh accepted the offer and exchanged her 750 shares of preference stock for 375 Imco participating certificates.
*900 From the formation of Imco, in April 1936, through December 1937 the bid and asked prices of the participating certificates were as follows: *860
| Bid | Asked | |
| August 1936 | $0.75 | $1.00 |
| October 1936 | .375 | .625 |
| November 1936 | .30 | .50 |
| December 1936 | .15 | .30 |
| February 1937 | .65 | .80 |
| March 1937 | 1.25 | 1.625 |
| April 1937 | 1.50 | 1.875 |
| May 1937 | $1.50 | $2.00 |
| July 1937 | 1.00 | 1.50 |
| August 1937 | .75 | 1.25 |
| October 1937 | .75 | .875 |
| November 1937 | .375 | .625 |
| December 1937 | .50 | .75 |
During the period covered by the foregoing quotations the usual brokerage commission on the sale of 100 participating certificates "over the counter" was $3.
Between July 1936, when Imco submitted its offer to the holders of preference stock, and January 3, 1938, there was a total of 15,018 shares of class B stock in the Swedish Match Co. sold at the request of Imco participating certificate holders. All sales were made on the London Stock Exchange. These shares were sold in 252 different lots varying in size from 2 shares to 2,000 shares. From the proceeds of the total number of shares thus sold, there was remitted to the holders of the participating certificates, the equivalent of $14,969.11 after the payment of brokerage fees, stamps, etc., and the payment of the equivalent of 20 Swedish Kronor per share*861 to the owners of the class B stock that was sold. This was an average net amount of .9967 cents for each participating certificate, or 49,835 cents per share of the preference stock in International which had been exchanged for the certificate. The first sales of class B stock were made on September 28, 1936, and the lowest net amount, per certificate, remitted to a participating certificate holder was from a sale of 5 shares of the stock made on that date. Such remittance was approximately 12 cents a participating certificate or 6 cents per share for the preference stock that had been exchanged for it. The highest remittance from a sale was of 900 class B shares on February 22, 1937. This amounted to $1,755 per certificate, or 87.75 cents per share of preference stock that had been exchanged therefor. Sales of class B stock, by months, with the average net amount per certificate remitted to holders of participating certificates, as well as the average amount per share for the preference stock exchanged therefor, were as follows:
| Month | Shares sold | Average net amount per participating certificate | Average net amount for each share of preference stock |
| Sept. 1936 | 150 | $0.14 | $0.07 |
| Feb. 1937 | 7,232 | .94 | .47 |
| Mar. 1937 | 1,235 | .94 | .47 |
| Apr. 1937 | 685 | 1.15 | .575 |
| May 1937 | 190 | .82 | .41 |
| June 1937 | 406 | 1.02 | .51 |
| July 1937 | 782 | $0.98 | $0.49 |
| Aug. 1937 | 3,596 | 1.24 | .62 |
| Sept. 1937 | 380 | .72 | .36 |
| Dec. 1937 | 332 | .33 | .165 |
| Jan. 1938 | 30 | .57 | .285 |
*862 *901 The City Bank Farmers Trust Co. was trustee under the trust indentures securing the above mentioned indentures of International. The petitioner, John B. Marsh, as attorney for the bank, appeared in the bankruptcy proceedings of International upon their inception and took an active part therein during most of 1932. In that capacity he attended meetings of creditors, conferred with the trustee in bankruptcy of International and its counsel, and was familiar with the reports made by the trustee to creditors and with the facts then generally known about the affairs of Kreuger and International. As a result of such knowledge and information he and Isabel S. Marsh, his wife, the petitioner, concluded, prior to the end of 1932, that the 750 shares of preference stock owned by her were worthless. Prior to 1932, they had no knowledge of any condition of the affairs of International which caused them to suspect that the preference stock had an intrinsic value of less than the price at which it was selling on the market. Neither of them had any knowledge or information respecting the existence of the two agreements of December 17, 1924, between the Swedish Match Co., International, *863 and the holders of the preference stock until the issuance in 1936 by Imco of its offer and prospectus relative thereto.
Since the payment of the distribution of the preference stock made on January 15, 1932, Isabel S. Marsh has received no distribution on her shares of preference stock.
The preference stock of International, on December 31, 1931, had a value of at least $16.50 a share, the lowest price at which it sold on the New York Stock Exchange on that date. During 1932 the stock became worthless.
OPINION.
LEECH: The petitioners contend that the preference stock in International became worthless in 1932. They argue that the events occurring in that year, which establish its worthlessness, were the death of Kreuger, the adjudication of the corporation as a bankrupt, the public disclosure of the frauds and embezzlements perpetrated by Kreuger, followed by the disappearance of a market value for the stock. It is therefore their position that all reasonable hope or expectation that the holders would ever receive anything on account of it thus vanished in that year. The respondent denies that the stock became worthless during 1932. He argues that it continued to have*864 value at least until 1936, when it was exchangeable for participating certificates in Imco, which in turn also had value. He concedes, however, that if the stock became worthless in 1932, the petitioners are entitled to the deduction taken in their return as a loss on the stock.
*902 The question of whether property becomes worthless during a particular year is one of fact. ; . The determination of that fact then calls for a practical, not a legal, test. . Usually, losses are evidenced by closed and completed transactions. However, the statute and regulations permit the deduction of losses which are not fixed by closed and completed transactions but which are determinable upon the occurrence of other identifiable events. A loss fixed by such identifiable events may be deductible, within the act and regulations, without the taxpayer establishing that no possibility of eventual recovery of any portion of his investment exists. Thus, in deducting losses on worthless investments a taxpayer is not required to be*865 an incorrigible optimist. ; "An identifiable event", other than a closed transaction, fixing a loss, has been described as "an incident or occurrence that points to or indicates a loss - an evidence of a loss." . Among such identifiable events which establish the worthlessness of corporate stock and the consequent right to a deduction of a loss thereon, is judicial bankruptcy of a corporation that is hopelessly insolvent. ; .
The record is replete with evidence of gigantic frauds perpetrated by Kreuger over a period of years through forgeries, deliberate and systematic false representations, misappropriation of assets, the violation of the confidence reposed in him by business associates, and /or otherwise. His death, in March 1932, and the immediately following revelation of the chaotic financial condition existing in the corporate empire dominated by him, *866 were the signals for the comprehensive and intensive investigations that were immediately begun in the United States and abroad. Very early, these investigations disclosed that this corporate empire, including International, was a victim of his wrongdoing. By the end of 1932, it was generally known that his fraudulent practices had been extensive and exceedingly damaging to the financial welfare of the corporations dominated by him.
The first tentative report of the receiver in bankruptcy, dated May 13, 1932, disclosed that, at the close of business on April 13, 1932, the unaudited books of International showed assets of approximately $197,000,000 and a surplus of about $14,000,000 above liabilities and outstanding capital stock. Investigations made in 1932 revealed that this picture was completely false; that many of the items listed on the books as assets were fictitious and worthless; that the values shown for *903 many others were greatly overstated and that other assets in large amounts, recorded on the books, were not in the possession of the corporation and that their recovery, even if possible, would be dependent on the outcome of legal proceedings. By the end*867 of 1932, the trustee in bankruptcy, who formerly had been the receiver, had only been able to reduce to possession securities having a cost of about $60,000,000, as shown by the books, and had on hand about $1,700,000 in cash, of which $1,380,000 was in a special fund pending determination of certain adverse claims with respect to it. Before January 31, 1933, the trustee had instituted suits against the directors in International for approximately $135,000,000, against certain banks for about $4,000,000 and for the recovery of income tax of about $2,290,000 which it was alleged was erroneously paid. As against the facts disclosed in the foregoing description of the condition with respect to assets, as of January 31, 1933, claims on debentures, alone, in an amount in excess of International's total outstanding liabilities of $105,444,014.43, as shown by its books, had been filed against the estate. While some of these claims had, doubtless, been improperly filed and were later disallowed by court order, such action had not been taken at that time. In addition, claims filed by or on behalf of the Swedish Match Co., A/B Kreuger & Toll (Swedish and American estates), and Dutch Kreuger*868 & Toll aggregated approximately $1,200,000,000. Although the trustee was contesting the last mentioned claims, they had not been adjudicated. Further, the Federal Government had under advisement the assessment of an additional income tax for 1931 of approximately $1,000,000, and this assessment was subsequently made.
Upon the unanimous request of the representatives of the creditors of International, the trustee did not, at the beginning of its administration of International's affairs, make any attempt to dispose of its assets, either in their entirety or piecemeal. No possibility existed for their sale as an entirety and any expenditure toward that end would probably have been useless. Piecemeal sales could not have been made at prices approximating the true value of the assets. As a result of vigorous and protracted negotiations in the settlement of intercompany claims and controversies, the recovery of assets and an orderly disposition of assets, as well as allowing liberal values for the principal assets undisposed of, it appears that the net value of International's assets after the payment of administration expenses, etc., was approximately $37,000,000, or about $61,000,000*869 less than the amount of the uncontested and allowed claims of creditors which were entitled to priority over the preference stock.
In our opinion, the situation existing at the close of 1932 clearly indicated that International was hopelessly insolvent. That such was the then view of the holders of and others interested in its outstanding *904 obligations and stock, is shown by the quotations on the New York Stock Exchange in November 1932 of from $65 to $102 per $1,000 face amount of its debentures and the public sales of the preference stock in December of that year, the proceeds from which were insufficient to pay the expenses incident thereto. While the public sales of preference stock were probably for the sole purpose of establishing losses, the negligible prices received, when considered in the light of known facts, tend to indicate that the sellers and buyers considered the stock was practically worthless. Subsequent developments only confirm what was known and generally regarded to be International's real financial condition in 1932.
In its reports to the court, to and including that of February 8, 1933, the trustee refrained from expressing its opinion as*870 to the value of International's assets. From an examination of those reports it seems that the trustee's action in this respect was not due to its opinion or belief that International was solvent, but resulted from its desire to avoid expressing an opinion of value which might finally prove to be excessive. The trustee merely presented the facts in its possession to the court and the public. It was left to the interested parties, themselves, to draw their own conclusions as to whether the company was insolvent.
The respondent contends that the "over the counter" sales of the preference stock, made within the price ranges per share of a high of 62 cents and a low of 12 1/2 cents in 1932, following the month of May, of a high of 25 cents and a low of 17 1/2 cents, in 1933; of a high of 16 1/2 cents and a low of 10 1/2 cents, in 1934; and of a high of 27 1/2 cents and a low of 11 1/2 cents in 1935, established that the stock continued to have value, not only throughout 1932 but during subsequent years through 1935. Applying the foregoing per share prices to 750 shares of preference stock, the number of shares owned by Isabel S. Marsh, and making allowance for brokerage commission*871 and transfer taxes, the respondent computes maximum and minimum values for the block of stock as follows: $429 and $54 in 1932; $135.75 and $79.50 in 1933; $72 and $27 in 1934; $154.50 and $34.50 in 1935. The record is silent as to the number, frequency, or size of the sales upon which the respondent relies. Whether they were scattered, isolated transactions involving only a few shares each, we do not know. Aside from the showing that they were made "over the counter", nothing is revealed of the circumstances surrounding any of them. In view of this condition of the record and of the public sales made about the end of 1932, the proceeds from which did not meet the expenses thereof, and considering the generally recognized insolvent condition of International in 1932, we think that these sales upon which the respondent relies, were of a type that is made for the purpose of establishing losses or represent purchases made by *905 optimists in defiance of reason and the generally known and accepted facts. Transactions of that type do not establish value for stock that is already worthless. *872 ;.
The respondent argues that the agreements of December 17, 1924, between the Swedish Match Co. and International and the holders of its preference stock, by reason of which it was possible for the Imco plan to be negotiated by the protective committee for the holders of preference stock, gave added value to the preference stock. A careful examination of the agreements in connection with the various prospectuses given to the public at the time of the offering of the different issues of preference stock, indicates that their primary purpose was to promote the sale of preference stock by attempting to mislead the public into believing that the preference stock was, in some way, backed by the Swedish Match Co. However, assuming that they were valid, which the Swedish Match Co. denied, the most that can be found in the agreements is that they imposed restrictions on the sale by the Swedish Match Co. of the common stock held by it in International and restricted the declaration of devidends on its own stock by the Swedish Match Co. The respondent does not point out, nor is it apparent, *873 that a violation of these restrictions would be injurious or damaging, necessarily, to the holders of preference stock in International. Although the petitioners were not familiar with the existence of these agreements prior to 1936, all the prospectuses given to the public in connection with the offerings of preference stock, refer to the agreements, and the prospectus, issued in connection with the offering of such stock in 1924, contains a fairly clear summary of the agreements. In view of this, we think it is only reasonable to concluded that the public, generally, knew of the existence of the agreements, was fairly definitely informed as to their contents, and gave such consideration to them as was deemed warranted in making purchases and sales of preference stock, both before and after International's adjudication as a bankrupt. Whatever value, if any, the agreements gave to the preference stock, was reflected in the price at which the stock was sold. There is not only nothing to show that the Swedish Match Co. violated its part of the agreements, but there is evidence which indicates performance of the portion relating to the retention of a majority of the common stock in*874 International. There is no evidence that International ever performed under the agreements. Under these circumstances the agreements appear, at best, to have had only a nuisance value. We are unable to say that they gave any appreciable value to the stock. This is demonstrated by the offer to the holders of preference stock under the Imco plan.
For the issuance of its preference stock, International had received very substantial sums of money just as it had in connection with the *906 issuance of its debentures. It was, therefore, natural for the protective committee for the holders of preference stock to try to obtain something of value for the holders of such stock. The Imco plan was used for the settlement of intercompany claims and the purchase of certain assets by the Swedish Match Co. The plan as proposed, in effect, offered, for a limited period ending June 30, 1938, to the holders of preference stock in the United States, a group of speculations, namely: That the selling price of class B stock in the Swedish Match Co. would increase; that the London buying price of Swiss Kronor would remain stationary or at least not increase; and that, since the stock was*875 to be sold outside of the United States, the exchange rate between the country in which the stock was sold and the United States would be favorable for making remittance to the holders of preference stock in the United States. On June 8, 1936, two days before the protective committee announced that the Imco plan would be offered to the holders of preference stock, the average selling price, on the London Stock Exchange, of class B shares in the Swedish Match Co. was equal to the London buying price of only about 19 Swedish Kronor, or a price which was below that at which any of such shares could be sold under the Imco plan. The evidence indicates that at that time on the London Stock Exchange, the shares were selling around the lowest price for the preceding period of about three months. That what was offered the holders of preference stock under the Imco plan, was of a highly speculative character, is demonstrated by the nominal and erratic prices at which Imco participating certificates were quoted.
At the time of the submission of the proceeding Isabel S. Marsh had received nothing from the Imco participating certificate which she had received in exchange for her shares of*876 preference stock in International. Whether she received anything between that date and June 30, 1938, when the rights under the certificates expired, we do not know. However, if she did, such recoupment of her loss resulting from the preference stock would not be fatal to her position here since she did not have the burden of showing that there was no possibility of recovering any portion of her investment.
After having duly considered the evidence we are of the opinion that the preference stock in International became worthless in 1932 and have so found as a fact. It follows that the petitioners are entitled to the deduction taken in their return with respect to the shares of such stock hold by Isabel S. Marsh. Cf. (on appeal C.C.A., 2d Cir.).
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. Not stated. ↩