*410 The Commissioner determined a deficiency of $1,637.46 for the calendar year 1921 from which the petitioner appeals and assigns as error that the Commissioner erred in disallowing a deduction of $5,000, representing a loss which the petitioner alleges it sustained in the year 1921 by reason of certain preferred stock of the Valier-Montana Land & Water Co. In its brief petitioner claims that it is entitled to a deduction of $5,500, consisting of $4,900, the amount of petitioner's original investment, and $600, accrued interest.
FINDINGS OF FACT.
Petitioner is a Minnesota corporation with place of business at Springfield. April 13, 1910, petitioner purchased $5,000 par value Conrad Land & Water Co. first mortgage bonds, dated December 17, 1909, bearing 6 per cent interest due July 1, 1914, for $4,900. These bonds were secured by a mortgage on certain lands and water rights and an irrigation system in Teton County, Mont. These mortgage bonds were purchased as an investment. Interest was paid on the bonds to January 1, 1911, and the interest payments due*3820 July 1, 1911, were defaulted. In 1912 a creditors' committee was organized to look after the interest of bondholders and to reorganize the company. It developed that the company did not have sufficient funds to complete certain projects undertaken. In order to raise sufficient funds, the company was reorganized as the Valier-Montana Land & Water Co. and $1,000,000 of prior lien Series A, first mortgage bonds were issued on the property, and in lieu of the former first mortgage bonds petitioner accepted Series B mortgage bonds for face value and a scrip certificate for $600, representing past due interest. Said bonds were due July 1, 1927, and the scrip certificate for the accrued interest was due January 1, 1916. Interest payments on both the new bonds and the scrip defaulted as soon as due. It developed that further funds were needed to complete the project, and on May 15, 1913, the creditors' committee offered a plan for further reorganization. Holders of the first mortgage bonds agreed to contribute additional funds and the holders of the Series B mortgage bonds were given the option to do so. Petitioner made no further contribution, but on the other hand surrendered its*3821 bonds to allow the necessary mortgages securing bonds issued for raising additional funds. In *411 lieu of the Series B mortgage bonds and scrip, petitioner received on January 12, 1915, 50 shares of the preferred stock of the Valier-Montana Land & Water Co. The common stock of the company was given as a bonus to those who participated in the last bond issue. The Valier-Montana Land & Water Co. was engaged in constructing, maintaining and operating an irrigation project and in the sale of stock, water rights, land and the operation of subsidiary companies incidental to and necessary for the carrying on of its operations.
At December 31, 1920, the liabilities of the company exceeded the fair value of its assets in an amount of at least $550,000. The company continued its operations throughout the year 1921. The financial condition of the Valier-Montana Land & Water Co. throughout the year 1921 was no different than its financial condition in 1920 or for several years prior thereto.
OPINION.
LITTLETON: Petitioner contends that it should be permitted to take a deduction for the year 1921 in respect of its investment in the stock of the Valier-Montana Land & Water*3822 Co. For some years this investment was carried upon the books of the petitioner in what it designated a "secret reserve" and the investment was charged off January 10, 1922, upon instructions from the bank examiner. Upon consideration of the testimony introduced by the petitioner, the Board is of the opinion that it is not entitled to a deduction of its investment in the Valier-Montana Land & Water Co. for the year 1921. The principal evidence in respect of the value of the stock in question consists of the testimony of the vice president and treasurer of the Valier-Montana Land & Water Co., who testified that at the end of 1920 the value of the assets of the corporation from which liabilities might be satisfied was at least $550,000 less than the liabilities of the corporation and that there was no hope that the petitioner upon liquidation could realize anything upon its preferred stock. This witness testified that the preferred stock of the Valier-Montana Land & Water Co. had no value on December 31, 1920, and that it had no value in 1919 or 1918.
If it could be conceded that the stock of an operating corporation might be deducted as a loss merely because the liabilities greatly*3823 exceeded the assets, nevertheless this petitioner would not be entitled to the deduction claimed in the year 1921 for the reason that the preponderance of the evidence establishes that the preferred stock of the Valier-Montana Land & Water Co. had no value for three years prior to the taxable year.
Judgment will be entered for the respondent.