*206 Decision will be entered under Rule 50.
In 1929 the petitioner made a secured loan to a corporation that became insolvent later in that year and went out of existence in 1933. Prior to 1943 the petitioner acquired ownership of the property it had received as security for the debt. In 1943 the petitioner claimed a worthless debt deduction. Held, the debt became worthless prior to 1943 and the deduction is not allowable for that year. Section 23 (k) (1), Internal Revenue Code.
*198 The respondent has determined a deficiency of $ 55,867.94 in petitioner's income tax for the calendar year 1943. The petitioner contests that part of the deficiency resulting from the disallowance of a worthless*207 debt deduction in the amount of $ 324,698.41 claimed for the calendar year 1943.
FINDINGS OF FACT.
The petitioner is a Rhode Island banking corporation with its principal place of business in Providence, Rhode Island. The petitioner is a member of the Federal Reserve System and is engaged in the general business of banking, including the making of loans to customers in the regular course of business.
On January 2, 1929, and thereafter until its liquidation and dissolution in 1933, the Dutee W. Flint Co., Inc., hereinafter referred to as Dutee, was a Rhode Island corporation doing business in Rhode Island.
On January 2, 1929, Dutee owed the petitioner $ 150,000, evidenced by two unsecured notes representing sums previously loaned to Dutee. On that date, the petitioner loaned to Dutee an additional sum of $ 850,000 for which Dutee executed and delivered to the petitioner its promissory note in the amount of $ 850,000 dated January 2, 1929, and payable on demand. On January 2, 1929, Dutee also delivered to the petitioner 23,853 shares of common stock of Standard Oil Company of New York as collateral security for the promissory note in the amount of $ 850,000. The value of the 23,853*208 shares of stock of the Socony Oil Company of New York on January 2, 1929, was $ 1,076,366.62.
Under the terms of the $ 850,000 note, the petitioner was authorized to sell the collateral, "without notice, either at public or private sale or otherwise" upon default, and apply the proceeds to the payment *199 of the note, and account to the maker for the surplus, if any. The note further provided that:
Should the market value of any security pledged for this loan, in the judgment of the holder or holders thereof, decline we hereby agree to deposit on demand (which may be made by a notice in writing sent by mail or otherwise to our residence or place of business) additional collateral so that the market value shall always be at least 20 per cent. more than the amount of this note; and failing to deposit such additional security this note shall be deemed to be due and payable forthwith, anything herein expressed to the contrary notwithstanding; and the holder or holders hereof may immediately reimburse themselves by the sale of the security, or any part thereof; and it is hereby agreed that the holder or holders of this note, or any person in his or their behalf, may purchase at*209 any such sale discharged from any right of redemption.
On July 15, 1929, Dutee delivered to the petitioner as additional security for the $ 850,000 note certificates aggregating 4,498 shares out of a total of 5,000 shares of the capital stock of Dutee. These certificates consisted of Certificate No. 4 in the name of Rose H. Flint for 2,000 shares, Certificate No. 7 in the name of Dutee W. Flint for one share, and Certificate No. 8 in the name of Rose H. Flint for 2,497 shares. The certificates in the name of Rose H. Flint were accompanied by an agreement of pledge dated July 18, 1929. On December 2, 1929, the petitioner delivered to Dutee W. Flint, as president and treasurer of Dutee, Certificates Nos. 7 and 8 aggregating 2,498 shares of the capital stock of Dutee.
The notes for $ 150,000 held prior to January 2, 1929, were wholly paid on January 28, 1929.
On May 7, 1929, the petitioner loaned to Dutee an additional sum of $ 35,000 and received from it its promissory note in the amount of $ 35,000 endorsed by Dutee W. Flint and payable on demand.
On January 27, 1932, as part of a plan of the merger of Standard Oil Company of New York and Vacuum Oil Company, one share of stock of*210 the Socony-Vacuum Corporation, the newly organized corporation, was received in exchange for each share of stock of Standard Oil Company of New York, and the petitioner therefore received 23,583 shares of Socony-Vacuum Corporation in exchange for the stock of Standard Oil Company of New York, originally pledged. These shares of Socony-Vacuum Corporation were issued in the name of Dutee W. Flint Oil Co., Inc.
On April 6, 1932, the petitioner caused to be transferred the 23,583 shares of Socony-Vacuum Corporation stock, referred to above, to a partnership known as Rowe & Co. Rowe & Co. was composed of officers and employees of the petitioner's trust department and was used by the petitioner as a nominee to hold securities and other property held by the petitioner in a fiduciary capacity. The transfer was made with the consent of Dutee, which was obtained on January 29, 1932.
*200 On April 6, 1932, the petitioner established in its trust department an account entitled "Loan Department Industrial Trust Co. for A/C: -- D. W. Flint Oil Co." and recorded in this account the receipt of the stock received as collateral on the $ 850,000 note. The phrase "Safe-Keeping Miscellaneous" *211 was printed on the account sheet.
On June 22, 1933, the petitioner made a settlement with Dutee W. Flint individually and accepted a 3 per cent payment from him in settlement of his obligation as endorser of the $ 35,000 note and certain obligations of other corporations also endorsed by him. On the same day the note of Dutee in the amount of $ 35,000, dated May 7, 1929, was charged off by the petitioner as wholly worthless. On its tax return for the year 1933, the petitioner took a deduction for the $ 35,000 note as a worthless debt and returned the amount received in settlement as "Other income." No part of the 3 per cent payment was applicable to the $ 850,000 note.
On November 20, 1933, the existence of Dutee was terminated in accordance with the laws of the State of Rhode Island because of its failure to file certain reports and other acts required of all corporations.
On December 29, 1933, the petitioner charged off on its books of account $ 125,000 of the $ 850,000 loan to Dutee and deducted this sum as a partially worthless debt on its Federal income tax return for the calendar year 1933.
As a member of the Federal Reserve System, petitioner is subject to examination and*212 regulation by the Federal Reserve Examiners. As the result of an examination made during the period from January 8, 1934, to January 20, 1934, the Federal Reserve Examiners required the petitioner to write down on its books the $ 850,000 note of Dutee to the amount of $ 353,745, this amount being the market value of the stock at the time of the examination. On June 23, 1934, the petitioner charged off on its books of account the sum proposed by the examiners but it did not claim or receive a partially worthless debt deduction in its Federal income tax return for the calendar year 1934 for all or any part of the sum charged off.
After June 23, 1934, the petitioner carried the value of the loan as $ 353,745 on its books of account whereas for income tax purposes the value of the loan was carried at $ 725,000 since only $ 125,000 of the total sum charged off had been claimed as a deduction.
On October 3, 1935, as part of a plan of reorganization of Socony-Vacuum Corporation, the shares of stock in that corporation were exchanged for a like number (23,583) of shares of Socony-Vacuum Oil Co., Inc. The certificates representing the new stock of Socony-Vacuum Oil Co., Inc., were received*213 and held by the petitioner in the name of Rowe & Co.
*201 On December 31, 1940, pursuant to the finding of the Federal Reserve Examiner, the sum of $ 49,256.83 of the note of Dutee was charged off and taken as a worthless debt deduction on the Federal income tax return of the petitioner for the year 1940. This deduction was taken by charging off $ 23,756.83 on the note record and by crediting the balance to a reserve account and indentifying the credit as being applicable to a specific debt. At this date, the remaining security was valued at $ 102,750. The charge-off reduced the book value of the note to $ 120,000. However, for income tax purposes the note was valued at $ 465,755.
Prior to the transfer of the stock to Rowe & Co., the dividends on the stock were received by Dutee and delivered to the petitioner in part payment of the interest due on the $ 850,000 loan. After the transfer to Rowe & Co., the dividends were sent directly to Rowe & Co. or to the petitioner. The petitioner reported these dividends as interest income on its income tax returns filed during the period January 2, 1929, to March 19, 1943. The petitioner did not seek authority to make this application*214 or give notice or account to anyone for the receipt of the dividends. The interest on the $ 850,000 loan was continuously in default since October 1929.
During the period October 24, 1936, to February 20, 1943, inclusive, Rowe & Co. sold all but 9,000 shares of stock of the Socony-Vacuum Oil Co., Inc. These sales were ordered by the president of the petitioner corporation. Rowe & Co. looked only to the petitioner for authority to sell the stock and neither the petitioner nor Rowe & Co. accounted to Dutee or Dutee W. Flint for these sales. The stock sold during this period was sold through brokers on the open market to purchasers unknown to the petitioner. The proceeds from the sales were recorded by the petitioner as payments on the $ 850,000 note. No other payments were ever made on the principal of the note. The petitioner did not seek authority to make the sales or give notice or account to anyone for the proceeds.
The petitioner's customary practice at the end of the year was to furnish a statement to the owners of the stock it held in a fiduciary capacity indicating the amount of dividends received, the sales made for their account, and whatever other information they *215 would need in preparing their income tax returns. This practice was not observed with reference to the stock of the Socony-Vacuum Oil Co., Inc.
On March 19, 1943, the petitioner made an entry on its books of account which transferred the 9,000 shares of stock of the Socony-Vacuum Oil Co., Inc., still on hand from its collateral account to its investments account. The sum of $ 108,000, representing the value of the stock as of that date, was recorded on the envelope enclosing the $ 850,000 note as a payment on the note.
*202 Prior to March 19, 1943, the stock received by the petitioner as collateral security for the $ 850,000 note was always recorded as collateral and carried in a collateral account. None of the shares was ever recorded as owned by the petitioner or carried in its investments account until March 19, 1943.
From January 2, 1929, to March 19, 1943, the $ 850,000 note, less sums charged off, was recorded on petitioner's books of account as an outstanding loan.
From the latter part of 1929 through the year in question, the value of the stock of the Socony-Vacuum Oil Co., Inc., and its predecessor corporations held by the petitioner was less than 120 per cent of the*216 amount of the loan made by the petitioner to Dutee on January 2, 1929. The market prices of the stock ranged from $ 32 to $ 48 per share in 1929, from $ 20 to $ 40 in 1930; from approximately $ 8 to $ 21 per share in 1931, and from approximately $ 5 to approximately $ 23 per share during the period 1932 through 1943.
The market values of the stock of Socony-Vacuum Oil Co., Inc., and its predecessor corporations on certain dates were as follows:
| January 2, 1929 | $ 45.125 |
| May 7, 1929 | 43.25 |
| July 15, 1929 | 38.8125 |
| December 2, 1929 | 34.875 |
| April 6, 1932 | 9.125 |
| June 22, 1933 | 13.1875 |
| November 20, 1933 | 16.6875 |
| December 29, 1933 | 16.25 |
| January 8, 1934 | 15.4375 |
| June 23, 1934 | 15.75 |
| December 31, 1940 | 8.5625 |
| December 31, 1942 | 10.125 |
| January 2, 1943 | 10.3125 |
| March 19, 1943 | 11.9375 |
The petitioner, on its Federal income tax returns for the years 1929 to 1940, inclusive, showed no taxable net income, and on its Federal income tax returns for the years 1941 to 1943, inclusive, showed the following income tax due:
| 1941 | $ 65,419.99 |
| 1942 | 57,009.50 |
| 1943 | 2,675.16 |
On its Federal income tax return for the year 1943, the petitioner claimed the amount of $ 324,698.41*217 on the note of Dutee as a worthless debt deduction. The amount of the worthless debt deduction was computed by deducting from the original amount of the note the charge-offs taken as partially worthless debt deductions in 1933 and 1940 aggregating $ 174,256.83, and further deducting the proceeds from sales of the stock received as collateral on the $ 850,000 note which aggregated $ 351,044.76 and were credited on the note.
OPINION.
The petitioner seeks a worthless debt deduction for 1943 for a secured debt incurred by a corporation that became insolvent and went out of business in 1930.
*203 The debt was incurred on January 2, 1929, by a corporation referred to herein as Dutee. The amount of the debt was $ 850,000 evidenced by a demand note and secured by shares of stock valued at $ 1,076,367.63 at the time the debt was incurred. In 1930, Dutee became insolvent and wound up its affairs without having made any payments on the principal or interest of the note. The existence of Dutee was terminated in accordance with the laws of the State of Rhode Island in 1933. 1 In 1943, the petitioner entered in an investments account appearing on its books the remaining shares of stock*218 which it had received as security in 1929, and claimed a worthless debt deduction for the year 1943.
Section 23 (k) (1) of the Internal Revenue Code provides*219 that "In computing net income there shall be allowed as deductions: * * * Debts which become worthless within the taxable year; * * *." The petitioner contends that a secured debt does not "become worthless" within the meaning of section 23 (k) (1) until the property securing it is disposed of even though the debtor went out of existence in a state of hopeless insolvency and the value of the security is considerably less than the debt. In support of its contention, the petitioner relies on Old Colony Trust Associates v. Hassett, 150 F. 2d 179; Frank A. Spencer, 21 B. T. A. 859; John H. Wood Co., 46 B. T. A. 895; Kessler Oil & Gas Co., 41 B. T. A. 31; Robert LeRoy, 4 T. C. 70, affirmed on another issue, 152 F. 2d 936; Regulations 111, section 29.23 (k)-3.
However, there is implicit in these cases as an essential condition to the rule they support the requirement that the taxpayer creditor has not acquired ownership of the security or dealt with it as his own property prior to the year for which the*220 deduction is claimed. A taxpayer cannot assert dominion as an owner and at the same time regard the property as collateral for tax purposes.
In Old Colony Trust Associates v. Hassett, supra, the court pointed out that the taxpayer creditor therein could not acquire ownership of the pledged property without foreclosure by public sale; that there was an existing corporation which possessed the right of redemption; and that the conduct of the taxpayer creditor indicated the lack of ownership of the pledged property. In the instant case, the taxpayer *204 creditor could acquire ownership of the pledged property with a minimum of formality; 2*221 the taxpayer could not identify any person as the holder of the right of redemption; 3 and the taxpayer conducted himself as owner of the property.
The petitioner's assertion of dominion over the property is evident from its procedure in dealing with the dividends and the proceeds from the sale of the stock. In 1932, the shares of stock were transferred to and registered in the name of a nominee of the petitioner and thereafter all dividends were paid directly to the petitioner or its nominee. The dividends were retained by the petitioner as its own property. The petitioner contends they were applied against the interest on the note and refers us to entries in its books of account to substantiate the contention. However, no permission to make this application was sought or obtained by the petitioner nor was any notice given or any accounting*222 of the application made to anyone.
The petitioner sold the shares in whatever quantities and at whatever time it desired without consulting anyone. The nominee disposed of the securities whenever ordered to by the petitioner and looked to no one else for instructions. Similarly, as in the case of the dividends, the petitioner contends the proceeds were applied to the principal of the note as evidenced by bookkeeping entries. However, the petitioner did not seek or obtain permission to sell the securities nor was any notice given or any accounting of the application made to anyone.
The petitioner conceded that this was not its customary practice. At the end of each year, the petitioner, like most institutional fiduciaries, sent to the owners of the property it held in a fiduciary capacity a statement indicating the dividends received, the proceeds from sales and other information needed by the owners in preparing their income tax returns.
A summary of the facts discloses that the debtor went out of existence in a state of hopeless insolvency in 1930; the payment of principal and interest was always in default; the ownership of the *205 collateral could be acquired by the creditor*223 with a minimum of formality, and there was no person identified as the holder of the right of redemption; and since 1932 the title to the securities had been held in the name of petitioner's nominee over whom it had complete control. Since 1932, the petitioner had assumed dominion and control over the dividends from the securities and the proceeds from their sale. Taking into consideration all of these factors and circumstances, it is our considered judgment that the petitioner was the owner of the securities, and this ownership had been acquired long prior to 1943. Certainly if the petitioner's conduct under these circumstances was not sufficient to convey to it the title of ownership of the shares of stock, then its unilateral act in making entries on its own books of account in 1943 was not sufficient for that purpose.
Section 23 (k) (1) as presently worded is designed to allow deductions for worthless debts in the year the worthlessness occurs. The time for deducting the worthless debt is not to be postponed to a year when for tax purposes it may better suit the interests of a taxpayer. Those cases holding that a taxpayer with a secured debt need not take a deduction for *224 worthlessness until the security is disposed of do not detract from the intent of section 23 (k) (1). They merely recognize that a subsisting debt that is secured is not completely worthless as long as the creditor retains the security as pledged property and deals with it as such without ever asserting dominion as owner or conducting himself in a manner inconsistent with his fiduciary status as pledgee. Old Colony Trust Associates v. Hassett, supra;Frank A. Spencer, supra;John H. Wood Co., supra;Kessler Oil & Gas Co., supra;Robert LeRoy, supra; Regulations 111, section 29.23 (k)-3.
For these reasons, we are of the view that the petitioner acquired ownership prior to 1943 and, therefore, the debt became worthless prior to that year even under the rule of law urged by the petitioner. Since the debt did not become worthless in 1943, the worthless debt deduction is not allowable for that year. Section 23 (k) (1) of the Code.
Decision will be entered under Rule 50.
Footnotes
1. Rhode Island General Laws of 1938, chapter 116, article 2, section 63, provides that:
Every corporation whose corporate existence expires by any limitation or is terminated by dissolution or otherwise shall nevertheless be continued as a body corporate for 3 years after the date of such expiration or termination for the purpose of prosecuting and defending actions, suits or proceedings by or against it, and of enabling it to settle and close its affairs, to dispose of its property and to distribute its assets, but not for the purpose of continuing the business for which it was established: Provided, however↩, that no action, suit or proceeding begun by or against any such corporation before the expiration of said 3 years shall abate because of the termination of said period.
See also Rhode Island General Laws of 1923, title XXIV, chapter 248, section 63.2. The contract between the petitioner and its debtor, Dutee, provided that the holder of the note could sell the collateral "without notice, either at public or private sale or otherwise" on nonperformance of the promise. The contract further provided that upon the failure to deposit, when necessary, additional collateral so that the market value of the pledged security would always be at least 20 per cent more than the amount of the note, the note would be deemed payable forthwith and the holder could reimburse himself by the sale of the securities, and the holder could "purchase at any such sale discharged from any right of redemption."
Since the latter part of 1929, the interest on the note was in default, the debtor made no payment on the principal, and the market value of the pledged security was considerably less than 120 per cent of the amount of the note. In short, since 1929, the petitioner was by the very terms of the contract authorized to acquire the ownership of the pledged securities with a minimum of formality.↩
3. It is unlikely that such a right could have been distributed to the shareholders of Dutee since the corporation was liquidated in a state of insolvency and there is no evidence that it was distributed to any creditor except perhaps the petitioner. At the time of the liquidation and dissolution of Dutee, the value of the pledged property was considerably less than the amount of the indebtedness it secured.↩