*745 1. The shareholders of a bank were entitled to share, through a trust, in dividends and cash distributions of an investment corporation which the bank had organized to engage in activities forbidden to it. The investment corporation's shares, always kept equal in number to outstanding bank shares, were owned by trustees, required to be bank directors or officers, and the corporation's activities were controlled by the bank's directors. The shareholders' rights under the trust were inseparable from their ownership of bank shares, and were evidenced only by an endorsement on their bank share certificates. In 1933 the investment corporation shares became worthless. Held, bank shareholders not entitled to the deduction of a loss. Stanley Hagerman,34 B.T.A. 1158">34 B.T.A. 1158, distinguished.
2. Complexity and difficulty of computation are in themselves insufficient reasons for denying the deduction of a loss; but an apportionment of basis, for the calculation of loss upon the worthlessness of a beneficial interest in shares in one corporation, acquired together with shares of another corporation which controlled the first, held, because of numerous circumstances including*746 imponderable factors, to be impracticable and not required to be made for the purpose of computing a deductible loss.
*1382 The Commissioner determined the following deficiencies in petitioners' income taxes for 1933:
| Allen K. Brehm | $1,897.33 |
| Siegfried Gabel and Paula A. Gabel | 921.29 |
| Ferdinand Anthony Grien | 772.88 |
| Andre deCoppet and Muriel deCoppet | 140,125.97 |
| Walter Frederichs | 4,689.27 |
| Frederick H. Hornby | 4,324.19 |
| Woolsey A. Shepard | 1,689.68 |
| Henry M. Wise | 7,262.35 |
They assail the disallowance of deductions for alleged losses sustained on the worthlessness of investment corporation shares held by trustees for the pro rata benefit of petitioners as the holders of bank shares. They contend that the cost of the bank shares can and should*747 be apportioned between their interests in the bank and in the investment corporation.
FINDINGS OF FACT.
Petitioners are all residents of New York, New York, except Henry M. Wise, who resides at Hillsdale, New Jersey. In 1933 they each owned shares of stock in the Continental Bank & Trust Co. of New York (herein called the bank), which entitled them to proportionate parts of all dividends and liquidating distributions of the Continental Corporation of New York (herein called the investment corporation), the shares of which were held by designated officers or directors of the bank as trustees. The investment corporation was organized in 1929 to pursue an investment policy forbidden to the bank, but regarded as desirable by its directors. It was dissolved on September 20, 1933, having no assets to distribute in liquidation.
At the beginning of 1929 the bank had capital stock of $1,000,000, divided into 10,000 shares of $100 par value. During that year it increased its capital stock to $2,000,000, represented by 200,000 shares of $10 par value. Shareholders exchanged each $100 share for 10 new $10 shares, and received with each new share the right to subscribe for one $10*748 par value share at the price of $40. As an integral part of this plan, the investment corporation was organized with a *1383 capital stock of $1,000,000, represented by 200,000 shares of $5 par value, title to which was to be held by three trustees, chosen from among the bank's officers and directors, "for the benefit of the stockholders of the Bank."
The bank's shareholders all exercised their subscription rights on June 15, 1929; the 100,000 new shares of the bank were issued to them; 200,000 shares of investment corporation were issued to the trustees; and $4,000,000 was realized from the sale. Pursuant to the plan as adopted and as previously explained to the shareholders, $1,000,000 of this amount was credited to the capital account of the bank, $2,000,000 to its paid-in surplus, and $1,000,000 to the capital account of the investment corporation. The trustees received the investment corporation shares by virtue of the following resolution of the bank's board of directors, adopted May 14, 1929:
RESOLVED that all of the capital stock of [investment corporation] be issued to Frederick H. Hornby, Andre deCoppet and Julian A. Acosta, as Trustees, * * * in consideration*749 of there being paid to [investment corporation] as capital $10 out of each $40 per share subscribed for the new 100,000 Ten Dollars par value stock of the Bank amounting in all to the sum of $1,000,000.
Each bank share bore a written endorsement that the registered holder:
* * * is entitled to a beneficial interest in the capital stock of the [investment corporation] * * *, from time to time held by the Trustees under said agreement, ratably with all other stockholders of the [bank] who have a beneficial interest in the capital stock of said [investment corporation], evidenced by certificates of stock of said [bank] * * *. The said beneficial interest is transferable only by the transfer on the books of said [bank] of the shares of stock represented by the within certificate of stock.
The agreement by which the trustees held the investment corporation shares recited that the investment corporation had been organized:
* * * to take advantage of opportunities for investment * * *, which the Bank cannot avail itself of, but which it is desired to make available to the stockholders of the Bank; * * *
and that:
* * * it is desired to provide for the ownership*750 of the stock of the [investment corporation] and for the management of its affairs in accordance with the recommendations of the Board of Directors of the Bank * * *.
The agreement incorporated the whole plan and provided specifically that:
ELEVENTH: The Trustees shall possess and may exercise all the rights and powers of absolute owners of capital stock of the [investment corporation].
and more particularly the "right to vote is and shall be reserved exclusively to and by the Trustees and their successors."
*1384 The trustees constituted the first board of directors and had power to appoint their successors. They were relieved of responsibility in respect of management except for gross negligence or willful malfeasance. The holders of bank shares were expressly vested "only with such rights in respect of the [investment corporation] or of its capital stock as are indicated in this Agreement * * *." These rights were:
THIRTEENTH: All dividends upon the capital stock of [investment corporation] (except as hereinafter provided) and all distributions of capital thereof received by the Trustees shall be paid by the Trustees to those stockholders of the Bank*751 whose certificates shall be indorsed as provided in clause (a) of paragraph TWELFTH hereof, according to the respective interests of such stockholders. Such payments may be made by the Trustees to said stockholders direct or to the Bank for their account, and the Bank in such case, shall distribute such dividends and distributions of capital among those entitled to receive the same. * * *
In the event that the [investment corporation] shall at any time or times declare a dividend or dividends payable in its capital stock, then such capital stock shall be payable to the Trustees hereunder to be held by them as Trustees in accordance with the terms and provisions of this Agreement * * *.
On July 1, 1929, the bank's capital stock was increased from $2,000,000 to $6,000,000, and 400,000 additional $10 par value shares were authorized, of which 100,000 were distributed as a 50 percent stock dividend to the bank's shareholders and 300,000 were offered for sale. On the same date the investment corporation's capital stock was increased from $1,000,000 to $3,000,000, and 400,000 additional $5 par value shares were authorized to:
* * * be sold at par payable in cash * * * pro rata*752 to such persons, firms, and/or corporations as shall purchase the 300,000 shares of additional stock of The [bank] which are to be sold for cash, upon the condition that all shares of additional stock of this Corporation so sold shall be forthwith transferred to the Trustees under the Trust Agreement dated May 1, 1929, for the pro-rata benefit of the persons from time to time constituting the stockholders of the [bank];
The bank's directors at the same time resolved that it:
* * * issue and sell to Messrs. Smith & Gallatin, or to such persons, firms and/or corporations as may be designated by Messrs. Smith & Gallatin, 300,000 shares of the additional stock of this Bank, (or such part thereof as can be sold), at the price of $45 per share, * * * such price to include the purchase at par by such purchasers from [investment corporation] of its additional stock of the par value of $5 per share, at the rate of one and one-third shares * * * for each share * * * of this Bank so purchased, * * *
The investment corporation shares were to be forthwith transferred to the trustees for the pro rata benefit of the bank's shareholders. The bank's shareholders were given a prior right*753 to subscribe on the same terms as Smith & Gallatin for new bank shares, proportionate *1385 to their holdings. A purchaser of each bank share who had not theretofore been a shareholder acquired beneficial rights only to one investment corporation share, and the benefit of the one-third share was enjoyed by the bank's old shareholders.
After approval of these proposed steps on July 3, 1929, by the shareholders of the bank and of the investment corporation, holders of about 30,000 shares of bank stock exercised their right to purchase new bank shares, and Smith & Gallatin, pursuant to contract, subscribed and paid for the remaining 270,000 shares. A total of $13,500,000 was thus paid in, of which $3,000,000 par value of the 300,000 new bank shares, was credited to the bank's capital stock account; $8,000,000 to its paid-in surplus account; $500,000 to its undivided profits account; and $2,000,000 to the capital stock account of the investment corporation in payment for its newly authorized 400,000 shares. These shares were issued to the trustees to hold for the benefit of the bank's shareholders under the agreement of May 1, 1929.
In July 1929 the investment corporation*754 made a contract to purchase a plot of land at 30-40 Broad Street, New York City, for $10,000,000. It transferred this contract to the Continental Realty Corporation, later known as the Thirty Broad Street Corporation, which took title to the land on November 1, 1930. An old structure upon the land was torn down, and contracts were let on May 1, 1931, for the construction of a 48-story office building. By September 15, 1931, the foundations had been laid, and the bank had bought 6,667 shares of the Thirty Broad Street Corporation, paying therefor $1,500,000 to that corporation, and had loaned $1,400,000 to the investment corporation for application to the construction work.
On September 15, 1931, the Straus National Bank & Trust Co. and the International Trust Co. were merged into the bank under a complicated plan which resulted in important changes in the capital structure and assets of the bank and of the investment corporation. The three banks contributed to the bank, as the surviving institution, assets of a specified net value, and the bank assumed all liabilities of the constituents. The contribution of the bank itself consisted of assets of an appraised value equal to*755 the sum of its liabilities (other than capital stock), surplus, undivided profits, and reserves and $9,500,000. All of its assets, comprising inter alia over $4,000,000 in cash and the 6,667 Thirty Broad Street Corporation shares, were, as a preliminary, transferred to a distributing agent, who later distributed among the old shareholders all of the assets in excess of the stipulated contribution to the surviving institution. About the same time the investment corporation likewise transferred to the distributing agent all of its assets, which consisted of cash $22,308.05, loans receivable $131,079.60, and stock, among which were 11,110 shares of *1386 the Thirty Broad Street Corporation, carried at cost, $2,500,000, and 43,000 shares of the bank, carried at cost, $1,737,003.38, and other shares, carried at cost, $88,801; total, $4,479,191.98. Among the aforesaid other shares were 1,000 of Indiana Southwestern Gas & Electric Co., which had been given to the investment corporation by a corporation indebted to the bank. The investment corporation then had liabilities of $1,404,982.38, of which $1,400,000 represented the aforesaid loan from the bank.
The distributing*756 agent surrendered 41,300 of the bank shares for cancellation and retained 1,700. At the same time the investment corporation shares were reduced by the cancellation of 41,300. Immediately thereafter the remaining 558,700 bank shares and the remaining 558,700 investment corporation shares were further reduced to 352,000 of each corporation. The shareholders of the bank surrendered their old certificates and received in exchange a proportionate number of the new, roughly 63 percent of the former number, and also $8 a share in cash from the distributing agent, together with a certificate of proportionate beneficial interest in the assets remaining in his hands, which had a book value of $1.40 a share, and an actual value of 40 or 50 cents a share. At the same time the trustees exchanged the old investment corporation shares for the same proportionate lesser number of the new.
The bank's distributing agent thereupon bought all the assets of the investment corporation for $4,000,000 in cash and the assumption of liabilities, $1,404,982.38. As a result of this transaction the distributing agent held the entire outstanding 17,777 shares of Thirty Broad Street Corporation, which it*757 then sold to the investment corporation for $4,000,000 cash. The investment corporation was thus left without liabilities and with all the shares of the Thirty Broad Street Corporation as its only asset.
In pursuance of the merger plan, the bank then increased its capital stock from 352,000 to 400,000 shares, and of this increase of 48,000 it issued 28,000 to the Straus corporation and 20,000 to the International corporation, in exchange for their contributions of assets to it as survivor. Concomitantly the investment corporation made the same increase in its capital stock, issuing 28,000 new shares to Straus and 20,000 to International, and received $250,000 in cash from each. Of this amount $240,000 was credited to capital account and $260,000 to paid-in surplus. The distributing agent's payment of $4,000,000 to the investment corporation for assets and the merged banks' payment of $500,000 for stock were steps taken to effect the intent of the merging parties that the investment corporation was to have a surplus of $2,500,000, of which the bank should provide $2,000,000 and Straus and International $250,000 each. This surplus was regarded as necessary to put the investment*758 corporation in a position to insure *1387 the completion by its subsidiary of the building at 30-40 Broad Street. The investment corporation's acquisition of all of the stock of the Thirty Broad Street Corporation was prompted by objections of the State Banking Department of New York to the bank's close connection with the building project through direct ownership of shares in the Thirty Broad Street Corporation.
The building at 30-40 Broad Street was completed and rented in May 1932, but it was not profitable. By August 1933 the investment corporation's financial position was such that it could not render the Thirty Broad Street Corporation the necessary assistance to meet its obligations and continue operations. On September 14, 1933, the Thirty Broad Street Corporation was indebted on mortgage bonds, with interest accrued, in the amount of $10,704,899.67, and its assets then consisted of $71,499.17 in cash and the encumbered property, which had a fair market value less than the amount of the encumbrances. For lack of funds to support the Thirty Broad Street Corporation and for other reasons, the investment corporation transferred all of the shares of Thirty Broad Street*759 Corporation to the mortgagee and was dissolved on September 20, 1933, having no assets.
1. In September 1933, Andre deCoppet was the owner of 32,023 shares of bank stock, which had their origin in the following acquisitions:
| Shares | Date acquired | Manner acquired | Cost |
| 11,000 | Prior to June 1929 | Purchase | $408,193.00 |
| 11,000 | June 15, 1929 | Rights exercised | 440,000.00 |
| 11,000 | do | Stock dividend | 0 |
| 250 | July 15, 1929 | Purchase | 11,250.00 |
| 1,000 | July 26, 1929 | do | 59,250.00 |
| 1,350 | Dec. 16, 1929 | Div. of other corp., value | 54,000.00 |
| 500 | Mar. 14, 1930 | Purchase | 18,500.00 |
| 100 | May 5, 1930 | do | 3,515.00 |
| 300 | Oct. 30, 1930 | do | 6,037.00 |
| 12,610 | May 18, 1931 | do | 270,000.00 |
| 49,110 | 1,270,745.00 | ||
| 94 | Oct. 15, 1931 | Received in payment of loan, value | 1,880.00 |
| 500 | June 1, 1932 | Purchase | 5,400.00 |
| 300 | June 3, 1932 | do | 3,262.00 |
| 76 | do | do | 817.00 |
| 113 | June 17, 1932 | Received in payment of loan, value | 1,356.00 |
| 1,083 | Total | 1,283,460.00 |
As the holder of 11,000 shares of the bank issued as a stock dividend in 1929, deCoppet became entitled to all dividends and liquidating distributions on 11,000 investment corporation shares held*760 under the trust agreement. He reported no income on account thereof in his income tax return for 1929. In January 1931 a revenue agent investigated the items on this return and was given access to all books and records by deCoppet's office manager; these showed in detail of what the several items were composed. The agent found "all items * * * correctly reported"; the Commissioner made only a minor adjustment not here material.
*1388 In September 1931 deCoppet received a cash distribution of $392,880 and certificates of beneficial interest on 49,110 shares of the bank from the bank's distributing agent. After an investigation, in the course of which the trustees' arrangements with Smith & Gallatin were produced, the Commissioner determined that $87,833.36 of the distribution was taxable as a dividend. After the merger of September 1931 deCoppet exchanged the 49,110 bank shares then held by him for 30,939 new shares of the bank, which with the 1,083 thereafter acquired constituted the 32,023 [sic] held by him in September 1933.
In computing the joint income tax of Andre and Muriel deCoppet, husband and wife, for 1933, the Commissioner disallowed the deduction*761 of a loss of $254,676.08 claimed on account of the worthlessness of 32,023 [sic] shares of the investment corporation.
2. In September 1933 Allen K. Brehm was the owner of 1,400 shares of the bank stock, which had their origin in the following acquisitions:
| Shares | Date acquired | Manner acquired | Cost |
| 400 | Sept. 9, 1929 | Purchase | $21,200.00 |
| 1,000 | Jan. 13, 1931 | do | 14,500.00 |
| 830 | Sept. 21, 1931 | do | 16,492.50 |
| 2,230 | Total | 52,192.50 |
In September 1931 Brehm received a cash distribution of $17,840 and certificates of beneficial interest on 2,230 bank shares from the bank's distributing agent. In his income tax return for 1931 he reported $20,962 on account thereof as a return of capital; the return was accepted by the Commissioner without adjustments. After the merger of September 1931 Brehm exchanged his 2,230 bank shares for 1,404.9 new shares of the bank, of which he sold 4.9 shares. The cost of the remaining 1,400 was $51,780.36.
In computing Brehm's income tax for 1933 the Commissioner disallowed the deduction of a loss of $15,750 claimed on account of the worthlessness of 1,400 investment corporation shares.
3. In September*762 1933 Siegfried Gabel was the owner of 1,417 1/2 shares of the bank stock, which had their origin in the following acquisitions:
| Shares | Date acquired | Manner acquired | Cost |
| 600 | Prior to May 1929 | Purchase | $30,990 |
| 600 | June 15, 1929 | Exercise of rights | 24,000 |
| 100 | June 3, 1929 | Purchase and exercise of rights | 8,000 |
| 200 | June 7, 1929 | Purchase and exercise of rights | 15,000 |
| 750 | June 24, 1929 | Stock dividend | |
| 2,250 | Total | 78,490 |
*1389 As the holder of 750 bank shares issued as a stock dividend, Gabel became entitled to all dividends and liquidating distributions on 750 investment corporation shares held under the trust agreement. He reported no income on account thereof in his income tax return for 1929. In september 1931 Gabel received a cash distribution of $18,000 and certificates of beneficial interest on 2,250 bank shares from the bank's distributing agent. In his income tax return for 1931 he reported $21,150 on account thereof as a return of capital; the return was accepted by the Commissioner without adjustments. After the merger of September 1931 Gabel exchanged his 2,250 bank shares for 1,417 1/2 new shares of the bank. On*763 September 18, 1931, Gabel's wife, Paula, purchased 82 1/2 new bank shares for $1,650. In September 1933 they held the total of 1,500 shares, for which they had paid $80,140.
In computing the joint income of Siegfried and Paula Gabel, husband and wife, for 1933, the Commissioner disallowed the deduction of a loss of $16,875 claimed on account of the worthlessness of 1,500 investment corporation shares.
4. In September 1933 Ferdinand Anthony Grien was the owner of 630 shares of the bank's stock, which had their origin in the following acquisitions:
| Shares | Date acquired | Manner acquired | Cost |
| 400 | Nov. 18, 1930 | $6,883.00 | |
| 100 | Mar. 19, 1931 | 1,450.00 | |
| 500 | June 27, 1931 | 8,049.50 | |
| 1,000 | Total | 16,382.50 |
In September 1931 Grien received a cash distribution of $8,000 and certificates of beneficial interest on 1,000 bank shares from the bank's distributing agent. In his income tax return for 1931 he reported $9,400 on account thereof as a return of capital; the Commissioner treated $5,320 as taxable income. After the merger of September 1931 Grien exchanged his 1,000 bank shares for 630 new shares of the bank.
In computing Grien's income*764 tax for 1933 the Commissioner disallowed the deduction of a loss of $7,593.75 claimed on account of the worthlessness of 630 shares of the investment corporation.
5. In September 1933 Walter Frederichs was the owner of 1,931 shares of the bank's stock, which had their origin in the following acquisitions:
| Shares | Date acquired | Manner acquired | Cost |
| 800 | Prior to June 1929 | Purchase | $15,081.51 |
| 666 | June 1929 | Inheritance; value | 35,964.00 |
| 634 | June 15, 1929 | Exercise of rights | 25,360.00 |
| 1,050 | July 15, 1929 | Stock dividend | 0.00 |
| 3,150 | Total | 76,405.51 |
*1390 By virtue of owning 1,466 shares in June 1929, Frederichs received the right to purchase an equal number of the new bank shares to be issued, which rights he exercised only in respect of 634 of them. He sold the right to purchase 666 for $14,666.66 and made a gift of the right to purchase 166. As the holder of 1,050 bank shares issued as a stock dividend, Frederichs became entitled to all dividends and liquidating distributions on 1,050 investment corporation shares held under the trust agreement. He reported no income on account thereof in his income tax return for 1929. In September*765 1931 Frederichs received a cash distribution of $25,200 and certificates of beneficial interest on 3,150 bank shares from the bank's distributing agent. In his income tax return for 1931 he reported $29,610 on account thereof as a return of capital, and the return was accepted by the Commissioner. After the merger of September 1931 Frederichs exchanged his 3,150 bank shares for 1,984 new shares of the bank, of which he gave 53 to his wife, and kept the remaining 1,931.
In computing Frederichs' income tax for 1933 the Commissioner disallowed the deduction of a loss of $21,723.25 claimed on account of the worthlessness of 1,931 investment corporation shares.
6. In September 1933 Frederick H. Hornby was the owner of 14,175 shares of the bank's stock, which had their origin in the following acquisitions:
| Shares | Date acquired | Manner acquired | Cost |
| 7,500 | Prior to June 1929 | Purchase | $261,386.29 |
| 7,500 | June 15, 1929 | Exercise of rights | 300,000.00 |
| 7,500 | July 15, 1929 | Stock dividend | 0.00 |
| 22,500 | Total | 561,386.29 |
As the holder of 7,500 bank shares issued as a stock dividend, Hornby became entitled to all dividends and liquidating distributions*766 on 7,500 investment corporation shares held under the trust agreement. He reported no income on account thereof in his income tax return for 1929. In September 1931 Hornby received a cash distribution of $180,000 and certificate of beneficial interest on 22,500 bank shares from the bank's distributing agent. In his income tax return for 1931 he reported $47,827.12 thereof as income and so the Commissioner treated it. After the merger of September 1931 Hornby exchanged his 22,500 bank shares for 14,175 new shares of the bank.
In computing Hornby's income tax for 1933 the Commissioner disallowed the deduction of a loss of $159,468.75 claimed on account of the worthlessness of 14,175 investment corporation shares.
*1391 7. In September 1933 Woolsey A. Shepard was the owner of 182 1/2 shares of the bank's stock, which had their origin in the following acquisitions:
| Shares | Date acquired | Manner acquired | Cost |
| 100 | Oct. 10, 1929 | $6,242.50 | |
| 50 | Jan. 9, 1931 | 825.00 | |
| 50 | May 20, 1931 | 900.00 | |
| 50 | June 11, 1931 | 925.00 | |
| 250 | 8,892.50 | ||
| 25 | Sept. 20, 1933 | Purchase | 412.50 |
| Total | 9,305.00 |
In September 1931 Shepard received a cash*767 distribution of $2,000 and certificates of beneficial interest on 250 bank shares from the bank's distributing agent. In his income tax return for 1931 he reported $2,350 on account thereof as a return of capital; the Commissioner treated $531.41 as taxable income. After the merger of September 1931 Shepard exchanged his 250 bank shares for 157 1/2 new shares of the bank, which with the 25 shares thereafter acquired constituted the 182 1/2 shares held by him in September 1933.
In computing Shepard's income tax for 1933 the Commissioner disallowed the deduction of a loss of $3,476.25 claimed on account of the worthlessness of 182 1/2 shares of the investment corporation.
8. In September 1933 Henry M. Wise was the owner of 1,812 1/2 shares of the bank's stock, which had their origin in the following acquisitions:
| Shares | Date acquired | Manner acquired | Cost |
| 600 | Prior to June 1929 | Purchase | $18,855.00 |
| 150 | June 13, 1929 | Purchase and exercise of rights | 12,000.00 |
| 150 | June 14, 1929 | Purchase and exercise of rights | 11,872.50 |
| 600 | June 15, 1929 | Exercise of rights | 24,000.00 |
| 18 | June 18, 1929 | Purchase and exercise of rights | 1,134.00 |
| 759 | July 15, 1929 | Stock dividend | 0.00 |
| 500 | Aug. 9, 1929 | Purchase | 28,087.50 |
| 100 | June 3, 1931 | do | 1,675.00 |
| 2,877 | Total | 97,624.00 |
*768 As the holder of 759 bank shares issued as a stock dividend, Wise became entitled to all dividends and liquidating distributions on 759 investment corporation shares held under the trust agreement. He reported no income on account thereof in his income tax return for 1929. In September 1931 Wise received a cash distribution of $23,016 and certificates of beneficial interest on 2,877 bank shares from the bank's liquidating agent. In his income tax return for 1931 he reported $27,043.80 on account thereof as a return of capital; the return was accepted by the Commissioner without adjustments. *1392 After the merger of September 1931 Wise exchanged his 2,877 bank shares for 1,812 1/2 new shares of the bank.
In computing Wise's income tax for 1933 the Commissioner disallowed the deduction of a loss of $20,610 claimed on account of the worthlessness of 1,812 1/2 shares of the investment corporation.
OPINION.
STERNHAGAN: The petitioners demand a deduction in 1933 for loss because of the worthlessness of the shares of the Continental Corporation of New York, the "investment corporation." The Commissioner disallowed the deduction for the reason that "* * * no part of*769 the cost of the [bank] stock can be allocated to the [investment corporation] stock."
The shares of the investment corporation were owned by the trustees, and the petitioners' interest in them was that of beneficiaries of the trust, a position which was always incidental to their ownership of shares in the bank. Notwithstanding this unity, petitioners have undertaken to prove a cost basis to them of the investment corporation shares, by way either of direct cost or of apportionment in the manner of Regulations 77, article 58. 2 They rely heavily on the Board's decision in (on review C.C.A., 3d Cir.), where an allocation was used to arrive at a basis for computing gain from the sale of interests in a security investment corporation similarly affiliated with a bank. There was some similarity in the purpose of organization of the Security Co. in that case and of the organization of the investment corporation in this, but the allocation of basis as between the bank shares and the Security Co. shares, found practicable in the Hagerman case, was predicated largely upon an actual separation. The Board said it was*770 "only because the unit [of bank and Security Co. shares] was in fact separated and one of its constituent parts sold that the present issue arose." It may not be assumed that allocation would have been recognized as proper if there had been no such separation.
The petitioners say that they sustained a loss when the investment corporation dissolved without assets and its shares became worthless. We find it impossible to accept this view. Strictly speaking, in accordance with the conception which underlies the trust agreement of May 1, 1929, they were never the owners of investment corporation *1393 shares from the time of its organization*771 until its dissolution. Their investment was always in shares of the bank, and indissolubly within that investment was embedded their more remote interest in the affairs of the investment corporation; and that interest went only so far as those affairs, conducted by the directors of the bank, might result in distribution to the trustees and in turn to them. In 1929 petitioners paid $40 entirely to the bank and the bank was to use $10 of it as a subscription for two shares of investment corporation stock to be issued to the trustees, who were the bank's directors. Aside from the New York law's requirement of a separate corporation, the affairs conducted in the name of the investment corporation were inseparable from those of the bank. They were conducted by the same persons, not because they happened to be holding positions as directors of both corporations, but because it was designed so and anything else was inherently impossible. The identity of a trustee was not in his person but in his position as a director or officer of the bank. Thus it was assured that there could be no conflict between the interests of the two. This unity was carried out in the identity of bank shareholders*772 and trust beneficiaries; in distributive interests of the investment corporation, one being proportionate to the other; and in the evidence of both being shown by the same certificate. To all this was added the injunction that no holder might dispose of either alone; both must be held inseparably. This unitary conception was thoroughly adopted and adhered to by everyone at all times throughout the life of the enterprise at every stage and in every change in its course. Through the Smith & Gallatin transactions (with one unimportant exception) and through the Straus and International merger the composite units were preserved. The new corporation was never for a moment treated practically as independent. During the merger the investment corporation transferred its assets to the bank's distributing agent, changed its shares with changes by the bank, and transferred its assets so that after the merger it owned the Thirty Broad Street shares, worth $2,000,000 more than the assets given up.
The final event which is relied upon to demonstrate the petitioners' loss is itself an indication of the inseparable composite character of their investment. The Thirty Broad Street Building*773 was found to be unprofitable. In itself this was not a recognizable loss to its owner, the Thirty Broad Street Corporation, but merely a failure of expected profits; it still owned the building, subject to a mortgage, and the mortgage had not been foreclosed. In actual value its assets were less than its liabilities. To its only shareholder its condition was not such an "identifiable event" as to establish a deductible loss. For its own reasons, the investment corporation transferred the shares of *1394 Thirty Broad Street Corporation to the mortgagee; and thus by its own act it made itself destitute and its own shares worthless. The trust corpus consisted of only such worthless investment corporation shares, and petitioners as beneficiaries were thus forever deprived of the expectation of trust distributions of amounts received by the trustees as dividends and capital distributions of the investment corporation. But the petitioners still had their bank shares for which they had paid various amounts at various times under various circumstances, all including the $40 per share in June 1929, of which $10 was in turn used by the bank to subscribe for two shares of the new*774 investment corporation.
The conclusion which seems to us inevitable is that petitioners' investment must be regarded as existing in their bank stock and that their relation to the investment corporation and the trust was an inherent part of their ownership of bank shares, the ultimate disposition of which will reflect gain or loss upon the full basis of their cost.
But if it were proper to consider the petitioners' investment as divisible between the bank shares and the beneficial interest in the investment shares, the question of the practicability of apportionment of basis would become important. We should find such an apportionment wholly impracticable. There is only a short parallel of the complex circumstances of acquisition here, as in deCoppet's case, and the comparatively simple circumstances of the transactions considered in These petitioners bought shares for cash, acquired them by inheritance, in discharge of loans, as dividends, and by the exercise of rights; both corporations canceled shares, the bank participated in a merger which involved a change in the investment corporation's share structure, and its assets and liabilities*775 were shifted for the convenience of the bank. The problem of computing the basis of shares in the investment corporation is thus far more difficult than in the cases cited.
Complexity and difficulty of computation are in themselves insufficient reasons for denying the deduction, and neither the Commissioner nor the Board may refuse to ascertain the amount of deduction merely because its computation is a burdensome task. The question whether an apportionment is practicable, however, goes further.
If this case had involved but the sale by each petitioner of a separate share in the investment corporation received from the trustees at a time when the shareholder's right thereto was the direct result of his paying the $40 to the bank upon the understanding that $10 would be turned in to the investment corporation, the gain or loss from such a sale might have been computed upon the basis of such $10 for each two shares sold. That, however, is not the question to be decided. The acts of June 1929 were still more complex and were soon enmeshed in such later transactions as obscured them entirely. *1395 Any calculation of a separate basis would require some appraisal of several*776 imponderable factors. The $2,000,000 gain in Thirty Broad Street shares is illustrative. The apportionment would be entirely artificial and quite unworthy of use - hardly reliable enough to be called "practicable."
The necessity is thus eliminated for considering the question whether there was a statutory reorganization in September 1931 affecting the basis of the investment shares, and also for considering the question, affirmatively raised by the respondent, whether in any event petitioners are estopped.
The Commissioner's determination is sustained.
Reviewed by the Board.
Decision will be entered under Rule 50.
LEECH, DISNEY, and KERN concur only in the result.
SMITH, dissenting: The evidence shows that the bank and the investment corporation were separate corporations. The shares of the investment corporation became worthless in 1933. It follows that a stockholder owning shares in the investment corporation sustained a loss in 1933 represented by his investment in the shares of the investment corporation.
The petitioners claim the right to deduct from their gross incomes of 1933 the amounts they paid for shares of stock in the investment*777 corporation. The Board has denied the claimed deductions upon the ground that it is difficult, if not impossible, to determine the exact amount of their investments in those shares. I am of the opinion that the deductions are not to be disallowed upon this ground. It is the function of the Board to determine the amount of the losses, if any such were sustained. The Board is not absolved from the duty of making such determinations because of difficulty in doing so. Cf. ; .
In the case of Andre deCoppet it is shown that he acquired 11,000 shares of the bank's stock prior to June 1929, and that on June 15, 1929, he paid $440,000 in the acquisition of an additional 11,000 shares. He was required to pay $40 a share, of which amount $10 was the cost to him of beneficial rights in 2 shares of the investment corporation, which shares were to be held by trustees for the benefit of the bank's shareholders. The shares of the investment corporation became worthless in 1933. DeCoppet plainly sustained a loss*778 on his investment in 22,000 shares of the investment corporation of at least $110,000. I think the Board is in error in disallowing the deduction of the proven loss.
*1396 DeCoppet also claims the right to the deduction of additional amounts representing his investment in shares of stock acquired subsequent to June 15, 1929. I think it is possible to determine that the loss was in excess of $110,000. But in any event deCoppet is entitled to deduct from the gross income of 1933 his proven loss.
It is also possible to determine minimum amounts of losses sustained by other petitioners which likewise are deductible.
ARUNDELL, VAN FOSSAN, and HARRON agree with this dissent.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Allen K. Brehm; Siegfried Gabel and Paula A. Gabel; Ferdinand Anthony Grien; Walter Frederichs; Frederick H. Hornby; Woolsey A. Shepard; and Henry M. Wise. ↩
2. * * * Where common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between such common stock and the securities purchased for the purpose of determining the portion of the cost attributable to each class of stock or securities, but if that should be impracticable in any case, no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost.
* * * ↩