*752 1. The taxpayer and others made a contract to build a tunnel and agreed among themselves to share the profits and losses in stated proportions. They then organized a construction company to perform the contract; each acquired shares therein, in proportion to his interest in the contract, for his promissory note; and the contract was sublet to the construction company. Before the contract had been completed, the taxpayer and an associate owning a like interest transferred their stock to a cattle company in which they each owned one half of the stock, and the latter gave the construction company a note for the subscription price of the stock. The construction company completed the contract at a loss, which resulted in its insolvency. After the loss became known the taxpayer and his associate reacquired the stock previously transferred to the cattle company and assumed and paid the liability of the cattle company on its note and a proportionate share of the remaining liabilities of the construction company. Held, that neither the corporate entity of the construction company, the acts and circumstances surrounding its creation and existence, nor the fact that the taxpayer was*753 not the owner of its stock when the loss was sustained, can be disregarded in determining whether the taxpayer sustained a deductible loss in the transaction.
2. The evidence as a whole does not justify a finding that, when the construction company's stock became worthless, the cattle company held the shares of such stock previously acquired from the taxpayer as nominee or trustee, or in any capacity other than that of an actual owner, and the taxpayer therefore may not take a deduction for a loss on the theory that he was at all times the owner of an interest in the construction company.
3. The reacquisition of the stock of the construction company by the taxpayer from the cattle company and the assumption by him of the liabilities of the latter, including the liability on the note given to the construction company, does not entitle the taxpayer to deduct any loss as cost to him of the construction company stock, since he knew when he reacquired the stock that the transaction would not result in a profit, but would make him liable for a part of the loss previously sustained by the construction company.
4. Where a stockholder assumes and pays his pro rata share of a particular*754 debt of a corporation, which the corporation is able to pay but for which he is liable under the state law, and the evidence does not show that he disposed of his stock in the corporation or that it became worthless in the year in which the debt was paid, and there is no evidence of the cost or other basis of the stock, he may not deduct the amount paid as a loss sustained on his investment in the corporation. In such case, he is entitled only to increase (to the the corporation. In such case, he is entitled only to increase (to the the stock is actually disposed of or sold.
*443 In this proceeding the petitioner contests the Commissioner's determination of a deficiency in income tax for the calendar year 1929 in the amount of $29,468.87. The sole issue raised by the pleadings is whether the petitioner sustained a deductible loss in the amount of $126,993.66.
FINDINGS OF FACT.
The petitioner is an individual, residing in San Francisco, California.
The County of Alameda, State of California, *755 in March 1925 asked for bids for the construction of a concrete traffic tunnel under the waters of the Oakland estuary between the cities of Oakland and Alameda, California. The petitioner and J. A. McCarthy, became interested in the project, partly because of the possibility of profit to the Old Mission Portland Cement Co., of which they were the highest officers and important stockholders, and also because of the profit which they expected to realize from the construction of the tunnel. They had previously joined with each other in various ventures on an equal basis. A. J. Crocker Co. and the Provident *444 Security Corporation decided to join them in this venture. These parties agreed that the petitioner and McCarthy would each take one half of a 35 percent interest, the Provident Security Corporation a 35 percent interest, and A. J. Crocker Co. a 25 percent interest in the venture. The remaining 5 percent was reserved for future subscription by employees or other disposition to be agreed upon later. Any losses sustained on the construction of the tunnel were to be paid by the respective parties in the same proportions.
These parties intended to organize a corporation*756 to construct the tunnel, but, due to shortness of time, they agreed that A. J. Crocker Co. should act as trustee for those interested and submit a bid to Alameda County. The bid was submitted by A. J. Crocker Co. and the contract was awarded to it by Alameda County on April 25, 1925. The total contract price was $3,882,958.40.
A. J. Crocker Co. was required to give two bonds to Alameda County of $1,942,000 each. The surety companies, before writing the bonds, insisted that $500,000 in cash be deposited as collateral in the Anglo & London-Paris Bank of San Francisco and that certain of the parties give their personal bonds to the Surety Co. to indemnify the latter in the event of loss on account of writing the bonds. The petitioner did not give any bond in that connection. The Old Mission Portland Cement Co. deposited $300,000 and Louis Schoenberg, who was interested in the Provident Security Corporation, deposited $200,000 of the required $500,000. The Old Mission Portland Cement Co. made this deposit of $300,000 because the parties interested in the construction contract agreed to purchase all cement from it; because they also agreed that before resorting to this cash deposit, *757 the bonds the individuals and corporations interested would first be exhausted; and because they also agreed that they would be liable severally to repay the Old Mission Portland Cement Co. the $300,000, or any part thereof, that should be used for indemnification of the surety companies. Cement was purchased from the Old Mission Portlant Cement Co.
The California Bridge & Tunnel Co. (hereinafter called the Tunnel Co.) was organized on May 18, 1925, under the laws of the State of California, for the purpose of completing the construction of the tube under the contract awarded to A. J. Crocker Co. The authorized capital stock of the Tunnel Co. was 10,000 shares each having a par value of $100. Only 5,000 shares were issued and they were subscribed for on July 15, 1925, as follows:
| Shares | Percentage | |
| Provident Security Corporation | 1,750 | 35 |
| A. J. Crocker Co | 1,250 | 25 |
| J. A. McCarthy (for himself and the petitioner) | 1,750 | 35 |
| Thornton Wilson (trustee) | 250 | 5 |
*445 A certificate of 1,748 shares of the Tunnel Co.'s stock was made to J. A. McCarthy, and a certificate for one share each to E. I. Fitzpatrick and E. L. Hammond. The certificate made*758 out to McCarthy was never detached from the stock certificate book, although he receipted for it. No cash was paid in for the stoc, but the stockholders gave their promissory notes therefor to the Tunnel Co. on July 2, 1925, in the following amounts:
| Provident Security Corporation | $175,000 |
| A. J. Crocker Co | 125,000 |
| J. A. McCarthy (for himself and the petitioner) | 175,000 |
| Thornton Wilson, trustee | 25,000 |
In order to obtain working capital the Tunnel Co. discounted its own $500,000 note at the Anglo & London-Paris National Bank, putting up its stockholders' notes aggregating $500,000 as collateral.
A small amount of work on the tube was done by A. J. Crocker Co. That company sublet its contract to the Tunnel Co. on July 2, 1925. After the contract was sublet, the Tunnel Co. performed the work to be done under the contract, but the subcontract was not recognized by Alameda County. A. J. Crocker Co. continued to be responsible to the county. It collected the contract price and paid the same over to the Tunnel Co. in accordance with the terms of the subcontract.
Contractors and cement companies complained because McCarthy was interested in the Old Mission*759 Portland Cement Co. and at the same time was engaged in the construction business. It was, therefore, deemed advisable to allay this criticism. The 1,750 shares of Tunnel Co. stock which McCarthy subscribed for on behalf of himself and the petitioner were transferred on September 23, 1926, to the Mission Land & Cattle Co. (hereinafter called the Cattle Co.), a California corporation, all of the stock of which was owned by McCarthy and the petitioner in equal proportions. The Cattle Co. gave the Tunnel Co. its note dated October 8, 1926, for $175,000 for the 1,750 shares of stock and this note was placed in the Anglo & London-Paris National Bank as collateral security for the indebtedness of the Tunnel Co. The record does not show what became of McCarthy's note for $175,000.
The 250 shares of stock held by Thornton Wilson, trustee, were transferred in September 1926 to F. S. Smith, trustee, and held by him until about July 11, 1929. F. S. Smith was the secretary of the Cattle Co. That company on October 8, 1926, gave its note for $25,000 to the Tunnel Co.
The Tunnel Co. completed the Oakland-Alameda Tube in July 1929 at a loss of approximately $750,000, which resulted in*760 the insolvency of the company. It was known for some time that such a loss would result. The Tunnel Co. called upon its stockholders to *446 pay their respective notes aggregating $500,000 given in payment for its capital stock. The board of directors of the Tunnel Co. on July 15, 1929, held a special meeting for the purpose of considering and acting upon offers received relating to the payment of these promissory notes. The minutes of that meeting recite the desire of the petitioner and J. A. McCarthy to acquire the 1,750 shares of the Tunnel Co.'s capital stock owned by the Cattle Co. and in payment therefor to assume the indebtedness of that company to the Tunnel Co. in the sum of $175,000. A resolution was adopted at the meeting consenting to the assumption of this indebtedness by these two individuals in equal proportions. The minutes also recite the desire of A. J. Crocker Co., Provident Security Corporation, J. A. McCarthy, and the petitioner to acquire the 250 shares of the capital stock of the Tunnel Co. owned by the Cattle Co. and to assume the indebtedness of that company to the Tunnel Co. in the sum of $25,000, and a resolution was adopted consenting to the*761 assumption of that indebtedness as follows:
| A. J. Crocker Co | $6,580 |
| Provident Security Corporation | 9,210 |
| William F. Humphrey | 4,605 |
| J. A. McCarthy | 4,605 |
A resolution was also adopted that upon the assumption by those individuals and corporations of the $200,000 indebtedness due the Tunnel Co. from the Cattle Co. the officers of the Tunnel Co. would cancel and return to the Cattle Co. its promissory notes in the amount of $200,000.
The 1,750 shares of stock of the Tunnel Co. issued in the name of the Cattle Co. were transferred on July 15, 1929, to McCarthy, 875 shares; to the petitioner, 874 shares; and to F. S. Smith, trustee, 1 share. On or about the same date, the 250 shares of Tunnel Co. stock owned by the Cattle Co. were taken over by A. J. Crocker Co., Provident Security Corporation, McCarthy, and the petitioner in the same proportions as their original investments, McCarthy and the petitioner each receiving 46.05 shares. The capital stock of the Tunnel Co. was worthless prior to July 15, 1929.
The petitioner, McCarthy, A. J. Crocker Co., and the Provident Security Corporation borrowed the following amounts from the Anglo & London-Paris National*762 Bank on their promissory notes dated July 15, 1929:
| Petitioner | $93,358.74 |
| J. A. McCarthy | 93,358.74 |
| A. J. Crocker Co | 133,398.60 |
| Provident Security Corporation | 186,717.48 |
The amounts borrowed by A. J. Crocker Co. and the Provident Security Corporation were deposited in their checking accounts at the *447 bank and they gave the Tunnel Co. their checks for $133,398.60 and $186,717.48, respectively, which were deposited by that company on July 18, 1929, in its account at the bank. The petitioner and McCarthy each directed that the amounts they borrowed be credited to the account of the Tunnel Co. The vice president and cashier of the bank, on July 30, 1929, made out two cashier's checks for $93,358.74 each, one payable to the order of the petitioner and the other to the order of J. A. McCarthy, and these checks were endorsed in the names of the petitioner and McCarthy, respectively, by the vice president and cashier of the bank and deposited to the credit of the Tunnel Co. on July 30, 1929. Previously, on July 5, 1929, the Cattle Co. paid $2,799.84 in cash to the Tunnel Co.
After receiving these amounts the Tunnel Co. drew a check on the Anglo & London-Paris*763 National Bank for $506,833.56 in payment of its own note of $500,000 and accrued interest thereon of approximately $6,833.56.
The notes of the Cattle Co. in the amounts of $175,000 and $25,000 were surrendered by the bank on July 30, 1929.
The Tunnel Co., after paying its note of $500,000 at the Anglo & London-Paris National Bank, still owed other creditors about $188,166.44. The Tunnel Co. borrowed $188,166.44 at the Anglo & London-Paris National Bank on July 30, 1929, and the stockholders guaranteed their proportionate share of this amount. The petitioner guaranteed 18.42 percent. The petitioner paid cash to the Tunnel Co. in the amount of $2,763 on November 30, 1929. The Tunnel Co. was liquidated and dissolved in December 1929. The company's note for $188,166.44 had been reduced by that time to $160,000. The bank demanded on December 2, 1929, that the stockholders make good their guaranty by paying the unpaid balance of $160,000. The petitioner then gave to the Anglo & London-Paris National Bank his personal note for $29,472 dated December 2, 1929 He gave the bank a new note for $122,830.74 dated December 31, 1929, in place of his note for $29,472 and his note for $93,358.74, *764 above mentioned.
The petitioner used the cash receipts and disbursements method of accounting for and reporting his income.
OPINION.
MURDOCK: The petitioner was on the cash receipts and disbursements basis and could not, under any circumstances, deduct as a loss for 1929 more than he actually paid in that year. A payment of $2,799.84 in cash to the Tunnel Co. was made on July 5, 1929. But that payment was made by the Cattle Co. The petitioner stated that one half of that amount was paid on his behalf. He was not a *448 stockholder of the Tunnel Co. at that time. The petitioner paid $2,763 in cash to the Tunnel Co. on November 30, 1929. The evidence does not disclose the purpose of either of those payments. The petitioner borrowed $93,358.74 from a bank on his promissory note and paid the money thus borrowed to the Tunnel Co. Of that payment $87,500 represented payment at par for one half of the 1,750 shares of Tunnel Co. stock; $4,605 represented a similar payment for 46.05 shares; and $1,253.74 represented a proportionate part of the interest on the Tunnel Co.'s note for $500,000. The petitioner includes in the amount of the deduction which he claims not only*765 all of the above items, but also an item of $29,472. The petitioner and other stockholders of the Tunnel Co. on July 30, 1929, guaranteed a loan which was made to the Tunnel Co. by a bank on a note of the Tunnel Co. The bank demanded on December 2, 1929, that the stockholders make good their guaranty by paying the unpaid balance of the note in the amount of $160,000. The petitioner's share of this unpaid balance was $29,472. He gave his promissory note to the bank for that amount. That bank then held two of his promissory notes - the one for $93,358.74, above described, and the one just given for $29,472. He combined the amounts of those two notes and gave a new note for the total of $122,830.74 either on the 31st of December 1929 or early in January 1930. Evidence of both dates came from the petitioner's witnesses. There might be considerable doubt as to whether all of these amounts were paid in 1929 and represented losses by one on the cash receipts and disbursements basis. However, the questions thus suggested need not be decided, for reasons which will later appear.
The petitioner advances three different arguments to support his claim that he is entitled to deduct*766 $126,993.66 from his income for 1929 as a loss under section 23(e)(2) of the Revenue Act of 1928. 1 The first argument which he makes is that he became liable under the original agreement of the parties for a certain share of any loss which might result from the construction of the tube; his share of the loss turned out to be $126,993.66; he paid this amount in 1929; the transaction was entered into for profit and therefore he is entitled to deduct the amount in controversy as a loss under section 23(e)(2). He reasons, in this connection, that the Tunnel Co. was a mere agency created for the sole purpose of constructing the tube; the parties to the original agreement contributed to the Tunnel Co. *449 only what they would have been required to pay if the corporation had never been organized; therefore the corporate entity of the Tunnel Co. should be disregarded.
*767 The petitioner originally entered into the transaction for profit and agreed to share a portion of any loss which might result. In the end he assumed, and probably paid, his share of the loss which resulted from the construction of the tube. But between the original agreement and the ultimate payment of the loss a number of transactions having tax significance intervened. Those intervening transactions can not be ignored. The original parties to the venture formed a corporation. The contract to construct the tube was turned over to that corporation. The corporation actually constructed the tunnel and sustained the loss. Furthermore, it paid for the loss. The petitioner subscribed for stock of that corporation. Instead of paying cash for the stock at the time of his subscription his associate gave a note in the amount of $175,000 to the corporation. That note represented merely a promise to pay. Later, for reasons satisfactory to the petitioner and his associate, they ceased to be stockholders of the corporation and allowed the shares which they had previously owned to become the property of the Cattle Co. The Cattle Co. gave its note to the corporation for $175,000. The*768 evidence does not show that the note given by McCarthy was surrendered, but certainly the petitioner can derive no benefit from the lack of proof in regard to what became of that note. The note was never paid. If he remained liable on that note he should have proven the facts to show his liability. If any inference were to be drawn, the natural one would be that McCarthy's note was surrendered when the note of the Cattle Co. was received by the Tunnel Co. In any event the Cattle Co. became the owner of the stock and the petitioner ceased to be the owner of any stock in the Tunnel Co. The Cattle Co. was the owner of the Tunnel Co. stock when that stock became worthless. Thereafter the petitioner reacquired some of the stock of the Tunnel Co. from the Cattle Co. and voluntarily assumed liability thereon for a proportionate part of the loss of the Tunnel Co. There is no sound reason in this case for disregarding the corporate entity of the Tunnel Co., the acts and circumstances surrounding its creation and existence, or the fact that its stockholder, at the time the loss was sustained and its stock became worthless, was the Cattle Co., not the petitioner. The following statement*769 of the Supreme Court in , is apposite: "While unusual cases may require disregard of corporate form, we think the record here fails to disclose any circumstances sufficient to support the petitioner's claim. Certainly the Improvement Company and the estate were separate *450 and distinct entities; the former was avowedly utilized to bring about a change in ownership beneficial to the latter." Consequently the first argument advanced by the petitioner is rejected as unsound.
The petitioner next argues that he and McCarthy were at all times the owners of 1,750 shares of stock of the Tunnel Co. and were at all times personally responsible for their proportionate part of the 250 shares which were held in trust; the Cattle Co. never owned any of the stock; and, therefore, he is entitled to deduct a loss of $126,993.66, representing his investment in the stock of the Tunnel Co. which became worthless in 1929. This contention is not supported by the facts. The petitioner and McCarthy originally subscribed for 1,750 shares of stock. They did not pay for this stock in cash, but merely gave a note whereby*770 they promised to pay $175,000 in the future. The note was never paid. They never received a certificate for the shares. The Cattle Co. acquired the 1,750 shares in question in 1926. It did not pay cash at that time, but gave its promissory note for $175,000 to the Tunnel Co. It was the actual owner of the 1,750 shares of stock when those shares became worthless. Although the petitioner's contention finds some support, the evidence as a whole does not justify a finding that the Cattle Co. held the stock merely as nominee, or that it held the stock in any other fiduciary capacity. Two hundred and fifty shares of Tunnel Co. stock were held in trust. The trustee was changed from time to time. When the stock became worthless the stockholders of the Tunnel Co. other than the trustee were liable for the entire loss which the Tunnel Co. had sustained. The Tunnel Co. then called upon its stockholders to pay for their stock. The petitioner had ceased to own any interest in the Tunnel Co. prior to that call for payment of the subscription price and prior to the time that the Tunnel Co. stock became worthless. The record does not show that the Cattle Co. was unable to shoulder its*771 entire responsibility as a stockholder of the Tunnel Co. If it had paid its share of the loss the petitioner would have had no loss to pay. The petitioner is not entitled to deduct the loss which he claims on the theory that at all times he was the owner of one half of a 35/95 interest in the Tunnel Co.
He maintains, as a sort of alternative to this second contention of his, that he is entitled to deduct the amount in question as the cost of the Tunnel Co. stock, even if it be held that he and McCarthy purchased the 1,750 shares from the Cattle Co. in July 1929. The acquisition by the petitioner of the Tunnel Co. stock from the Cattle Co. in July 1929 was not a transaction entered into for profit. He was fully aware before he entered into that transaction that it would *451 not result in a profit, but, on the contrary, would make him liable for a part of the loss sustained by the Tunnel Co. in the construction of the tube. Any loss from that transaction would not be deductible under section 23(e)(2), since it was not sustained in a transaction entered into for profit. Neither would it be deductible under section 23(e)(1), since it was not a loss sustained in connection*772 with the petitioner's trade or business. No effort was made to show what the petitioner's trade or business was. He has not shown and he does not claim that the loss was sustained in connection with his trade or business. The Cattle Co., as owner of the Tunnel Co. stock in July 1929, was liable for 35/95 of the loss sustained by the Tunnel Co. in the construction of the tube. The petitioner, by voluntarily assuming one-half of the liability of the Cattle Co. on account of the loss of the Tunnel Co. did not become entitled under section 23(e) to any deduction from his income tax.
The petitioner's final argument is that he was liable as a stockholder of the Cattle Co. for one half of the indebtedness of the Cattle Co. on its note for $175,000 which it had given to the Tunnel Co.; he assumed and paid one half of the debt and interest, or $88,753.74; his investment in the Cattle Co. was a transaction entered into for profit; and he is entitled to deduct $88,753.74 as a loss sustained by him in a transaction entered into for profit. The parties agree that in California a stockholder is liable for his proportionate part of the debts of the corporation in which he owns stock contracted*773 during the period of his stockholding. Nevertheless, the petitioner is not entitled to deduct any amount on this theory. The Cattle Co. was liable for its debt to the Tunnel Co., and if the Cattle Co. was unable to pay that debt, such fact does not appear in this record. If he paid the amount in question because he held one half of the stock in the Cattle Co., that payment was a voluntary one on his part and merely served to increase the basis for gain or loss in his hands of the Cattle Co. stock. ; affd., ; certiorari denied, ; . The cost of the Cattle Co. stock to the petitioner has not been shown. There is no evidence to indicate that the Cattle Co. stock was worthless in 1929. The petitioner still held his stock in the Cattle Co. at the end of 1929. His investment in the stock of the Cattle Co. may have been a transaction entered into for profit, although there is no proof on that point. Since the Cattle Co. stock was not worthless in 1929 and was not disposed of any the petitioner in 1929, no gain or loss for 1929 based upon*774 his investment in the Cattle Co. stock can be computed for that year. The additional amount which he *452 invested in the stock of the Cattle Co. by paying the $888,753.74 will be taken into consideration in computing his gain or loss when he disposes of his Cattle Co. stock. The petitioner has not claimed the right to deduct more than $88,753.74 on this theory. However, the Tunnel Co. sustained its entire loss while the Cattle Co. was a stockholder. The Cattle Co. was liable as a stockholder of the Tunnel Co. for the latter's indebtedness. If the petitioner were to argue that as a stockholder of the Cattle Co. he was liable for a part of this additional indebtedness and for the loss which its payment represented to him, the answer would be that any payment which he made in this connection would likewise represent additional investment in the stock of the Cattle Co. Thus on no theory that has been suggested would the petitioner be entitled to deduct the loss which he claims.
The petitioner originally joined with others in a joint venture. At that time he was in position to become liable for a share of any future losses of the venture, as well as to share in its future*775 profits. The form for carrying out the venture was changed when the individuals organized the corporation and transferrred to it the contract for the construction of the tube. There was no longer a joint venture with individual liability for future loss and individual rights to future gains. Thereafter it was a corporate venture. The petitioner ceased to be a stockholder in the Tunnel Co. Thereafter he was no longer responsible, on his original agreement, for any future losses sustained in the construction of the tube. The original parties to the venture, prior to the organization of the corporation, also made themselves personally liable to the parties who deposited cash for the protection of the indemnity company, and they also made themselves liable to the parties who gave their personal bonds for the protection of the depositors of the cash. The liability thus created may have persisted until and throughout 1929. However, the depositors of the cash lost nothing, those who gave their personal bonds were not called upon to make good any loss of the depositors, and the petitioner was not called upon to indemnify the ones who had given their bonds. Thus he sustained no loss*776 as a result of those original agreements. The Tunnel Co., in taking over the contract for the construction of the tube, agreed to indemnify and hold harmless the general contractor. The loss of the Tunnel Co. was paid without recourse to the bonds or deposits made before it was organized. The Cattle Co., as one of the stockholders of the Tunnel Co., was liable for its share of the loss of the Tunnel Co. There is nothing in the record to indicate that it was not at all times able to meet *453 its obligations. It thus stood between the petitioner and any possible loss on his part. But the petitioner voluntarily assumed a part of the liability of the Cattle Co. to the Tunnel Co. The revenue act, however, does not permit the transfer of a loss of a corporation to its stockholders under such circumstances.
Deductions are purely statutory and if no specific authorization can be found in the statute no deduction can be taken. The Board is not called upon at this time to decide whether or not the Cattle Co. might be entitled to deduct a loss. The plan whereby the Cattle Co. became a stockholder in the Tunnel Co. was designed to serve useful purposes of the petitioner and*777 McCarthy. If the Tunnel Co. had made a profit on the construction of the tube, the Cattle Co. could have received its share of the profit tax free as dividends. Since the Tunnel Co. sustained a loss, it is to the petitioner's advantage to disregard his act of substituting the Cattle Co. for himself as a stockholder. Having voluntarily made the Cattle Co. the stockholder for the benefits which that step offered, he must likewise accept its inherent disadvantages.
Decision will be entered for the respondent.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(e) Losses by individuals. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -
* * *
(2) if incurred in any transaction entered into for profit, though not connected with thre trade or business; * * * ↩