*1001 Held, determination by the respondent that stock was worthless in 1933 and not 1936, has not been overcome by the evidence, and the respondent's disallowance of loss deduction for 1936 is sustained.
*444 The respondent determined an income tax deficiency of $4,453.31 for the year 1936, as the result of his disallowance of a deduction of $13,150 claimed as a loss sustained on certain bank stock alleged to have become worthless in that year. Petitioner assigns error in such determination.
FINDINGS OF FACT.
In 1930 the petitioner, an individual, residing at 950 Hill Road, Winnetka, Illinois, acquired by cash purchase 30 shares of stock in the Security Bank of Chicago at a total cost of $13,150. There were in all 7,000 shares outstanding. The owner of each share of Security Bank stock automatically owned one-half share of stock in the Second Security Bank of Chicago, whose 3,500 shares were held in trust for the benefit of stockholders of the Security Bank. Petitioner still holds the*1002 30 shares of stock in the Security Bank and the *445 15 shares in the Second Security Bank, both of which banks are incorporated under the laws of Illinois, and are hereinafter referred to as the banks.
In March 1933, as a result of Presidential proclamation, the two banks were closed in accordance with the general bank holiday and have never reopened for the purpose of doing business. For some months prior to that date there had been a heavy withdrawal of deposits, requiring the disposal of much of the liquid assets of both banks, and the borrowing of cash from the First National Bank of Chicago, as a result of which the Security Bank was indebted to the First National in the sum of $1,141.704.08, exclusive of interest; and the Second Security Bank owed the First National $825,000, exclusive of interest.
On March 12, 1933, the directors of the two banks met at a special meeting to consider reopening after the moratorium. They decided that, although the book value of their assets showed sufficient convertible funds to pay off depositors, they would accept no further deposits. Further, they authorized the officers of the two banks to borrow cash from the First National*1003 Bank in an amount sufficient to pay all depositors in full, and to pledge all the remaining assets, cash excluded, as security therefor.
The assets consisted in the main of real estate pledged to secure loans. At the time of the loans the property was estimated to be worth twice as much as the cash advanced.
The material provisions of the directors' resolution are as follows:
WHEREAS, this Bank is not a member of the Federal Reserve System, and, although solvent, the character of its securities and assets does not justify any reasonable belief that, if this Bank should now apply for membership in the Federal Reserve System, it would be admitted to membership, or, if admitted to membership, that it could secure adequate credit from the Federal Reserve Bank of Chicago (in contemplation of said recent Federal legislation) and failing such admission to membership and the procuring of such credit, this Bank is not in a position to reopen on any basis of operation, either under Federal or State permission, which would offer any reasonable prospect of conserving its going value or assuring uninterrupted operation; and
WHEREAS, in the opinion of the Board of Directors, it is for*1004 the best interests of the bank and its depositors that this Bank cease to receive any further deposits, and that arrangements be made whereby all of the depositors of this Bank can at once be paid the full amount of their respective deposits; * * *
The phrase "although solvent" was intended to mean that the anticipated value of the assets was sufficient to pay off the depositors.
The following day the two loan agreements were executed. The First National Bank agreed that, upon repayment of the loans, it would return to each bank any remaining collateral. But the First National Bank had the right to liquidate all assets it received as "security", the liquidation expenses to be borne by the banks.
*446 The First National took possession of all the assets and commenced to liquidate the same. On October 31, 1933, an appraisal was made of the banks' assets by G. C. Kiddoo, vice president of the First National Bank, which appraisal was embodied in a communication to McCloud, executive vice president of the First National Bank, bearing date of November 15, 1933. The appraisal figures were:
| Former value per books | Estimated recovery on appraisal | |
| Security Bank | $3,646,019 | $1,554.246 |
| Second Security Bank | 2,435,180 | 1,110,851 |
*1005 The liabilities of both banks exceeded the estimated recoveries on this date. In explanation of the appraisal the communication contained the following paragraph:
The above figures are based on an estimated recovery on real estate mortgages and bonds of 40% of their book value, which is only a general estimate. The above figures also do not take into account the expense of liquidation including the fees which will be payable to the National Security Bank and fees of attorneys and other incidental liquidation expenses. It is probably a fair guess that the assets of these banks will fall short of liquidating for enough to cover their liabilities by $1,100,000, not taking into account assessment of the stockholders.
This appraisal was not sent to the stockholders or made public in any other manner.
Charles V. Clark, attorney for the banks at the time they closed, and James B. Forgan, chairman of the board of the banks, both claimed deductions on account of this worthless bank stock in 1933. These deductions were allowed by Commissioner.
No detailed appraisement of these assets was, however, brought to petitioner's notice until early in 1936, when he received a circular*1006 letter signed by the members of the stockholders' committee. This report showed the former book value to be misrepresentative of the actual value of the assets and, in conclusion, showed that the banks were clearly insolvent. The letter also offered to each shareholder a full release of his statutory double liability ( $150 per share) for one-sixth of that amount, or $25 per share. On December 31, 1936, petitioner paid the sum of $750 to the National Bank and obtained his full release.
The banks have not yet been completely liquidated; both have maintained their corporate charters while in liquidation, but have not functioned as banks. The tax returns filed annually since 1933 have contained a statement to the effect that the banks are in liquidation.
*447 In his income tax return for the calendar year 1936, petitioner deducted from his gross income the $13,150 cost of his 30 shares of Security Bank stock as a loss in a transaction entered into for profit, sustained by virtue of such shares becoming worthless in 1936. Petitioner had not previously claimed this as a loss in any tax return. The Commissioner disallowed this loss, holding that the stock was worthless*1007 at a prior date.
Petitioner's stock in the banks became worthless during 1933.
OPINION.
HILL: The issue presents a question of fact as to whether the bank stocks actually became worthless in the taxable year 1936, which presupposes that they had value during the years 1933-1936, or, whether such stock became worthless in a taxable year prior to 1936.
A loss by reason of the worthlessness of stock must be deducted in the year in which the stock becomes worthless and the loss is thereby actually sustained. In , cited in , the Board reviewed many types of "identifiable events" which have in the past been considered as establishing the worthlessness of stock. Applying the principles of these two cases to the facts in the instant case, it is the Board's conclusion that the petitioner's bank stocks actually became worthless during 1933 and thus prior to the taxable year here involved.
Here it is shown that the two banks were in an admittedly precarious position prior to the national bank holiday in March 1933. As was the condition in many other sections of the country, *1008 depositors were hastening to withdraw their accounts. The two banks had borrowed cash from the First National Bank in a sizable amount and in addition had converted a portion of the their more easily liquidated assets. The directors, in view of this situation, called a special meeting and decided not to reopen, but to endeavor to pay off all the depositors if possible. The resolution adopted at that meeting showed only too clearly that they believed the banks could not reopen. The subsequent pledge of all the banks' assets to the First National Bank in exchange for the further loan did not change the financial position of the banks, so far as the stockholders were concerned. The depositors were the only beneficiaries of this liquidation. It was only in view of the outside possibility of there being a surplus of collateral after the eventual pay-off of the creditors that the directors made a condition to the loan agreement that the First National would return to them all amounts received from liquidation more than sufficient to repay the loan. To avoid a determination that the stock became *448 worthless at that time, there must be a showing that, despite the loss of any*1009 surplus liquidating value, there still remained a real potential value until the year 1936 through the continued existence of a reasonable expectation that the stock would become valuable.
The banks did not continue to do any business after the bank holiday. Complete control of all their erstwhile assets was in the hands of the First National Bank, which assumed none of the liabilities of the banks. Further, all costs of liquidation were to be borne by the banks. The assets consisted of realty in and around Chicago; and it was common knowledge that values in realty had hit a new low at this time. The values of these assets as recorded on the books of the banks did not clearly and can not ever be said to reflect actual value. Cf. . As was later shown, by circular letter in 1936, the values per the books were grossly inflated. There was no basis for a reasonable expectation that the book values would ever clearly reflect the possible liquidating value of the assets. Hence, there was no reasonable expectation that the stockholders would ever realize anything on their shares, inasmuch as the depositors themselves*1010 would require all the cash on hand at the banks after the final loan from the First National.
Petitioner contends that a slow process of liquidation by the First National could be expected to realize a better price than an immediate liquidation in 1933 and that it therefore was not unreasonable to assume that a figure more nearly allied to that shown on the books of the banks might be realized.
"It is just onceivable that cases might arise in which some realization could be had by the stockholders in the long future. As a practical matter, however, the business world never remotely considers that contingency. * * *" ; affirmed per curiam, . Furthermore, the primary assumption of petitioner's statement must be that the book figures reasonably reflected actual value; which assumption can not fairly be made.
Thus, from the time efforts to liquidate the assets commenced and up to and including the year 1936, the lack of any reasonable prospect of the petitioner ever recovering anything on his stock remained the same.
The element of notice, on which petitioner appears to rely, is of no materiality. *1011 Regardless of when the stockholders learn of the value of their stock, it is the date of worthlessness that is material. Admittedly, the rule is a harsh one. A fraudulently operated corporation might succeed in keeping the information from reasonably diligent shareholders for years, but this would not entitle them to a deduction in the year they discovered the fraud. The standard for judging worth under section 23(e) of the Revenue Act of 1936 has been interpreted *449 to be an objective one; not subjective. Hence, regardless of petitioner's opinion as to the reasonable possibilities in 1933, the facts of the matter disallow the conclusion reached by him at that time. .
The Commissioner determined that worthlessness occurred in 1933. Not only has that determination not been refuted by the petitioner, but the evidence very strongly supports it. That determination and the evidence in the case entirely overcome any presumption of continuing worth of the stock through and after 1933. The disallowance of the claimed loss deduction is, therefore, sustained.
Decision will be entered for respondent.