*2087 A corporation was organized to take over the business of another corporation, and taxpayers prior to the taxable year received preferred stock of the former in exchange for bonds of the latter. They surrendered one-half of the preferred stock so acquired during the taxable year and asserted that they thereby sustained a deductible loss.
Held: (1) Since the evidence did not show that all of the stockholders did not likewise surrender their stock, the value inherent in the stock surrendered was absorbed by the stock retained, and there was no more loss than there is a gain in the case of a stock dividend.
(2) The contention that this principle does not apply to preferred stock must be rejected for want of evidence of the terms of the stock or the corporation's capital structure.
(3) In the absence of evidence that the stock was surrendered to persons other than the corporation, the converse application of the stock dividend rule was proper.
(4) The loss was not deductible for the further reason that there was no evidence as to the measure of the loss in the taxable year, if any, because of the possible inference, consistent with the evidence, that part or all of the*2088 loss may have occurred and been deductible in the year in which the exchange was made.
*262 These proceedings, which present substantially identical issues of fact and law, were consolidated upon petitioners' motion at the hearing. The respondent determined deficiencies in income tax for 1922 as follows:
| Edith Scoville | $7,037.18 |
| Lois Church Warner | 7,692.36 |
| Grace Scoville | 2,459.72 |
| Mary F. McChesney | 9,176.55 |
The question presented is whether petitioners sustained deductible losses of stock, representing one-half petitioners' holdings which were surrendered to procure financial aid for the issuing corporation.
FINDING OF FACT.
The petitioners are individuals with address at 250 Park Avenue, New York City.
On February 2, 1903, petitioner Edith Scoville acquired fifty 5 per cent bonds of the Barnum Richardson Co. at a cost of $50,416.66; on February 19, 1917, she purchased at par twenty-five 6 per cent bonds of said company at a cost of $25,000. Interest on these bonds was paid from the dates of purchase until July, *2089 1918. In 1920 and 1921 all the bonds were exchanged for 5,513 shares of the preferred stock of the Salisbury Iron Corporation. The par value of this stock was $10 a share.
On February 19, 1917, petitioner Louis Church Warner acquired at par 6 per cent bonds of said company of the value of $25,000, and on April 24, 1917, additional 6 per cent bonds of the value of $50,000, all of which she exchanged during 1920 and 1921 for 3,750 shares of the preferred stock of the Salisbury Iron Corporation.
*263 On July 15, 1898, petitioner Grace Scoville acquired at par 6 per cent bonds of the aforesaid company of the value of $25,000. A later assessment of $275 for reorganization expenses raised the debit against these bonds to $25,275. Petitioner received interest on them until June, 1918. In 1920 she exchanged them for 2,000 shares of the preferred stock of the Salisbury Iron Corporation.
On May 7, 1904, petitioner Mary F. McChesney purchased at par fifteen 5 per cent bonds of the aforesaid company of the value of $15,000, and on February 19 and April 24, 1917, purchased at par 6 per cent bonds of the respective values of $25,000 and $34,000. Upon these bonds she received*2090 interest until June, 1918. During 1920 and 1921 they were exchanged for 4,358 shares of the preferred stock of the Salisbury Iron Corporation.
Petitioners Mary F. McChesney and Edith Scoville each purchased 2,600 shares of the preferred stock of the Barnum Richardson Co., paying therefor $25 a share.
The Barnum Richardson Co. was a closely held family corporation, dating back to the Revolution. It was engaged in the operation of a car wheel foundry and a general casting foundry at Lime Rock, Conn.; it also operated two blast furnaces for local ores with charcoal until the cost of this fuel made it impractical. The Company then, through an affiliated firm, built a wood chemical plant near the furnaces a few years prior to the World War. Shortly after the entrance of the United States into the war, the demand for wood and the price regulation of products by the Government caused economic difficulties. Prior to 1917 the company had consistently enjoyed a fair average of properity and nothing had happened to impair the value of its bonds.
In 1919 the Salisbury Iron Corporation was organized to take over the business of the Barnum Richardson Co., and preferred stock of the*2091 Salisbury Co. was exchanged for bonds of the Barnum Co. In September, 1922, each of the petitioners surrendered one-half of the number of shares of preferred stock which she had thus acquired in exchange for the bonds. According to an entry in petitioner Grace Scoville's ledger, this surrender was made "to the company to be contributed by it to the company's loan syndicate to advance to the company funds needed to prevent foreclosure and receivership which would destroy any value of the company's preferred stock." In Mary Frances McChesney's journal the entry stated "surrendered to the company to be used by it with their other stock in inducing a loan syndicate (H. W. Davis & Co., Managers) to advance funds necessary to prevent a foreclosure which would destroy and possible value in the preferred stock." The ledgers of the other two petitioners described the surrender as to the syndicate.
*264 After the surrender of the preferred stock petitioner's books showed no reduction of the original investments. Losses were not normally transferred on the books to a profit and loss account.
OPINION.
STERNHAGEN: The petitioners contend that when in 1922 they "surrendered" one-half*2092 of their preferred stock in the Salisbury Co. they thereby sustained a loss deductible under the Revenue Act of 1921. They do not specify the particular section or subsection of the statute upon which they rely for the deduction.
In the condition of the evidence it can not, in our opinion, be said that in 1922 a loss was sustained. It is entirely consistent with the evidence to infer that the petitioners, with all other stockholders, surrendered half their stock to the corporation. If so, and nothing further was done, the remaining stock absorbed the value inherent in the surrendered certificates and there was no more loss than there is a gain in a stock dividend. ; . Counsel suggests in brief that this would not be true as to preferred stock even if it were true as to common. But we know nothing of the terms of the stock or the corporation's capital structure, and hence we must take the omission as against petitioners, since the burden was upon them. That counsel was fully aware of this question and the inadequacy of the evidence to make the situation clear is indicated*2093 by his brief.
Petitioners also argue that the stock dividend rule may not be conversely applied, because the so-called surrender was made to an alleged syndicate and not to the corporation. The evidence fails to establish the identity of the transferee of the stock as other than the corporation, although the bookkeeping entries are ambiguous and further evidence by petitioners might have supported their view of this question of fact.
But, going further, there is lack of evidence as to the measure of the loss in 1922, if any, because of the possible inference, consistent with the evidence, that part or all of the loss may have occurred and been deductible at the time of the exchange in 1919. If the exchange of 1919 resulted in loss and such loss was to any extent deductible then, it could not be carried forward to 1922. Petitioners say that no loss was deductible in 1919 because the transaction in that year was within section 202(b), Revenue Act of 1918. There is but one fact tending to support this, and that is that the Salisbury Co. "was organized to take over the business" of the Barnum Co. This does not, in our opinion, go far enough to establish a situation within section*2094 202(b), any more than it would have done were the deduction in 1919 directly here in issue. We need not decide that a loss was *265 sustained in 1919, but only that such a possibility prevents a decision that the loss claimed occurred and was deductible in 1922.
All of these omissions in the evidence were matters of fact within the ability presumably of the petitioners to prove. The failure of proof requires that
Judgment be entered for the respondent.