*856 1. Respondent disallowed the deduction of the cost of certain preferred stock to the petitioner, as a loss, on the ground that the stock became worthless prior to the taxable year. Held, such stock was not worthless prior to that year but became so during that period.
2. Held, that certain amounts were deductible from petitioner's gross income of the taxable year.
*538 Respondent determined a deficiency in petitioner's income tax for the year 1937 in the sum of $16,868.74. Respondent, by amended answer, requests that the deficiency be increased by the sum of $1,719.85. The first issue is whether or not petitioner is entitled to a deduction in the taxable year for a loss due to worthlessness of certain stock. The second issue is whether or not petitioner may deduct certain amounts expended in the taxable year as ordinary and necessary expenses of a trade or business. Many of the facts were stipulated. Additional facts were adduced from evidence presented at the hearing.
FINDINGS OF FACT.
First Issue.*857
Most of the facts with which the first issue is concerned were stipulated. We adopt the stipulated facts as a part of our findings but set forth herein only those of the stipulated facts which are material to discussion in our opinion.
Petitioner is an individual residing in New Rochelle, New York. He filed his Federal income tax return for the year 1937 with the collector of internal revenue for the first collection district of Illinois.
*539 Orpheum Circuit, Inc., hereinafter referred to as Orpheum, was a holding company incorporated on December 22, 1919, under the laws of the State of Delaware. Thereafter, Orpheum acquired all, or substantially all, of the stock of a number of companies operating a chain of vaudeville and motion picture theatres in the western part of the United States and Canada.
In 1928, Keith-Albee-Orpheum Corporation, hereinafter known as K.A.O., was organized and thereafter acquired all of the outstanding common stock of Orpheum. Later in 1928, the entire outstanding common stock of K.A.O. was acquired by Radio-Keith-Orpheum Corporation, hereinafter referred to as R.K.O. K.A.O. and R.K.O. were holding companies engaged in the business*858 of producing, distributing and showing motion pictures and vaudeville. Orpheum, K.A.O., and R.K.O. were all operated as a part of a single operating system under the control and management of R.K.O.
The total issued outstanding shares of 8 percent cumulative convertible preferred stock of Orpheum, hereinafter called the preferred stock, aggregated 63,840 shares, of which 9,462 shares were owned and held by K.A.O. and the remaining 53,378 shares were owned by the general public. The stock had a par value $100of per share. Petitioner acquired 1,500 shares of Orpheum preferred stock in 1925 for cash at an aggregate cost of $150,099. Petitioner acquired an additional 220 shares of this stock in 1932 for cash at a total cost of $1,446.50.
Dividends on the preferred stock of Orpheum were paid regularly from 1920 until October 1, 1931, when there was a default on the quarterly dividend due on that date. No dividends were ever paid thereafter on this stock.
In January 1932, a group of 18,000 Orpheum preferred stockholders organized a protective committee known as Orpheum Circuit, Inc. Preferred Stockholders Protective Committee. At or about the same time, an additional protective*859 committee was organized by a group of Orpheum preferred stockholders on the Pacific Coast. On December 6, 1932, both of these committees were consolidated into a single committee known as Orpheum Circuit, Inc. Preferred Stockholders Consolidated Protective Committee and hereafter referred to as the committee. Petitioner was a member of this committee which continued to function until January 3, 1938.
On January 11, 1932, R.K.O. offered to the preferred stockholders of Orpheum the right to convert Orpheum preferred stock into R.K.O. common stock on the basis of two shares of R.K.O. common for one share of Orpheum preferred. This offer expired on November 30, 1933, and was not thereafter extended. Petitioner did not avail himself of the offer. In December 1932, R.K.O. made a *540 new offer to the committee to exchange three shares of R.K.O. common for each share of Orpheum preferred. From eight to ten thousand shares, only, of the 53,378 shares of Orpheum preferred stock outstanding in the hands of the public were so exchanged. Petitioner and other preferred shareholders rejected the offer on the ground that the Orpheum preferred stock was of far greater value than*860 the R.K.O. common stock.
On January 27, 1933, Orpheum filed a voluntary petition in bankruptcy in the United States District Court for the Southern District of New York, hereinafter referred to as the District Court, and on the same day was adjudicated a bankrupt. On February 17, 1933, the Irving Trust Co. of New York was elected trustee in bankruptcy of Orpheum. In September 1933, because of its dual capacity of trustee of Orpheum and receiver of R.K.O. and consequent diversity of interests, the Irving Trust Co. resigned as trustee in bankruptcy of Orpheum and Marcus Heiman was appointed successor trustee in bankruptcy. Orpheum continued in bankruptcy thereafter, the trustee filing his final report with the District Court on April 11, 1938. Creditors were paid an aggregate of 30 cents on the dollar for their claims against the bankrupt. Nothing was ever paid with respect to the preferred or common stock of the company. At the time of its adjudication in bankruptcy Orpheum filed schedules showing total assets of $22,328,067.81 and total liabilities of $16,727,884.58.
On January 27, 1933, receivership proceedings were instituted in the District Court against R.K.O. and a*861 receiver in equity was duly appointed on that date. In June 1934, the receivership proceeding was converted into a proceeding under section 77B of the Bankruptcy Act. The Irving Trust Co. of New York acted as trustee of the debtor's estate and was still serving as such on September 8, 1938.
Stadium Theatres Corporation, hereinafter referred to as Stadium, was incorporated on January 27, 1933, under the laws of the State of Delaware. Its officers were the same as those of R.K.O. and K.A.O. The entire capital stock of Stadium was issued to the Irving Trust Co. as receiver in equity for R.K.O.
Prior to May 3, 1932, Orpheum began to borrow large sums from K.A.O. By October 1, 1932, K.A.O. had advanced to Orpheum a total principal amount of $2,880,000 and had received from Orpheum notes therefor secured by nearly all of Orpheum's assets, consisting of stocks held by it in theatre companies and claims against those companies. After January 27, 1933, K.A.O. filed a claim in the amount of $3,000,000 in the bankruptcy proceedings of Orpheum. This claim was filed as a secured one. Some months later, the claim of K.A.O. was assigned to Stadium, which took possession of the pledged*862 securities and has managed them ever since. Heiman, as trustee in bankruptcy *541 for Orpheum, never operated any of the properties or companies the stocks of which were pledged to Stadium. The next largest claim filed in the bankruptcy proceedings was in the sum of $1,112,000 and was filed on behalf of the trustee for bondholders of the Omaha Orpheum Co., one of Orpheum's subsidiaries, the bonds of which had been guaranteed by Orpheum. This claim was objected to by the trustee in bankruptcy but was held valid and later passed to one Snyder as successor trustee for the Omaha bondholders. As of January 1933, the total claims against Orpheum amounted to about $5,600,000. At that time the assets consisted of approximately $3,000 in cash and the bankrupt's equity of redemption in the stocks and claims pledged as collateral security to K.A.O. and thereafter held by Stadium.
Under date of May 21, 1934, Stadium informed the trustee in bankruptcy of Orpheum that all of the notes of Orpheum held by Stadium were in default. Under date of June 5, 1934, the trustee in bankruptcy of Orpheum notified Stadium that he did not recognize the validity of the notes held by Stadium nor*863 the validity of the pledge of collateral and that any steps taken with regard to the notes or pledge would be taken on the responsibility of Stadium.
On December 21, 1934, the committee served formal notice on the trustee in bankruptcy of Orpheum demanding that the trustee institute action against the officers and directors of Orpheum, K.A.O., and R.K.O. for damages incurred by the pledge of Orpheum's assets to Stadium, waste of assets of Orpheum and dissipation of its property, and other alleged misdeeds. The committee further demanded that the trustee institute action to set aside the transfer of Orpheum's assets to Stadium.
No action was taken by the trustee in bankruptcy of Orpheum on this demand. On June 6, 1935, preferred bondholders of Orpheum filed a petition with the referee in bankruptcy of Orpheum for an order allowing them to sue for recovery of the assets from Stadium and also for damages against the officers and directors of Orpheum, K.A.O., and R.K.O. On the same date the Northwestern National Bank of Minneapolis, Minnesota, a creditor of Orpheum, filed a similar petition in the pending bankruptcy proceedings, requesting the same relief sought by the preferred*864 shareholders.
On June 6, 1935, the trustee in bankruptcy of Orpheum filed an affidavit in connection with the hearings on the petitions of the preferred bondholders and the creditor filed June 6, 1935, in which he requested that legal action such as demanded by the petitions of June 6, 1935, should be postponed until the plan of reorganization of R.K.O. had been formulated.
On June 26, 1935, the referee in bankruptcy of Orpheum entered an order denying the applications of the preferred shareholders and of the Northwestern National Bank of Minneapolis, with the proviso *542 that the applications might be renewed within a reasonable time if no plan of reorganization of Orpheum was effected or satisfactory disposition of the matter made within that time.
On July 5, 1935, a petition to review the order of the referee in bankruptcy was filed. On September 3, 1935, the District Court entered an order affirming the order of the referee. This order was also entered without prejudice of the applicants to renew their applications.
On September 26, 1935, additional petitions were filed by the preferred bondholders and the Northwestern National Bank of Minneapolis, requesting*865 the relief previously applied for on June 6, 1935. On September 26, 1935, the trustee in bankruptcy of Orpheum filed a report with the referee in bankruptcy in which he requested that legal action by the preferred shareholders be delayed until the formation of a plan of reorganization for R.K.O.
On March 30, 1936, the referee in bankruptcy entered an order with respect to the petitions of September 26, 1935, by which the trustee in bankruptcy was directed to institute actions to recover Orpheum's assets in the hands of Stadium and to obtain damages arising from the transfer of assets to Stadium. The order authorized the petitioning preferred shareholders and Northwestern National Bank of Minneapolis to institute actions at the cost of the preferred shareholders and the Northwestern National Bank of Minneapolis against persons responsible for the waste and dissipation of Orpheum's assets. A petition for review of this order was thereafter filed and, on May 2, 1936, the referee in bankruptcy for Orpheum filed with the District Court his certificate on the petition to review his order dated March 30, 1936. No order was ever entered by the District Court with respect to this proceeding*866 for review.
On or about November 20, 1936, a plan of reorganization of R.K.O. was filed in the District Court in the then pending 77B proceedings. This plan was the first plan of reorganization filed in the 77B proceedings and made no provision for participation of the preferred stockholders of Orpheum in the reorganization of R.K.O.
In November or December 1936, petitioner became chairman of the committee. On November 7, 1936, the committee voted to assess the preferred shareholders of Orpheum one dollar per share in order to meet the expenses of the committee. In response to this call holders of 13,845 shares of Orpheum preferred stock contributed the sum of $13,845. The holders of an additional 4,612 shares authorized the committee to act for them but did not pay the one dollar per share assessment. Of the total amount paid on this assessment, $11,601 was collected prior to January 2, 1937. The remaining $2,244 was collected during the period January 2 to June 1, 1937. Petitioner contributed the sum of $1,720 in response to the one dollar a share assessment.
*543 On December 23, 1936, Stadium offered to purchase all of the assets of Orpheum (with the exception*867 of cash in possession of the trustee in bankruptcy in the sum of $2,500) for the sum of $700,000 in cash and the cancellation or subordination of its claims and certain claims held by its subsidiaries in the sum of approximately $3,450,000 to the claims of other creditors.
On January 8, 1937, the referee in bankruptcy of Orpheum appointed appraisers to appraise all of the bankrupt's estate. No appraisal of the assets of Orpheum prior to the one ordered January 8, 1937, had been made subsequent to the filing of the petition in bankruptcy of Orpheum. The appraisers' report on Orpheum's assets held in pledge by Stadium showed a value of $2,700,000 as of January 28, 1937. On February 2, 1937, the claims of creditors (including interest) amounted to approximately $7,000,000.
On January 25, 1937, the committee filed a petition with the referee requesting that the trustee be directed to reflect the offer of Stadium, to file a petition in the 77B proceedings of R.K.O. in order to bring Orpheum within the R.K.O. plan of reorganization and to object to the proposed plan of reorganization of R.K.O. which had been presented on or about November 20, 1936.
At a creditors' meeting held*868 on February 2, 1937, at which the Stadium offer was considered, the preferred shareholders tendered an offer of $2,000,000 free and clear of liens for the pledged assets. The preferred shareholders gave no assurance that the independent creditors would receive as much as they would receive under the Stadium offer.
On February 18, 1937, the referee in bankruptcy for Orpheum entered an order directing the trustee in bankruptcy to accept the offer of Stadium. On the same day, he entered an order dismissing the petition of the committee which had been filed January 25, 1937. Thereafter, title to all the assets of Orpheum (other than the $2,500 in cash in possession of the trustee in bankruptcy) was conveyed to Stadium pursuant to the order of the referee. A petition to review these orders of the referee was then filed. It was denied by the District Court on June 11, 1937, and the order of the referee affirmed. Petition for leave to appeal from the decision of the District Court to the Circuit Court of Appeals for the Second Circuit was denied on July 30, 1937.
On August 16, 1937, the committee filed a petition for leave to intervene in the 77B proceedings of R.K.O. This petition*869 was denied on August 31, 1937, by the District Court.
The Central Hanover Bank & Trust Co. was designated as transfer agent for the preferred stock of Orpheum in New York City. Its term as transferee agent expired on or about June 20, 1933. The trustee in bankruptcy for Orpheum refused to pay in advance fees of the *544 transfer agent and the Central Hanover Bank & Trust Co. refused to act as transfer agent. Under the rules of the New York Stock Exchange a security for which facilities for transfer in the city of New York are not maintained may be removed from the list. The preferred stock of Orpheum prior to June 20, 1933, had been listed on the New York Stock Exchange. On June 20, 1933, it was removed from the exchange because of failure to maintain a transfer agent and has not since been listed on any stock exchange. On January 27, 1933, the closing price of the preferred stock on the New York Stock Exchange was $3 per share. On January 28, 1933, the closing price of this stock on the New York Stock Exchange was $3 a share. On June 14, 1933, the closing price of the preferred stock on the New York Stock Exchange was $6 per share.
The preferred stock of Orpheum*870 was traded in the over-the-counter market until sometime in 1937. Munds, Winslow & Potter, stock brokers, on January 11, 1936, owned 230 shares and on that date purchased for their own account two lots of 25 shares at $8 and 75 shares at 10 1/8 per share. On January 22 of that year they purchased for their own account 10 shares at 11 3/4 and on the same date sold 100 shares at 10 1/2 and 100 shares at 10 3/8 per share. On June 30, 1936, they sold 40 shares at 10 1/2 per share. On September 29 of that year they bought 15 shares at $10 and on October 20, 41 shares at $6 per share. On November 9 of the same year they sold 55 shares at $9 per share. On November 19, they bought 30 shares at $8 per share. On November 27 of that year they bought 50 shares at $7, on December 2, 3 shares at $7, on December 11, 10 shares at $7 and on December 30 sold 50 shares at 7 1/2 per share. On January 6, 1937, these brokers sold 50 shares at 6 1/2 and on March 11, 34 shares at 5 1/2 per share. On the same day they sold, as agents for another broker, 166 shares at 5 1/2 per share. The bid and asked prices for this stock during 1936 and 1937 follow:
| Date | Firm | Address | Shares | Bid | Shares | Offer |
| 2-8-36 | A. C. Gebhardt & Co | N.Y | 10 | 11 | 100 | 13 |
| 3-9-36 | Englander & Co | N.Y | 10 | 11 | ||
| 3-18-36 | Morris Stein & Co | N.Y | 10 | 8 1/2 | ||
| 3-27-36 | Swift, Langill & Henke | Chgo | 100 | 7 3/4 | ||
| 3-31-36 | Carstairs & Co | Phila | 100 | 6 1/2 | 10 | 7 1/2 |
| Wurts, Dulles & Co | Phila | 10 | 8 1/2 | |||
| 4-2-36 | Robert C. Mayer & Co | N.Y | 7 | 10 | ||
| 4-9-36 | Vermilye Bros | N.Y | 7 | 9 | ||
| Munds, Winslow & Potter | N.Y | 100 | 7 | 100 | 10 | |
| Hanson & Hanson | N.Y | 100 | 5 | 100 | 8 | |
| 4-24-36 | Carstairs & Co | Phila | 10 | 7 1/2 | ||
| 5-7-36 | Philipson & Co | Utica | 5 1/2 | |||
| 7-9-36 | Abbott, Proctor & Paine | N.Y | 15 | 3 | ||
| 7-23-36 | Distributors Group Inc | N.Y | 100 | 2 | 100 | 5 |
| 8-7-36 | H. D. Knox & Co | Boston | 4 | 700 | ||
| 7 | ||||||
| 9-2-36 | Crockett & Co | Boston | 5 | 4 | ||
| 9-9-36 | Steelman & Birkins | N.Y | 5 | 9 | ||
| Munds, Winslow & Potter | N.Y | 6 | 9 | |||
| 10-5-36 | Wurts, Dulles & Co | Phila | 10 | 8 7/8 | ||
| 10-6-36 | Paul E. Kern & Co | N.Y | 50 | 6 | ||
| 10-9-36 | Robert C. Mayer & Co | N.Y | 5 | 8 | ||
| 10-9-36 | Vermilye Bros | N.Y | 5 | 8 | ||
| Hanson & Hanson | N.Y | 50 | 4 | 50 | 8 | |
| 11-20-36 | Wurts, Dulles & Co | Phila | 10 | 8 7/8 | ||
| 12-3-36 | Gilbert J. Postley & Co | N.Y | 20 | 9 | ||
| 12-8-36 | Paul E. Kern & Co | N.Y | 50 | 8 1/4 | ||
| 12-9-36 | Carstairs & Co | Phila | 10 | 8 | ||
| 4-8-37 | H. D. Knox & Co | Boston | 100 | 2 | 100 | 5 |
| 4-9-37 | Pelz & Co | N.Y | 3 | |||
| 4-9-37 | Munds, Winslow & Potter | N.Y | 100 | 4 | 100 | 7 |
| Vermilye Bros | N.Y | 3 1/2 | 5 1/2 | |||
| Robert C. Mayer & Co | N.Y | 2 | 5 | |||
| Hanson & Hanson | N.Y | 100 | 4 1/2 | 100 | 7 1/2 | |
| 5-6-37 | Paul E. Kern & Co | N.Y | 100 | 2 1/4 | ||
| 6-8-37 | H. D. Knox & Co | Boston | 100 | 2 | 100 | 5 |
| 6-9-37 | Pelz & Co | N.Y | 2 1/4 | 3 3/4 | ||
| 8-18-37 | H. D. Shuldiner & Co | N.Y | 100 | 2 | 40 | 3 1/2 |
| 10-5-37 | Robert C. Mayer & Co | N.Y | 100 | 2 | ||
| 10-9-37 | Munds, Winslow & Potter | N.Y | 2 | |||
| Vermilye Bros | N.Y | 2 | 4 | |||
| Hanson & Hanson | N.Y | 100 | 2 1/2 | |||
| 11-9-37 | Vermilye Bros | N.Y. | 2 | 4 | ||
| 1-7-38 | Robert C. Mayer & Co | N.Y | 100 | 3 | ||
| 4-8-38 | Pelz & Co | N.Y | 1/8 | |||
| 4-9-38 | Hanson & Hanson | N.Y | 100 | 2 | ||
| 8-9-38 | Robert C. Mayer & Co | N.Y | 5 | |||
| Luckhurst & Co | N.Y | 1/4 | ||||
| 10-8-38 | Hanson & Hanson | N.Y | 100 | 2 |
*871 *545 From the time of its formation the committee, through its counsel, consulted with officers of R.K.O. and K.A.O. concerning the interests of the preferred stockholders. The committee protested the pledge of the assets of Orpheum to Stadium but was informed that in view of the proposed reorganization of R.K.O. such intercompany transactions would have no effect on their interests. Counsel for the committee remained in close contact with the progress of the bankruptcy proceedings of Orpheum. The committee was requested by R.K.O. officials to refrain from bringing actions against R.K.O. and K.A.O. and their officers and directors, the reason given for the request being that such action was unnecessary to secure to the preferred stockholders of Orpheum the full anc complete protection in the reorganization being worked out for R.K.O. The representatives of the preferred stockholders were repeatedly assured from 1933 on that the plan contemplated would secure such full protection of the equity of the preferred stockholders as to give entire satisfaction to them. These assurances by R.K.O. officers that the plan of reorganization then being prepared would include Orpheum*872 were continued to a time practically coincident with the filing on November 20, 1936, by the representatives of R.K.O. of the plan of reorganization of the latter, under which plan no provision was made for the participation of the preferred stockholders of Orpheum.
Petitioner had a total cost basis of $153,265.50 for the 1,720 shares of Orpheum preferred stock which he continued to hold up to and including December 31, 1937. This stock had a substantial value at the end of 1936 and became worthless during the calendar year 1937. On his Federal income tax return for the year 1937, petitioner *546 deducted the sum of $153,265.50 as a loss due to worthlessness of stock. Respondent disallowed the deduction.
Second Issue.
In the year 1937, petitioner was president of the Ward Baking Corporation, receiving a salary of $38,372.75 and director's fees of $675. Petitioner devoted the greater part of his time to that position. During the year 1937, petitioner received income from other sources as follows:
| Dividends from foreign and domestic corporations | $34,896.97 |
| Interest | 1,402.36 |
| Syndicate | 404.67 |
| Rent | 144.31 |
| Income from business (Greenroof Tearoom and ranch in Estes Park, Colorado) | 913.68 |
| Gain from sales of securities | 4,806.02 |
*873 Petitioner is not a trader in securities and buys securities solely for investment purposes. During the year 1937, petitioner owned real estate having a total cost basis of approximately $200,000. Petitioner also had investments in two corporations amounting to approximately $42,000 and $100,000, respectively.
On his return for the year 1937, petitioner deducted the following amounts under the heading "Other deductions authorized by law":
| Legal and Auditing expenses | $944.51 |
| Office salaries | 2,600.00 |
| Office and miscellaneous expense | 92.18 |
| Depreciation of office furniture and fixtures | 22.55 |
| Total | 3,659.24 |
The sum of $250 of the amount deducted for legal and auditing expense was paid for attorney's fees incurred in changing title registration of certain property owned by petitioner to the Torrens System. The remainder of the legal and auditing expense deduction related to fees paid to an accountant for auditing and for preparation of petitioner's income tax return.
The sum of $2,600 which constituted the deduction for office salaries was paid to petitioner's brother who attended to petitioner's real estate interests and acted as petitioner's representative*874 as a director on the boards of two corporations in which petitioner was interested.
Petitioner maintained an office in a building occupied by a corporation in which petitioner had a large investment. Petitioner paid no rent for this office. The office and miscellaneous expense deducted by petitioner on his return for the taxable year consisted of expenditures for items such as telephone calls and stamps. The *547 deduction by petitioner for depreciation of office furniture and fixtures was taken on items located in petitioner's rent-free office.
In his notice of deficiency respondent allowed petitioner deductions for legal and auditing expenses, office salary, office and miscellaneous expense and depreciation on office furniture and fixtures in an aggregate amount of $3,659.24. By amended answer respondent made claim for increased deficiency on the ground that he erred in allowing the deductions totaling $3,659.24.
OPINION.
LEECH: The primary issue is whether or not petitioner may deduct in the taxable year a loss due to worthlessness of Orpheum preferred stock. The law is clear that the loss may be deducted only in the year in which it was sustained. There*875 must be something identifiable to mark the period. . The rule is clear, only its application is difficult.
Respondent determined that the preferred shares of Orpheum became worthless prior to 1937, the year in which petitioner asserts his right to deduct the loss. It is, of course, the petitioner's burden to overcome the prima facie correctness of that determination and to show that these shares became worthless during 1937. This burden may be met by proof that the stock had value either at the end of 1936, ; affd., , or that it had value at the beginning of 1937, , and that it lost such value during that year. But this value means, not necessarily intrinsic value of the assets applicable to the stock, but may include the market value of the stock. .
Respondent points to *876 , which affirmed the memorandum opinion of this Board holding that the same stock became worthless prior to 1934. However, the proceeding now before us, involving an issue of fact, must be decided wholly on the present record, which is much more complete than that in the Lambert case. Here it is disclosed that Orpheum had paid dividends regularly on its preferred shares from the date of its organization in 1920 until October, 1931, when it defaulted. K.A.O. then owned all the common shares of Orpheum, and R.K.O., in turn, owned all the common shares of K.A.O. The three companies had the same officers and were operated as a single enterprise. Large loans had been made to Orpheum by K.A.O. By October 1, 1932, these loans amounted to $2,880,000 and most of Orpheum's assets had been assigned to K.A.O. as security therefor. Petitioner and many other preferred shareholders, as well as bondholders, bank and other *548 creditors, were dissatisfied with the management being given to the company by R.K.O. Committees were organized in 1932, to protect their interests. The position of these committees was that the*877 officers and directors of Orpheum had been guilty of waste and mismanagement and were liable to damages therefor, that the notes given by Orpheum to K.A.O. were not valid obligations of Orpheum and that the transfer of Orpheum assets collateralizing those notes was likewise, therefore, invalid.
Early in 1933, the Orpheum notes and securing assets were transferred to Stadium. On January 27, 1933, Orpheum filed a voluntary petition in bankruptcy and, as a matter of course, a formal adjudication was made on the same day. Its schedules, filed at that time, showed it to be solvent by about five and one-half million dollars. Certainly that adjudication afforded no basis for a determination of worthlessness of Orpheum preferred stock. ; ; ; ; affd., ; ; *878 ; . That conclusion is corroborated emphatically by several facts. On January 28, 1933, one day after the bankruptcy adjudication, the stock sold at $3 per share on the New York Stock Exchange while on June 14, five months later, the market had risen to $6 per share. Throughout 1933, after this adjudication, the preferred shareholders of Orpheum had an existing right under an offer by R.K.O. to exchange each share of their preferred stock for two shares of common stock of the latter company. This offer was later increased to three shares of R.K.O. common stock for one preferred share of Orpheum. Neither of these offers was accepted by petitioner and the other holders of more than 43,000 of the 53,378 shares of Orpheum preferred stock in the hands of the public, because they believed Orpheum preferred stock had a value in excess of the R.K.O. stock for which it could be exchanged.
In 1934 and 1935, conditions continued substantially the same. The assets of the bankrupt were being managed by the trustee. The preferred shareholders, as well as the bondholders, were organized to protect*879 their investments. Committees representing them, as well as a bank creditor acting for itself, had made several efforts to have suit brought against the officers and directors of Orpheum, who were likewise officers and directors of K.A.O., R.K.O., and Stadium, to have the notes of Orpheum to K.A.O., together with the transfer of Orpheum's assets securing the notes, then in the hands of Stadium, declared invalid, and to recover damages from such officers for mismanagement and waste. But these efforts were not fruitful. The *549 officers of R.K.O. continued their assurances, begun in 1933, that the interests of the preferred shareholders would not be served by such suits and that their equity would be recognized by providing for their participation in the reorganization of R.K.O. in the 77B proceedings. Both the referee in bankruptcy and the District Court lent weight to this advice by denying for that reason and without prejudice petitions asking the referee to direct the trustee in bankruptcy to bring such suits. Finally, in 1936, on the repeated filing of such petitions, the referee in bankruptcy entered an order directing that such suits be instituted by or in the name*880 of the trustee in bankruptcy. However, a petition for review of this order was filed and no order was ever entered thereon by the District Court. The assurances from the officers of R.K.O. continued, however, until late in 1936, when the plan of reorganization of R.K.O. was filed in the District Court in the then pending 77B proceedings. This was the first plan of reorganization filed in those proceedings and made no provision for participation by the preferred stockholders of Orpheum. See Following that closely, in December of 1936, the offer to purchase the assets of Orpheum was made by Stadium, the holder of Orpheum's notes and assets. In order to pass upon this offer, the assets of Orpheum were appraised for the first time early in 1937. The value of these assets was there shown to be considerably less than the claims which had been filed against Orpheum in the bankruptcy proceeding.
Following this appraisal came the orders of the referee in bankruptcy on February 18, 1937, directing the trustee to accept the offer by Stadium and dismissing the petition of the committee filed January 25, 1937, under which orders the assets of Orpheum*881 were transferred to Stadium, leaving nothing for the preferred shareholders of Orpheum and no hope for participation in the reorganization of R.K.O., which had been assured to them. See Then came the order of the District Court on June 11, 1937, affirming these orders of the referee. Petition for leave to appeal from this decision to the Circuit Court of Appeals was denied on July 30, 1937.
The preferred stock of Orpheum was removed from the New York Stock Exchange June 20, 1933. But this was only because it no longer had a transfer agent in New York City. However, the stock was traded in the over-the-counter market thereafter until sometime in 1937. The records of actual sales during 1936 and 1937, as well as the bid and asked prices for this stock during those years, closely parallel the history of this company during that period, and they are therefore entitled to real evidentiary weight. Cf. . Though the actual purchases and sales disclosed during that period in this record were made by one firm *550 of stockbrokers, those purchases and*882 sales were made from and to at least six different brokerage firms.
Between November 7, 1936, and June 1, 1937, 116 shareholders, owning 13,845 shares of the 18,000 shares of Orpheum preferred stock represented by the committee, contributed $13,845, or $1 per share, for the purposes of the committee. Petitioner contributed $1,720.
We think petitioner has met his burden. This record establishes to our satisfaction (1) that Orpheum preferred stock had a market value at the close of 1936 and the beginning of 1937 and (2) that such stock became worthless during 1937, as we have found. Respondent is reversed on this issue.
The second issue is whether or not petitioner is entitled to deduct certain amounts from gross income of the taxable year as ordinary and necessary expenses of a trade or business. This issue arises from an affirmative pleading by respondent in his amended answer. Consequently, respondent has the burden of proving that he erroneously allowed the deductions in question.
The evidence shows that petitioner was engaged in activities involving real estate and investments in two corporations. It may be that both of these activities constituted a trade or business*883 of petitioner. In any event, respondent has failed to prove that they did not. Where expenses are incurred in activities which are business and nonbusiness in nature an allocation of expenditures may be made. . Here respondent has not shown the basis for a proper allocation. We may assume, therefore, that petitioner was engaged in a trade or business and that expenses incurred therein may be deductible.
We are of the opinion, however, that the sum of $250 expended for change of title registration is not a proper deduction but should be reflected in the basis of the property to which it related. Petitioner concedes on brief that only 80 percent of the salary deduction should be allowed. Adjustments covering these items should be made. Respondent has not proved that the other amounts deducted under "Other deductions authorized by law" were improperly allowed by him.
Reviewed by the Board.
Decision will be entered under Rele 50.
ARUNDELL, dissenting: As the Member who heard the testimony in this case it seems proper that I should set forth the reasons for my disagreement with the majority*884 opinion. The Commissioner determined that the preferred shares of Orpheum became worthless prior to 1937, the period in which the petitioner seeks to take his loss. To *551 prevail petitioner must prove that the shares in fact had value at the beginning of 1937, and that that value ceased within the year 1937. Mark D. Eagleton,35 B.T.A. 551">35 B.T.A. 551; affd., 97 Fed.(2d) 62. The undisputed evidence shows that the Orpheum Corporation was declared a bankrupt in 1933, that the creditors were finally paid 30 cents on the dollar, and that the preferred shareholders received nothing. The only possible basis for the attachment of any value to these shares in 1937 is that 250 of the shares were disposed of in over-the-counter sales and that there were some "bid and asked" prices. This testimony came from a bookkeeper of a defunct brokerage firm who knew absolutely nothing about the circumstances of the sales.
The statute allows losses in the year within which the property becomes worthless and at no other time. The rule is not like that provided for bad debts where the ascertainment of the creditor is all important. It is the period of the loss and not*885 the time the taxpayer learned of his loss which is determinative. Given an identifiable event demonstrating worthlessness, one need not be an optimist.
If we approach the situation here present in the way it usually appears, the error of the majority would seem more self-evident. Thus, should a taxpayer prove that the corporation in which he holds shares has been declared a bankrupt, that the shares have not one penny of liquidating value, and that the creditors will not receive more than 30 cents on the dollar, he must still be denied his loss on such shares if perchance the Commissioner shows purchases by some badly informed optimists who are ready to gamble on the chances of salvaging something out of the situation. There were 63,840 preferred shares of Orpheum, 10,000 of which had been converted and 9,462 of which were owned by K.A.O., the parent company, leaving some 43,000 preferred shares in the hands of the public. Are these stockholders to be denied their loss at the actual time the shares become worthless because it is shown within the year 1937 less than one-half of 1 percent of the shares were sold over the counter under circumstances not disclosed? There is not*886 even proof in this case that this individual taxpayer could have sold his holdings of 1,720 shares within the year 1937, let alone that there was any market in that year for the entire outstanding shares of preferred stock.
As pointed out by Judge Patterson in the Orpheum bankruptcy proceedings, , not once did these stockholders, of which petitioner was one, prove their right to share in any of the bankrupt's estate. The Congressional plan has always been to require that losses be taken when sustained and the statute contemplates that shares of stock in a corporation become worthless at the same time for all stockholders.
VAN FOSSAN and DISNEY agree with this dissent.