*2198 The transaction involved herein held to be a bona fide sale which resulted in a deductible loss.
*127 These proceedings are for the redetermination of deficiencies asserted by the respondent for the year 1921 in the amount of $4,015.99 as to each petitioner. The error alleged is that the respondent disallowed deductions claimed for losses sustained on a sale of bank stock during the taxable year. The proceedings are consolidated for hearing.
FINDINGS OF FACT.
The petitioners are husband and wife, who lived in Wichita Falls, Tex. The law of community property was in force in Texas during 1921 and the property herein involved was community property.
The petitioner A. H. Britain was a practicing lawyer in Wichita Falls. One of his law partners during 1921 and 1922 was one S.A.L. Morgan. In 1920 and the early part of 1921 Britain acquired a total of 250 shares of the capital stock of the City National Bank of Commerce of Wichita Falls. The total cost of the stock to Britain was $56,830. Britain was a director of the bank.
Morgan, *2199 the petitioner's partner, owned 117 shares of the capital stock of the First National Bank of Wichita Falls and was a director of that bank.
A business depression set in during 1921 which seriously affected all banks in and near Wichita Falls. None of them made any profits that year, several failed, and the two here involved, the City National and the First National, passed through a critical period. In December, 1921, both Britain and Morgan realized that their respective bank-stock holdings had diminished greatly in value. For the purpose of enabling them actually to sustain those losses and to take them as deductions on their income-tax returns for 1921, Britain and his partner, without consulting each other, decided to sell their bank stocks.
When each learned that the other had decided to sell, they entered into negotiations as a result of which Britain, on December 12, 1921, sold and delivered to Morgan certificates for 240 shares of City National *128 Bank stock for $28,800, or $120 per share, which was approximately the then book value. Morgan gave in payment his negotiable promissory note, due in one year, and bearing 6 per cent interest. On the same day*2200 Morgan sold and delivered to Britain certificates for 117 shares of First National Bank stock for $26,325, or $225 per share, which at that time was the approximate book value. Britain gave in payment his negotiable promissory note, due in one year and bearing 6 per cent interest. After the sales each purchaser obtained a new certificate or certificates to himself for the bank stock so purchased from his partner. There was at the time no agreement between the partners relative to any repurchase of the stock they had sold to each other, and there was no such intention on the part of either one.
By agreement at the time the stocks were sold Morgan was to receive any January, 1922, dividend which might be paid on the First National Bank stock, and Britain was to receive any like dividend paid on the City National Bank stock. The latter bank paid no dividends during 1922, but the First National paid dividends as follows:
| January 1, 1922 | 3% cash |
| June, 1922 | 25% stock |
| July 1, 1922 | 4% cash |
| October 2, 1922 | 3% cash |
The stock dividend increased Britain's holdings of First National Bank stock to 146 shares.
In September, 1922, Morgan desired to purchase a house*2201 of one O'Donohoe. Not having the ready cash, he offered O'Donohoe shares of City National Bank stock in payment for the house. O'Donohoe, who was a director of the First National Bank, declined to accept City National stock, but said he would accept stock of the First National Bank. Thereupon, Morgan requested Britain to deliver 58 shares of First National stock to O'Donohoe, the price of the stock, $200 per share, to be credited upon Britain's promissory note to Morgan. Britain was not willing to sell a part only of the stock, and therefore an agreement was reached whereby Britain was to, and did, deliver 58 shares of First National stock to O'Donohoe on Morgan's account and received credit in the amount of $11,600 on his note to Morgan; and Britain was to resell to Morgan the balance of his First National stock and at the same time he agreed to repurchase from Morgan the City National stock sold in December, 1921. However, Morgan had hypothecated his 240 shares of City National Bank stock and he was not able to secure the stock and consummate the agreement to resell to Britain until some time in December, 1922, when the resales were made. Petitioner then repossessed 240 shares*2202 of City National Bank stock and *129 returned to Morgan the purchase money note given for the stock one year previously. Morgan repossessed the balance, 88 shares, of the 146 shares of First National Bank stock held by Britain and returned to the petitioner his promissory note given one year before. Nothing had been paid upon either note, except the credit of $11,600, connected with the O'Donohoe transaction in September, 1922. Both Morgan and the petitioner were financially able to pay their respective notes. There was no substantial change in the value of the stock of either bank between December of 1921, and December of 1922. Petitioner did not acquire any City National Bank stock within ninety days after selling to Morgan.
Britain and his wife, the present petitioners, claimed a deduction of $28,030 as a loss on the sale of the City National Bank stock sustained in the taxable year 1921. The respondent disallowed the deduction.
OPINION.
MARQUETTE: The petitioners deducted from their income-tax returns for the year 1921, as a loss, the amount of $28,030, representing the difference between the cost to them of certain bank stock and the price for which the said*2203 stock was sold by them during the year. This deduction was disallowed by the respondent, upon the ground that the petitioners had not sold the stock in good faith but had merely transferred it for the sole purpose of establishing a loss. The bona fides of that transaction is the only question presented.
The petitioners admittedly sold 240 shares of stock of the City National Bank for the purpose of deducting the loss from their 1921 income-tax returns. The price at which the stock was sold was its book value, and no question is raised on that score. The sale was made to a law partner of one of the petitioners, a man abundantly able to pay the promissory note which he gave for the stock. The shares were transferred on the books of the bank and a new certificate in the name of the purchaser was issued to him. He treated it as his own and used it as collateral security in securing a loan. The petitioners were not in any way restricted as to the use they might make of the purchase money note; they might hold it, or discount it, as they saw fit. There was no agreement or understanding between seller and buyer at the time of this sale, relating to any repurchase of the stock*2204 by the seller.
It also appears that at the same time the City National Bank stock was sold by the petitioners they acquired 117 shares of First National Bank stock by purchase from the man who bought their City National stock. A. H. Britain, one of the petitioners, gave his promissory note for the full purchase price. The stock was transferred to him on the books of the bank and new certificates were *130 issued to him. At the time of sale there was no agreement relating to any repurchase of the stock by the seller, nor any intention to repurchase it. Some nine months later, in September, 1922, a circumstance arose in connection with the transaction between Morgan and O'Donohue, which induced Britain and his partner to resell, each to the other, the stocks they had bought one from the other in December, 1921. This agreement was carried out and the respective purchase money notes were canceled. Therefore the respondent contends that the original sale was not bona fide.
We are unable to concur in this contention of the respondent. When the City National stock was sold by the petitioners, they definitely parted with both the legal and equitable ownership of the property, *2205 and the control of it passed from their hands. The purchaser of the stock became vested with the full title, together with dominion and control thereof. The transaction was complete. There were no conditions or reservations attached to it whereby the petitioners could compel a resale of the stock to them. The note given them in payment for the stock was collectible and they were free to sell it or utilize it in any manner they saw fit. We are satisfied that Britain's sale of City National stock to Morgan was made in good faith and that the loss thereby sustained is deductible from gross income for 1921.
However, the loss sustained by the petitioners was not the full amount claimed by them. Britain acquired 250 shares of City National Bank stock at an average cost of $227.32 per share. The ten shares which he did not sell, therefore, represented an investment of $2,273.20 upon which no loss is shown. The balance of his investment, $54,556.80, was the cost to him of the shares which he sold for $28,800. The difference between these latter two amounts is $25,756.80, and represents the loss sustained by the petitioners, which loss should be allowed them as a deduction.
*2206 Reviewed by the Board.
Judgment will be rendered under Rule 50.
LANSDON dissents.