*2110 1. DEDUCTIONS - LOSSES ON SALE OR DISPOSITION OF CORPORATE STOCKS. - During the years under review and for many years prior thereto the petitioner was and had been the owner of the majority of the stock of a corporation which had continued as a going concern from 1908 to 1926. From 1923 to 1926, inclusive, the business was in the hands of a creditors' committee. Upon the showing made in this record it may not be held that the common stock of this corporation was worthless or a total loss at any time while the business was continued as a going concern. It is further held that bona fide sales of such common stock, made by the petitioner during the years 1923, 1924, and 1925, for a nominal consideration, properly reflect losses deductible from petitioner's gross income.
2. In 1926, the creditors forced this concern into liquidation and thereupon, it appearing that the liabilities exceeded the assets, the said common stock is held to then have become a total loss deductible from gross income.
*443 These are proceedings for*2111 the redetermination of deficiencies in income taxes determined by the respondent in the following amounts: for 1923, $2,006.49; for 1924, $176.09; for 1925, $44.02; for 1926, $313.27. Upon motion duly made and granted the appeals were amended and were consolidated for purposes of hearing and decision.
The petitioner claims that he is entitled to deductions of losses on sales of stocks as follows: in 1923, $49,500; in 1924, $71,193.04; in 1925, $29,700; in 1926, $85,000. The respondent has disallowed the claimed deductions on the grounds that the sales were not bona fide and further, even if they were bona fide they did not bring *444 about realization for income tax purposes of the losses since the stock sold had become worthless prior to the taxable years.
FINDINGS OF FACT.
The petitioner is a resident of Glencoe, L. I. He previously was a resident of Newark, N.J.
The J. H. Ladew Company, hereinafter referred to as the corporation, is a New Jersey corporation incorporated in 1908, and until 1926 was engaged in the business of tanning sole leather.
The balance sheet of the corporation as at December 31, 1913, reflected the following assets, liabilities, and*2112 capital:
| ASSETS | ||
| Cash | $76,059.35 | |
| Accounts receivable | $121,422.82 | |
| Bills receivable | 121,422.82 | |
| Inventories: | ||
| Materials and supplies | 38,843.23 | |
| Hides | 104,311.86 | |
| Hides in process | 387,833.39 | |
| Tannage earned (betterment) | 70,677.11 | |
| Liquors | 19,900.00 | |
| Leather | 267,000.00 | |
| 888,565.59 | ||
| Investments: | ||
| Chattanooga tannery | 18,029.30 | |
| Patents | 1,065.25 | |
| 19,094.55 | ||
| Deferred charges: | ||
| Interest and discount | 11,291.17 | |
| Insurance premiums | 7,215.17 | |
| Miscellaneous | 7.71 | |
| 18,514.05 | ||
| Fixed assets: | ||
| Buildings, structures, etc | 321,985.75 | |
| Machinery, tools, equipment, etc | 204,414.65 | |
| 526,400.40 | ||
| 1,650,056.76 | ||
| LIABILITIES AND CAPITAL | ||
| Notes payable: | ||
| To officers | $819,000.00 | |
| To others, including banks | 575,000.00 | |
| $1,394,000.00 | ||
| Accounts payable: | ||
| Trade | 186,866.97 | |
| Others | ||
| 186,866.97 | ||
| Accrued expenses, and reserves: | ||
| Depreciation, buildings, structures, etc | $26,674.94 | |
| Depreciation, machinery, tools, equipment, etc | 56,050.28 | |
| Other accrued expenses | 14,149.85 | |
| $92,875.07 | ||
| Capital stock | 500,000.00 | |
| 2,173,742.04 | ||
| Deficit | 523,685.28 | |
| 1,650,056.76 |
*445 The corporation issued capital stock, par value $100 per*2113 share, as follows: in 1916, 5,000 shares; in 1918, 5,000 shares.
Beginning in 1920, the leather-manufacturing business generally becoae bad, and it grew steadily worse. The sales of the petitioner for 1919 amounted to approximately $4,000,000; for 1920, they amounted to $3,000,000; and for 1921, they were less than $2,000,000. The gross profits for 1922 and 1923, as recorded in the returns filed by the corporation, were as follows:
| 1922 | 1923 | |
| Sales | $1,778,045.67 | $1,382,709.86 |
| Cost of goods sold | 1,739,889.07 | 1,576,527.98 |
| Gross profit in sales | 38,156.60 | |
| Loss reflected in sales | 193,818.12 |
The heavy indebtedness of the corporation included obligations to banks, and beginning in 1923, the operations of the corporation were under the supervision of a creditors' committee. If the creditors had elected, they could have thrown the corporation into bankruptcy, but they preferred to allow operations to continue, for the reason that the unsatisfactory conditions arose out of general conditions in the industry, and it was hoped that they would change for the better so that the petitioner could resume the earning of profits which would enable it to pay off*2114 its creditors. However, upon the insistence of the creditors a reorganization of the capital structure of the corporation was effected in 1923, and was reflected upon the books of account as follows: the entire outstanding capital stock, par value $1,000,000, was turned in to the corporation and, in lieu thereof, common stock having no par value was issued retaining, however, pro rata the respective distinctions of classes A, B, and C; the par value of the previous stock was charged off against the existing deficit and no value was entered upon the books for the no-par stock; the petitioner consented to accept in discharge of an indebtedness to him for cash loaned to the corporation in the amount of $670,000, shares of preferred stock of the corporation having a par value of $670,000; *446 this preferred stock was entered upon the books at its par value; the buildings, machinery and equipment belonging to the corporation were revalued upon the books through the medium of a reduction of the accumulated reserve for depreciation. These changes resulted in a large reduction of the deficit reflected upon the books. In the return filed by the corporation for 1923, the balance sheets*2115 at the beginning and end of the year were reported as follows:
| Beginning of the year | End of the year | |||
| Ladew | The Ladew | Ladew | The Ladew | |
| Realty Co | Co. | Realty Co | Co. | |
| ASSETS | ||||
| Cash | 47.15 | $7,831.00 | $2,774.58 | |
| Accounts receivable | 16,007.32 | 289,821.51 | $3,401.63 | 80,116.96 |
| Inventories | 431,395.90 | 402,003.80 | ||
| Investments: | ||||
| Stock of Ladew Realty Co | 152,948.95 | 152,948.95 | ||
| Tanners Products Co | 12,000.00 | 12,000.00 | ||
| Building bonds of Chamber of | ||||
| Commerce | 1,750.00 | 1,750.00 | ||
| Deferred charges | 6,190.52 | 3,958.84 | ||
| Land | 97,933.87 | 799.15 | 97,933.87 | 799.15 |
| Buildings, machinery, and | ||||
| equipment, less reserve for | ||||
| depreciation 1 | 417,936.77 | 694,354.83 | ||
| Construction (intangible) | 9,063.63 | 9,063.63 | ||
| Total | 113,988.34 | 1,329,737.43 | 101,335.50 | 1,359,770.74 |
| LIABILITIES AND CAPITAL | ||||
| Notes payable | 630,317.60 | 567,924.55 | ||
| Accounts payable | 12,404.55 | 795,465.44 | 356,598.09 | |
| Accrued expenses | 11,561.72 | 14,452.33 | ||
| Debentures | 50,000.00 | 50,000.00 | ||
| Capital stock: | ||||
| Preferred | 670,000.00 | |||
| Common | 100,000.00 | 1,000,000.00 | 100,000.00 | |
| Surplus | 1,583.79 | 1,335.50 | ||
| Deficit | 1,157,667.33 | 299,204.23 | ||
| Total | 113,988.34 | 1,329,737.43 | 101,335.50 | 1,359,770.74 |
In the returns filed by the corporation salary payments to the petitioner were reflected as follows: for 1922, nil; for 1923, $11,000.
At the beginning of 1923 the petitioner was the owner of all of the outstanding capital stock of the corporation, and he was the record holder of all of the shares, with the exception of two or three which were held by others for qualifying purposes. The stock was *447 divided into classes (A), (B), and (C); the object of these classes was mainly to distinguish certain voting privileges on the stock. The petitioner's holdings had been acquired as follows: in 1908, 3,000 shares at a cost of $100 per share, paid in to the corporation in cash; in 1916, 2,000 shares, purchased from a concern referred to in the testimony as Wilson & Company. In the same year 5,000 shares additional stock were issued to the petitioner by the corporation for cash paid in at par value $100 per share. Following these transactions the petitioner sold to a concern referred to in the testimony as the Cattaragus Tanning Company, 4,000 shares, all of which were class (C) stock. In 1920 the petitioner reacquired these 4,000 shares of class (C) stock at a cost of $170.62 per share paid in cash.
The average cost to the petitioner and/or value as of March 1, 1913, of this common stock was as follows:
| Date acquired | Shares | Cost basis | Lower of cost |
| or value | |||
| Mar. 1, 1913, | |||
| basis | |||
| 1908 | 3,000 | $300,000 | 1 |
| 1916 | 2,000 | 1 | 1 |
| 1916 | 1,000 | 100,000 | 100,000 |
| 1920 | 4,000 | 682,480 | 682,480 |
| Total | 10,000 | 1,082,480 | 782,480 |
| Average per share | 108.248 | 78.248 |
In 1923, in connection with the financial reorganization of the corporation, the petitioner exchanged all of his common stock for 10,000 shares of the new no-par common stock.
The following transactions were had in 1923: the petitioner sold 450 shares of the common stock of the corporation to various employees and 50 shares of the same stock to his son, J. Harvey Ladew, Jr. All of this stock was sold for a consideration of $1 per share paid to the petitioner in cash. At this time the petitioner's son, J. Harvey Ladew, Jr., was about 18 years of age and he had an interest in some money which had been left for him by his mother, and which subsequently amounted to about $9,000 when it was turned over to him when he became of age. This trust was administered by the petitioner. A loss of $49,500 attributable to this transaction was claimed in the return filed by the petitioner.
The petitioner sold to his wife 500 shares of the common stock of the corporation in 1924 for a cash consideration of $500. A loss of $49,500 was claimed in the return filed by the petitioner.
*448 The petitioner sold 300 shares of the common stock of the corporation to*2118 his wife in 1925 for a cash consideration of $300. The petitioner's wife had means of her own at this time and also during the previous year, invested in stocks and bonds and in real estate located in New York City, which the petitioner had previously given to her during their married life.
The petitioner sold 500 shares of the common stock of the corporation to his son, Oliver H. Ladew, in 1926, for a cash consideration of $300. A loss of $85,010 was claimed in the return filed by the petitioner. At this time Oliver H. Ladew was about 19 years old.
The corporation continued in business under supervision of the creditors' committee until 1926, when the creditor banks refused to permit further operations, and liquidation of the corporation was immediately undertaken. Exactly the month and day is undisclosed by the record. The corporation is still in process of liquidation.
OPINION.
TRUSSELL: The petitioner in this case appeared in his own behalf with the explanation that his financial affairs were so heavily involved following the enormous losses he has suffered that he did not feel able to avail himself of the services of an attorney. He took the stand and testified*2119 fully and frankly so far as he was able from his own recollection as refreshed from the returns and other papers in the case. The respondent does not contest the fact that enormous losses have been suffered by this petitioner, but he offers the contention that all of the losses claimed in the returns and disallowed were with respect to certain sales which, in his opinion, were not bona fide, and even if bona fide, they were substantially of no significance with respect to the taxable years, for the reason that the stock had become worthless prior to the taxable years. In support of the contention of worthlessness the returns of the corporation were put in evidence, with reliance mainly upon the balance sheets as reported in the returns, reflecting before financial reorganization an enormous operating deficit. The corporation, however, was able to hold off its creditors until some time in 1926; it had behind it the earnest support and backing of the petitioner; and its troubles were largely due to general adverse trade conditions, so that we think it can not be said that prospects were hopeless for a financial rehabilitation.
The regulations of the Commissioner have uniformly*2120 required that a loss through worthless stock is only allowable through a closed transaction or where there is a clear showing that the stock *449 is utterly without any value whatever. See article 144 of Regulations 45 and 62.
However bad the statement of affairs appears from the balance sheet at the beginning of 1923, it is not a basis upon which we think the respondent, in the face of continued operations, would have permitted the petitioner to have taken, in a prior year, the deduction of a loss through worthlessness.
We prefer the view that the evidence does not establish the utter worthlessness of the stock prior to the taxable years.
We turn then to the first taxable year and find in that year the petitioner sold 450 shares of stock for a consideration of $1 per share to various employees who paid him in cash. We believe that she sales were bona fide and the resulting losses are allowable as a deduction from income.
In the same year the petitioner claims to have sold to his son 50 shares of the stock for a cash consideration. In support of this claim the petitioner testified that the son, then a minor, had separate means through a trust fund which the petitioner*2121 was administering. We are of the opinion that this transaction is obviously open to serious question, and it does not afford a satisfactory basis for the allowances of a loss. We think the trust fund can not be recognized as available for the purposes of the petitioner acting both for himself and as trustee. There is in evidence no other source of the cash consideration. This loss may not be allowed.
In 1924 the petitioner sold to his wife 500 shares of the stock for a cash consideration of $500. The wife had means of her own. We think the sale was bona fide; conceived and executed for a legal purpose, and it was valid as between the parties. It follows that the loss is allowable.
We arrive at the same conclusion of fact with respect to the sale of 300 shares of the stock to petitioner's wife in 1925. It follows that the resulting loss is allowable.
In 1926 the creditors closed down on the corporation and liquidation immediately began. Leaving out of consideration the probability of loss upon the preferred stock which the petitioner owned, there remains a heavy loss, for we see no chance whatever for the petitioner to realize anything on the remainder of his no-par*2122 common stock, and we believe there is a satisfactory basis for a conclusion that this no-par stock became worthless in 1926. The loss eliminates the net income.
It is unnecessary to give detailed consideration to the claimed sale of 500 shares of the stock to another minor son.
Upon the record the bases for computation of the several losses are as follows: for 1923, under section 202(b)(2) of the Revenue *450 Act of 1921, $78.248 per share; for 1924 and 1925, under section 204(b) of the Revenue Acts of 1924 and 1926, $108.248 per share; for 1926, under sections 214(a)(4)(5) and (6) and 204(b) of the Revenue Act of 1926, $108.248 per share.
The several net incomes should be recomputed in conformity with this opinion.
Reviewed by the Board.
Decision will be entered pursuant to Rule 50.
MURDOCK concurs in the result only.
TRAMMELL dissents on the question of sales of stock.