1928 BTA LEXIS 4172">*4172 1. Negotiable notes paid in for stock were worth their face value and should be included in invested capital for each of the taxable years.
2. Held, that the petitioner properly deducted from its gross income losses sustained and bad debts ascertained to be worthless in the fiscal year ended July 31, 1921.
10 B.T.A. 211">*211 The respondent has asserted deficiencies in income and profits taxes for the fiscal years ended July 31, 1920, and July 31, 1921, in the respective amounts of $828.49 and $2,025.78. The petitioner alleges that the respondent erred (1) in excluding from invested capital for each of the years certain notes made by subscribers for stock; (2) in disallowing as deductions from gross income in 1921 certain losses and bad debts sustained or ascertained to be worthless and charged off in such year.
FINDINGS OF FACT.
The petitioner is a Wyoming corporation with its principal place of business at Sheridan. On August 1, 1919, it increased its capitalization in the amount of $35,900, and issued its capital stock in that 10 B.T.A. 211">*212 amount. 1928 BTA LEXIS 4172">*4173 For the stock so issued it received $4,000 in cash and for the remainder subscription notes, each bearing revenue stamps as required by law for negotiable paper, in the following form:
I hereby subscribe for one hundred twenty (120) shares of Common Capital Stock of Sheridan Meat Company of Sheridan, Wyoming. Said one hundred twenty (20) shares to be issued to me at once as value received for which I promise to pay to the order of Sheridan Meat Company on demand the sum of twelve thousand dollars.
The makers of the subscription notes were, for the most part, employees or prior shareholders. All were solvent at August 1, 1919, and, prior to the hearing of this proceeding, all such notes had been paid in full. The notes were worth their face value at the time paid in for stock.
Some time in the latter half of the year 1920, the Livingston Meat Co. was incorporated with an authorized capitalization of $50,000, for the purpose of conducting a high-class meat market at Livingston, Mont. The petitioner subscribed and paid for 20 shares of the stock of such company, and paid therefor the amount of $2,000, and also loaned to it the amount of $2,300.
The Livingston Meat Co. 1928 BTA LEXIS 4172">*4174 was not successful and ceased operations some time in the first half of the year 1921, at which time it had outstanding liabilities in excess of $25,000. Its only assets were its shop fixtures, mostly built into a leased building, which had cost $21,667.67, and accounts receivable in the approximate amount of $1,000. The fixtures were transferred to the owner of the building used as the place of business of such company, as consideration for cancellation of the unexpired lease thereon. The petitioner received the accounts receivable to be applied on its note, as collected.
At the annual meeting of the stockholders of the petitioner, in July, 1921, notice was taken of the fact that the Livingston Meat Co. had discontinued business with no assets except as above stated, and it was ordered that $1,800, representing a part of the principal of the note of such company owed by the petitioner, should be written off as a bad debt, and that the entire investment of $2,000 in the stock should be written off as a loss sustained in that year. This was done as of July 31, 1921, and such amounts were deducted from the petitioner's gross income in its income-tax return for such year.
OPINION.
1928 BTA LEXIS 4172">*4175 LANSDON: The petitioner's claim that the amount of unpaid subscription notes should be included in its invested capital for each of the taxable years is amply supported by the record.
Each of the subscribers for stock was solvent. A banker in business at Sheridan testified that the notes were worth their face value. 10 B.T.A. 211">*213 This evidence is corroborated by the fact that all such notes were paid long before the hearing of this proceeding. We are of the opinion that the amounts of the unpaid stock subscription notes, which were negotiable paper, should be included in the petitioner's invested capital as claimed. ; ; .
The evidence is conclusive that the Livingston Meat Co. was insolvent and out of business in the year 1921, and that it had no assets available either for the payment of its current liabilities or for distribution as liquidating dividends, except as set forth in our findings of fact. The stock of such company, acquired by the petitioner at a cost of $2,000, was worthless at July 31, 1921, and1928 BTA LEXIS 4172">*4176 its cost is a proper deduction from the gross income of the petitioner as a loss sustained in the taxable year.
Under the Revenue Act of 1921, and the regulations pertaining thereto, a debt may be charged off to the extent that it is determined to be worthless. The petitioner owned the $2,300 promissory note of the Livingston Meat Co. Its only hope of collecting any part thereof was from the proceeds of the accounts receivable of such defunct company. It thought it might realize $500 from such accounts and so charged off the note, less than amount. The amount of $1,800 should be deducted from the petitioner's gross income for the fiscal year ended July 31, 1921, as a debt ascertained to be worthless and charged off in such year.
Reviewed by the Board.
Judgment will be entered for the petitioner.