Cornish v. Commissioner

*474 These proceedings are for a redetermination of the deficiency proposed by the Commissioner in his notice of deficiency dated January 11, 1928.

The taxes in controversy are income taxes for 1924, and the deficiency proposed by the Commissioner is $2,812.13.

*475 Petitioner alleges that the Commissioner erred in the disallowance of a loss sustained on a certain stock transaction in 1924, and claimed as a deduction from income in that year.

FINDINGS OF FACT.

Petitioner is a resident of Cold Spring, N.Y., engaged in business at 111 Broadway, New York City.

Prior to December, 1922, petitioner, together with his wife and his sister, became stockholders in the Omaha Alfalfa Milling Company, a Nebraska corporation, hereinafter referred to as "the company." His sister was made president of the company. Petitioner owned both preferred*2115 and common stock of the company, and lent to it a large amount of money.

In 1922 petitioner sold to his sister, Mrs. Anna V. Metcalf, 300 shares of the common stock of the company for $7,500, for which he took his sister's note in that amount, and the stock was transferred upon the books of the company into his sister's name at that time. This block of stock had cost petitioner $28,000 when he originally acquired it, but because he did not intend to lend the company any more money, he did not think that the stock was at that time worth more than $7,500. His sister was very insistent that he should lend them more money, notwithstanding which he refused to make any further advances to the company. The company was forced into bankruptcy in 1923 by creditors other than himself; the referee's sale was made in that year, and the properties did not sell for enough to pay the company's debts. The stock became worthless in 1923, and was so considered by petitioner.

In 1924, Mrs. Metcalf refused to pay her note for $7,500 that petitioner held, giving as her reasons for such refusal, first, that petitioner knew all about the affairs of the company of which she was ignorant and had overreached*2116 her; second, that petitioner had not intended to lend the company any more money and that, therefore, it, had to fail; third, that as an experienced lawyer, petitioner knew that with the company in bankruptcy, its stock would be worth nothing; and fourth, that she understood petitioner had requested her to buy the stock from him in 1922 so that he could deduct his loss on his income tax return for that year.

This colloquy took place in New York City. Petitioner admits that his sister's allegations were substantially true, and influenced by these considerations, although his sister was a woman of considerable wealth, abundantly able to pay this note or any other note which she might contract, petitioner did not sue her or make any other attempt to collect on the note, after asking her to pay it and receiving her refusal. Instead, he tore up the note with the understanding that *476 upon his sister's return to Omaha she would forward to petitioner the worthless stock in question duly assigned to him.

As a result of this latter transaction, petitioner decided that he had sustained a deductible loss of $7,500 in 1924, and took it on his income tax return for that year. This*2117 deduction was disallowed and restored to income by the Commissioner.

OPINION.

LOVE: We sustain the Commissioner in the disallowance of this deduction.

Petitioner contends that the destruction by him of his sister's note in his favor, and her return to him of the stock purchased from him in 1922, is equivalent to a rescission of the sale of such stock fully executed in that year. We are not of that opinion for the reason, among several others, that the transaction of 1924 did not operate to restore the status quo ante of the sale in 1922, the stock in the meantime, having fallen from what was regarded by both parties as a fair market value of $7,500, to worthlessness in 1923. Nor are we inclined to concur in petitioner's conviction that recovery could not, under the circumstances, be had upon his sister's note. According to his own testimony, she was abundantly able to pay the note, and as president of the corporation she is to be presumed to have been at least as fully informed as to its financial condition as was he who does not appear to have been anything more than a stockholder therein, and a creditor. Even though we were of the opinion that the sale in 1922 was*2118 rescinded by the 1924 transaction, petitioner would not benefit thereby. In ; affd., ; certiorari denied, , it was held "that if the proof shows stock became worthless in a given year, the deduction must be taken for that year and may not be taken for any other years." See also . The worthlessness of the stock here in question was established in 1923, and if there was at any time a deductible loss, it was deductible in that year, but petitioner did not then own the stock.

We are of the opinion that the 1924 transaction constituted a resale of the stock from Mrs. Metcalf to petitioner, and that there was no deductible loss in any year resulting from that purchase and sale.

The Revenue Act of 1924 provides, in section 214, for deductions allowed individuals. It is not necessary to quote the provisions of this section of the statute in extenso, but there are three paragraphs providing in terms for deductible losses and a fourth providing for the deduction of worthless debts.

Petitioner does not claim that this note was worthless; *2119 to the contary, he asserts that his sister was abundantly able to pay, it, and we *477 are of the opinion that she had no valid defense against it. Thus his loss on that ground is excluded. He can not claim it as a loss sustained during the taxable year incurred in trade or business. It is not a loss arising from fires, storms, shipwreck, or other casualty, and just as certainly, it is not a loss sustained during the taxable year incurred in any transaction entered into for profit.

Petitioner knew when he surrendered (or destroyed) his sister's valid note in exchange for the stock which he had sold to her two years previously, that there was no possible profit for him in the transaction, for he knew and had known for a year or more prior to his purchase, that the stock which he was then buying back from her was worthless.

No losses of a character other than those to which we have referred above are provided for in the statute as allowable deductions from gross income, and, therefore, we must hold that this transaction in 1924, to which petitioner was influenced by motives other than profit to himself, did not result in a deductible loss in that, or any other year.

*2120 Cf. ; affd., . The Goldsborough case is more favorable to the taxpayer than that here decided, the alleged loss in the former cases having been claimed in the year in which the value of the securities declined, and the claim was based upon the petitioner's antecedent promise to make good the loss if it should be sustained.

Judgment will be entered for the respondent.