Sandler v. Commissioner

*137 The respondent has asserted a deficiency in income tax for the year 1924 in the amount of $1,762.66. The only issue is whether certain shares of bank stock bought by petitioner in 1920 were worthless in the taxable year.

*138 FINDINGS OF FACT.

The petitioner is an individual residing in Kansas City, Mo. On October 27, 1920, he purchased shares of capital stock of the Midwest Reserve Trust Company, a bank operating under a Missouri charter and hereinafter designated Midwest, at a cost of $14,500.

In the latter part of the year 1921, Midwest became somewhat involved financially. Following an examination by the Commissioner of Finance of the State of Missouri, its officers were advised that its doors would be closed on November 7, 1921, and its affairs taken over by the State Banking Department for liquidation, unless emergency measures were adopted to strengthen its financial*1921 condition. Thereafter its directors and officers were in practically continuous conference for several days prior to November 7, 1921, and a liquidation plan which met with the approval of the Finance Commission of Missouri was worked out and adopted. Such plan, in the form of an agreement to which Midwest, the Commerce Trust Company of Kansas City, Missouri, hereinafter sometimes called the liquidator, and all the banks of the Kansas City Clearing House Association, hereinafter designated the Association, were parties is in evidence in this proceeding.

Under the terms of the aforesaid agreement notes aggregating $1,000,000 jointly and severally executed by the directors of Midwest were discounted by the member banks of the Association and the proceeds paid over to the Commerce Trust Company, which undertook to liquidate the assets of Midwest. The agreement provided that the liquidator should have two years within which to settle the affairs of the Midwest and that at the expiration of that time it had the option of retaining the assets thereof or turning them over to the member banks of the Association. It was further provided that if the remaining assets were so turned over*1922 the said member banks would reimburse the liquidator for any losses sustained by it as such.

On November 7, 1923, this liquidator notified the Association that it had sustained a loss in the amount of $1,865,500.27 in the liquidation, that it would not retain the assets of Midwest, and called on the members of the Association to pay their pro rata shares of such loss in conformity with the terms of the agreement. On November 27, 1923, a second agreement, also in evidence in this proceeding, was entered into between the liquidator and the members of the Association, under which the Commerce Trust Company was to continue as liquidator and receive as its commission 5 per cent of all amounts realized from the remaining assets of Midwest. The loss of $1,865,500.27 represented the difference between the liabilities of Midwest *139 which had been taken into a special account on the books of the liquidator and the amounts realized from the assets thereof during the two years in which the first agreement was effective, but did not include the notes of the directors of Midwest in the amount of $1,000,000 which had been discounted by members of the Association.

At November 27, 1923, the*1923 unliquidated assets of the Midwest had a face value about equal to the remaining liabilities and an actual value of several hundred thousand dollars. At no time prior to December 31, 1923, did the liquidator render any statement to the directors or stockholders of Midwest and on that date the petitioner was without any definite information as to the value of the stock thereof, the remaining assets or the total liabilities, aside from capital stock still outstanding.

During the year 1924 the petitioner undertook to get some information as to the affairs of Midwest. He talked with the officers of several members of the Association and became convinced that the liabilities of Midwest, excluding the capital stock, were greatly in excess of any amounts that could ever be realized from the liquidation of its assets. Thereafter, in 1924, he sold the stock here in question for one dollar. In his income-tax return for 1924, he deducted the cost of such stock in the amount of $14,500 from his gross income as a loss sustained in that taxable year. Upon audit the respondent disallowed the deduction taken on the theory that the loss was sustained in a prior year. The stock of Midwest was*1924 worthless in 1924.

OPINION.

LANSDON: The record is clear and the respondent concedes that petitioner lost his entire investment in the stock of the Midwest Reserve Trust Company. The only question here is whether such loss was sustained in the taxable year as pleaded by the petitioner or in some prior year as contended by the respondent. The officer of the Commerce Trust Company who had charge of the liquidation of the assets of Midwest testified that no information or statement as to the value of such assets or the probable results of the liquidation thereof was sent to the directors or stockholders of Midwest prior to December 31, 1923, and that at such date the remaining assets of the insolvent bank had a very substantial value. The petitioner testified that prior to 1924, he could get no definite information as to the condition of Midwest or the probable results of the liquidation of its assets. In 1924 he was assured by bankers connected with the Association that the stockholders of Midwest would realize nothing from the liquidation.

*140 In our opinion the petitioner has sustained the burden of proof necessary to support his allegation of fact. The sale of*1925 the stock in 1924 for $1 has no real bearing on the issue and the bona fides of that transfer is not material. The transaction was entered into for profit and resulted in a loss which the petitioner is entitled to deduct from his gross income in the year in which it was sustained. The respondent, while conceding the loss, contends that it was deductible in 1921, or, at the latest, in 1923. There is nothing in the record to indicate that a deduction from income on account of the worthlessness of Midwest stock would have been allowed before 1924. The corporation was in liquidation and still had unrealized assets of substantial value. Prior to 1924, petitioner hoped to save some of his investment, but no man is required to be an "incorrigible optimist." In 1924, on sufficient information, he abandoned hope and in his income-tax return deducted the cost of the Midwest stock from his gross income as a loss sustained in that year. We are of the opinion that the loss in question was sustained as alleged and should be deducted from petitioner's gross income in the taxable year. See *1926 .

Decision will be entered for the petitioner.