Opinion
Suit by George P. Lyon against the United States.
Judgment for defendant.
Frank J. Albus, of Washington, D.C., for plaintiff.
Joseph H. Sheppard, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen. (William W. Scott and Elizabeth B. Davis, both of Washington, D.C., on the brief), for the United States.
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. About the year 1919 the plaintiff invested $8,000 and his wife $1,000 in the stock of the Silver Roll Oil Association which was promoted by an individual who was the owner of 161.2 acres of land at Wichita Falls, Texas. The total outstanding capital stock of the Silver Roll Oil Association was 56,730 shares of a par value of $1.00 per share. The land subsequently became the property of the Silver Roll Oil Association.
2. In 1922, the manager of the Silver Roll Oil Association investigated the status and value of this land for oil purposes, and reported that, while the property was within six miles of a good oil field, there were no producing wells nearer, and recommended to the directors that the property be held to await future developments, In the meantime, the property was rented for 1923 for agricultural purposes. In 1924, the manager advised the stockholders that in the opinion of the directors it was not profitable to hold the land longer and suggested that a meeting be held to authorize its sale and wind up the affairs of the association. Later in the same year, the stockholders' meeting not having been held, the manager advised the stockholders that he had no other recourse than to apply to the courts for the sale of the property, the dissolution of the association, and the distribution of the assets.
3. In 1922 and 1923, test wells were drilled in close proximity of the land and found to be dry wells. Upon application to the courts of the state of Texas in 1925 a receiver was appointed to sell the property, dissolve the corporation, and disburse the remaining assets. The receivership terminated in 1927, at which time the plaintiff received a liquidating dividend of $582.72 and his wife a liquidating dividend of $72.84.
4. On or about March 12, 1926, the plaintiff filed with the collector of internal revenue at Richmond, Va., an income tax return, being a joint return of plaintiff and his wife, for the calendar year 1925, showing a tax due of $994.66, which was paid to the collector of internal revenue at Richmond, Va., on March 12, 1926. In arriving at the net income shown on the said income tax return for the year 1925, the plaintiff deducted an amount of $9,000, representing the investment in the stock of the Silver Roll Oil Association of Texas. This deduction was listed under item 14, 'Bad debts,' and explained under schedule F as 'Stock Silver Roll Oil Co. worthless.'
The Commissioner of Internal Revenue disallowed this deduction of $9,000 in connection with the Silver Roll Oil Association, and, on account of this disallowance together with some others as adjustments, he determined an additional tax due from the plaintiff of $2,488.97 which, together with interest of $321.50, was paid by the plaintiff on May 2, 1928. On September 12, 1929, the plaintiff filed a claim for refund in the sum of $1,393.06 for the year 1925 on the ground that the total cost of his stock in the Silver Roll Oil Association of Texas represented a deductible loss on his return for 1925.
On October 23, 1929, the Commissioner advised the plaintiff that his claim for refund for the year 1925 was disallowed. On October 16, 1930, the plaintiff having requested that the Commissioner reopen his claim for refund, the Commissioner advised him that the prior action rejecting the claim for refund was sustained on the ground that an examination failed to show that a loss was sustained in the year 1925; further, that since the loss resulted from a stock subscription the amount thereof could not be determined until the business was liquidated and the liquidating dividend received, which was in 1927. 5. On March 13, 1928, plaintiff filed his income tax return for the year 1927, being a joint return of plaintiff and his wife, which showed that in the year 1927 there was suffered a net loss of $18,561.10. In said return, plaintiff listed under item 6 'Profit from sale of real estate, stocks, bonds, ' etc., a loss of $8,417.28 arising from the stock loss in issue. The item was explained in schedule C as 'Disallowed as a loss in return, no change was recommended and no tax was assessed.
Before BOOTH, Chief Justice, and GREEN, WHALEY, WILLIAMS, and LITTLETON, Judges.
GREEN, Judge.
There is no controversy over the facts in this case. About March 12, 1926, the plaintiff made an income tax return for himself and wife for the year 1925 showing a tax due of $994.66 which was duly paid. In arriving at the net income for this return plaintiff deducted $9,000, being the amount he had invested in the stock of a company known as the Silver Roll Oil Association. This deduction was listed under bad debts and explained under schedule F as 'Stock Silver Roll Oil Co. worthless.'
The Commissioner of Internal Revenue disallowed this deduction, and by reason thereof and some other adjustments determined that there was an additional tax due from the plaintiff of $2,488.97, which together with interest was paid by the plaintiff. On September 12, 1929, plaintiff filed a claim for refund in the sum of $1,393.06 for the year 1925 on the ground that the total cost of his stock in the Silver Roll Oil Association represented a deductible loss on his return for 1925. The Commissioner rejected this claim, and the sole question in the case is whether his action was proper.
We think it was. While the findings of fact show that it was evident as early as 1923 that the real estate owned by the company had little or no value for oil-producing purposes, and in 1925, a receiver was appointed to sell the property, dissolve the corporation, and disburse the remaining assets, the evidence fails to show the value of the assets in 1925 and how much plaintiff might expect to receive as a liquidating dividend when the property of the company was sold and distributed to the stockholders. This did not appear until 1927, at which time the plaintiff received a liquidating dividend of $582.72 and his wife a liquidating dividend of $72.84.
It is generally held that the mere appointment of a receiver or even a showing of bankruptcy of a corporation is not sufficient in itself and alone to entitle a taxpayer to deduct the cost of the stock in such corporation as worthless. For all this may happen merely because the corporation is unable to meet its obligations in the ordinary course of business. Nor do we think that the loss could be deducted as a bad debt. The allowance for loss in a case like the one at bar must be made under section 214(a)(5) of the 1926 Act (26 USCA § 955(a)(5) as a loss 'sustained during the taxable year * * * if incurred in any transaction entered into for profit. ' Regulations 69, article 144, provide that when the stock of a corporation becomes worthless the cost may be deducted in the taxable year in which the stock became worthless. The distribution of the liquidating dividend showed that the stock never did become absolutely worthless. It did, however, fix the amount of the loss when made, which was in 1927.
The facts shown in the cases cited by plaintiff are so different from those in the case at bar as to make the decisions therein not applicable.
We think the decision of the Commissioner was right, and it is therefore ordered that the plaintiff's petition be dismissed.