Marks v. United States, (1944)

Full title: MARKS v. UNITED STATES

Court: United States Court of Federal Claims

Date published: Dec 4, 1944

58 F. Supp. 182 (Fed. Cl. 1944)

Opinion

No. 45702.

December 4, 1944.

Allen Trafford Klots, of New York City (G. Herbert Semler, Edward S. Hand, and Winthrop, Stimson, Putnam Roberts, on the briefs), for plaintiff.

J.H. Sheppard, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the briefs), for defendant.

Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.

Action by Laurence M. Marks against the United States to recover an alleged overpayment of income taxes for the year 1936.

Judgment for defendant dismissing the petition.

This case having been heard by the Court of Claims, the court, upon a stipulation of facts entered into by the parties, makes the following special findings of fact:

1. The plaintiff, Laurence M. Marks, whose business address is No. 49 Wall Street, New York, New York, was, in the year 1936, and still is, the owner of 3,000 shares of participating preference stock of International Match Corporation, which stock he purchased at a total cost of $141,562.50 as follows:

1925 1,000 shares ...................... $ 50,262.50 1926 500 shares ........................ 25,000.00 1927 500 shares ........................ 31,337.50 1931 1,000 shares ...................... 34,962.50 __________ 141,562.50

2. On or about March 15, 1937, the taxpayer filed a Federal income tax return for the year 1936 with the Collector of Internal Revenue for the First District of New York, showing a tax liability of $179,973.18, which was paid in quarterly installments as follows:

March 17, 1937 ........................... $44,993.31 June 15, 1937 ............................ 44,993.29 September 15, 1937 ....................... 44,993.29 December 14, 1937 ........................ 44,993.29

3. In computing his net income on the aforesaid return the plaintiff did not claim any deduction on account of the cost of said 3,000 shares of participating preference stock of International Match Corporation.

4. On March 8, 1940, the plaintiff filed a claim for refund, Treasury Department Form 843, for $94,973.93 with the then Collector of Internal Revenue for the First District of New York. The ground upon which said refund claim was based stated as follows:

"Prior to the year 1936 the Taxpayer purchased 3000 shares of the participating preference stock of the International Match Corporation at a total cost of $141,562.50. This stock became worthless in the year 1936, and the Taxpayer thereby sustained a loss of $141,562.50. The Taxpayer did not claim this loss as a deduction on his 1936 income tax return.

"The Taxpayer claims a refund on the ground that he sustained a loss in 1936 in the amount of $141,562.50 by reason of the fact that the above-mentioned stock became worthless in 1936."

5. Plaintiff's claim for refund was referred to a revenue agent who made a reexamination of the plaintiff's books and records in connection therewith. The revenue agent's report, copy of which was transmitted to the plaintiff by letter dated April 25, 1940, from the Internal Revenue Agent in Charge, concluded with the following: "The claim is rejected for the reason that this office, as per records available, holds that the Participating Preferred Stock of the International Match Co. was worthless in 1932."

The Commissioner of Internal Revenue forwarded to the plaintiff by registered mail a letter dated June 28, 1940, advising that plaintiff's refund claim was disallowed in its entirety.

6. The International Match Corporation, hereafter referred to as International, was incorporated under the laws of Delaware in June 1923. It acquired from the Swedish Match Co. and others the greater part of the entire capital stocks of companies owning over 100 match manufacturing plants in Mexico, Norway, Denmark, Latvia, Finland, Poland, Austria, Hungary, Czechoslovakia, Jugoslavia, Estonia, Philippine Islands, and Turkey, with a daily capacity of more than two billion finished matches, and also the entire capital stock of the Vulcan Match Co., which was the sales company for products of the Swedish Match Co. and its subsidiaries.

7. The original authorized capital stock of International consisted of 900,000 shares of participating preference stock of a par value of $35 each, hereafter referred to as preference stock, and 1,450,000 shares of common stock of no par value. In December, 1924, July, 1925, and October, 1926, issues of 450,000 shares, each, of the preference stock, which was entitled to cumulative dividends at the rate of $2.60 a share annually, and after the payment of a like amount on the common, was entitled to share equally with the common, were offered to the public through the firm of Lee, Higginson Co. The issue of preference stock in December, 1924, was for the purpose of retiring an outstanding issue of debentures in the amount of $15,000,000. On December 17, 1924, and apparently in connection with the issuance of the preference stock in that month, the Swedish Match Co., which at that time was the owner of a majority of the outstanding shares of common stock in International, entered into two related agreements with International and the holders of shares of the preference stock. The two agreements, together, provided:

1. As to Swedish Match Co.:

(1) That it would not, at any time, reduce the number of shares of common stock, owned by it in International, below a majority of the total number of such shares then outstanding unless it should first publish a notice stating its intention so to do and offering and agreeing to purchase, at not less than 120 percent of par value ($35 per share) plus accrued dividends, all shares of preference stock in International which might be presented to it for that purpose within a period of three months of the date of first giving notice;

"(2) That it would, from time to time, upon the request of International endorse or cause to be endorsed upon the certificates of preference stock a notation duly executed by it (the Swedish Match Co.) evidencing the agreement referred to in (1) above;

"(3) That, so long as it continued to own a majority of the outstanding shares of common stock in International it would not, in any year, pay dividends on any class of capital stock of the Swedish Match Co. in cash, stock or otherwise, at a rate in excess of 12 per cent per annum unless International had paid the full amount of the cumulative preference dividends at the rate of $2.60 per share per annum on its outstanding shares of preference stock for all previous years; that in case the full amount of these cumulative dividends had been paid by International, the Swedish Match Co. would not pay in any year dividends on any class of its capital stock in cash, stock or otherwise, at a rate in excess of 12 per cent per annum except that such rate of dividends on the capital stock of the Swedish Match Co. might be increased to a rate not in excess of the greater of the following two proportions:

"(a) One and two-thirds times the rate of dividends actually paid during the preceding calendar year by International on its preference stock;

"(b) One and two-third times the rate of dividends which the net earnings and income of International during such preceding calendar year, as shown by a consolidated income account of International and its subsidiary or controlled companies, would suffice to pay on the outstanding shares of preference stock, assuming that these net earnings and income were to be distributed and paid by International as dividends at the rate of $2.60 per share on its outstanding preference stock and at the rate of $2.60 on its outstanding common stock and the balance distributed and paid equally by International share for share on its outstanding preference stock and common stock; and

"(4) That, in event the net earnings and income of International for any two successive years as shown by the consolidated income account of International and of its subsidiary or controlled companies should be insufficient to pay the full cumulative dividends at the rate of $2.60 a share on International's preference stock, it (the Swedish Match Co.) would reduce the rate of dividends paid on its own capital stock during the next succeeding calendar year to 1 2/3 times the average rate of dividends actually paid by International on its preference stock during the two preceding years; and that the Swedish Match Co. would not thereafter increase the rate of its dividends on the outstanding shares of its capital stock except to the extent of the proportion set out in (3) above."

2. As to International:

"That, as soon as practicable after the close of each calendar year, it would have a consolidated income account of itself and of its subsidiary or controlled companies for the preceding calendar year prepared and mail a copy thereof to the Swedish Match Co. at Stockholm, Sweden, together with a statement signed by the president or vice president of International setting forth;

"(1) The number of shares of preference stock and common stock International had outstanding at the beginning and at the end of the last preceding calendar year and of any changes in the amount of the shares of stock of either of said classes outstanding during such year;

"(2) The rate of dividends International actually paid during such last preceding calendar year on its outstanding preference stock and common stock; and

"(3) The rate of dividends which the net earnings and income of International during such last preceding calendar year, as shown by the consolidated income account of International and its subsidiary or controlled companies, would suffice to pay on the outstanding shares of preference stock on the basis set forth in (3)(b) above among the provisions relating to the Swedish Match Co."

3. As to the holders of preference stock: "Every holder of preference stock, by accepting a certificate therefor, was to become a party to the agreement and entitled to the benefits thereof with the same force and effect as if such holder had personally executed the agreement."

8. The recited consideration to the Swedish Match Co. for entering into the agreements was the agreements of the other parties and the benefits that would accrue to it as the owner of a majority of the outstanding common stock in International, from the sale by International of 450,000 shares of its preference stock to provide funds for the retirement by International of its outstanding 6½ per cent debentures issued about November 1923.

9. The foregoing agreements were signed for the Swedish Match Co. by Ivar Kreuger, as managing director, and for International by Atterbert, as vice president.

10. The circulars issued by Lee, Higginson Co. in connection with the offerings of the preference stock in 1924, 1925, and 1926 each contained a letter addressed by Kreuger to Lee, Higginson Co. relative to the alleged business history and financial condition of International, as well as to the business history of the Swedish Match Co. The letter from Kreuger, written in connection with the issue offered in December, 1924, contained the following statement:

"Covenants of Swedish Match Company

"The Swedish Match Company, which now owns a majority of the 1,000,000 outstanding shares of Common Stock of the International Match Corporation agrees, that (1) it will not reduce its ownership of said shares below a majority of the amount thereof at any time outstanding, without first publishing notice of its intention so to do and offering to purchase at not less than $42 a share and accrued dividends all Participating Preference Stock presented to it for that purpose within 3 months after the first publication of such notice; and (2) so long as it owns the majority of such outstanding shares of Common Stock, will pay no dividends upon its own capital stock at any higher rate relatively to the dividends then being paid on the Participating Preference Stock of the International Match Corporation than represented by the relation between the present rate of 12% per annum on the stock of the Swedish Match Company and the initial rate of $2.60 per annum on the Participating Preference Stock of the International Match Corporation, unless the Directors of the International Match Corporation, the earnings and income of that Corporation being sufficient for the payment of dividends under this ratio, should for any reason fail to declare such dividends, in which case the Swedish Match Company is not to be restricted in its dividend policy."

The letters written in connection with the issues offered in 1925 and 1926, while containing a statement respecting the Swedish Match Co.'s agreement to buy preference stock in International at a premium, contain no reference to an agreement restricting the Swedish Match Co. in its payment of dividends.

11. In January, 1932, there were 12,834 separate holders of preference stock in International.

12. In April, 1932, there were issued and outstanding approximately 1,350,000 shares of preference stock in International and 1,000,000 shares of common stock. The class of stock held by American investors including the plaintiff, was preference stock. Almost all of the common stock was held by the Swedish Match Co., which was a subsidiary of A/B Kreuger Toll. The affairs of International prior to the death of Kreuger, were dominated by him. Kreuger shot himself and died on March 12, 1932.

13. On April 13, 1932, a creditor's bill in equity was filed in the District Court of the United States for the Southern District of New York praying for the appointment of a receiver to conserve the assets of International in the interest of its creditors and stockholders. The corporation filed an answer admitting the allegations of the bill and consenting to the appointment of a receiver. The Irving Trust Co. was appointed receiver in equity on the same day and duly qualified. On April 19, 1932, International filed a voluntary petition in bankruptcy and on the same day was adjudicated a bankrupt by the District Court of the United States for the Southern District of New York. The case was referred to a referee in bankruptcy, Oscar W. Ehrhorn. At the time of the adjudication, the Irving Trust Co. was appointed receiver in bankruptcy. On June 1, 1932, it was elected by the creditors as trustee in bankruptcy and has since been acting in that capacity.

14. The first cash distribution made to the stockholders in International was paid on April 15, 1925, to the holders of preference stock, and the amounts of distributions paid per share on each class of stock for the respective years were as follows:

------------------------------------------------- | Preference | Common Year | ($35 par) | (no par) ---------------------|--------------|------------ 1925 ............... | $2.10 | none 1926 ............... | 3.20 | none 1927 ............... | 3.20 | $1.69 1928 ............... | 3.20 | 3.20 1929 ............... | 3.20 | 3.20 1930-1931 .......... | 4.00 | 4.00 1932 ............... | 1.00 | 1.00 -------------------------------------------------

15. The last cash distribution paid by International to its stockholders was on January 15, 1932, when $1 a share was paid on each class of stock Since the corporation's adjudication as a bankrupt, no distributions by way of dividends or otherwise have been made with respect to its preference stock.

16. The preference stock in International was listed and traded on the New York Stock Exchange upon and after the issuance thereof until it was struck off the list of the Exchange on May 19, 1932, because of the corporation's failure to maintain a transfer office in New York City. The price range per share of the stock on the New York Stock Exchange was as follows:

---------------------------------------------------- Year | High | Low ----------------------|--------------|-------------- 1925 ................ | $60 7/8 | $56 5/8 1926 ................ | 66 3/8 | 53½ 1927 ................ | 95½ | 62 1928 ................ | 121 7/8 | 85 1929 ................ | 102½ | 47 1930 ................ | 92 | 52¼ 1931 ................ | 73¼ | 11 January, 1932 ....... | 24 3/8 | 15¾ February, 1932 ...... | 24½ | 16¾ March, 1932 ......... | 21¼ | 3½ April, 1932 ......... | 4 5/8 | 3/8 May, 1932 ........... | 3/8 | ¼ --------------------------------------------------------------

17. After May, 1932, sales of the preference stock in International were made through brokers "over the counter" at prices within the following price range per share:

-------------------------------------------------------- Year | High | Low --------------------|------------------|---------------- | Cents | Cents 1932 .............. | 62½ | 12½ 1933 .............. | 25 | 17½ 1934 .............. | 16½ | 10½ 1935 .............. | 27½ | 11½ ---------------------------------------------------------

18. The following bid and asked prices per share were quoted on the preference stock in International in "over the counter" transactions in New York City, Boston, and Philadelphia in November and December 1932 and January 1933:

------------------------------------------------------------------ | Number | | Date | of Shares | Bid | Asked ---------------------|-------------------|------------|----------- Nov. 7, 1932 ....... | 500 | $0.125 | .......... Nov. 9, 1932 ....... | 25 | .......... | $0.50 Nov. 9, 1932 ....... | (¹) | .125 | .375 Nov. 10, 1932 ...... | 200 | .125 | .......... Nov. 11, 1932 ...... | 500 | .......... | .375 Nov. 16, 1932 ...... | 200 | .......... | .125 Nov. 16, 1932 ...... | 200 | .......... | .25 Nov. 18, 1932 ...... | 300 | .125 | .......... Dec. 5, 1932 ....... | 100 | .0625 | .1875 Dec. 7, 1932 ....... | (^fn1) | .0625 | .1875 Dec. 8, 1932 ....... | 600 | .......... | .25 Dec. 9, 1932 ....... | 100 | .125 | .25 Dec. 17, 1932 ...... | (^fn1) | .......... | .1875 Jan. 6, 1933 ....... | (^fn1) | .20 | .28 Jan. 16, 1933 ...... | 65 | .......... | .15 Jan. 19, 1933 ...... | 400 | .......... | .20 Jan. 20, 1933 ...... | 1,000 | .05 | .......... Jan. 23, 1933 ...... | 500 | .0625 | .1875 -------------------------------------------------------------------

1 Not stated.

19. The following sales of preference stock in International were made at auction on the indicated dates to the highest bidders through Adrian H. Muller Son, auctioneers in New York City, after at least two advertisements of the proposed sales in the New York Herald Tribune and the Wall Street Journal, both being papers published in New York City:

Nov. 20, 1932, 361 shares at $10 for the entire lot.

Dec. 28, 1932, 100 shares at $3 for the entire lot.

Dec. 28, 1932, 25 shares at $6 for the entire lot.

20. The following sales of preference stock in International were made at auction to the highest bidders through R.L. Day Co., auctioneers in Boston, on December 28, 1932:

100 shares at $1 for the entire lot. 500 shares at $3 for the entire lot. 35 shares at $1 for the entire lot. 50 shares at $1 for the entire lot. 100 shares at $3 for the entire lot.

21. During the year 1936, the following firms traded in shares of participating preference stock of International Match Corporation:

A.C. Gebhardt Co., 11 Broadway, New York City.

William C. Orton Co., 1 Wall Street, New York City.

Mabon Co., 50 Broadway, New York City.

Elliot Wolfe, 52 Broadway, New York City.

Paul D. Sheeline Co., 24 Federal Street, Boston, Massachusetts.

22. The prices at which transactions in this stock during the period from January 1, 1936, through October 31, 1936, were consummated by the above-mentioned firms and the number of shares traded in at each price are set out below:

No. of Shares Price per Share

2468 shares 10 cents 4712 " 12½; " 7623 " 15 " 10166 " 20 " 4756 " 25 " 11224 " 30 " 7935 " 35 " 2930 " 40 " 1440 " 45 " 5330 " 50 " 4835 " 55 " 1265 " 60 " 690 " 62½ " 100 " 65 " _____ Total ........ 65474

23. The prices at which transactions in this stock during the period from November 1, 1936, through December 31, 1936, were consummated by the above mentioned firms and the number of shares traded in at each price are set out below:

60 shares .......................... 1 cent 126 shares ......................... 10 cents

24. In the year 1937 A.C. Gebhardt Co. purchased certificates of deposit for participating preference stock as follows:

February 3, 1937 ......... 30 shares at $ .05 per share March 2, 1937 ............ 50 shares at $ .05 per share

25. During the years 1936, 1937 and 1938 the following firms conducted auction sales at which shares of participating preference stock of International Match Corporation were sold:

R.L. Day Co., 45 Milk Street, Boston, Massachusetts.

Crockett Co., 50 Congress Street, Boston, Massachusetts.

26. The above quotations of bid, asked, and sales prices of shares preference stock were before the deduction and payment of transfer taxes and commissions payable by the sellers. The Federal stock tax on the sale or transfer of each 100 shares of preference stock was $1.40 during 1932 and all other years here under consideration. The New York State stock transfer tax on the sale or transfer of 100 shares of such stock was $1.40 during 1932 and to June 1, 1933, and $3 at all subsequent times here pertinent.

27. After May 18, 1932, the usual brokerage commission on a sale of 100 shares of such stock "over the counter" was $2.50 and the cost of selling a like amount of such stock at auction, including the cost of advertising, was in excess of such "over the counter" brokerage commission.

28. In addition to the amount of the preference and common stocks outstanding on April 19, 1932, International had outstanding and unpaid on that date two issues of debentures consisting of $47,430,500 twenty-year 5 percent sinking fund debentures, due November 1, 1947, and $48,979,000 ten-year 5 percent convertible debentures, due January 15, 1941. It also had other outstanding indebtedness of a substantial amount.

29. Preliminary to the authorization of the issuance of the debentures due January 15, 1941, Kreuger, as president of International, under date of January 14, 1931, addressed a letter to its stockholders containing in part the following:

"The consolidated net earnings of the Corporation and its subsidiaries, after depreciation, available for interest, for the 4 years ended December 31, 1929, averaged $20,124,377 or 4.09 times the $4,912,050 annual interest requirement on total present funded debt including the proposed new issue. For the year 1929 alone, such net earnings were $24,135,266, or 4.91 times this requirement. Net earnings available for dividends, for the year ended December 31, 1929, were $20,623,530, equivalent to $8.77 per share on the combined 1,350,000 shares of Participating Preference Stock and 1,000,000 shares of Common Stock now outstanding. Except in isolated cases, the match industry has not suffered from the current general business depression and the consumption of matches during the past year has maintained practically the same rate of increase as in previous years. While final figures for the year are not yet available, results of operations indicate that net earnings of the Corporation for 1930 will be somewhat in excess of those for 1929, even after making provision in 1930 for reducing book value of securities owned to a figure well below market value."

30. The two issues of debentures mentioned above were and are entitled to payment out of the assets of the corporation and its trustee in bankruptcy before any payment or distribution from that source is made to the holders of the preference stock. The following claims of debenture holders were allowed without objection by the trustee in bankruptcy:

5% convertible debentures due Jan. 15, 1941 .... $48,979,000.00 Interest accrued at the date of bankruptcy ..... 635,656.42 5% sinking fund debentures due Nov. 1, 1947 .... 47,430,500.00 Interest accrued at the date of bankruptcy ..... 1,102,610.91 ______________ Total ...................................... 98,147,767.33

31. The debentures of International were listed and dealt in on the New York Stock Exchange from the time of their issuance until November 1, 1932, when they were struck from the list of the Exchange because their maturity had been accelerated and there was some question about their negotiability. On November 1, 1932, the quotations on the Exchange per $1,000 face amount of the debentures due in 1947 were $65 bid and $102 asked, and for the same face amount of the debentures due in 1941 were $65 bid and $70 asked. On September 30, 1936, the quotations in New York City per $1,000 face amount of each class of debentures were $122½ bid and $126¼ asked. The foregoing quotations were flat, that is, without the addition of accrued interest.

32. Immediately upon its appointment, the receiver reduced to possession such assets of International as were within the jurisdiction of the United States District Court for the Southern District of New York and made arrangements to have such assets conserved so far as possible, pending the election of a trustee. It found that in excess of 90 percent of the apparent assets consisted of bonds of foreign governments or investments in or advances to subsidiaries or affiliated companies conducting their business outside of the United States. Finding no adequate records of the affairs of such corporations available in the United States it endeavored, through representatives abroad, to ascertain the actual condition of the affairs and assets of International. The Swedish Match Co., a Swedish corporation which owned almost all of the common stock of International, had and now has its principal place of business in Stockholm, Sweden. The Swedish Match Co. owned or controlled match factories throughout the world and was, in turn, controlled by A/B Kreuger Toll. These three corporations represented a capital investment of approximately $1,000,000,000, over one-fourth of which was paid in by American investors. Kreuger dominated all of the companies and their affairs were conducted under his direction. Following Kreuger's death, the Swedish Government appointed an investigating commission to probe into the affairs of the three corporations and their subsidiaries. The Swedish Commission retained as its accountants, Price, Waterhouse Co., a firm of accountants of international reputation, which immediately began the preparation of a comprehensive report for the commission with respect to the corporations and their numerous and affiliated subsidiary companies. Immediately after its appointment, the receiver for International obtained court authorization for the fullest possible cooperation with the Swedish Commission and thereafter it cooperated fully with the commission and its accountants.

33. Under the provisions of the Bankruptcy Act, 11 U.S.C.A. § 1 et seq., and in accordance with court authorization, the receiver conducted examinations of officers and directors of International and of other persons, firms and corporations with which International had had dealings. By May 13, 1932, when the receiver submitted its first tentative report to the court, it had learned that the affairs of International were in an extremely complicated condition; that the administration of its estate would be difficult; that immediate and vigorous action by negotiation or by suit was necessary to protect its interests with respect to a number of its assets, as well as in other matters; that adequate legal and accounting representation abroad probably would be required and that certain subsidiary or debtor corporations appeared to have been used by Kreuger as conduits or vehicles for fictitious transactions.

34. As a part of its first tentative report, the receiver submitted the following statement of assets and liabilities of International, as of the close of business April 13, 1932, as disclosed by the unaudited books of account of the company:

ASSETS Cash: Chase National Bank ......................................... $ 2,294.37 Guaranty Trust Company ...................................... 20,676.69 National City Bank .......................................... 168,330.06 Lee, Higginson Company .................................... 1.42 _____________ $ 191,302.54 Sinking funds for Gold Debentures ............................................. 613.05 Advances: Continental Investment A/G .................................. $74,739,582.91 Vulcan Match Co., Inc. ...................................... 6,878,424.72 N.V. Financiele Maatschappij Garanta ........ $14,875,000.00 Accrued interest ............................. 841,166.66 ______________ 15,716,166.66 ______________ 97,334,174.29 Investments in constituent companies .......................................... 35,103,048.10 Investments in foreign Government loans (and accrued interest thereon): German Reich 6% External Loan Bonds of 1980 $46,500,000.00 Accrued interest ............................. 733,333.33 ______________ $47,233,333.33 Turkish Government 6½% drafts, ($1,500,000 not paid for; see contra) .......................... 10,000,000.00 Less amortization ............................... 255,019.85 ______________ 9,744,980.15 Accrued interest ................................ 161,464.14 ______________ 9,906,444.29 Republic of Guatemala 7% Bonds of 1960 .......... 2,238,500.60 Less amortization ............................... 24,115.00 ______________ 2,214,435.60 Accrued interest ................................ 20,572.38 ______________ 2,235,007.98 ______________ 59,374,785.60 Deferred charges and prepaid expenses: Discount and commission on debentures, less amortization .... $ 4,982,675.42 Prepaid interest ............................................ 27,988.88 ______________ $ 5,010,664.30 _______________ Total assets ............................................................. $197,014,587.88 LIABILITIES AND CAPITAL Liabilities: Compania Mexicana de Cerillos y Fosforos ................................... $ 118,693.48 Accounts payable ........................................................... 28,052.60 Accrued salaries ........................................................... 967.78 H.J. Graffman .............................................................. 787.01 Notes payable .............................................................. 3,800,000.00 Due to Government of Republic of Turkey (see contra) ....................... 1,500,000.00 Deferred liabilities ....................................................... 692,500.00 Polish Monopoly Co. (designated in books as "suspense") .................... 167,804.00 Reserve for federal taxes .................................................. 1,053,303.42 Ten-Year 5% Convertible Gold Debentures, due 1941 ............ $48,979,000.00 Accrued interest ............................................. 598,632.23 ______________ 49,577,632.23 Twenty-Year 5% Sinking Fund Gold Debentures, due 1947 ........ 47,430,500.00 Accrued interest ............................................. 1,073,773.82 ______________ 48,504,273.82 _______________ Total liabilities ....................................................... $105,444,014.43 Capital: Capital stock: Participating preferred stock ............................. $47,250,000.00 Common stock .............................................. 30,000,000.00 Surplus: Paid-in surplus ....................................... 9,907,446.00 Earned surplus: Balance, January 1, 1932 ....................... $4,017,279.58 Net profit for the period from January 1, 1932, to April 13, 1932 (before income taxes) ....... 395,847.87 _____________ 4,413,127.45 _____________ Total Capital ........................................................... 91,570,573.45 _______________ Total Liabilities and Capital ........................................... $197,014,587.88

35. Relative to the asset item above, "N.V. Financiele Maatschappij Garanta $15,716,166.66", Kreuger owned all of the stock of this corporation, which was not organized for business purposes. It had no office or place of business and no assets except a small bank balance and a claim against Kreuger.

36. The receiver's report did not contain a list or schedule of the various securities constituting the item of "Investments in constituent companies $35,103,048.10." Apparently this item was composed of the following securities which were shown in International's unaudited balance sheet at March 31, 1932, as investment in subsidiary companies:

---------------------------------------------------------------- Shares | Company | Amount ----------|-----------------------------------|----------------- 120,000 | Continental Investment | | A/G ............................ | $21,489,422.16 2,400 | Handelskompagniet Hafnia | | A/S ............................ | 1,932,667.48 6,886 | Finska Elektrokemiska | | A/B ............................ | 1,844,772.53 10,000 | Vulcan Match Co., Inc. .......... | 400,000.00 1,000 | Bryn Halden Tandstiksfabrikker | | A/S ............................ | 743,305.67 1,500 | Bryn-Halden Nitedals | | Taendsticksfabrik A/S .......... | 1,431,399.58 1,334 | Bjerneborgs Tandsticksfabriks | | A/B ............................ | 462,708.60 50,000 | Apolka Akcyjna do Eksploatacji | | Pantswowego | | Monopolu Zpalczanego w | | Poisce (Polish Match | | Monopoly Co.) .................. | 2,579,000.00 30,000 | American Turkish Investment | | Corp. .......................... | 3,000,000.00 133,598 | Drava Aundwarenfabrik | | A/G ............................ | 842,706.42 29,983 | Drvoresbarksa Twornica | | Vrbovsko ....................... | 206,133.88 540 | Philippine Match Co., Ltd. ..... | 170,931.78 | |_________________ | Total ...................... | $35,103,048.10 ----------------------------------------------------------------

37. The unaudited balance sheet at March 31, 1932, of Continental Investment A/G, which appeared to be the largest debtor to International, as well as in which it had its largest investment, was as follows:

ASSETS Cash on deposit ............................................................ $ 88,599.58 Spanish suspense .............................................................. 27,830,600.00 Investment in and advances to subsidiary and affiliated companies: Par or shares: 1,000 Finska Tandsticksfabrik A/B ................ $ 2,314,169.88 46,500 "Solo" Wien ................................ 8,023,326.12 16,620 "Cia." Arrendataria de Fosforos ............ 6,915,915.16 58,792 "Solo" Prague .............................. .19 208,000 United Plywood Timber Industries, Ltd. ... 2,045,740.56 500 Aug. H. Soini O/Y .......................... 10,670.00 40,000 A/S Eesti Tulitikumonopol .................. 1,285,380.00 789,000 "Hangya" bonds ............................. 789,489.99 £ 345,000.0.0 Roumanian Government 4% bonds .............. 263,676.60 £ 21,000,000.0.0 "Italian" 6% bonds ........................ 102,000,500.00 1,180,850 Fabbriche Riunite de Fiammiferi .................. 43,235,182.10 O/Y Savo ......................................... 200,537.28 Bjorneborgs Tandstickfabrik A/B .................. 286,394.54 Finska Elektrokemiska A/B ........................ 268,536.71 Hungarian General Match Mfg. Co. ................. 5,366,458.92 Lettlandische A/G der Zundholzwerke "Vulkan" 103,972.49 _______________ $173,109,950.54 STAB — "Spolka Dividend Account" ............................................. 223,880.00 S.A. France Afrique — "Spanish Dividend Account" ............................. 94,647.27 Miscellaneous accounts ............................................................. 25,487.39 _______________ Total assets .................................................................... $201,373,164.78 =============== LIABILITIES AND CAPITAL Swedish Match Co. ............................................................. $ 26,367,149.66 A/B Kreuger Toll ............................................................ 657,064.20 Export A/B Norden ............................................................. 324,236.69 N.V. Financieele Maatschappij Kreuger Toll .................................. 1,519,816.37 Szikra Ungarische Bundholzfabrik A/G .......................................... 9,126.89 E. Hartman .................................................................... 2,207.24 International Match Corporation ............................................... 74,545,416.03 Special reserve ............................................................... 9,909,422.16 Reserve for bond valuation .................................................... 5,000,000.00 Capital stock ................................................................. 11,580,000.00 Surplus ....................................................................... 71,458,725.54 _______________ Total liabilities and capital ............................................. $201,373,164.78

38. The purported assets "Spanish suspense $27,830,600.00" and "£ 21,000,000.0.0 Italian 6% bonds $102,000,500.00," appearing in the foregoing balance sheet, were wholly fictitious and nonexistent.

39. Poor's 1932 Industrial Volume, a well recognized financial trade journal, published about the middle of 1932 an article on International, in which the preference stock as well as the debentures were rated as very speculative investments. In a letter dated October 7, 1932, from the chairman of the protective committee for the holders of preference stock the holders were informed that an investigation then being made by a firm of accountants of the affairs of International, A/B Kreuger Toll, and the Swedish Match Co. would probably show that the liabilities of International were substantially in excess of its assets.

40. The problem of the trustee in bankruptcy of International and its attorneys and accountants in gathering its assets, ascertaining its true financial condition, and otherwise administering the estate, was extremely difficult. International itself did not own or operate any manufacturing plants, but was a holding company. Its corporate structure involved more than 100 separate corporations scattered throughout the world. On the date of its receivership, its stated (but not actual) capital, bonded indebtedness, and surplus, together with the reported (but not actual) surplus of its subsidiaries, constituted a capital structure (including surplus) of more than $260,000,000. International owned all the outstanding capital stock of its foreign subsidiary, Continental Investment A/G, and a great many of its investments in foreign subsidiaries, as well as other reported foreign assets, were held by this subsidiary holding company. International's interests and operations were interlocked with those of A/B Kreuger Toll and the Swedish Match Co., and the three corporations had more than 250 subsidiary companies.

41. In its first and preliminary report to the court dated August 5, 1932, the trustee of International stated that the problems confronting it were made infinitely more complicated because of the deliberate fraud and concealment practiced by Kreuger in connection with dealings between the numerous subsidiaries of the International-Swedish Match Co. — A/B Kreuger Toll groups.

42. Investigations, made in 1932, demonstrated that the books of International gave a completely false picture of the actual worth of the bankrupt and that the assets, represented as being owned by it, included many fictitious and worthless items, as well as many assets whose value was greatly overstated. It was then further disclosed that assets in very large amounts, recorded in the books, were not in possession of the record holders and that recovery thereof, even where possible, would depend on the outcome of legal proceedings. No unified audit had ever been made of International and of its subsidiaries. The examination of the Kreuger group of companies by Price, Waterhouse Co. was begun a week after Kreuger shot himself and covered the period from 1917 to March 31, 1932. The final report of the examination, comprising more than 50 volumes, was dated November 28, 1932, and showed that, of the $770,400,000 representing capital investments by the public and advances by banks to those companies, $179,100,000 had been paid out as interest on debentures and as dividends to stockholders; that $115,800,000 had been withdrawn and misappropriated by Kreuger; and that the balance had been invested in government and other securities, and in associated companies within the Kreuger group, as well as in monopoly concessions. The report further showed that, of the published consolidated or book earnings of $316,100,000, the approximate actual earnings were only $40,500,000, or an overstatement of $275,600,000. In addition to the investigation made by Price, Waterhouse Co., police investigations were made in an effort to uncover assets of the Kreuger group.

43. On June 1, 1932, the Swedish Government granted a moratorium to the Swedish Match Co. for three months in respect of such of its debts as were due on that date, or which might become due during the period of the moratorium. At the same time, it was decreed that, during the period of the moratorium, the company's affairs should be administered by appointees of the Swedish Government. The moratorium, subsequently, was extended and was in force through November, 1932. Afterward, for an undisclosed period, the company was operated under a plan approved by its banking creditors. In 1932 A/B Kreuger Toll was adjudicated a bankrupt in Sweden, where its affairs were administered by liquidators. It was also adjudicated a bankrupt by the United States District Court for the Southern District of New York on August 6, 1932, and a trustee was appointed for it in that proceeding. The estate of Kreuger was adjudicated bankrupt in Sweden and the public administrator in the County of New York was appointed to administer any assets of Kreuger that were in New York State.

44. The second intermediate report of the trustee, dated February 8, 1933, shows that by the end of 1932 the trustee of International had obtained possession of securities belonging to International and its subsidiaries, having a total cost of approximately $60,000,000, as shown by the books. On January 31, 1933, after the receipt of dividends, interest, etc., including $250,000 received from the sale of trustee's certificates to obtain funds for the administration of the estate and after the payment of various expenses, costs, fees, etc., the trustee had on hand approximately $1,700,000, of which about $1,380,000 had been received from the sale of certain shares of stock in the Diamond Match Co., which was held in a special fund pending final determination of the rights of various claimants in it. The 6 percent bonds of the German Reich, appearing on the books of International, had a par value of $50,000,000, and, after their purchase by International, had been placed in a bank in Berlin for safekeeping. In the fall of 1931, Kreuger, who was president of International, unlawfully removed and placed them with certain Swedish banks as security for his own indebtedness and/or that of A/B Kreuger Toll and others and for his guarantees of indebtedness of the Swedish Match Co., and A/B Kreuger Toll to those banks. Prior to January 31, 1933, a settlement of certain litigation involving ownership of the bonds was concluded, subject to court approval, whereunder the trustee would receive $21,000,000 par value of the bonds with July 15, 1932, and subsequent coupons attached thereto. Before the end of 1932 the trustee instituted the following suits: (1) against the directors of International for the recovery of $35,000,000 alleged to have been paid by them as dividends upon the corporation's stock; (2) against the directors of International for the recovery of approximately $100,000,000 for their negligent acts and conduct in connection with the affairs of the corporation; and (3) against four banks in the United States for the recovery of approximately $4,000,000, claimed by the trustees to have been received as a preference out of the proceeds from the sale of the stock in the Diamond Match Co. heretofore mentioned. The trustee was also considering the bringing of other suits involving various sums. The trustee also had filed claims for the refund of income taxes alleged to have been erroneously paid as follows: 1929, $1,091,108.37; 1930, $1,198,235.52; 1931, $2,500. In addition, a suit had been instituted for a small amount of taxes alleged to have been overpaid in earlier years and a suit instituted by International had also been prosecuted. The trustee had been advised that the United States Government might propose an additional income tax of about $1,000,000 for 1931 on the basis of International's books. This was subsequently done.

45. By January 31, 1933, more than 23,000 claims had been filed against the estate of International. The total face amount of the claims filed upon debentures alone was in excess of the face amount of its outstanding obligations as shown by the books. Among the claims that had been filed against the estate were the following: (1) Swedish bankruptcy liquidators of A/B Kreuger Toll in the amount of $464,445,330.79; (2) American Trustee in Bankruptcy of A/B Kreuger Toll, for a like amount; (3) Dutch Kreuger Toll, $165,000,000; (4) Swedish Match Co. for $112,247,758.53, or a total of $1,206,138,420.11. The claims of these four parties were contested by the trustee, who was of the opinion that the estate of International was a substantial creditor of all four claimants.

46. In its report for the period to January 31, 1933, dated February 8, 1933, the trustee of International expressly refrained from expressing any opinion as to the ultimate value of the estate on the ground that in view of the complexities of the affairs of all of the companies within the Kreuger group, any expression of value at that time would be premature. The trustee also refrained from expressing an opinion as to the value of International's assets in foreign countries on the ground that it might be misleading.

47. During the year 1936 the trustee effected the following: (1) a settlement of intercompany disputes with the Swedish Match Co. and a sale to it of the match properties of International and of Continental Investment A/G located in the Philippines and in Europe, with the exception of those in Turkey; (2) a settlement with the Swedish liquidators of A/B Kreuger Toll and with the trustee in bankruptcy of the American estate of that company; (3) settlement of the suits against four banks involving stock in the Diamond Match Co.; and (4) settlement of the suits against the directors of International. During 1936, the last of the claims filed against the estate of International by the Swedish Match Co. and A/B Kreuger Toll interests were withdrawn, thus reducing the claims against the estate to miscellaneous allowed claims in the amount of $12,380.11, disputed claims aggregating less than $100,000, and claims of debenture holders with interest ($200,000 face amount of the debentures due in 1941 having been surrendered to the trustee and the claim upon them expunged by order of the court in connection with the settlement of the suit against the directors), amounting to $97,748,837.77.

48. Due to the unsatisfactory financial condition of International, and as a means of affording a medium through which the holders of the preference stock could unite and cooperate for the protection of their mutual interests, a Protective Committee was formed with respect to such stock and a protective agreement was executed on April 15, 1932. For a year prior to June, 1936, the committee was engaged in negotiations with various persons interested in the affairs of International in an attempt to obtain something of value for the holders of the preference stock. Claims were asserted on behalf of the holders of such stock against the Swedish Match Co., by reason of the alleged rights accruing or that might accrue in the future to such stockholders under the two agreements of December 17, 1924, between the Swedish Match Co., International, and the holders of shares of preference stock in International and described above. The Swedish Match Co. contended that the agreements were entirely invalid and unenforceable.

49. In order to facilitate the settlement of the intercompany claims of International, the Swedish Match Co., A/B Kreuger Toll and their subsidiaries, and the purchase by the Swedish Match Co. of the European and Philippine assets of International and Continental Investment A/G, heretofore referred to, the Swedish Match Co. offered to provide for settlement of the claims of holders of preference stock in International by making arrangements whereby an offer, which is set forth below, would be made to the holders of the preference stock by a corporation to be organized and to be known as "Imco Participating Company, Ltd.," hereafter referred to as Imco. On April 15, 1936, Imco was incorporated under the English Companies Act of 1929, with its principal place of business in London, England.

50. Pursuant to the efforts of the Protective Committee for the holders of preference stock, and pursuant to the plan whereby Imco was formed, and by which the Swedish Match Co. offered to settle the claims against it on behalf of the preference stockholders, an escrow agreement was entered into between Imco, Continental Investment A/G, A/B Kreuger Toll (Swedish estate in bankruptcy), and others with Lazard Brothers Co., Ltd., of London, as escrow agent. In accordance with the terms of the escrow agreement, 675,000 shares of class B stock in the Swedish Match Co. (an amount equal to one-half of total number of outstanding shares of preference stock in International) were deposited with the escrow agent. Of the 675,000 shares, Continental Investment A/G deposited 425,000 shares, A/B Kreuger Toll (Swedish estate in bankruptcy), 125,000 shares, and Swedish Match Co. caused the remaining 125,000 shares to be deposited. Title to all such shares so deposited remained in the persons depositing them until such shares were sold under the agreement. With respect to the shares deposited by Continental Investment A/G and A/B Kreuger Toll, which were of a new issue, the Swedish Match Co. agreed to apply for and use its best efforts to obtain permission to deal and/or obtain an official quotation for such shares on the London Stock Exchange.

51. About July, 1936, Imco made an offer to the holders of preference stock in International to exchange one of the participating certificates in Imco for each two outstanding shares of preference stock. As a part of the arrangement, the offer was made by Imco sending a copy thereof to all known holders of preference stock and by publishing a notice thereof in one newspaper of general circulation in each of the cities of New York, Boston, Philadelphia, Chicago, and San Francisco and in London once a week for two successive weeks. Imco was to keep the offer open for a period of 90 days and, with the consent of the Swedish Match Co., could keep it open for a further period, not exceeding 90 days. Within 30 days after termination of the offer, Imco was to deliver to the Swedish Match Co. certificates for all preference shares in International which it had received pursuant to the offer. The Swedish Match Co. was not to dispose of such certificates so received except to surrender them for cancellation or to destroy them. In the offer made by Imco and in the plan whereby Imco was organized, it was provided that at any time and from time to time within the period commencing either on the date on which the 675,000 shares of class B stock in the Swedish Match Co. were deposited with the escrow agent, or on the date on which permission to deal in such shares on the London Stock Exchange was granted, whichever was the later date, and terminating on a date one year and 46 weeks after all the 675,000 shares of class B stock were deposited with the escrow agent, or on June 30, 1938, whichever was the later date (developments resulted in June 30, 1938, being the terminating date) each holder of preference stock, accepting the offer and surrendering such preference stock in exchange for participating certificates of Imco, should have the right to direct Imco to cause to be sold by the escrow agent such number of class B shares on deposit with the escrow agent as should equal one-half the number of preference shares surrendered in exchange for participating certificates in Imco. It was provided, however, that the escrow agent should not sell or cause to be sold in the United States any of the class B shares and that the escrow agent should not sell any of the class B shares at a price per share less than the sterling equivalent at the London buying rate on the date of sale for 20 Swedish kronor, plus all taxes or stamp duty payable on the share certificates and all commissions payable to the seller's broker and all other expenses of sale. It was also provided that, upon such sale, the escrow agent should pay out of the proceeds of sale 20 Swedish kronor, for each share sold, to the person or persons who deposited the share or shares thus sold (that is, Continental Investment A/G, Swedish Match Co., or A/B Kreuger Toll Swedish estate in bankruptcy), and, after deducting the aforesaid taxes and expenses, the holder of the Imco participating certificate directing such sale should receive the balance, if any, of the proceeds of sale. It was further provided that, upon the termination of the period within which the holders of shares in preference stock who had exchanged them for participating certificates could direct Imco to cause the sale of shares of class B stock, all rights of the holders of participating certificates should terminate.

52. The offer made by Imco provided that all actions or claims which the holders of preference stock might then or thereafter have against International or its officers or directors, the trustee in bankruptcy of International, the Swedish Match Co., the persons, firms or corporation which had from time to time engaged in the sale of the preference stock, and any other person, firm or corporation, whether by reason of misrepresentations contained in circulars offering such stock for sale or otherwise, which were predicated upon the retention of such preference stock, would be lost upon acceptance of the exchange offer. In making this offer to the holders of preference stock, Imco stated that it made no representations as to the validity of the two agreements of December 17, 1924, between the Swedish Match Co. and International and the holders of preference stock in the latter, nor as to whether International and the Swedish Match Co. had performed the several covenants and claims contained in those two agreements, and stated that it was unable to obtain such information necessary to make such representation.

53. By a letter dated June 10, 1936, and by a newspaper advertisement published the following day in New York City, the holders of preference stock were notified by the protective committee that arrangement had been made whereby the above described offer for the exchange of preference stock for participating certificates in Imco was to be made. In these notices the committee stated that it had long been obvious that International could not satisfy even its creditors in full and that the arrangement respecting the exchange of preference stock for participating certificates in Imco could only be negotiated because of the existence of the agreements of the Swedish Match Co. of December 17, 1924, heretofore described. The committee also expressed the belief that the Imco arrangement was the best that could be made under the circumstances.

54. Under date of October 3, 1936, the protective committee addressed a letter to the holders of certificates of deposit for participating preference stock of the International Match Corporation and holders of such stock. The holders of a total of 923,128 of the 1,350,000 outstanding shares of preference stock accepted the offer of Imco and surrendered such shares in exchange for Imco participating certificates. The plaintiff did not accept this offer and did not exchange his shares of preference stock for Imco participating certificates.

55. From the formation of Imco in April, 1936, through December, 1937, the bid and asked prices of the Imco participating certificates were as follows:

-------------------------------------------------- | Bid | Asked ----------------------------|----------|---------- August, 1936 .............. | $0.75 | $1.00 October, 1936 ............. | .375 | .625 November, 1936 ............ | .30 | .50 December, 1936 ............ | .15 | .30 February, 1937 ............ | .65 | .80 March, 1937 ............... | 1.25 | 1.625 April, 1937 ............... | 1.50 | 1.875 May, 1937 ................. | 1.50 | 2.00 July, 1937 ................ | 1.00 | 1.50 August, 1937 .............. | .75 | 1.25 October, 1937 ............. | .75 | .875 November, 1937 ............ | .375 | .625 December, 1937 ............ | .50 | .75 -------------------------------------------------

During the period covered by the foregoing quotations the usual brokerage commission on the sale of 100 Imco participating certificates "over the counter" was $3.

56. Between July 1936, when Imco submitted its offer to the holders of preference stock, and January 3, 1938, there was a total of 15,018 shares of class B stock in the Swedish Match Co. sold at the request of Imco participating certificate holders. All sales were made on the London Stock Exchange. These shares were sold in 252 different lots varying in size from 2 shares to 2,000 shares. From the proceeds of the total number of shares thus sold, there was remitted to the holders of Imco participating certificates, the equivalent of $14,969.11 after the payment of brokerage fees, stamps, etc., and the payment of the equivalent of 20 Swedish kronor per share to the owners of the class B stock that was sold. This was an average net amount of 99.67 cents for each participating certificate, or 49.835 cents per share of the preference stock in International which had been exchanged for the certificate. The first sales of class B stock were made on September 28, 1936, and the lowest net amount, per certificate, remitted to an Imco participating certificate holder was from a sale of 5 shares of the stock made on that date. Such remittance was approximately 12 cents a participating certificate or 6 cents per share for the preference stock that had been exchanged for it. The highest remittance from a sale was of 900 class B shares on February 22, 1937. This amounted to $1,755 per certificate, or 87.75 cents per share of preference stock that had been exchanged therefor. Sales of Class B stock, by months, with the average net amount per certificate remitted to holders of Imco participating certificates, as well as the average amount per share for the preference stock exchanged therefor, were as follows:

------------------------------------------------------------------------------------------- | | | Average net | | Average net | amount for | | amount per | each share of | | participating | preference Month | Shares sold | certificate | stock ----------------------------------|----------------|--------------------|------------------ September, 1936 ................. | 150 | $0.14 | $0.07 February, 1937 .................. | 7,232 | .94 | .47 March, 1937 ..................... | 1,235 | .94 | .47 April, 1937 ..................... | 685 | 1.15 | .575 May, 1937 ....................... | 190 | .82 | .41 June, 1937 ...................... | 406 | 1.02 | .51 July, 1937 ...................... | 782 | .98 | .49 August, 1937 .................... | 3,596 | 1.24 | .62 September, 1937 ................. | 380 | .72 | .36 December, 1937 .................. | 332 | .33 | .165 January, 1938 ................... | 30 | .57 | .285 ===========================================================================================

57. After the consummation of the sales to the Swedish Match Co., the principal assets of International at the end of 1936 were as follows:

Cash remaining after the payment to creditors of a first dividend of 5% and a second dividend of 10% and totaling $14,705,129.46, $6,907,355.27.

$2,460,484.01 face value Republic of Guatemala 7% bonds of 1960. (Interest in default $258,343.56, amortization in default $146,243.57).

$14,255,598 face value notes of the Turkish Republic maturing semi-annually at the rate of $407,302.80 commencing July 1, 1938.

120,000 shares Continental Investment Aktiengesellschaft and account receivable from that company.

100 shares Vulcan Match Co. and account receivable from that company.

30,000 shares of American Turkish Investment Corporation.

Possible equity in fund of $175,000 arising from the sale of Diamond Match Co. stock which is subject to certain applications for compensation.

Special account of $125,000 held subject to the order of the Court.

Possible equity in fund of $12,500 withheld by Swedish Match Co. for payment of Trustee's share (one-half) of taxes payable outside the United States on assets purchased by Swedish Match Co.

Claims filed in other bankruptcy proceedings:

Claim of $1,500,000 allowed in the American and Swedish Bankruptcy proceeding of A/B Kreuger Toll, subject, in the Swedish proceeding, to a deduction of $185,996.25 from dividends paid.

Claim against the Estate of Krister Littorin, Stockholm, allowed at S. Kr. 18,000,000.

Claim for S.Kr. 325,000,000 allowed against the estate of Ivar Kreuger in Bankruptcy in Stockholm.

Claim for $402,416.35, allowed against the American estate of Ivar Kreuger.

Suit against the United States for refund of income taxes paid in the sum of $2,019,066.80.

The principal assets of Continental Investment A/G were as follows:

Cash ................................... $2,355,635.58 Advances to American Turkish Investment Corporation .......................... 100,000.00 899,877 shares Swedish Match Co. class B stock stated value ................. 4,499,385.00 Deposit with Swedish Match Co. to cover certain taxes (recoverable portion, if any, unknown) ........................ 10,000.00 _____________ Total .............................. 6,965,020.58

58. A plan was prepared by the protective committee for the debenture holders of International and approved by the independent debenture holders' protective committee for the sale and liquidation of the remaining assets of International other than cash. Pursuant to that plan, a corporation known as "International Match Realization Company, Ltd." hereafter referred to as the Realization Co., was organized and incorporated by act of the Legislature of Bermuda, effective November 3, 1936, for the purpose of purchasing certain assets of the bankrupt estate from the trustee in bankruptcy and realizing on them for the benefit of the debenture holders. The debenture holders, desiring to participate in the plan, were required to assign to the Realization Co., in exchange for voting certificates for shares of its stock, their debentures and all claims against the bankrupt estate of International represented thereby, the debentures to remain alive as assets of the Realization Co. The effect of such exchange was that the Realization Co. was substituted for the former debenture holders as the owner of such debentures and the claims represented thereby.

59. In July, 1937, the following assets of International were sold to the Realization Co. for $7,250,000:

$2,460,484.01 principal amount of the Republic of Guatemala 7% bonds of 1960 comprising 50 bonds each of the denomination of $50,000, numbered 1 to 50 inclusive with March 1, 1934, and subsequent coupons attached.

$36,900 principal amount of Arrears Certificates of the Republic of Guatemala due October 1, 1934, issued in respect of the aforesaid bonds.

$14,255,598 of notes of the Republic of Turkey comprising 35 notes, each having a face value of $407,302.80 maturing serially without interest semiannually, commencing July 1, 1938, and ending on July 1, 1955.

30,000 shares comprising all of the capital stock of American Turkish Investment Corporation a Delaware corporation, and claims of the Trustee in Bankruptcy of International Match Corporation against American Turkish Investment Corporation, amounting to $186,740.36 on June 1, 1937.

120,000 shares comprising all of the capital stock of Continental Investment A.G., a Liechtenstein corporation and the claims of the Trustee in Bankruptcy of International Match Corporation against Continental Investment A.G., in the amount of $69,087,906.22 and Swiss francs 138,493,417.

60. At the time of the foregoing sale, the cash item of $2,355,635.58, heretofore shown as among the principal assets of Continental Investment A/G at the end of 1936, apparently had been paid to the trustee of International on account of indebtedness owing to it since, at the time of the sale, the assets of Continental Investment A/G consisted of only 785,774 shares of class B stock in the Swedish Match Co. Of such shares, 310,774 were listed on the London Stock Exchange and deposited in escrow, subject to sale at the direction of holders of participating certificates of Imco Participating Co., Ltd., as is explained more fully hereinbefore. The remaining 475,000 shares were not so deposited nor listed on the Exchange nor subject to sale, but the Swedish Match Co. had agreed to use its best efforts to obtain and maintain such listing at its own expense.

61. Of the principal assets of International on hand at the end of 1936, there remained the following with their respective maximum realizable values after the above mentioned sale in July, 1937:

100 shares of Vulcan Match Co. and accounts receivable from that company ............. $1,584,010.77 Possible equity in fund of $175,000 arising from the sale of Diamond Match Co., subject to certain applications for compensation ............................ 175,000.00 Special account held subject to order of the court ............................... 125,000.00 Possible equity in fund of $12,500 held by Swedish Match Co. for payment of taxes outside the United States ............... 12,500.00 Claim allowed in the American and Swedish Bankruptcy proceedings of A/B Kreuger Toll ...................... 1,314,003.75 Claim allowed against the estate of Krister Littorin ................................ 23,220.00 Claim allowed against the estate of Ivar Kreuger in bankruptcy in Stockholm ...... 419,250.00 Claim allowed against the American Estate of Ivar Kreuger ......................... 2,012.08 Suit against the United States for refund of income taxes paid .................... 2,019,066.80 ______________ Total ................................. $5,674,063.40

62. By December 31, 1936, the trustee had received cash in the total amount of $23,631,410.79 (before the payment of administration, other expenses and the payment of dividends to creditors). This amount, plus receipts from the sale of assets to the Realization Co., the payment by Continental Investment A/G on its indebtedness and the maximum realizable value of remaining assets, totals $38,911,109.77 as the approximate aggregate value of the bankrupt's estate without deduction of $2,010,751.34, representing disbursements to the end of 1936 for administration expenses and other purposes, except the payment of preferred claims and dividends to general creditors, or an approximate net value of $36,900,358.43. By subtracting the latter amount from the $97,948,837.77, the amount of allowed claims of debenture holders, a deficiency of $61,048,479.34 is disclosed in assets necessary to pay the allowed claims of creditors entitled to priority over the preference stock.

63. To June 1, 1942, the trustee of International had been authorized to and had paid to the debenture holders dividends as follows on each $1,000 face value of debentures: December 20, 1935, $50; October 20, 1936, $100; July 16, 1937, $50; August 16, 1937, $74; August 22, 1939, $30; August 7, 1940, $20; or a total of $324. As a result of these payments there remains due and unpaid on each such $1,000 of debentures, the principal amount of $676, plus accrued interest.

64. The participating preference stock of International Match Corporation became worthless in 1932. It did not become worthless in 1936.

WHITAKER, Judge.

Plaintiff sues to recover $94,973.33 alleged to have been an overpayment of income taxes for the year 1936. In making his return for this year he claimed no deduction on account of a loss alleged to have been sustained in the participating preference stock in the International Match Corporation, but subsequently he filed a claim for refund therefor, alleging that in the year 1936 this stock had become worthless and that in that year he had lost his entire investment in it amounting to $141,562.50. The defendant says the stock became worthless in a year other than 1936.

The International Match Corporation was a subsidiary of the Swedish Match Company, which in turn was owned by A/B Kreuger Toll. A/B Kreuger Toll was owned and controlled by Ivar Kreuger.

Ivar Kreuger shot himself and died on March 12, 1932. This caused an investigation of the affairs of the companies he controlled. About a month after his death, on April 13, 1932, a creditor's bill was filed in the District Court for the United States for the Southern District of New York, praying for the appointment of a receiver for the International Match Corporation. Less than a week later this company filed a voluntary petition in bankruptcy and was adjudicated a bankrupt. The Irving Trust Company was appointed as trustee.

According to the first tentative report of the receiver the books of this company showed total assets of $197,014,587.88, and total liabilities, exclusive of capital and surplus, of $105,444,014.43. Many of the assets listed, however, were grossly over-valued and some were purely fictitious. For instance, among the assets carried on the books was one of $15,716,166.66, an advance to N.V. Financiele Maatschappij Garanta. Apparently this corporation was organized merely as a cloak for some of Kreuger's activities; it had no office or place of business and no assets, except a small bank balance and a claim against Kreuger, which was absolutely worthless. Another asset listed was one of $74,739,582.91, an advance to Continental Investment A/G, one of the Kreuger companies. Included among the $35,103,048.10 representing investments in constituent companies was an item of $21,489,422.16 representing the company's stock holdings in the Continental Investment A/G. The books of the Continental showed total assets of $201,373,164.78, which was several million dollars in excess of its liabilities, but included among the assets were two items which were wholly fictitious. One was $27,830,600 "Spanish suspense," and another was $102,000,500.00 representing "£ 21,000,000.0.0 `Italian' 6% bonds." These items did not exist. Another asset carried on the books was $46,500,000 of German Reich 6% External Loan Bonds of 1980, plus interest. These had been misappropriated by Kreuger and pledged with Swedish banks to secure his own indebtedness and that of some of his companies on which he was indorser.

The affairs of the International Match Corporation and its affiliated companies were in a state of the utmost confusion, but in 1932 it was quite apparent to all who had any knowledge of the situation that there was every probability that the assets of the company would be insufficient to pay its debts and that its stock was, therefore, without value. For instance, the protective committee for the preference stockholders informed these stockholders on October 7, 1932, that the investigation of the affairs of the International Match Corporation and its affiliates "will probably show that International Match Corporation's liabilities are substantially in excess of its assets." The lawyer and public accountant who represented the trustee in bankruptcy testified that in 1932 it appeared that the assets would lack about $30,000,000 of paying the debenture holders. Further investigation of the affairs of this company finally disclosed that its liabilities were some $61,000,000 in excess of its assets.

Whatever may have been thought of the value of the stock in this company in 1932, subsequent events proved it to be in fact worthless in that year.

It is, of course, true that stock which is in fact worthless may have a value on the market, and, if so, cannot be said to be worthless for income tax purposes. The market value of the International stock had fluctuated greatly prior to Kreuger's death. In 1925 it sold for a high of $60 7/8; in 1926 at $66 3/8; in 1927 at $95½; in 1928, $121 7/8; in 1929, $102½; in 1930, $92; in 1931, $73¼; in January, 1932, $24 3/8; in March, 1932, $21¼. After Kreuger's death it dropped from $21¼ to 3/8 during the month of April, and in the month of May it sold at a high of 3/8 and a low of ¼. In that month it was struck from the board of the New York Stock Exchange. Thereafter, in the year 1932, this stock was sold "over the counter" at prices ranging from a high of 62½ cents to a low of 12½ cents, but there were sales at auction for prices as low as 1 cent. The highest price realized at any auction sale was 3.61 cents, except for one sale of 25 shares, which brought 24 cents a share. From 1932 to 1935 the highest price at which any of this stock was sold "over the counter" was 27½ cents. In 1936 it sold at prices ranging from 10 cents to 65 cents. In 1937 there were two sales at 5 cents a share.

It will be seen, therefore, that the market fairly accurately reflected the true condition of the financial affairs of this company. A market which dropped from $21¼ to 12½ cents, and in some instances to even less than this, demonstrates almost complete lack of confidence in the value of this stock. One who paid 12½ cents could have had but a most remote hope of ever realizing anything on the stock. He must have known that his chances were not better than "one in a million."

Section 23(e) of the Revenue Act of 1936, 49 Stat. 1648, 1659, 26 U.S.C.A.Int. Rev. Code, § 23(e), provides for the deduction from gross income of an individual of "losses sustained during the taxable year and not compensated for by insurance or otherwise." Article 23(e)-4 of Regulations 94, promulgated under this Act, prohibits a deduction of "shrinkage in value" through fluctuation of the market; but this was not a "shrinkage in value" due to a fluctuation in market. It is not a case of fluctuation in the market, but one where the bottom had dropped out of the market.

The above cited article of Regulations 94 provides for a deduction in the "taxable year in which the stock became worthless, provided a satisfactory showing is made of its worthlessness." In our opinion, where a taxpayer shows that the dominant figure in the corporation in which he owns stock has committed suicide, and that this is followed by the filing of a voluntary petition in bankruptcy by this corporation, and that an examination of the books of the corporation shows that there was carried thereon assets at grossly exaggerated figures, and some that were purely fictitious, and that the liabilities greatly exceeded the assets, and who shows that the market value of the stock dropped from $21¼ immediately prior to the suicide to 12½ cents thereafter, and never thereafter sold for a higher price than 27½ cents, has successfully carried the burden of showing that the stock became worthless in the year in which these things happened. A taxpayer is not required, in order to show worthlessness, to exclude the remote possibility that the stock may have some slight value in the future. As the Supreme Court said, in United States v. S.S. White Dental Mfg. Company, 274 U.S. 398, 47 S.Ct. 598, 600, 71 L.Ed. 1120: "The taxing act does not require the taxpayer to be an incorrigible optimist." It was further said in that opinion: "The quoted regulations, consistently with the statute, contemplate that a loss may become complete enough for deduction without the taxpayer's establishing that there is no possibility of an eventual recoupment."

Sales of a stock, formerly selling as high as $121 7/8, at 10 cents, or even at 65 cents, demonstrate that all hope of recoupment was gone, except in the breast of the "incorrigible optimist," or of a speculator unable to resist odds of 250 to 1.

But the taxpayer says there was some substantial hope of eventual recoupment on account of a certain agreement entered into between the Swedish Match Company and the International Match Corporation in 1924, just before the stock of International was offered for sale. In order to boost the sale of this stock by showing its confidence in it, the Swedish Match Company entered into an agreement with prospective purchasers of International stock, whereby it agreed, among other things, that if the International Match Corporation was unable to pay the stipulated dividends on its stock for two successive years, the Swedish Match Company would reduce its rate of dividends on its own stock to 1 2/3 times the average rate of dividends paid by International Match Corporation. The taxpayer says that the protective committee, formed to protect the interests of the preference stockholders, hoped to use this agreement to get something for them. Just how they hoped to do so it is difficult to see unless they intended to make use of its nuisance value. What difference would it make to the holders of the preference stock of International whether or not the Swedish Match Company paid any dividends to its own stockholders? And if the Swedish Match Company violated the agreement and paid its stockholders more than it had promised to pay, how were the stockholders of International Match Corporation injured thereby and, hence, what remedy did they have? It is difficult to see how this agreement added any legitimate value to International's stock.

Now it is true that this protective committee did use this agreement to get an agreement of a sort out of the Swedish Match Company. Under the agreement obtained a corporation known as Imco was formed. With it the Swedish Match Company and the Continental Match Company deposited 675,000 shares of class B stock of the Swedish Match Company, against which Imco was authorized to issue a certificate to every preference shareholder of International Match Corporation who deposited with it two shares of his preference stock. This certificate gave the preference shareholders the right to demand of Imco that one share of the Swedish Match Company should be sold on the London Stock Exchange for every certificate which he held at a price of not less than 20 Swedish kronor. Out of the proceeds of the sale of the stock 20 Swedish kronor were to be paid to the company which had deposited it, and the excess to the certificate holder. (At the time of the making of this agreement the Swedish Match Company's stock was selling at 19 Swedish kronor.)

After the consummation of this agreement there was bid for these certificates various prices ranging from 15 cents to $1.50, and the holders of them were asking prices varying from 30 cents to $2.00. By means of it, therefore, a holder of these preference shares was able to realize on his stock a sum somewhere between 7½ cents and a dollar. After its consummation these preference shares sold from 10 cents to 65 cents. It was an agreement of some, but very little, value. The taxpayer did not think it of enough value to take the trouble to turn in his stock for the certificates.

This agreement with the Swedish Match Company was entered into in 1936. In 1932 a holder of the preference shares of International in determining whether or not his stock was worthless had for consideration only the Swedish Match Company's agreement of 1924 restricting the rate of its dividends. For the reason stated above, we think this added nothing to the value of International stock, and that stock being worthless in 1932, that he had a right to deduct it as a loss in that year. If that right accrued in 1932, it could not be exercised in 1936.

Heretofore three actions have been brought claiming losses on account of the worthlessness of this stock. The first one was Marsh v. Commissioner, 38 B.T.A. 878. In this case the Board of Tax Appeals held that the stock became worthless in 1932. In Young v. Commissioner, 123 F.2d 597, the Circuit Court of Appeals for the Second Circuit also held that it became worthless in 1932. In Clark v. Welch, a jury in the District Court for the District of Massachusetts held that this stock did not become worthless in 1936. An appeal was taken to the Circuit Court of Appeals for the First Circuit on alleged errors in the Judge's charge to the jury. The judgment below was affirmed. Clark v. Welch, 140 F.2d 271.

We are of opinion that the taxpayer in this case has not successfully borne the burden upon him of showing that the stock first became worthless in 1936.

The plaintiff in his excellent brief cites a number of cases involving the worthlessness of the stock of the Middle West Utilities Company. Those decisions are in hopeless conflict. They all depend upon the facts presented in the particular case. Under the facts of this case we are clearly of the opinion that the plaintiff has not borne the burden of showing that the stock became worthless in 1936. His petition, therefore, will be dismissed. It is so ordered.

JONES, Judge, took no part in the decision of this case.