Court Opinion

ID: 4600954
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:26:37.99582+00
Date Added: 2024-06-11T07:52:24.087200
License: Public Domain

SMITH & RUMERY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Smith & Rumery Co. v. CommissionerDocket No. 26402.United States Board of Tax Appeals21 B.T.A. 352; 1930 BTA LEXIS 1867; November 17, 1930, Promulgated *1867  In 1918 the petitioner charged off its books of account an investment in stock determined by it to be worthless in that year, and claimed the loss as a deduction in its income-tax return for 1918.  The deduction was disallowed by the Commissioner and the petitioner made a further claim for its deduction in its return for 1923.  Held that the amount is not a legal deduction from gross income in its return for 1923.  Arthur J. Welch, Esq., and Chester M. Foss, C.P.A., for the petitioner.  P. M. Clark, Esq., for the respondent.  SMITH*352  The petitioner seeks a redetermination of a deficiency in income tax for 1923 in the amount of $522.78.  In its petition petitioner alleges that the Commissioner erred in disallowing a deduction from the gross income of 1924 of $4,100, which represented its investment in the shares of stock of a corporation.  FINDINGS OF FACT.  The petitioner is a Maine corporation, with offices at Portland.  In 1911 it accepted in payment of a debt owed to it in the amount of $4,100, capital stock of the Consolidated Broken Stone & Gravel Co. of a par value and fair market value of $4,100.  The petitioner never received*1868  any dividends upon the stock.  The company almost continuously operated at a loss.  It carried on operations from the time of its organization until after 1923.  There were no known sales of the stock from the time it was acquired by the petitioner in 1911 to 1923.  Petitioner tried to sell it in 1918, but could find no market for it.  It therefore charged off its investment of $4,100 in the stock in 1918, and claimed as a deduction from gross income in its return for that year the $4,100 as a loss.  This deduction was disallowed by the Commissioner.  The petitioner again claimed the deduction in its income-tax return for 1923.  The deduction has been disallowed by the Commissioner in the determination of the deficiency herein involved.  *353  OPINION SMITH: Section 234(a)(4) permits a corporation to deduct from gross income in its income-tax return "losses sustained during the taxable year and not compensated for by insurance or otherwise; unless, in order to clearly reflect the income, the loss should in the opinion of the Commissioner be accounted for as of a different period.  * * *" The petitioner in 1918 determined that certain stock which it had acquired in 1911*1869  was worthless.  It therefore charged it off its books of account and claimed the amount as a deduction from gross income in its income-tax return for 1918.  This was disallowed by the respondent.  The petitioner was advised of the disallowance in 1921.  It was advised by its accountant in 1923 that under the then rulings of the Commissioner an investment in stock which became worthless was deductible from gross income in the year in which the worth-lessness was determined.  Inasmuch as its claim for a deduction for the loss had been disallowed for 1918, it claimed the deduction in its return for 1923.  In its petition the taxpayer states that "if not a proper deduction of the year 1923, in what year should the loss be sustained?" In response to a question as to what efforts, if any, were made to ascertain the worthlessness of the stock in 1918, the treasurer and general manager of the petitioner testified: Why, at that time, during the year 1918, I suspected that the stock was of little value.  Rather than take my own decision in the matter, I took it up with a broker who makes a specialty of State of Maine stocks and bonds, and I asked him to pass judgment upon this particular*1870  stock.  He sent me a letter in October stating it had not paid dividends, and he would not consider it of any value.  Further than that, I took it before my Board, rather than decide myself, and it was agreed by the Board "that the stock had little value, and they voted to charge it off." Upon learning that the deduction claimed for 1918 had been disallowed by the respondent, the petitioner made efforts to sell it in 1921.  In respect to a question why the treasurer and general manager had not made any sale of the stock since 1918, he replied: Why, the stock is a local stock, unlisted, and we could not sell to anybody without examination, and on examination I doubt if anybody would have bought it, for it had not paid dividends.  I tried one or two, in trying to sell it, but they discouraged me in trying to sell it.  That was subsequent to the disallowance by the United States Government in 1921.  The taxing statute contemplates the deduction from gross income of losses "which are fixed by identifiable events, such as the sale of property * * * or cost of its destruction or physical injury * * *." *1871 . *354  In the proceeding at bar, there is no identifiable event which fixes the loss of the petitioner's investment in the stock of the Consolidated Broken Stone & Gravel Co. in 1923.  The evidence shows that the petitioner's debtor could not pay his debt in 1911, and the petitioner accepted the stock of the Gravel Co. as the best settlement that could be made.  It is not clear that the stock had any substantial value in 1913.  The Gravel Co. was never a profitable concern.  Apparently it continued to operate in a small way even beyond 1923.  But it almost continuously operated at a loss.  The evidence indicates that the stock was worthless in 1918, if not prior thereto.  There was no loss sustained in respect of the stock in 1923.  Judgment will be entered for the respondent.