Court Opinion

ID: 4615400
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:32:16.386048+00
Date Added: 2024-06-11T07:54:56.607223
License: Public Domain

C. P. MAYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mayer v. CommissionerDocket No. 26776.United States Board of Tax Appeals16 B.T.A. 1239; 1929 BTA LEXIS 2433; June 28, 1929, Promulgated 1929 BTA LEXIS 2433">*2433  A loss of an investment in the stock of a corporation held to have been sustained in 1923.  Joseph M. Kennedy, Esq., for the petitioner.  R. W. Wilson, Esq., for the respondent.  SMITH 16 B.T.A. 1239">*1239  The petition filed in this proceeding is for the review of a determination of a deficiency in income tax for 1923 in the amount of $9,010.31.  The points in issue are (1) the right of the petitioner to deduct $42,000 from the gross income of 1923, representing the cost to him of shares of stock of the International Shale Process Corporation which are alleged to have become worthless during the year 1923, and (2) the right to deduct $202.71 advanced by the petitioner to the same corporation, which indebtedness was ascertained to be worthless by the petitioner in 1923.  FINDINGS OF FACT.  The petitioner is a resident of Bridgeville, Pa.  In 1921 and 1922 he invested $42,000 in the capital stock of the International Shale Process Corporation, which was organized under the laws of the State of Delaware in 1921 for the purpose of acquiring the patent rights and the privilege of using certain new and useful improvements and processes, claimed to have been1929 BTA LEXIS 2433">*2434  invented by E. W. Hartman, for extracting oils, gases, and by-products from mineral shale and other minerals.  The authorized capital stock of the corporation was $5,000,000, divided into 1,000,000 shares of the par 16 B.T.A. 1239">*1240  value of $5 each.  The petitioner and a number of other individuals tentatively agreed each to invest $25,000 in the capital stock of the corporation.  The petitioner first invested $25,000 in the capital stock and at a later date an additional amount of $17,000.  Some of the other individuals invested a portion of the amount tentatively agreed upon.  Hartman assigned to the corporation his rights in the processes, for which he received a small amount of cash and certain shares of stock in the corporation.  Most of the cash which had been subscribed was spent in 1921 and 1922 in the acquisition of two retorts for demonstration purposes, and for the construction of a large retort at Buffalo, N.Y., for commercial purposes.  In 1921 the corporation made extensive efforts to secure further subscriptions to its capital stock and to obtain contracts for the licensing of the processes of manufacture.  In 1922 a contract was entered into with the Universal Shale Products1929 BTA LEXIS 2433">*2435  Co., under which that company agreed to construct 20 retorts in the State of Ohio, for which it agreed to pay the International Shale Process Corporation $10,000 for each and every plant sold or erected in the State of Ohio.  The corporation not having further funds in its treasury for the prosecution of the enterprise, the petitioner, upon his own responsibility, advanced to two salesmen certain sums of money in 1922, aggregating over $8,000, which advances were to be paid by the salesmen from commissions which they were entitled to receive upon contracts for the use of the processes.  The corporation was in dire financial straits at the end of 1922 and the Universal Shale Products Co. was likewise embarrassed by not being able to raise money to construct the plants in Ohio.  In 1923 it was demonstrated beyond doubt that the process for the extraction of oil from shale was not successful where the shale contained sand.  The machine became clogged with the sand and would not perform satisfactorily.  It likewise was definitely proven in 1923 that the Universal Shale Products Co. would never be able to carry out its portion of the contract.  All of the incorporators and all of the1929 BTA LEXIS 2433">*2436  stockholders, including petitioner, abandoned further efforts to continue the corporation in or about August, 1923.  All of the assets of the corporation of value were disposed of in 1923, and the amount realized was not sufficient to meet the liabilities of the corporation.  The processes acquired from Hartman, although carried upon the books at a large figure, had no value whatever.  The stock was absolutely worthless in 1923.  In his attempts to keep the corporation going the petitioner, in 1922 or 1923, advanced to it the amount of $202.71.  The amount was determined to be uncollectible in 1923.  16 B.T.A. 1239">*1241  In his income-tax return for 1923 the petitioner deducted from gross income $42,000, representing the loss of his investment in the capital stock of the International Shale Process Corporation, and also $202.71 as a debt ascertained to be worthless.  The Commissioner disallowed these deductions and determined a deficiency accordingly.  The petitioner's investment in the stock of the International Shale Process Corporation was made with the idea of deriving a profit therefrom.  OPINION.  SMITH: Section 214(a)(5) of the Revenue Act of 1921 permits a taxpayer to deduct1929 BTA LEXIS 2433">*2437  from gross income in his tax return: Losses sustained during the taxable year and not compesated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or busines; * * * Subdivision (7) of the same section permits the deduction from gross income of "Debts ascertained to be worthless and charged off within the taxable year * * *." The petitioner claims that he sustained a loss of $42,000 upon his investment in the capital stock of the International Shale Process Corporation; that the same was sustained in 1923; and that the amount thereof is deductible from gross income by virtue of section 214(a)(5) above quoted.  The respondent, on the other hand, contends that the loss was sustained prior to 1923 and that if the petitioner is entitled to any deduction in respect of his investment it is a legal deduction from gross income of 1922 or 1921.  Although the evidence indicates that the International Shale Process Co. had little or no cash on hand in 1922, it did have the same rights to the Hartman processes which it had in 1921, which unquestionably were the principal asset of the corporation and the asset which1929 BTA LEXIS 2433">*2438  had induced the petitioner and others to invest money in the corporation.  The evidence further shows that the petitioner had not lost his faith in the ultimate success of the corporation in 1922, and that if the Universal Shale Products Co. had been able to carry out its contract of 1922, the International Shale Process Corporation would have been in funds with which to carry on operations beyond 1923.  The evidence further shows that the Hartman process or processes were not determined to be valueless until 1923.  Upon the record we are of the opinion that the worthlessness of the shares of stock owned by the petitioner was not determined until 1923; that the loss of the investment was properly allocated by the petitioner to 1923; and that the amount of $42,000 is a legal deduction from the petitioner's gross income of that year.  16 B.T.A. 1239">*1242  With respect to the claim of the petitioner to the deduction of his debt against the International Shale Process Corporation in the amount of $202.71, the record is silent as to whether the petitioner charged this debt off his books of account in 1923.  In order that a debt may be deductible in a taxable year two things are necessary - 1929 BTA LEXIS 2433">*2439  (1) that it be ascertained to be worthless in the taxable year, and (2) that it be charged off within the taxable year.  There being no evidence before us that the debt was charged off the petitioner's books in 1923, the disallowance of the deduction of $202.71 by the respondent is sustained.  Judgment will be entered under Rule 50.