Court Opinion

ID: 4597854
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:20:03.505748+00
Date Added: 2024-06-11T07:51:51.943795
License: Public Domain

GILBERT H. PEARSALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Pearsall v. CommissionerDocket No. 11997.United States Board of Tax Appeals10 B.T.A. 467; 1928 BTA LEXIS 4092; February 2, 1928, Promulgated *4092  Stock held by petitioner was worthless in 1921, and the cost thereof was a deductible loss in that year.  Jesse I. Miller, Esq., for the petitioner.  Henry Ravenel, Esq., for the respondent.  ARUNDELL*467  In this proceeding the petitioner seeks a redetermination of his income tax for 1921, for which the Commissioner determined a deficiency of $1,339.35, resulting from the disallowance of a deduction of $10,000 claimed as a loss sustained on 200 shares of stock.  FINDINGS OF FACT.  In 1917 the petitioner, a resident of South Orange, N.J., purchased for $10,000,200 shares of stock of the Railway Specialty Co., a close corporation engaged in the manufacture and sale at Atchison, Kans., of railway motor truck cars.  The stock was purchased on the solicitation of Henry W. Jacobs, a business associate for five years and an officer actively engaged in the management of the corporation.  Four or five other business associates of Jacobs and petitioner each purchased stock for a like amount.  *468  In 1918 the Railway Specialty Co. received a cancellation of its principal sales contract with the Burton W. Mudge Co., and as a result the former*4093  was faced with a probable loss of about $60,000, due from the latter for deliveries previously made, and a big loss through depreciation in the value of material on hand purchased for the manufacture of railway motor cars under the contract.  Stockholders suggested several plans for refinancing the corporation.  None of them, however, were put into effect.  During 1919 and 1920 Henry W. Jacobs rendered several reports to petitioner regarding the condition of the company, which showed that the former still hoped to be able to rehabilitate its affairs.  Some time during these years the Railway Specialty Co. employed a man to develop and supervise the manufacture of a lot of garage specialties.  Early in the year 1921 the company had a deficit of $50,000 and among its list of assets was an uncollectible account of about $60,000 against the Burton Mudge Co. and an item of $100,000, representing the inventory value of garage specialties which could not be sold.  At that time the Railway Specialty Co. was also in default in the payment of semiannual interest on money borrowed from bankers or individuals at Atchison.  The failure of the company to pay the interest on this indebtedness*4094  subsequently caused it to go into the hands of a receiver.  The financial condition of the Railway Specialty Co. at this time was such that in liquidation stockholders would not have received any return on their investment and it is doubtful whether there were sufficient assets to pay creditors in full.  Upon learning early in 1921 that the company required funds to pay creditors demanding settlement of their claims, failing in which a receivership would result, petitioner agreed to loan $1,500 to the company, secured by a corporate bond, provided the other stockholders did likewise.  As the petitioner learned in the fall of 1921 that other stockholders failed to make a like investment, petitioner never paid his subscription.  After the Railway Specialty Co. failed in its attempt to borrow money from its stockholders, it had no money to meet its pay rolls.  The stock in question was not listed on the exchange and the petitioner made no attempt to sell his holdings prior to the fall of 1921, when he endeavored to sell them to Henry W. Jacobs and Clyde Hastings, president of the company, and through them to other parties.  They advised him of their inability to locate a buyer who*4095  would pay anything for the stock.  The Railway Specialty Co. went into receivership February 20, 1922, and in liquidation in 1925 paid creditors about one-third of their claims, leaving nothing as a liquidating dividend for stockholders.  *469  During the latter part of 1922 petitioner sold the stock in question to Charles Ducas of New York for $200.  Before the buyer offered that amount for the stock he was advised by petitioner that the company was in the hands of a receiver and that in his opinion the stock was valueless.  The amount received was reported as income for the year 1922.  The purchase price of the stock was claimed as a loss in 1921.  The deduction was disallowed by the Commissioner on the ground that the stock was not worthless in 1921 and that any loss incurred in the transaction was determined in the following year.  OPINION.  ARUNDELL: From the foregoing statement of facts it is apparent that the Railway Specialty Co. was insolvent in 1921.  At that time it had a deficit of $50,000, with an uncollectible account receivable of about $60,000; it was unable to sell its manufactured product; it could not pay overdue interest on borrowed capital; and*4096  its stockholders apparently did not have sufficient confidence in its ability to recover to invest additional money in the enterprise.  Additional evidence of the worthlessness of the stock is found in the unsuccessful attempt made by the petitioner in the fall of 1921 to find a purchaser for his holdings at any price.  Developments subsequent to 1921 confirmed the opinion.  The stock was worthless at the close of 1921 and the cost thereof was a deductible loss occurring in that year.  See , and . The fact that petitioner found some one in the following year who was willing to take a flyer on the stock at a nominal price does not change the situation or make the loss any the less definite and ascertained in the prior year.  Judgment will be entered on 15 days' notice, under Rule 50.