
    SQUIER et al. v. COMMISSIONER OF INTERNAL REVENUE.
    No. 15.
    Circuit Court of Appeals, Second Circuit.
    Dec. 11, 1933.
    Henry M. Wise and Woolsey A. Shepard, both of New York City (Woolsey A. Shepard, of New York City, of counsel), for appellants.
    Pat Malloy, Asst. Atty. Gen., and John H. McEvers and Walter L. Barlow, Sp. Assts. to Atty. Gen., for appellee.
    Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
   AUGUSTUS N. HAND, Circuit Judge.

The question is whether certain deductions jn connection with a purchase of 985 shares of stoek of the Shur-Loe Elevator Safety Corn-Pan^ Ina;> at an aggregate cost of $40,500, loaf to that company amounting to $52,9o0, and certain loans to tne Shur-Loc Company °f Ilknols> aggregating^,000, should be allowed a* a dod.uet*on„m comPutjng tkc net income of Edwin M. Squier accruing during the period from January 1, 1926, to the date of his death on November 91, in that year,

During the years 1914 to 1919; Squier had purchased the 985 shares of stock of the Shur-Loe Elevator Safety Company, Inc., a New York corporation, at a cost of $40,500. The operations of the company consisted in the construction and installation of certain elevator safcty devices, and it was constantly ^successful throughout the entire period of a°tivity. During the years 1917 to¡ 192G> inclusive, Squier advanced the total sum of $356,10», receiving in return the company’s demand notes hearing interest at 6 per cent, Between January and November 5, 1926', he advanced $52,950; the last item of this amount being advanced on November 5, only four days before bis death. He was a direetor of the company, and was active in its management.

j 19rl5 gh r Oomnanv „ ¿r • 7 ■’ “ + Loc Company of Illinois was incorporated to act as sales agent in an effort to market the New York company’s products. Squier, though the owner of but one share of stoek of the Illinois company, was a director and made comsiderable advances to it. It had frequent need of money a^d no source of financial aid other ^k£U1 Squier. Between August 25, 1921, and November 3,1926, he made periodical advano ^ Illinois company in the aggregate of $9«,000. Both companies ceased to operate as^ soon as the death of Squier terruinated his financial support. Ilis exeeutors eame int° 'll10 possession of:

985 shares of capital stoek of Shur-Loe Elevator Safety Company, Inc., which had cost the decedent.. $40,500.

share of stock of Shur-Loe Company of Illinois

the Shur-Loe Elevator Safety Company, Inc, covering advances by the decedent -amounting to........................$356,100.

Notes of the Shur-Loe Company of Illinois covering advances of.....$98,000’.

Decedent’s sole occupation was the management of his investments and acting as director in certain banks and manufacturing corporations. He employed no clerk or assistant. He kept no books or records of ae-counts other than the entries of deposits and withdrawals in his cheek books and a memorandum book showing his advances to both companies and the notes received therefor, He was in good health and attended to his affairs at his office until November 5,1926. On November 6; 1926; he was taken ill with pneumonia and died November 9; 1926.

The stock of the Shur-Loe Elevator Safety Company, Inc., was valued for transfer tax purposes at $1, and the share of Shur-Loe Company of Illinois stock at the same figure. The notes of both corporations were appraised as of no value.

On December 31,1926; the executors wrote off as of November 8, 1926; in the memorandum book kept by the decedent, the total of all the advances made by him to both companies. They filed an income tax return on behalf of the decedent for the period from January 1, 1926, to November &, 1926; and deducted for bad debts $52,960; the amount advanced by the decedent to Shur-Loe Elevator Safety Company, Inc., in the year 1926; and $98,000, the aggregate amount of the advanees to the Shur-Loe Company of Illinois from August 5; 1921, to November 9, 1920. They also deducted the sum of $40,500, the amount invested by the decedent in the stock of the Shur-Loc Elevator Safety Company, jne

The Commissioner assessed a deficiency tax for the period from January 1 1926, to November 91, 1920, on the ground that none „ „ 3 . % & n , of the foregoing deductions could property be made. The executors appealed to the Board of Tax Appeals, which found that the ... , , , i „ .., , probabie actuai rea dable value of the assets of the Shur-Loe Elevator Safety Company, !nc as of November 30,1926, was $19,436.33, and the liabihties were $384,820.62, with an apparent deficiency of capital amounting to $365,384.29; also that the Illinois Company had an operating deficiency on September 30, 1925, of $135,584.39, that there was an apparent deficiency of capital of $78,584.39|, and that its financial condition had not improved between that date and November 30,1926'. It further found that the decedent took an aetive part in the affairs of both companies up to the time of his death and that both companies ceased to operate when the death of the decedent terminated his financial support, The Board said in its opinion that the execú-tors asserted that, if the decedent had attempted to establish a fiscal period ending prior to his death and to take the deductions on the return for such period, he would have failed because the • worthlessness could not have been demonstrated. This, however, is denied by the executors in their brief submitted on this appeal, and it at most could have amounted to no more than a statement by the counsel for the executors of what they thought to be the fact. The Board of Tax Appeals held that the worthlessness did not occur until after the decedent’s death, and hence that “V deductions could not be attributed to the Pen°d before his death. Accordingly, the Board entered an order affirming the deffieieney found by the Commissioner.

The provisions of the Revenue Act of 1926, chapter 27, 44 Stat. 26, § 214 (a) (4, 5, 7), 26 USCA § 955 & <4’'5’ 7), which gov-em the Present Sltuatl0n’ ® foUows:

Sec. 214. “(a) In computing net income there shall be allowed as deductions: * * *
“(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
«(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *
“{7) Debts ascertained to be worthless and cbarged off within tbe tasable ,year> * • * »

, ,, Subdivision 5 seems to cover the losses which are claimed by reason of the worthlessness 0f £b6 stock.

Artiele 14A o£ Regulations 45 of the Treas-__,__. _ , , nry Department relating to income taxes (wMeb was in effeet prior to 1926) provides ^ a stoek of a eoiToration beeo¿¿ WOTth_ ■» i ^ r -j -j • •. .■» less, its cost “may be deducted by the owner ^ ^ taxable in wbieb stoek ^ ascertained to be ,vortMess and charged off, yided a satisfaotory sllowing of its worth-legsness be made M ^ tbe cage o£ bad debts„

Perhaps under article 144 of Regulations ^ it “igkt have been contended that a tax-P&y®1 who wished to deduct the loss upon stock that had become worthless must “aseertain” its worthlessness and “charge off” its cost as is re9uire(i by section 214^ (a) (7) of the act, 26 USCA § 955 (a) (7), in case of a worthless debt.

But the form of the regulation for the Revenue Act of 1926 differed. Article 144 of Regulations 69! (applicable to the act of 1926) provided that:

“If stock of a corporation becomes worthless, its cost or other basis determined under section 204 may he deducted by the owner in the taxable year m which the stock became worthless, provided a satisfactory showing of its worthlessness be made, as m the case of bad debts.”

Even before the change in the regulations, there had been a ruling by the Bureau of Internal Revenue in answer to an inquiry by a taxpayer as to the right of an administrator to deduct losses upon stock held by a taxpay- or who died in August, 1921. The ruling was that: '

“I£ the decedent did not deduct the amount of the loss on account of the worthless stock from his 1920 gross income in determining his net income for that year, such a loss is an allowable deduction from the gross income of the decedent for the period Jaau-ary 1, 1921, to the date of his death, the appraisal determining the worthlessness of the stock as of the latter date. The amount of the loss will be the amount of the cost of the stock or its fair market value on March 1, 1913, whichever is lower.” I. T. 1381 G. B. 1-2, p. 113.

Neither the statute nor the regulation required tho decedent to “ascertain” the worthlessness of the stock during his lifetime in or-dor that its cost might be deducted from Ms income. It only had to become actually worthless during the taxable period in which the loss was claimed. If it beeame worthless between January 1, 1926, and November 9’, 1926, his executors might take the deduction,

We are satisfied that the stock of such a hopelessly insolvent corporation as Shur-Loc Elevator Safety Company, Inc., was worthless during the taxable period. But so far as we can see it was worthless some years beforo. The record shows an operating loss from the organization of tho Shur-Loc Elevator Safety Company, Inc., in 1914, up to November 30, 1926, when it ceased to do business. Prior to January 1, 1926, the loss had already aggregated $322,765.82. The burden was upon the exeeutors to establish that the stock, the cost of which they seek to deduct, became worthless during the taxable year*. But it seems quite evident that it was equally worthless the year beforo and doubtless for several years prior to that. In such circumstances, it cannot he said that tho loss was sustained during tho taxable year in which it is sought to- be deducted. Accordingly the deduction for the Ioss upon the stock cannot be allowed. De Loss v. Commissioner (C. C. A.) 28 F.(2d) 803 ; Volker v. United States (D. C.) 40 F.(2d) 697.

The debts weve, neVer “ascertained” by tbe testator to be wortWesg- Ho made ad_ vanees Qnly foOT or flye days beforo Hs death, wMcb sll0rwed tbat be stiu believed tbat the corporations had some vitality and thought that he could salvage something from thtím. Upon no other theory can his continuance to advance money be explained. Inasmuch as ho kept no books of account, we may ignore his failure to charge off the debts [Shiman v. Commissioner (C. C. A.) 60 F.(2d) 65, at page 66], hut we cannot say that he “ascertainod”' them to be worthless when almost the last acts of his life were to make advances to promote the continuance of their business, The right to claim a deduction is a statutory privilege, and the statute was not complied with. American Cigar Co. v. Commissioner (C. C. A.) 66 F.(2d) 425; Ludlow Valve Mfg. Co. v. Durcy (C. C. A.) 62 F.(2d) 508.

It may be argued that if the decedent, at the moment of his death, had been aware of his immediate demise and of the condition of bis companies, he would have ascertained the debts to be worthless and would have declared them such. But the validity of this argument depends upon an assumption that at the moment-of death he knew that he was dying and that he would make no further advances to keep the companies afloat. Such an assumption we think unwarranted,

In our opinion neither the losses upon the stock nor the bad debts are such deductions as may he taken by the exeeutors.

order affirmed,  