Comm'r of Internal Revenue (In re Estate of Williamson)

Tax Court of the United States.Oct 17, 1957
29 T.C. 51 (U.S.T.C. 1957)
29 T.C. 51T.C.

Docket Nos. 54540 54541 54542.



James Evert Denebeim, Esq., and Bruce K. Denebeim, Esq., for the petitioners. Edward H. Boyle, Esq., for the respondent.

James Evert Denebeim, Esq., and Bruce K. Denebeim, Esq., for the petitioners. Edward H. Boyle, Esq., for the respondent.

1. An amount credited to petitioner's partnership capital account, held, to be additional taxable income in absence of contrary proof.

2. Cash basis seller required by purchaser to leave proceeds of corporate stock sale for disbursement to the corporation as a loan on open account, held, not to have realized income in year of sale in the absence of collection of debt from corporation.

3. Advances by petitioner to a corporation which subsequently became insolvent, held, not deductible either as a loss or as a business bad debt.

Respondent determined the following deficiencies in petitioners' income tax:

+-----------------------------------------------------------------+ ¦Petitioner ¦Year¦Amount ¦ +--------------------------------------------------+----+---------¦ ¦Estate of W. F. Williamson and Paula R. Williamson¦1948¦$2,035.88¦ +--------------------------------------------------+----+---------¦ ¦Estate of W. F. Williamson ¦1949¦8,168.29 ¦ +--------------------------------------------------+----+---------¦ ¦Paula R. Williamson ¦1949¦8,840.86 ¦ +-----------------------------------------------------------------+

Petitioners have claimed an overpayment of $13,351.26 for 1948, of $461.06 for 1949 in the case of Estate of W. F. Williamson, and of $220.70 for 1949 in the case of Paula R. Williamson. Petitioners have conceded some of respondent's adjustments and abandoned a portion of their 1948 overpayment claim on brief.

The issues to be decided are:

1. Did an amount which was credited to the law firm capital account of W. F. Williamson in 1948 constitute taxable income?

2. Did petitioners realize constructive income in 1948 by reason of the fact that certain of their shares of stock in New Sutherland Divide Mining Company were sold and the proceeds loaned to the company?

3. Was the loss sustained by petitioners in 1949 on ‘New Sutherland Divide Mining Co. Pools' allowable in full or was it subject to treatment as a nonbusiness bad debt pursuant to section 23(h)(4) of the Internal Revenue Code of 1939?


The facts stipulated are hereby found.

Petitioners are decedent's estate and his widow. Decedent and his wife resided in San Francisco, California, and for the calendar years 1948 and 1949 filed a joint return and separate returns, respectively, with the collector of internal revenue for the first district of California. These returns were prepared and submitted on the basis of cash receipts and disbursements.

Petitioner Paula R. Williamson had no knowledge of her husband's business affairs and is involved in this case because of her interest in the community property.

Decedent died prior to the hearing of this case. He had been an attorney since 1893 and had engaged in the practice of law in San Francisco, California. He was the senior partner in the law firm of Williamson & Wallace, but devoted very little time to the practice of law during the years in issue.

Pacific Coast Shipbuilding Company, a company in which decedent had an interest, was dissolved by decedent's law firm and its assets distributed pro rata to the shareholders. Two or three of the shareholders could not be located after notices of the dissolution and distribution of the assets were sent out. A trust arrangement was set up to hold the funds for them and decedent became trustee. In 1948, the sum of $1,000 was credited to the law firm capital account of decedent but it was not reported by him as income.

Decedent's law partnership was dissolved in 1950 because for many years decedent had not made any substantial contribution to its funds or earnings and he refused to take as his share a smaller percentage of the partnership earnings.

Between 1894 and 1954 decedent had been either a director, officer, or active in the management of a total of 20 business enterprises in various fields. He had at time loaned money to 10 of these enterprises and he was instrumental in organizing 7 of them. In addition, he assisted, possibly in a legal capacity, in the organization or reorganization of 2 corporations.

In 1947 through 1949, decedent was active in the management of California Union Insurance Company and New Sutherland Divide Mining Company. He was a member of the executive committee of El Dorado Oil Works at a salary of $88 per month. His law firm was retained as its counsel.

A few people, including clients, consulted decedent over the advisability of various investments.

As of December 31, 1949, decedent had invested in ‘securities and property’ the sum of $323,361.82. Of this amount decedent had $107,925.24 invested in companies in which he had been active at some time during his life, namely:

Proceedings of the following petitioners are consolidated herewith: Paula R. Williamson, Docket No. 54541; and Estate of W. F. Williamson, deceased, Paula R. Williamson, Administratrix, and Paula R. Williamson, Docket No. 54542.

So stipulated.

+-----------------------------------------------+ ¦California Union Insurance Company ¦$9,550.00 ¦ +------------------------------------+----------¦ ¦El Dorado Oil Works ¦78,125.00 ¦ +------------------------------------+----------¦ ¦General Paint Corporation ¦2,368.38 ¦ +------------------------------------+----------¦ ¦Hobbs Battery Company “A” ¦3,628.00 ¦ +------------------------------------+----------¦ ¦Hunt Foods, Inc ¦57.07 ¦ +------------------------------------+----------¦ ¦H. N. Cook Belting Company ¦7,100.00 ¦ +------------------------------------+----------¦ ¦New Sutherland Divide Mining Company¦3,096.79 ¦ +------------------------------------+----------¦ ¦Santa Cruz Seaside Company ¦4,000.00 ¦ +------------------------------------+----------¦ ¦Total ¦107,925.24¦ +-----------------------------------------------+

During the years 1948 and 1949 decedent received dividends from companies in which he had at some time been active, as follows:

+----------------------------------------------+ ¦Name of Stock ¦1948 ¦1949 ¦ +--------------------------+---------+---------¦ ¦H. N. Cook Belting Company¦$710.00 ¦$355.00 ¦ +--------------------------+---------+---------¦ ¦El Dorado Oil Works ¦17,710.00¦23,920.00¦ +--------------------------+---------+---------¦ ¦General Paint Corporation ¦150.00 ¦150.00 ¦ +--------------------------+---------+---------¦ ¦Hobbs Battery Company “A” ¦275.00 ¦175.00 ¦ +--------------------------+---------+---------¦ ¦Hunt Foods, Inc ¦522.51 ¦11.26 ¦ +--------------------------+---------+---------¦ ¦Santa Cruz Seaside Company¦880.00 ¦800.00 ¦ +--------------------------+---------+---------¦ ¦Total ¦20,247.51¦25,411.26¦ +----------------------------------------------+

In the same years, petitioners' returns show that decedent received additional dividends of $15,444.85 and $16,644.55, respectively, presumably from other companies in which he had no interest except as a passive investor, and that he received as his distributive share of partnership income from his law partnership the sums of $24,797.56 and $34,939.88, respectively.

On October 25, 1941, decedent's law firm received 224,753 shares of stock of the New Sutherland Divide Mining Company, hereafter referred to as New Sutherland, as part payment of a fee for aiding John Gallois to obtain control of the company. Decedent received 112,376 shares of stock as his share of the legal fee. He reported as income for the year 1941 the stock at the then fair market value of 1 cent per share, or $1,123.76. New Sutherland was a California corporation authorized to issue 3,000,000 shares of assessable stock, but as of June 12, 1947, it had issued and outstanding 1,206,620 shares. The majority of the stock was concentrated on June 12, 1947, as follows:

+-----------------+ ¦ ¦Shares ¦ +--------+--------¦ ¦Gallois ¦319,753 ¦ +--------+--------¦ ¦Decedent¦112,376 ¦ +--------+--------¦ ¦Elder ¦129,000 ¦ +--------+--------¦ ¦Anderson¦72,800 ¦ +--------+--------¦ ¦Total ¦633,929 ¦ +-----------------+

The most important mining development of the company was the Queen of Sheba Mine. The mine was in the process of development and by the first part of 1946 had reached the stage where a large quantity of ore had been mined and it was imprudent to continue mining operations unless a mill was constructed to process the ore.

Since the early part of 1946, decedent had been a member of the board of directors and active in the affairs of New Sutherland. He was elected vice president, a position which he held until he submitted his resignation on April 5, 1948.

The directors decided to secure the necessary financing in order that a mill might be constructed at the mine location. To raise the necessary funds to pay for the mill, decedent attempted to negotiate a loan from the Reconstruction Finance Corporation. The loan application was unsuccessful and after discussion the directors decided to raise the necessary financing by a series of assessments on the stock of the company. Decedent paid the following assessments:

+------------------------+ ¦May 4, 1942 ¦$475.63 ¦ +--------------+---------¦ ¦May 4, 1942 ¦86.25 ¦ +--------------+---------¦ ¦Dec. 30, 1944 ¦254.64 ¦ +--------------+---------¦ ¦Sept. 4, 1946 ¦1,992.88 ¦ +--------------+---------¦ ¦Oct. 7, 1946 ¦6,743.56 ¦ +--------------+---------¦ ¦June 16, 1947 ¦2,247.52 ¦ +--------------+---------¦ ¦Total ¦11,800.48¦ +------------------------+

Construction of the mill at the location of the Queen of Sheba Mine began in March 1947. Decedent took an active part in directing and supervising the construction of the mill. When the president of New Sutherland, Gallois, departed for Europe in May 1947, decedent, as vice president, assumed control of the construction of the mill.

The mill construction did not progress as expected and additional funds were required from time to time to complete the construction and to meet the current obligations of New Sutherland. In order to complete the mill and get it into operation, an additional issue of stock to raise the necessary capital required was authorized. To encourage the present shareholders to subscribe fully to the issue, the assessment feature was removed and in September 1947, 241,324 shares were offered by the company to its shareholders at the price of 10 cents a share.

William Ray, a partner in decedent's law firm, had the right as a shareholder to subscribe to 1,146 shares of the new issue at the price of $114.60. On November 19, 1947, decedent was issued that portion of the stock to which Ray was entitled by paying to the company $114.60.

Decedent was permitted to purchase 22,475 shares of New Sutherland stock, his proportionate interest, at the price of $2,247.52. He did so on September 30, 1947.

By November 1947, decedent had acquired 135,997 shares of stock in New Sutherland. His basis for these shares was $15,286.36. This amount represented, in addition to the amount reported by decedent as income for the year 1941, decedent's advances by way of assessment or additional purchases. At that time the stock was selling at between 9 and 10 cents a share.

Gallois and decedent negotiated with two firms of stock promoters relative to the sale of the New Sutherland stock. Decedent was interested in effecting a sale because the proposed price would mean considerable profit on his stock. The negotiations seemed to turn largely on something being done by or for the company as an inducement to the prospective purchasers so that the stock would be boosted in price. When they announced that they were going to construct a mill, the price of the stock went up from about 7 to 9 cents to 22 to 23 cents.

In order to dispose of their stock, decedent, Gallois, and Elder joined together in November 1947 and put in a portion of their stock as follows:

+-----------------+ ¦ ¦Shares ¦ +--------+--------¦ ¦Gallois ¦253,000 ¦ +--------+--------¦ ¦Decedent¦121,000 ¦ +--------+--------¦ ¦Elder ¦102,000 ¦ +--------+--------¦ ¦Total ¦476,000 ¦ +-----------------+

Other shareholders were allowed to put in stock and did so as follows:

+-----------------+ ¦ ¦Shares ¦ +--------+--------¦ ¦Atkins ¦8,000 ¦ +--------+--------¦ ¦Anderson¦16,000 ¦ +--------+--------¦ ¦Total ¦24,000 ¦ +-----------------+

In addition to the stock contributed by these five individuals, hereafter referred to as the vendor stockholders, Gallois put in 50,000 shares of stock which were to be returned.

Throughout the period decedent and Gallois were associated together in the New Sutherland venture, neither took any important step without consulting the other. The vendor stockholders agreed to share in the profits of the sale of the stock in proportion to the amount of stock that each one contributed; The vendor stockholders always acted together in relation to the conduct of the company or the sale of stock.

On November 24, 1947, the vendor stockholders succeeded in arranging the sale of 300,000 shares to R. H. Travers, a Los Angeles underwriter. The terms of the sale stipulated that the vendor stockholders deposit in escrow with the Bank of America 300,000 shares of stock and that Travers execute a 1-year note in the principal sum of $52,500 at 4 per cent per annum interest and deposit it in escrow. Travers was to have the right, on partial payments of the note in cash, to withdraw stock as follows:

+---------------------+ ¦Cents per ¦ ¦ +------------+--------¦ ¦share ¦Shares ¦ +------------+--------¦ ¦15 ¦50,000 ¦ +------------+--------¦ ¦16 ¦50,000 ¦ +------------+--------¦ ¦17 ¦50,000 ¦ +------------+--------¦ ¦18 ¦50,000 ¦ +------------+--------¦ ¦19 ¦50,000 ¦ +------------+--------¦ ¦20 ¦50,000 ¦ +------------+--------¦ ¦Total ¦300,000 ¦ +---------------------+

Also on November 24, 1947, the vendor stockholders were successful in arranging the sale to Travers of an additional 302,500 shares on the following terms:

52,500 shares at the price of 10 cents per share

Option for 30 days for 50,000 shares at 11 cents

Option for 60 days for 50,000 shares at 12 cents

Option for 90 days for 50,000 shares at 13 cents

Option for 120 days for 50,000 shares at 14 cents

Option for 150 days for 50,000 shares at 15 cents

Gallois made the contracts for the vendor stockholders, generally conducted the negotiations, and represented the vendor stockholders in the sale of their stock.

Travers wanted to get control of the company and was willing to pay more than the current market price for some 600,000 shares of the company stock. It was desired by Travers and his associates that there be no interference by the sale of stock outside the agreement during the period he was promoting the sale of the stock. The vendor stockholders, as a condition of the sale, orally agreed with Travers and his associates not to sell any outside stock they possessed during the period he was buying from them and reselling the stock.

As a further condition of the contract with Travers, it was orally agreed by the vendor stockholders that the proceeds of the sale would be loaned to New Sutherland. Travers would not have gone through with the purchase unless the vendor stockholders agreed to loan the proceeds of the sale to the company for at least the construction and completion of the mill. As a result of this oral agreement, the proceeds of the sale of the stock went directly to the company, and the money never went through the vendor stockholders' hands. The company received $5,500 in 1947 and $42,500 in 1948 as a result of this agreement. Three of the vendor stockholders, Elder, Atkins, and Anderson, withdrew a total of $2,256 in 1948.

The advances by the vendor stockholders were credited to them proportionally and were carried on the books of the corporation as an open account. Decedent's share of the sales was $1,331 for 1946, and $10,285 for 1948. Decedent's basis for the Travers stock sold in 1947 was $1,360.04, and in 1948 was $8,160.24. Decedent did not report a $2,124.76 gain in 1948 nor did he claim this amount as a loss in 1949. Respondent appears to have treated decedent's share of the 1947 sale as a part of the 1948 transaction in his deficiency notice. He determined that decedent realized a $2,095.72 capital gain in 1948. Petitioners did not constructively receive this $2,095.72 of income or any part of it in 1948.

Title to all of decedent's stock in New Sutherland which was sold by or for decedent in 1947, 1948, and 1949 remained in his name until the actual sale to Travers.

In addition to the proceeds of the stock sale, the company received $17,700 from decedent and $17,200 from other vendor stockholders during 1948.

Pursuant to their agreement with Travers and his associates, the vendor stockholders took the responsibility to complete the mill, to manage it, and to run the affairs of the company. All advances were for the purpose of completing the mill, getting the mine into operation, and for the development of the mine. Decedent advanced cash to the company in 1948 to improve the condition of the company in expectation that it would induce readier sale of the stock at a better price. It was understood by all the parties involved that the amounts advanced by the vendor stockholders would be repaid in 1949.

Travers defaulted on his obligations and the vendor stockholders negotiated a new agreement with him in January 1949, in which they were to sell 150,000 shares. Under this new agreement, the vendor stockholders were to lend the proceeds of these sales to the company. Under this agreement, Travers paid $26,500 and accepted 145,000 shares of stock. The proceeds of these sales were advanced to the company and credited to the accounts of the vendor stockholders in proportion to the contributions of each. Decendent's share of the proceeds from these sales was $6,413, and the basis for the stock contributed by him was $3,944.12. Travers refused to purchase the remaining stock.

During 1948 and 1949 decedent made sales for his own account, on the general market, of shares other than those sold to Travers, and these sales were reported as long-term capital gain on his returns.

Gallois refused to make further advances or put up more money when the reports of the engineers were such that further advances were not warranted.

From 1946 through 1949, New Sutherland had great difficulty meeting its payroll, withholding taxes, social security, and general creditors, including two banks. The cost of the mill construction and operation exceeded the estimates and all sources of funds (including the proceeds of the sale of the Travers stock) proved inadequate so that it became necessary to pledge the assets of the company in order to secure a loan. During the latter part of 1948, the financial situation of the company was such that there was a delinquency in the remittance of withholding and social security tax payments.

The company ran out of all sources of money in 1949. The mill operation had not produced a grade of ore which would justify the trucking costs; the mortgage on the mill was about to be foreclosed; the labor commissioner advised that the company was in default in payment of employee wages; deficiency notices were received from the Federal Government for withholding and social security taxes; and the operation was discontinued in August or September 1949. The mill was almost completed in 1948, but only ground about three cars of ore. In the middle of 1949, New Sutherland's bank account contained about $600 or $700, but the company owed the Federal Government $1,100 for taxes. Ray, the former secretary-treasurer, tried to get the purchasers of the stock to cease operations at the mine and to pay off the taxes; however, the mine continued tin operation until all sums were used. The mortgagee took possession of the property of the corporation in September 1949.

During the year 1949, New Sutherland had the following sales of its stock:

+-----------------------------------+ ¦1949 ¦Number of¦High ¦Low ¦ +---------+---------+-------+-------¦ ¦ ¦shares ¦(cents)¦(cents)¦ +---------+---------+-------+-------¦ ¦ ¦ ¦ ¦ ¦ +---------+---------+-------+-------¦ ¦January ¦39,500 ¦26 ¦21 ¦ +---------+---------+-------+-------¦ ¦February ¦35,300 ¦25 ¦20 ¦ +---------+---------+-------+-------¦ ¦March ¦26,000 ¦25 ¦20 ¦ +---------+---------+-------+-------¦ ¦April ¦41,500 ¦25 ¦19 ¦ +---------+---------+-------+-------¦ ¦May ¦9,000 ¦20 ¦15 ¦ +---------+---------+-------+-------¦ ¦June ¦11,000 ¦15 ¦13 ¦ +---------+---------+-------+-------¦ ¦July ¦10,000 ¦14 ¦12 ¦ +---------+---------+-------+-------¦ ¦August ¦13,000 ¦13 ¦11 ¦ +---------+---------+-------+-------¦ ¦September¦30,000 ¦13 ¦6 ¦ +---------+---------+-------+-------¦ ¦October ¦66,500 ¦6 ¦5 ¦ +---------+---------+-------+-------¦ ¦November ¦7,000 ¦4 ¦3 ¦ +---------+---------+-------+-------¦ ¦December ¦167,000 ¦3 ¦1 ¦ +---------+---------+-------+-------¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------+

In April 1949, there were accounts of $72,244, with interest of $2,259.63, payable by New Sutherland to the vendor stockholders. Fifty thousand of the unsold shares were given to Gallois to repay his stock loan, and the remaining 5,000 shares were divided among the contributors, decedent receiving 2,207 shares. In addition, decedent retained as his share of the accounts payable a claim for $35,729 plus $1,069.80 in interest due.

In 1949, the vendor stockholders made demands on the company for repayment of the loans, receipt of the demand was acknowledged by the company, but they were unsuccessful in obtaining any repayment. Decedent computed his loss for 1949 as follows:

+-----------------------------------------------------+ ¦Cost of stock contributed and not returned¦$13,464.40¦ +------------------------------------------+----------¦ ¦Cash advance ¦17,700.00 ¦ +------------------------------------------+----------¦ ¦Total ¦31,164.40 ¦ +-----------------------------------------------------+

Decedent did not receive compensation for his services with New Sutherland in any form; nor was his law firm reimbursed for any services performed; nor did any officers of the company receive any salary.

The loss sustained by petitioners in 1949 was a nonbusiness bad debt and not an ordinary loss.


OPPER, Judge:

In 1948 an item of $1,000 was credited to decedent's capital account with his law firm, but was unreported as taxable income. Respondent treated this as additional ordinary income but petitioners contend that it was a trust fund and should have been dealt with accordingly. The difficulty is that there is no specific evidence to that effect and certainly none that there was a trust fund of which the $1,000 in question or any fraction of it was a part, or which was so earmarked. Since we are unable to find the facts in this connection in petitioners' favor, the deficiency must be sustained to that extent.

The other controversy as to 1948 deals with an arrangement made by decedent for the sale of his stock in the New Sutherland Divide Mining Company. He, along with a number of other owners, agreed to sell a large portion of his holdings in that company. We have found as a fact that decedent as one of the vendors was forced to and actually did agree with the prospective buyer in advance that the proceeds of the sales would not be available to him but would be transmitted to New Sutherland and treated by it as a further investment or advance by the vendors.

Decedent could, to be sure, have refused to sell his stock on such terms just as any seller can refuse to sell on credit. In that case the transaction would not have taken place, there would have been no profits from the sale even on paper, and no question to be raised before the Tax Court. But we fail to see that, having accepted the offer, decedent was any better off when the stock had been sold than any other seller who accepts an account receivable instead of cash for his property. To a cash basis taxpayer, that is not income until the debt is collected. Consolidated Asphalt Co., 1 B.T.A 79, 82. And once the contract was made, decedent was effectively disabled from receiving, for the stock, cash or its equivalent or any consideration other than an account receivable. See Shiman v. Commissioner, (C.A. 2) 60 F.2d 65, 66. He was never a free agent as to collecting the proceeds.

There is no question that the cash was not actually received by decedent during the tax year, and, under the circumstances, it cannot be said that it was constructively received by him in the sense that it was income available to him and subject to his command but upon which he turned his back. Hal E. Roach, 20 B.T.A. 919; L. M. Fisher, 14 T.C. 792; Harold W. Johnston, 14 T.C. 560; cf. John I. Chipley, 25 B.T.A. 1103; John A. Brander, 3 B.T.A. 231. And certainly the open account on New Sutherland's books was not so nearly the equivalent of cash that it could be construed as income to a cash basis taxpayer. Nina J. Ennis, 17 T.C. 465; Harold W. Johnston, supra. ‘So far as we have been able to ascertain, a promise to pay evidenced solely by an open account has never been regarded as income to one reporting on a cash basis by the Bureau of Internal Revenue. Certainly this is true in the absence of any showing that the amount was immediately available to the taxpayer.’ John B. Atkins et al., 9 B.T.A. 140, 149, affd. (C.A., D.C.) 36 F. 2d 611. On this issue petitioner is sustained.

The final and principal question is whether decedent's loss in New Sutherland was a capital or ordinary one when it occurred either in 1948 or 1949. Petitioners of course insist that it was deductible in full on the ground that decedent was a professional promoter and that loss was incurred in that business; or that it was a business bad debt deductible for similar reasons; or that the arrangement he made for the sale of the stock constituted a joint venture participated in by decedent and his fellow shareholders and that the ultimate loss was thus the result of a partnership of which decedent was a member.

It is apparently conceded that decedent was not engaged in corporate financing as a business. Whether or not he could be considered generally as a ‘promoter,‘ which seems highly doubtful in view of the comparatively few separate ventures he actively engaged in over a 60-year period, see Charles G. Berwind, 20 T.C. 808, affirmed per curiam (C.A. 3) F.2d 575; Fred A. Bihlmaier, 17 T.C. 620; but cf. Weldon D. Smith, 17 T.C. 135, revd. (C.A. 2) 203 F.2d 310, certiorari denied 346 U.S. 816; Henry E. Sage, 15 T.C. 299; Vincent C. Campbell, 11 T.C. 510, it seems clear he did not enter the New Sutherland Divide Mining operation in that capacity. Samuel Towers, 24 T.C. 199, affd. (C.A. 2) F. 2d 233.

Decedent's original connection with New Sutherland was as a lawyer, and his subsequent activities all had their origin in this beginning since his status as a stockholder, and that of several of his associates, derived from their receipt of the stock as a legal fee. The subsequent actions were directed to making that fee as lucrative as possible by disposing of the stock on profitable terms. See Charles G. Berwind, 8 T.C. 1112. Unless the ‘business' aspect of the loss was part of his law business, and we think it clearly was not, Carl Reimers Co., 19 T.C. 1235, affd. (C.A. 2) 211 F.2d 66, decedent's advances must hence be viewed as nonbusiness debts. Wheeler v. Commissioner, (C.A. 2) 241 F.2d 883, affirming per curiam T.C. Memo. 1955-138.

Besides this, not only the worthlessness of the debt, but in fact its origin, arose in years when, whatever his past history, decedent was no longer active. If he was ever previously engaged in promotion he was thus not so occupied in 1947, 1948, and 1949 when the claims arose, nor, of course, when they became worthless in the latter year. They are consequently barred from deduction as business debts. Hadwen C. Fuller, 21 T.C. 407; Jan G. J. Boissevain, 17 T.C. 325; Hickerson v. Commissioner, (C.A. 2) 229 F.2d 631; affirming T.C. Memo. 1954-237. The same result is necessary if the loss is claimed as one incurred in carrying on a business under section 23(e)(1), I.R.C. 1939. Marian Bourne Elbert, 45 B.T.A. 685, 690.

Even if we assume that the vendor stockholders; group in which decedent was a participant was a joint venture in the sense of sections 182 and 3797(a)(2), I.R.C. 1939, a point we need not reach, it seems clear that none of the funds advanced by him to New Sutherland were made to such a joint venture. The payments were to the company, were credited to his individual account, and were clearly for the purpose of improving the position of his own stock; and we have so found at petitioners' request. See Charles G. Berwind, 20 T.C. 808. If they were not contributions to capital, they were at the most loans as to which he was the individual creditor.

Even assuming, however, that decedent advanced the funds to a joint venture of which he was a member, there is no evidence of any loss in that undertaking. And, in fact, the indications are to the contrary. Although the supposed ‘partnership’ made no tax return, it apparently liquidated and distributed its assets in about April 1949. At that time the fair market value of the New Sutherland stock was such that all of the interests of the supposed joint venturers could have been paid off either in cash or by a return of their stock. If there was a loss in 1949, and this seems to be conceded, it must have occurred later in the year and constituted an individual capital loss of decedent.

Reviewed by the Court.

Decisions will be entered under Rule 50.

BRUCE, J., dissents.

MURDOCK, J., dissenting: Some of the shares of New Sutherland stock belonging to Williamson were sold in 1947 and 1948 as a result of which he had a loss of $29.04 from the 1947 sales and a gain of $2,124.76 from the 1948 sales. Travers, an underwriter acting for himself and others, either bought the shares or arranged for their purchase. Prospects of completion of the corporation's mill had already raised the market price of the stock and it was felt that efforts to complete the plant would benefit future sales. Any such benefit would be to Williamson's advantage as well as to the advantage of Travers, his associates, and other stock owners hoping to sell shares in the future. Williamson agreed with Travers before the sales here in question that he would lend the proceeds of the sales to the corporation to help complete its plant. He voluntarily furnished other larger amounts to the corporation during 1948.

The result of the majority Opinion is that Williamson's loss from the 1947 sales is not deductible in that year, and his gain from the 1948 sales is not taxable in that year, despite the fact that the full purchase price was paid in cash by the purchasers. All of the sales transactions are combined and regarded as still open for tax purposes after 1948. This odd result is reached by getting into the field of constructive receipt, and apparently whatever net gain or loss may ultimately result is to depend upon the outcome of the loan to the corporation of the proceeds of the sales. I do not follow this reasoning as to the losses or the gains and deem it contrary to the holding in Luther Bonham, 33 B.T.A. 1100, affd. 89 F.2d 725. Obviously, a loss could not be reduced by a subsequent loan of the proceeds of the sale.

Will the loan of the sales proceeds, made by Williamson to the corporation, have as its basis for possible loss, not the $11,616 actually loaned but, instead, the basis for Williamson of the stock will he sold to or through Travers? Suppose the corporation is eventually able to pay 50 cents on the dollar. Is the difference between that amount and the basis of the stock a loss from a bad debt or the amount realized from cash sales to third parties; is the amount received on the debt not to be subtracted from the amount loaned to determine the bad debt; or is the amount paid on the debt to be divided in some way between payment of the debt and the amount realized from the sale of the stock, even though none of it was received from the purchaser of the stock? The tax effects of a sale and a bad debt could differ by 50 per cent. If the company is able to repay the loan in full, does Williamson have a gain at that time from a loan or is the entire amount to be regarded as realized on the sale of the stock and the loan ignored? And, if the loan is to be ignored, are the normal interest payments from the corporation to Williamson to be regarded as additional amounts realized from the sale of the stock to Travers?

The uncertain financial condition of Sutherland is not claimed to support the majority treatment of these transactions. Suppose a taxpayer owns a substantial number of shares of a small solvent operating corporation; the cost of the stock to him was $1 a share; the stock is selling at $100 a share; the corporation needs $10,000 of additional funds; the taxpayer recognizes the advantages to him through his remaining shares of the proposed use of the money by the corporation; and a purchaser is willing to buy 100 chares of the taxpayer's stock at market if the seller is willing to buy 100 shares of the taxpayer's stock at market if the seller is willing to lend the proceeds to the corporation. Can the taxpayer avoid a taxable profit of $9,900 by agreeing with the purchaser prior to the sale that the proceeds of the sale will be loaned to the corporation? I think not.

The sale of the stock and the loan to the company have to be kept separate for income tax purposes. Williamson sold his stock, the purchaser paid cash for it, Williamson loaned the proceeds to the corporation and thus entered into a new loan transaction with a new party, the corporation. The new transaction does not affect the sale of his stock to the third party. The loan had no effect upon the loss realized from the 1947 sales and the 1948 gain was taxable in that year.

TURNER, WITHEY, and PIERCE, JJ., agree with this dissent.