same amount as a guarantee that it would comply with its contract. Test cars of coal were shipped to the city, and they were refused on the ground that the coal did not meet the terms of the contract as to quality. The city then canceled the contract with Hoffberger & Co. The taxpayer then demanded the return of the money deposited by it with Hoffberger & Co., who refused to return it on the ground that the taxpayer had not complied with its contract as to furnishing coal and claimed that it was entitled to damages for the breach in an amount in excess of $5,000. All of these transactions took place in 1919.

The taxpayer referred the question to its lawyers, who after consideration advised, by letter June 24, 1919, that it had no cause of action against Hoffberger & Co. for the return of the money except to the extent that the $5,000 exceeded the damages Hoffberger & Co. sustained on account of the breach of contract by the taxpayer, and that the damages might exceed that amount.

During the latter part of 1920 taxpayer's counsel made an examination into the legal liability of the Ridge Co., from which the taxpayer purchased the coal to supply to Hoffberger & Co., and he reached the conclusion that that company was not liable to the taxpayer and that no recovery could be had from anyone. The taxpayer thereupon, before the close of that year, charged off the entire amount of $5,000 on its books. In 1921 the taxpayer succeeded, through the efforts of another attorney, in recovering $1,250 from Hoffberger & Co. on account of the claim and settled the controversy.

DECISION.

The deficiency should be computed in accordance with the concession of the Commissioner and the following opinion. Final determination will be settled on 10 days' notice, under Rule 50.

OPINION.

TRAMMELL: We have held that before a deduction can be allowed on account of a debt ascertained to be worthless and charged off there must first be a debt. Appeal of Luke & Fleming, Inc., 1 B. T. A. 12; Appeal of Louis Titus, 2 B. T. A. 754. In this appeal any amount due by Hoffberger & Co. was at all times collectible. It is not intimated that they were not financially responsible and able to pay the amount. They denied owing the taxpayer anything, and claimed that the taxpayer owed them damages in excess of the amount. This appears to have been the only reason that the claim was not paid in full in 1919, when the controversy arose. It is

104881-27- -55

true that in 1921 Hoffberger & Co. did pay one-fourth of the amount to the taxpayer in settlement of the claim.

If the debtor was not legally liable to the taxpayer, then there was no debt to become worthless. It can not become worthless because of inability to establish legally the liability for the debt, for in such a case there is not an ascertainment of worthlessness of an existing debt, but an ascertainment of the nonexistence of such a debt. Appeal of Luke & Fleming, Inc., supra.

If the taxpayer sustained a loss from the transaction, such loss is deductible only in the year in which the loss is sustained. It is sufficient for the purposes of this appeal to say that the loss was not sustained in 1920.

APPEALS OF D. W. COWDEN AND GEORGE R. COWDEN. Docket Nos. 2605, 2606. Submitted November 10, 1925. Decided February 17,

1926.

1. Commissioner's method of determining gain on sale of shares of stock approved.

2. Shares of stock sold in 1919 had a fair market value of $100 each at March 1, 1913.

Phil D. Morelock and Dudley Doolittle, Esq8., for the taxpayers. Robert A. Littleton, Esq., for the Commissioner.

Before STERNHAGEN, LANSDON, and ARUNDELL.

Each of these appeals is from a determination of a deficiency in income taxes for the year 1919. The amounts in controversy are $11,627.03 and $6,234.93 as to D. W. Cowden and George R. Cowden, respectively. In each case the asserted deficiency results from the Commissioner's inclusion in gross income of gain found to have been realized from the sale of shares of stock of a corporation. On motion of counsel the two appeals were consolidated and heard together.

FINDINGS OF FACT.

In the year 1919 D. W. Cowden owned 1,300 shares of the par value of $100 each of the H. D. Lee Mercantile Co., hereinafter designated as the corporation. He acquired 100 shares of such stock in 1889, when the corporation was organized, and the remainder at various dates prior to the taxable year here involved. All such shares were bought either from H. D. Lee, the president and principal stockholder of the corporation, from the corporation at the several dates when the authorized capitalization was increased by

corporate action, or from other stockholders who were unable to take up their allotments or increases in authorized capital in proportion to their prior holdings. He paid the par value for the entire 1,300 shares. On March 1, 1913, he owned 750 shares. In the year 1919 he received a stock dividend in the amount of 557.05 shares, thereby increasing his total holdings to 1,857.05 shares. In the year 1919, prior to receiving the stock dividend but subsequent to the declaration thereof, he sold 1,300 shares for $130,000. He reported no gain from such sale in his income-tax return for that year.

In 1919 George R. Cowden owned 900 shares of the corporation, which he had acquired at various dates between the years 1900 and 1919. He bought this stock from Lee, from minor stockholders, and from the corporation when additional shares resulting from increases in authorized capital were issued. He owned 263 shares on March 1, 1913. In all cases he paid the par value for such shares. In 1919 he received a stock dividend in the amount of 385.65 shares, and in the same year, at some date subsequent to the declaration of the stock dividend but prior to his receipt of the certificates, he sold 900 shares and received therefor the par value for 794 shares and $115 per share for the remaining 106 shares. In the same year he sold 59 shares of the stock received by way of dividend for $115 a share. In his income-tax return for 1919 he included as gains realized during the taxable year the difference between the cost at par of the 106 shares and the $115 per share received therefor, and also the total of $6,785 received from the sale of the 59 dividend shares.

The corporation was organized about 1889 by H. D. Lee and D. W. Cowden. The original authorized capital was $100,000, divided into shares of the par value of $100 each, of which Lee owned 75 per cent. As the business of the corporation developed, the capitalization was increased from time to time. Between January 1, 1908, and March 27, 1912, the outstanding capital stock was 5,000 shares of the par value of $100 each, and on the latter date was increased to 8,000 shares of the same par value, and so remained until after March 1, 1913. From 1889 until after 1910 the stock of the corporation was somewhat closely held by the founders and its officers and employees, but some shares were owned by customers and others not directly participating in the management or operation. In 1916 the corporation increased its capitalization and issued a large number of new shares, which were offered and sold to the public and to prior owners of stock at par.

During the five years preceding 1913 the corporation was prosperous and paid regular dividends ranging from 6 per cent to 20 per cent and averaging 15.6 per cent. Its books show the follow

ing gains, undivided profits, and dividend payments in the years 1908 to 1912, inclusive:

The balance in the undivided profits account of the corporation at January 1, 1912, was $99,424.54. On February 15, 1912, this was increased by a credit in the amount of $77,107.56, which represents the net earnings from the year 1911, and on that date a cash dividend in the amount of $50,000 was declared. On March 27, 1912, two additional items, in the total amount of $22,873.50, the sources of which are not disclosed by the record, were credited to this account, and on the same date an additional cash dividend in the amount of $150,000 was declared.

The stock of the H. D. Lee Mercantile Co. had a fair market value of $100 per share on March 1, 1913.

DECISION.

The determination of the Commissioner is approved.

OPINION.

LANSDON: In support of their allegations in this appeal the taxpayers raise two issues which must be determined before their tax liability for the year 1919 can be ascertained: (1) That the Commissioner used an incorrect method in ascertaining the gain realized from their sales of stock in 1919, and (2) that even if the Commissioner's method of computing such gain is correct the result is erroneous, because the fair market price or value of the shares of the corporation exceeded the par value at March 1, 1913.

On January 1, 1919, D. W. Cowden owned 1,300 shares of the capital stock of the corporation, which he had bought at par. He had acquired 750 of such shares prior to March 1, 1913. In the year 1919 he received a stock dividend in the amount of 557.05 shares. In the same year, and subsequent to the declaration of the stock dividend, he sold 1,300 shares for $130,000. On January 1, 1919, George R. Cowden owned 900 shares of the corporation, which he had acquired at par. He owned 263 of these shares on March 1, 1913. In the year 1919 he received a stock dividend in the amount

of 385.65 shares. For the purpose of arriving at a basis for determining gain on these transactions the Commissioner computed the cost of the whole number of shares owned by each of the taxpayers after receipt of stock dividend by applying the method or formula set forth in article 1547 of Regulations 45. Having ascertained that the cost of the taxpayer's stock and the fair market price or value of the shares owned at March 1, 1913, were identical, he divided the amount so paid, which was $130,000 in the case of D. W. Cowden and $90,000 in the case of George R. Cowden, by the whole number of shares owned by each after the declaration of the stock dividend, and multiplied the resulting quotients by 1,300 and 900, and thereby found that the cost of the shares sold by D. W. Cowden and George R. Cowden during the year in question was $91,004.55 and $67,133.35, and that the resulting gains from such sales were $38,995.45 and $31,241.63, respectively.

The taxpayers' first contention is that the cost of the shares sold by them in 1919 was $130,000 and $90,000, respectively, and that no taxable gains resulted from the sales. We are unable to agree with this conclusion. Before the declaration of the stock dividend the taxpayers had certain inchoate interests in the assets of the corporation. The declaration and distribution of such dividend neither increased nor decreased their interests. The dividend shares after issue were indistinguishable from the old shares, either legally or in the market sense. The only result of the declaration and distribution of the stock dividend was that each of the taxpayers, in common with all other stockholders, had a larger number of shares evidencing his ownership of unchanged interest in the assets of the corporation. It follows, therefore, that the cost of each share, either before or after the distribution of the stock dividend, must be found by dividing the cost of all by the whole number of shares involved. Eisner v. Macomber, 252 U. S. 189; Miles v. Safe Deposit & Trust Co., 259 U. S. 247; Towne v. McElligott, 274 Fed. 960.

The taxpayers further contend that they sold their original purchases of stock before they received the stock dividends and prior to their ownership of the shares evidencing such distribution, and that the time at which such sales were made enables them to identify the property sold as the identical shares which theretofore had been purchased for $100 each, which they assert is the correct basis for computing the gains resulting from the sales in question. In our opinion this position is untenable. It is refuted by the taxpayers' admission that they received and sold the stock-dividend shares. If they had sold their shares acquired by purchase prior to the declaration of the stock dividend, in the absence of any contract other