[437]*437OPINION.
Milliken:
Petitioner contends that since the respondent in his 60-day notice, which is the basis of this proceeding, refers to the transactions involving the conveyances of real estate to the Frisch-korn Development Co. and the Frischkorn Homes Co. as “sales,” [438]*438he can not be taxed on profits arising therefrom unless it be shown that these transactions were in fact sales in the technical sense of that term, and even though these transactions were in fact exchanges, he should now escape all taxation on gain realized from what was an exchange rather than a sale. This Board was not created for the sole purpose of reviewing rulings made by the respondent, but was created for a broader purpose, i. e., of determining the correctness of deficiencies in tax found by the respondent. When all the facts of record conclusively prove a transaction to be an exchange rather than a sale, it is our duty to pass upon the question of law and fact thus raised, with its consequent effect on the taxability or nontax-ability of the transaction. In his petition in this proceeding, petitioner not only raises the question of the taxability of the exchange, but quotes as the law of his case, section 202(b) of the Revenue Act of 1918, and article 1566 of Regulations 45, as amended by T. D. 2924, all of which refer to exchanges. The testimony taken by him before the date of the hearing was largely addressed to the question of gain arising from the exchange of the various pieces of property for the stock of the corporations. The petitioner has not been misled. There is no merit in this contention.
At the hearing, the auditor of the Frischkorn Development Co. testified that the certificates for 630 shares of the preferred stock of the company issued on May 27, 1919, were never in fact issued to the petitioner; that the word “ canceled ” written across the face of each certificate indicates that these certificates were void and that they were in fact void. The witness stated that these certificates were issued in his absence and that as soon as he returned to the office, he marked them canceled, in order to show that they were void. He further testifies that the word “ canceled ” written in red ink across the face of the certificates issued June 14,1919, and October 27, 1919, to petitioner, for 320 and 550 shares, respectively, indicates that they too were void. There is no testimony that the auditor was absent when these last-mentioned certificates were issued. The fact is that the corporation pursued the same method in the case of the purchase of every piece of real estate which it acquired. The stock certificate book of the corporation shows that each of the certificates issued to petitioner was stamped with the amount of documentary revenue stamps required by section 1107(3) of the Revenue Act of 1918, for original issues of stock, and that all the other stubs of certificates were stamped at the rate required by section 1107 (4) of said Act, for transfers of stock. The stubs of each of these certificates show that the issue was from treasury stock. Every other certificate can be traced back, not to treasury stock, but to one of these original issues. We, therefore, reject the testimony of the auditor on this point, and accept that of petitioner, who testified:
[439]*439Q. Were tlie 1,500 shares of stock of the Frischkorn Development Company, the certificates of which were written out to you, were they ever actually owned by you, and were they delivered to you?
A. No, they were simply issued to me for the purpose of making proper transfers. They were never even torn out of the book, as you will notice. Then the stock to my partners in the deal, was issued to them.
Q. Do you mean that the original certificates which were made out to you, were canceled, and other certificates made out to the interested parties?
A. Yes, that is it.
It thus appears that the preferred stock of the Frischkorn Development Co. was first issued to petitioner and then by him transferred to his associates in compliance with the terms of a previous agreement between them.
The testimony introduced at the hearing, shows that petitioner and certain others, including W. B. Faunce, Fred Warner, and W. J. Davie, entered into an agreement to purchase the properties which were conveyed to the Frischkorn Development Co. out of moneys advanced by them. The testimony does not show how much any one contributed to the enterprises, except that F. W. Warner testified that he advanced over $25,000. Petitioner introduced no testimony to the effect that he advanced any amount. On the contrary, his brother, George M. Frischkorn, testified:
Q. Was It because of the fact that these other stockholders were looking to you and to Mr. E. S. Frischkorn largely for the success of the business, that you and Mr. E. S. Frischkorn were able to secure an interest in the Frischkorn Development Company without cost to yourselves?
A. Yes.
It is thus shown that petitioner paid nothing for his preferred stock in the Frischkorn Development Co. in the way of cash or property, and that the only consideration for the transfer of the 81% shares of preferred stock, which he received out of the first two transactions, and the 95 shares of stock which he received out of the third set of transactions, was the services he was to render in the future. He was thus paid for his services in advance.
We have determined a value for the 81% shares of stock, in the light of all the evidence to be $37.26 per share, and the petitioner thus realized income in the sum of $3,036.69.
We are of the opinion that the 550 shares of preferred stock issued on October 27, 1919, had a value equal to the par value thereof. The corporation had been actively engaged in business for about five months. It had been successful, as shown by the fact that about four months later it not only declared a dividend on its preferred stock, but that it had a surplus sufficient to enable it to begin to redeem such stock at 105 cents on the dollar, and that it did on that date begin to redeem such stock at that rate. The respondent has found that the stock was worth par. The burden is on the petitioner [440]*440to show that the respondent erred and he has introduced no testimony whatever on this point. We hold, therefore, that the 95 shares of stock issued to the petitioner out of the 550 shares of stock issued on October 27, 1919, were worth $9,500. The record shows that the petitioner, in addition to these 95 shares of stock, received $17,680 in cash, making a total gain in this transaction of $27,180.
We have had much difficulty in unraveling the confused mass of evidence which has been adduced by the petitioner with reference to his transactions with the Frischkorn Homes Co. On all the facts as presented by the record, we are convinced that W. J. Davie and Charles R. Frischkorn did not purchase the shares of stock in this company which stand in their names, from the company, but that they acquired them by reason of entering into an agreement with petitioner prior to the organization of the corporation to acquire the contracts of purchase which were afterwards transferred to the corporation. In other words, these persons acquired their shares of stock by reason of their respective interests in the contracts transferred.
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[437]*437OPINION.
Milliken:
Petitioner contends that since the respondent in his 60-day notice, which is the basis of this proceeding, refers to the transactions involving the conveyances of real estate to the Frisch-korn Development Co. and the Frischkorn Homes Co. as “sales,” [438]*438he can not be taxed on profits arising therefrom unless it be shown that these transactions were in fact sales in the technical sense of that term, and even though these transactions were in fact exchanges, he should now escape all taxation on gain realized from what was an exchange rather than a sale. This Board was not created for the sole purpose of reviewing rulings made by the respondent, but was created for a broader purpose, i. e., of determining the correctness of deficiencies in tax found by the respondent. When all the facts of record conclusively prove a transaction to be an exchange rather than a sale, it is our duty to pass upon the question of law and fact thus raised, with its consequent effect on the taxability or nontax-ability of the transaction. In his petition in this proceeding, petitioner not only raises the question of the taxability of the exchange, but quotes as the law of his case, section 202(b) of the Revenue Act of 1918, and article 1566 of Regulations 45, as amended by T. D. 2924, all of which refer to exchanges. The testimony taken by him before the date of the hearing was largely addressed to the question of gain arising from the exchange of the various pieces of property for the stock of the corporations. The petitioner has not been misled. There is no merit in this contention.
At the hearing, the auditor of the Frischkorn Development Co. testified that the certificates for 630 shares of the preferred stock of the company issued on May 27, 1919, were never in fact issued to the petitioner; that the word “ canceled ” written across the face of each certificate indicates that these certificates were void and that they were in fact void. The witness stated that these certificates were issued in his absence and that as soon as he returned to the office, he marked them canceled, in order to show that they were void. He further testifies that the word “ canceled ” written in red ink across the face of the certificates issued June 14,1919, and October 27, 1919, to petitioner, for 320 and 550 shares, respectively, indicates that they too were void. There is no testimony that the auditor was absent when these last-mentioned certificates were issued. The fact is that the corporation pursued the same method in the case of the purchase of every piece of real estate which it acquired. The stock certificate book of the corporation shows that each of the certificates issued to petitioner was stamped with the amount of documentary revenue stamps required by section 1107(3) of the Revenue Act of 1918, for original issues of stock, and that all the other stubs of certificates were stamped at the rate required by section 1107 (4) of said Act, for transfers of stock. The stubs of each of these certificates show that the issue was from treasury stock. Every other certificate can be traced back, not to treasury stock, but to one of these original issues. We, therefore, reject the testimony of the auditor on this point, and accept that of petitioner, who testified:
[439]*439Q. Were tlie 1,500 shares of stock of the Frischkorn Development Company, the certificates of which were written out to you, were they ever actually owned by you, and were they delivered to you?
A. No, they were simply issued to me for the purpose of making proper transfers. They were never even torn out of the book, as you will notice. Then the stock to my partners in the deal, was issued to them.
Q. Do you mean that the original certificates which were made out to you, were canceled, and other certificates made out to the interested parties?
A. Yes, that is it.
It thus appears that the preferred stock of the Frischkorn Development Co. was first issued to petitioner and then by him transferred to his associates in compliance with the terms of a previous agreement between them.
The testimony introduced at the hearing, shows that petitioner and certain others, including W. B. Faunce, Fred Warner, and W. J. Davie, entered into an agreement to purchase the properties which were conveyed to the Frischkorn Development Co. out of moneys advanced by them. The testimony does not show how much any one contributed to the enterprises, except that F. W. Warner testified that he advanced over $25,000. Petitioner introduced no testimony to the effect that he advanced any amount. On the contrary, his brother, George M. Frischkorn, testified:
Q. Was It because of the fact that these other stockholders were looking to you and to Mr. E. S. Frischkorn largely for the success of the business, that you and Mr. E. S. Frischkorn were able to secure an interest in the Frischkorn Development Company without cost to yourselves?
A. Yes.
It is thus shown that petitioner paid nothing for his preferred stock in the Frischkorn Development Co. in the way of cash or property, and that the only consideration for the transfer of the 81% shares of preferred stock, which he received out of the first two transactions, and the 95 shares of stock which he received out of the third set of transactions, was the services he was to render in the future. He was thus paid for his services in advance.
We have determined a value for the 81% shares of stock, in the light of all the evidence to be $37.26 per share, and the petitioner thus realized income in the sum of $3,036.69.
We are of the opinion that the 550 shares of preferred stock issued on October 27, 1919, had a value equal to the par value thereof. The corporation had been actively engaged in business for about five months. It had been successful, as shown by the fact that about four months later it not only declared a dividend on its preferred stock, but that it had a surplus sufficient to enable it to begin to redeem such stock at 105 cents on the dollar, and that it did on that date begin to redeem such stock at that rate. The respondent has found that the stock was worth par. The burden is on the petitioner [440]*440to show that the respondent erred and he has introduced no testimony whatever on this point. We hold, therefore, that the 95 shares of stock issued to the petitioner out of the 550 shares of stock issued on October 27, 1919, were worth $9,500. The record shows that the petitioner, in addition to these 95 shares of stock, received $17,680 in cash, making a total gain in this transaction of $27,180.
We have had much difficulty in unraveling the confused mass of evidence which has been adduced by the petitioner with reference to his transactions with the Frischkorn Homes Co. On all the facts as presented by the record, we are convinced that W. J. Davie and Charles R. Frischkorn did not purchase the shares of stock in this company which stand in their names, from the company, but that they acquired them by reason of entering into an agreement with petitioner prior to the organization of the corporation to acquire the contracts of purchase which were afterwards transferred to the corporation. In other words, these persons acquired their shares of stock by reason of their respective interests in the contracts transferred. This contention is borne out by the excerpt from petitioner’s cash book and journal, filed by the auditor. This excerpt showed that W. J. Davie paid to the petitioner $5,000 on June 30, 1920; $13,000 on August 11, 1920; $10,000 on August 18, 1920; and $2,000 on August 30, 1920, making a total of payments to the petitioner by Davie of $30,000, all but $2,000 of which was paid to petitioner before the corjioration was fully organized and before any stock was issued. This same excerpt shows that Charles ft. Frischkorn paid to petitioner $5,000 on August 13, 1920. These are all the payments that the record discloses were made by any one to the petitioner in these transactions. George M. Frischkorn testified that he paid nothing.
The only persons whom the record discloses to have been active in securing the contracts of purchase which were afterward transferred to the Frischkorn Homes Co., were petitioner and his brothers, Charles R. Frischkorn and George M. Frischkorn, and W. J. Davie. It is true that George M. Frischkorn testified that perhaps Guy W. Ellis was interested. However, the stock book of the company discloses that Ellis did not acquire any stock in the company until December 31, 1921, or a year and four months after the transaction took place. This eliminates him. The cash consideration paid for these contracts by these four persons, amounted to $48,000. Of this amount, George M. Frischkorn paid nothing, Charles R. Frischkorn contributed $5,000, and W. J. Davie contributed $30,000. It is thus shown that petitioner contributed $13,000.
After the petitioner received the 1,100 shares of preferred stock, he transferred first and last 300 shares to W. J. Davie, 50 shares to Charles R. Frischkorn, and 70 shares to George M. Frischkorn. These were the only transfers which he made to those who were interested [441]*441with him in the purchase .of the contracts. No other transfer can be regarded as a transfer to a person interested in the purchase, since there is no evidence in the record to that effect. After deducting the shares transferred to his brothers and to Davie, there were left in petitioner’s hands 680 shares, and the difference between the value of these shares, as above indicated, and the $13,000 found to have been contributed by petitioner' toward the purchase of the contracts, is gain to him for the year 1920.
The action of respondent in refusing to permit the petitioner to deduct from his return for 1920, an item of $2,585.19, claimed to have been paid as interest, is approved, since there is no evidence in the record indicating that the petitioner paid such interest, or any part thereof. Petitioner claims, in his brief filed in this proceeding, that his cash book and journal which was introduced as evidence at the hearing, discloses items of interest paid by him during the year 1920. While it is true that the cash book and journal was introduced in evidence by the auditor, his testimony does not indicate that the book contained items showing interest paid by the petitioner during the taxable year.. The petitioner, with the consent of respondent, secured the right to withdraw this exhibit and substitute in its place, photostat copies of so much thereof as they deemed pertinent to the questions in issue. Petitioner availed himself of this privilege and filed a photostat copy of certain portions of the book, but this photostat copy contains no items which in any way relate to interest.
Petitioner urges that respondent erred in refusing to permit him to take as deductions from gross income for the years 1920 and 1921, certain expenses incurred in those years in traveling and entertaining in pursuit of his business. The only testimony introduced by the petitioner, with respect to traveling expenses, is that of himself and his auditor. The petitioner, in his depositions, makes the following-statement :
Q. Did you, or did you not, expend any moneys for traveling or entertaining during the year 1920, in connection with your business affairs?
A. Yes, I did. X expended a great deal in traveling in the interest of the Company, and also in entertaining, maintaining automobiles for clients and out-general business.
He further testified:
Q. Is it your opinion that your boohs for 1920 will correctly show the amount you expended for this purpose — for expenses?
A. No, I never turned in any expense account.
Q. In your opinion, Mr. Frischkorn, the amounts that may be entered on your books, as having been expended for traveling and entertaining, in that year (1920), is it your opinion that you actually expended that much money?
A. Yes, and I spent more than that. Amounts set aside for expenses by no means cover my expenses during those years.
[442]*442Q. Did tlie same conditions prevail during 1921, in regard to traveling and entertaining expenses?
A. Yes.
No books of account have been produced which contain any entries relative to traveling and entertainment expenses. The auditor produced at the hearing 4 checks, amounting in all to $775, which were issued during the year 1920 and 35 checks issued in 1921, amounting in all to $3,741.50. These checks are petitioner’s personal checks and many of them are drawn in favor of the Frischkorn Real Estate Co. It is not shown by any competent evidence for what purpose these checks were used. The only person who could testify to that effect is petitioner himself and he has given no such testimony. Further, the petitioner has failed to prove that the traveling was done in pursuit of his own business rather than that of the corporations with which he was connected, and if for the business of the corporations, whether he was to be reimbursed or not. In fact, he has not shown that during these years he was engaged in any private business, other than for his corporations. On the evidence of record, we sustain the action of respondent in disallowing these deductions. Appeal of Barnett Weiss, 3 B. T. A. 228; Appeal of Sam Israel, 3 B. T. A. 663; Appeal of Franklin M. Magill, 4 B. T. A. 272.
The petitioner’s last claim is that the respondent erred in refusing to permit him to deduct as worthless debts, the following: Debt of George W. Stewart for $1,350; debt of P. J. Moran, $52, and debt of H. F. Baker, $1,600, which he alleges were found to be worthless and charged off in the year 1921. Although petitioner has proven that these debts were worthless and were charged off in 1921, he has introduced no evidence whatever as to when he first ascertained them to be worthless. The petitioner has, therefore, failed to produce the proof required by section 214(a) (7) of the Revenue Acts of 1918 and 1921, and the action of respondent in denying these deductions is sustained.
Judgment will be entered on 15 days1 notice, u/nder Rule 50.