[714]*714OPINION.
Mellott:
Petitioner contends that his stock in the Arcade Co. became worthless during the calendar year 1935, as a result of which he sustained a loss, deductible in full as an ordinary loss, in an amount equal to the cost of the stock. In his income tax return he deducted, as an ordinary loss, the difference between the cost of the stock ($32,220) and the aggregate of the liquidating dividends ($1,985.94) or $30,234.06. The respondent determined that the loss was a capital loss, deductible only to the extent authorized by sub-paragraphs (a) and (d) of section 117 of the Revenue Act of 1934.1 •The amount so computed ($9,956.74) was allowed as a capital loss.
[715]*715In tlie original petition it is alleged the respondent erroneously determined that the loss was a capital loss. In an amended petition it is alleged that petitioner “is entitled as a matter of law to deduct the full sum of his cost * * * as a loss due to said stock having become worthless * * that “when the Prudential Life Insurance Company began proceedings to foreclose its mortgage on the Main Street Arcade Building, which was the only asset of value the corporation had, and the fact became apparent that said mortgagee intended to enforce its mortgage lien by foreclosure and a sale of that property, it was then established that the * * * company was insolvent and its stock worthless, for that its indebtedness then greatly exceeded the actual or any reasonably possible value of all of its assets; that all dividends distributed by the * * * company to its stockholders after that date were liquidating dividends, for that they were necessarily paid out of the corporation’s capital; and that the amount of such dividends received by the petitioner were not his property, but were so received in trust for creditors of the corporation, for by operation of law he became a trustee, and the amount of such dividends a trust fund in his hands, for the benefit of the creditors of the corporation.”
Respondent denies that he erred in determining the deficiency in tax. In an amended answer he alleges that if the loss is not a capital loss resulting from the liquidation of the corporation then petitioner is entitled to no deduction from gross income for the year 1935 on account of his investment in the stock because it did not become worthless during that year.
It is doubtful if the mere institution of the suit to foreclose the mortgage and the appointment of a receiver to collect the rents constituted an “identifiable event” (United States v. White Dental Manufacturing Co., 274 U. S. 398) establishing worthlessness of the stock of the corporation which owned the real estate. Cf. Peter Doelger Brewing Co., 22 B. T. A. 1176; William H. Redfield, 34 B. T. A. 967; Olds & Whipple v. Commissioner, 75 Fed. (2d) 272. The corporation itself sustained no deductible loss until the property was sold. Helvering v. Hammel, 311 U. S. 504. This did not occur until 1936. It is not contended that there was any abandonment of the property by the corporation. Collateral Mortgage & Investment Co., 37 B. T. A. 630. Indeed the contrary appears. The corporation directed its attorneys to represent it “in the foreclosure proceedings and endeavor to delay the final sale of the property with the hope that there might be a considerable advance in real estate before that time” Had the hoped for advance occurred, it is possible that no loss would ever have been sustained by the corporation.
[716]*716But our question is not whether the corporation sustained a loss in 1935. It is: Did petitioner’s stock become worthless during that year ? The test to be applied is a practical rather than a legal one (Lucas v. American Code Co., 280 U. S. 445) and petitioner has the burden of proof.
In support of his contention that the dividends received by him were not his property but were received in trust for creditors of the corporation, petitioner cites several Oklahoma cases applying the rule enunciated by Justice Story in Woods v. Dummer, 3 Mason, 308; 30 Fed. Cases 435, and by the Supreme Court in Sanger v. Upton, 91 U. S. 56. It is thus stated by the Supreme Court of Oklahoma:
Equity regards the property of a corporation as Reid in trust for the payment of the debts of the corporation, and recognizes the right of creditors to pursue it into whosesoever possession it may be transferred, unless it has passed into the hands of a bona fide purchaser. * * * if the fund has been distributed among the stockholders * * * leaving debts of the corporation unpaid, the established rule in equity is that such holders take the fund charged with the trust in favor of creditors, which a court of equity will enforce * * *. Kramer v. Eysenbach, 186 Okla. 234, 96 Pac. (2d) 1049.
The rule is sound and will be applied in proper cases. Thus in Benjamin E. May, 35 B. T. A. 84, it was held that stockholders receiving the assets of a corporation upon its liquidation were liable, as transferees, for its unpaid income taxes. In O. B. Barker, 3 B. T. A. 1180, it was held that a taxpayer need not include in his gross income the portion of a liquidating dividend which he had been compelled to pay out on account of taxes assessed against the liquidating corporation. A similar conclusion was reached in E. F. Cremin, 5 B. T. A. 1164; J. G. Tomlinson, 7 B. T. A. 961, and Edward F. Harkness, 31 B. T. A. 1100. In Carey Van Fleet, 2 B. T. A. 825, it was held that a lawyer, keeping his books and making his return of income upon a cash basis, need not include in gross income his portion of a fee collected by the partnership of which he was a member where the firm had acknowledged that it was not entitled to the fee at the time it was paid.
It will be noted that in each of the cited cases the taxpayer either had paid out the amount which had been received or, as in the Van Fleet case, had acknowledged that the amount was being held in trust. This petitioner, however, received the $1,985.94 “under a claim of right and without any restriction as to its disposition.” Burnet v. Sanford & Brooks Co., 282 U. S. 359. He commingled it with his other property, still retains it (or in any event was still retaining it at the date of the hearing), and has always treated it as belonging to him. In his return of income for the year in [717]*717which, it was received he considered it to be a partial return of his capital investment in the stock of the corporation, computing his loss to be the difference between the cost of the stock and the aggregate of the dividends. In his petition he alleges that the corporation had no earnings or surplus from which ordinary dividends could be declared and that the amount distributed consisted of the cash on hand and collections on notes and accounts.
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[714]*714OPINION.
Mellott:
Petitioner contends that his stock in the Arcade Co. became worthless during the calendar year 1935, as a result of which he sustained a loss, deductible in full as an ordinary loss, in an amount equal to the cost of the stock. In his income tax return he deducted, as an ordinary loss, the difference between the cost of the stock ($32,220) and the aggregate of the liquidating dividends ($1,985.94) or $30,234.06. The respondent determined that the loss was a capital loss, deductible only to the extent authorized by sub-paragraphs (a) and (d) of section 117 of the Revenue Act of 1934.1 •The amount so computed ($9,956.74) was allowed as a capital loss.
[715]*715In tlie original petition it is alleged the respondent erroneously determined that the loss was a capital loss. In an amended petition it is alleged that petitioner “is entitled as a matter of law to deduct the full sum of his cost * * * as a loss due to said stock having become worthless * * that “when the Prudential Life Insurance Company began proceedings to foreclose its mortgage on the Main Street Arcade Building, which was the only asset of value the corporation had, and the fact became apparent that said mortgagee intended to enforce its mortgage lien by foreclosure and a sale of that property, it was then established that the * * * company was insolvent and its stock worthless, for that its indebtedness then greatly exceeded the actual or any reasonably possible value of all of its assets; that all dividends distributed by the * * * company to its stockholders after that date were liquidating dividends, for that they were necessarily paid out of the corporation’s capital; and that the amount of such dividends received by the petitioner were not his property, but were so received in trust for creditors of the corporation, for by operation of law he became a trustee, and the amount of such dividends a trust fund in his hands, for the benefit of the creditors of the corporation.”
Respondent denies that he erred in determining the deficiency in tax. In an amended answer he alleges that if the loss is not a capital loss resulting from the liquidation of the corporation then petitioner is entitled to no deduction from gross income for the year 1935 on account of his investment in the stock because it did not become worthless during that year.
It is doubtful if the mere institution of the suit to foreclose the mortgage and the appointment of a receiver to collect the rents constituted an “identifiable event” (United States v. White Dental Manufacturing Co., 274 U. S. 398) establishing worthlessness of the stock of the corporation which owned the real estate. Cf. Peter Doelger Brewing Co., 22 B. T. A. 1176; William H. Redfield, 34 B. T. A. 967; Olds & Whipple v. Commissioner, 75 Fed. (2d) 272. The corporation itself sustained no deductible loss until the property was sold. Helvering v. Hammel, 311 U. S. 504. This did not occur until 1936. It is not contended that there was any abandonment of the property by the corporation. Collateral Mortgage & Investment Co., 37 B. T. A. 630. Indeed the contrary appears. The corporation directed its attorneys to represent it “in the foreclosure proceedings and endeavor to delay the final sale of the property with the hope that there might be a considerable advance in real estate before that time” Had the hoped for advance occurred, it is possible that no loss would ever have been sustained by the corporation.
[716]*716But our question is not whether the corporation sustained a loss in 1935. It is: Did petitioner’s stock become worthless during that year ? The test to be applied is a practical rather than a legal one (Lucas v. American Code Co., 280 U. S. 445) and petitioner has the burden of proof.
In support of his contention that the dividends received by him were not his property but were received in trust for creditors of the corporation, petitioner cites several Oklahoma cases applying the rule enunciated by Justice Story in Woods v. Dummer, 3 Mason, 308; 30 Fed. Cases 435, and by the Supreme Court in Sanger v. Upton, 91 U. S. 56. It is thus stated by the Supreme Court of Oklahoma:
Equity regards the property of a corporation as Reid in trust for the payment of the debts of the corporation, and recognizes the right of creditors to pursue it into whosesoever possession it may be transferred, unless it has passed into the hands of a bona fide purchaser. * * * if the fund has been distributed among the stockholders * * * leaving debts of the corporation unpaid, the established rule in equity is that such holders take the fund charged with the trust in favor of creditors, which a court of equity will enforce * * *. Kramer v. Eysenbach, 186 Okla. 234, 96 Pac. (2d) 1049.
The rule is sound and will be applied in proper cases. Thus in Benjamin E. May, 35 B. T. A. 84, it was held that stockholders receiving the assets of a corporation upon its liquidation were liable, as transferees, for its unpaid income taxes. In O. B. Barker, 3 B. T. A. 1180, it was held that a taxpayer need not include in his gross income the portion of a liquidating dividend which he had been compelled to pay out on account of taxes assessed against the liquidating corporation. A similar conclusion was reached in E. F. Cremin, 5 B. T. A. 1164; J. G. Tomlinson, 7 B. T. A. 961, and Edward F. Harkness, 31 B. T. A. 1100. In Carey Van Fleet, 2 B. T. A. 825, it was held that a lawyer, keeping his books and making his return of income upon a cash basis, need not include in gross income his portion of a fee collected by the partnership of which he was a member where the firm had acknowledged that it was not entitled to the fee at the time it was paid.
It will be noted that in each of the cited cases the taxpayer either had paid out the amount which had been received or, as in the Van Fleet case, had acknowledged that the amount was being held in trust. This petitioner, however, received the $1,985.94 “under a claim of right and without any restriction as to its disposition.” Burnet v. Sanford & Brooks Co., 282 U. S. 359. He commingled it with his other property, still retains it (or in any event was still retaining it at the date of the hearing), and has always treated it as belonging to him. In his return of income for the year in [717]*717which, it was received he considered it to be a partial return of his capital investment in the stock of the corporation, computing his loss to be the difference between the cost of the stock and the aggregate of the dividends. In his petition he alleges that the corporation had no earnings or surplus from which ordinary dividends could be declared and that the amount distributed consisted of the cash on hand and collections on notes and accounts. It may be that the corporation itself or its creditors could, in an appropriate action, compel petitioner to pay over the amount distributed to him; but no attempt has been made to do so. Petitioner touched the whole -question only very generally at the hearing. His testimony was directed primarily to the value of the real estate. Under cross-examination, however, he admitted that between $1,900 and $2,000 was received by him; that the entire amount was retained; and that so far as he knew he would never be required to pay over any portion of it to anyone. We know of no reason why we should not consider the payments precisely as they were considered by the corporation and its stockholders — as liquidating dividends. Incidentally it may be pointed out that only if we do so can petitioner be allowed any deduction from gross income during the taxable year; for in our opinion the evidence indicates that the stock had as much value in 1935 as it had in 1934; and, if it were not worthless at the beginning of 1935, it is questionable if it became entirely worthless earlier than 1936.
In our opinion petitioner correctly computed the amount of his loss upon the Arcade Co. stock in his return of income for the calendar year 1935. He erred, however, in failing to treat it as a capital loss. White v. United States, 305 U. S. 281; Helvering v. Weaver Co., 305 U S. 293; Martin General Agency v. Commissioner, 101 Fed. (2d) 165; Inter-State Grocery Co., 39 B. T. A. 182. The Commissioner committed no error in determining the deficiency.
Reviewed by the Board.
Decision will be entered for the resyondent.