The opinion of the court was delivered by: Perry, District Judge.
The sole issue of fact and law presented by the pleadings and
evidence is whether 500 shares of Class A stock in Van Schaack
Bros. Chemical Works, Inc., purchased by plaintiff, Kenneth B.
Lacy, for $10,000 in 1926, became worthless during 1944. If the
stock did become worthless, then under the provisions of Section
23(e)(2) and (g)(2), Internal Revenue Code, 26 U.S.C.A. §
23(e)(2), (g)(2), plaintiffs are entitled to a deduction of
$1,000 for that year and for each succeeding year through 1948,
as a capital loss carry-over permitted by Section 117 Internal
Revenue Code, 26 U.S.C.A. § 117(e). If not, judgment should be
for the defendant.
The Government contends that a series of events had occurred
prior to 1944, when the last asset consisting of improved
industrial realty was sold, which established the worthlessness
of the plaintiff's stock. These alleged identifiable events may
be summarized as follows:
1. The audit of September 30, 1935, filed by the debtor
corporation, disclosing that the corporation had not paid taxes
for the preceding four years, that it has operated at a loss of
$89,646.43 for the preceding nine months, and that working
capital had decreased from $51,608.05 from April 30, 1935, when
the petition for reorganization was filed under 77B of the
Bankruptcy Act, 11 U.S.C.A. § 207 to $23,348.53 on September 30,
2. The stipulation by the debtor corporation of June 7, 1937,
that (a) no feasible plan of reorganization of the debtor could
be proposed or accepted, (b) that the estate and assets of the
debtor should be liquidated, and (c) that it should be
3. The cessation of business operations in 1937.
4. The Court order of June 16, 1937, confirming the finding of
the Special Master that the aggregate value of the corporation
assets was less than the total amount of its liabilities, and
that the corporation was unable to submit a fair and feasible
plan of reorganization, and further adjudicating the corporation
5. The Court order of June 16, 1937, appointing a trustee to
take possession of the bankrupt's property for purposes of
6. The sworn statement of the bankrupt's treasurer of July 23,
1937, listing liabilities at that time as $360,000 and the only
substantial assets as real estate, plants and equipment of the
bankrupt in Chicago, Illinois, and Heath, Ohio.
7. The appraisal by three appointees of the Court in the
bankruptcy proceeding, filed April 18, 1938, reporting the
Chicago property at a fair market value of only $204,706 and the
appraisal of May 23, 1938, reporting the property in Heath, Ohio,
at a market value of $5,100.
8. The sale of the Heath property of the bankrupt on September
23, 1938 for $1,725.
9. The order of April 18, 1938, authorizing private sale of the
Chicago property because no bids had been received by the trustee
at public sale.
10. The trustee's report of October 30, 1939, showing his
inability to obtain a purchaser for the Chicago property at
private sale and the expiration of the contract of the brokers
who were employed to obtain a purchaser.
11. The sale of July 22, 1940, of three parcels of the Chicago
land with six buildings, together with furniture and machinery,
for $7,500, subject to $30,000 of tax liens, leaving but 316,000
12. The petition of the trustee of October 20, 1941, to pay the
costs of unsuccessfully advertising the remaining 316,000 feet of
property at 35¢ per square foot, which, if sold at the ...