The opinion of the court was delivered by: WALKER
This is a suit commenced by Julian A. Gregory, individually and as executor for his wife, Virginia E. Gregory, to recover a deficiency tax assessed against his wife and himself by the Commissioner of Internal Revenue. Upon the death of Julian A. Gregory, the Surrogate's Court appointed Julian A. Gregory, Jr., and Stewart E. Gregory, executors of his will and Julian A. Gregory, Jr., the substitutionary administrator with the will annexed of the will of Virginia E. Gregory.
1. Julian A. Gregory, the plaintiff, and his wife, Virginia E. Gregory, filed a joint federal income tax return for the year 1934, in which they deducted $20,000, from gross income on the ground that certain shares of stock of Mrs. Gregory in Pine Products Co., Ltd., became worthless during that year.
2. When the return was audited by the Commissioner of Internal Revenue this loss was disallowed and a deficiency was assessed against the Gregorys which was paid by them under protest on January 20th or 21st, 1937.
3. On October 23, 1937, a claim for refund was filed with the Commissioner but it was rejected on April 20, 1938, and this action ensues.
4. In the year 1922, one Gordon Bryan became the grantee of a concession agreement issued to him by The Belize Estate and Produce Company, Ltd., which permitted him to operate a large piece of timber land in British Honduras for wood products. The said agreement contained a provision that the grantee of the concession should pay a minimum annual royalty of $5,000, and if a default in payment of an installment of $5,000 should occur, interest should be paid on the unpaid portion at the rate of 8% per annum. The agreement also provided for the cancellation of the concession upon a default in the payment of a royalty installment after written notice was sent to the holder of the concession.
5. On October 30, 1923, Gordon Bryan assigned the concession agreement to Pine Products Co., Ltd., with the consent of The Belize Estate and Produce Company, Ltd.
6. It was not the intention of Pine Products Co., Ltd., to operate the land itself but to interest others to operate the property under the concession.
7. Mrs. Gregory purchased 250 shares of stock in Pine Products Co., Ltd., for the sum of $20,000, during 1923 and 1924.
9. In its income tax return for the year 1930, which was not filed until April 24, 1931, Pine Products Co., Ltd., stated: "This company has not been operated commercially during the past year." Accompanying the return was a letter from the plaintiff saying that the stockholders in the company considered their holdings worthless, that the minimum annual royalties had not been paid for two years, that the officers looked upon the company as dead and that a judgment for $20,000 had been procured against the company in 1928, which however, was going to be satisfied.No net income was shown by the return.
10. The income tax return for 1931 showed a loss of $135.59. It was accompanied by a letter dated April 11, 1932, from the president of Pine Products Co., Ltd., saying that the company was so near going out of business that the return had been overlooked until then.
11. This was the last income tax return filed by the company although capital stock returns for 1934 and 1935 were sent to ...