1947 U.S. Tax Ct. LEXIS 282">*283 8 T.C. 309">*309 The Commissioner determined a deficiency of $ 383.06 in the petitioners' income tax for the calendar year 1941. One of the adjustments was explained in the notice of deficiency as follows:

It is held that the settlement effected in 1941 between Mrs. Menefee and her former husband, whereby she agreed to accept 98 shares less of Sears Roebuck 8 T.C. 309">*310 & Co. stock than called for under an agreement executed between the parties in 1934, does not result in a deductible loss.

The petitioners claim error on the part of the Commissioner in so holding and allege that the value of the undelivered stock at the time of the compromise was $ 7,178.50. A deduction in that amount was claimed as either a loss or a bad debt.

FINDINGS OF FACT.

The petitioners, husband and wife, reside in New York City. They filed a joint return for 1941 with the collector of internal revenue for the second district of New York. The wife alone will be referred to hereinafter as the "petitioner," since only her income is involved in this proceeding.

The petitioner had married L. Montefiore Stein on November 7, 1913. He was a stockbroker. While married to the petitioner he had taken care of all of her 1947 U.S. Tax Ct. LEXIS 282">*284 financial affairs, including the custody of stocks which belonged to her. She received the dividends on such stock. His secretary had a power of attorney to endorse checks drawn to her order.

The petitioner had acquired 100 shares of the common stock of Sears, Roebuck & Co. prior to March 1, 1913, by gift from her uncle, Julius Rosenwald. Between 1913 and 1934 the 100 shares increased to 1,184 shares by reason of stock dividends and a four-for-one split of stock. The "basis" of the 1,184 shares has been stipulated to be $ 16.723 per share.

The petitioner turned over her Sears stock to Stein shortly after their marriage in 1913. From time to time she also gave him cash for investment and other securities for reinvestment. An account known as the "Florence E. Stein Stock Account" was carried on the books of the brokerage firms in which Stein was successively a partner.

Stein gave the petitioner memoranda dated December 26, 1928, and January 15, 1929, which showed that 1,044 shares of her Sears stock had been placed in her stock account, along with other stock, and that 33 shares of the Sears stock were in a safe deposit box. The market value of all the petitioner's stocks, plus1947 U.S. Tax Ct. LEXIS 282">*285 cash on hand, was stated to be $ 302,638.03 on January 15, 1929.

Stein gave the petitioner a memorandum statement on October 18, 1934, which showed that she owed Stein, Brennan & Co., in which he was then a partner, a debit balance of $ 36,710.48 and that the following shares of stock were held as collateral thereto: 8 T.C. 309">*311

The petitioner claimed that Stein owed her a sum equivalent to the value of 1,184 shares of the Sears stock and also a sum in excess of $ 13,000. He denied that he was indebted to the extent claimed by her and denied that he had received any cash or securities from her except the items specifically mentioned in the statement of Stein, Brennan & Co.

The petitioner and Stein were divorced on November 15, 1934, by decree of the Superior Court of Cook County, Illinois. On that date the petitioner executed an agreement with Stein and a collateral agreement with Stein, Brennan & Co. These agreements are incorporated herein by this reference. ¹ The petitioner's1947 U.S. Tax Ct. LEXIS 282">*286 agreement with Stein was referred to in the decree of divorce, in part, as follows:

* * * that said agreement has been submitted to the court, that the settlement therein made and set forth constitutes a full and complete settlement of all property rights and all other statutory or common law property rights of the parties hereto as between each other, and constitutes a payment of alimony in gross, and the court from all of its knowledge of the facts and circumstances in this case Finds that said settlement is a fair, equitable and just settlement as between the parties hereto.

The agreement between the petitioner and Stein recited that they desired to make a full and complete settlement of all property rights between them, including the petitioner's claim against Stein, "such settlement to constitute a complete payment of alimony in gross." Stein agreed in material part that he would pay the debit balance of the petitioner's account with Stein, Brennan & Co. after giving effect to the1947 U.S. Tax Ct. LEXIS 282">*287 purchase of 400 shares of Sears, Roebuck & Co. stock and the sale of all securities shown in the statement of Stein, Brennan & Co., except the 762 shares of Sears stock; that he would deliver to the petitioner $ 13,000 cash, 25 shares of Commercial Investment Trust, and 22 shares of Sears stock on the day succeeding the decree of divorce; that he would deliver to the petitioner 1,162 shares of Sears stock within 6 years at the rate of "not less than twelve (12) shares" each month; that he would assign and deliver to the petitioner insurance policies on his life to be maintained in specified amounts in order to insure the payment and delivery of the Sears stock. The 8 T.C. 309">*312 petitioner was given the right to take over the policies as her own property upon repayment of all premiums paid by Stein when his obligation to pay premiums under the agreement had expired. The agreement also provided that Stein could fulfill his obligation by the delivery of 1,184 shares of Sears stock or the payment in money "of the then market value of any part of such stock still undelivered." The petitioner agreed that such stock "may be delivered" out of the collateral to her account with Stein, Brennan1947 U.S. Tax Ct. LEXIS 282">*288 & Co. Other provisions of the settlement related to property not involved in this proceeding.

The petitioner's agreement with Stein, Brennan & Co. (which was attached as an exhibit to her agreement with Stein) released her from liability for the payment of the debit balance of her account. Stein, Brennan & Co. agreed to deduct $ 500 per month from the salary or other compensation of Stein, to credit that amount to the debit balance of her account, and, when so credited, to release and deliver 12 shares of Sears stock to the petitioner. Stein, Brennan & Co. also agreed to release and deliver any or all of the Sears stock at any time upon payment of an amount equivalent to $ 40 per share.

The petitioner reported neither gain nor loss as a result of these agreements. The market price of Sears stock on November 15, 1934, was $ 41.6875 per share.

Pursuant to these agreements, all but 298 shares of the Sears stock had been delivered to the petitioner within six years ended November 15, 1940. The 298 shares were not delivered at that time because both Stein and Stein, Brennan & Co. were then in financial difficulty. They had assets which were just about sufficient to discharge all 1947 U.S. Tax Ct. LEXIS 282">*289 obligations except approximately $ 544,000 which they owed to the Rosenwald Family Association. The petitioner had a limited liability to the Association as an accommodation endorser for Stein. In order to prevent a forced liquidation the association agreed to forgive $ 330,000 of the indebtedness. It also agreed to release the petitioner from her liability if she would forgive Stein a part of his obligation under their agreement of settlement. The petitioner released Stein and Stein, Brennan & Co. on March 20, 1941, upon the delivery to her of 200 shares of the Sears stock.

In her income tax return for 1941 the petitioner claimed a deduction of $ 7,178.50, which was alleged to be the fair market value of the undelivered 98 shares of Sears stock at the date of the compromise. The deduction was disallowed by the respondent in the determination of the deficiency.

OPINION.

The question for decision is whether the compromise of the property settlement between the petitioner and her former husband resulted in a deductible loss or gave rise to a bad debt deduction 8 T.C. 309">*313 in 1941. Under the compromise in 1941 the petitioner accepted 98 shares less than the total shares of certain1947 U.S. Tax Ct. LEXIS 282">*290 stock which her former husband had agreed to deliver to her under a settlement made at the time of their divorce in 1934. The petitioner claimed in her return for 1941, and in the petition, that the value of the 98 shares at the time of compromise was deductible as either a loss under section 23 (e) (2), or as a bad debt under section 23 (k), of the Internal Revenue Code, as amended.

The property settlement between the petitioner and her former husband was called a "payment of alimony in gross" in their agreement and in the decree of the court which divorced them. The petitioner concedes that the compromise of an obligation to pay alimony would not result in deductible loss, since alimony is not a "transaction entered into for profit." Thomas v. Commissioner, 100 Fed. (2d) 408, 411. Nor is unpaid alimony deductible as a bad debt. Pearl A. Long, 35 B. T. A. 479; affirmed on other grounds, 96 Fed. (2d) 270; certiorari denied, 305 U.S. 616">305 U.S. 616. In that case we said:

* * * The taxing statute, as has often been said, is concerned with realized gains and losses. This, 1947 U.S. Tax Ct. LEXIS 282">*291 it seems to us, is the proper test to be applied in these cases. The taxpayer was not out of pocket anything as the result of the promissor's failure to comply with his agreement. There was no realization either as a gain or loss at any time. There was no outlay of cash or property by the petitioner in the taxable year, or any other year, by which to measure a loss. She merely failed to receive something promised, which is vastly different from the loss of something once reduced to possession.

The petitioner contends, however, that her former husband's agreement to deliver the stock in question was not part of his obligation to pay alimony. She argues that it was an agreement which satisfied a preexisting obligation (presumably, to repay losses). In our opinion the existence of such obligation has not been demonstrated by the petitioner.

The petitioner testified that she gave her Sears, Roebuck & Co. stock to her former husband for safekeeping. She authorized him to handle her financial affairs, including the investment of cash and the reinvestment of stocks. He placed some of the petitioner's investments, including at least 1,044 shares of Sears, Roebuck & Co. stock, in a 1947 U.S. Tax Ct. LEXIS 282">*292 stock account which bore her name. The facts show that she had notice of that transaction in 1928 and again in 1929, when the market value of her investments was stated to be over $ 300,000. There is no evidence that she made any objection to the management of her stock account until shortly prior to their divorce in 1934. At that time she owed a debit balance of approximately $ 36,000 on her account, for which 762 shares of the Sears stock and other stocks were held as collateral. The value of that collateral is not in evidence. It may be inferred from recitals in their agreement of settlement that 400 8 T.C. 309">*314 shares of the Sears stock had been sold. The circumstances of that sale are not in evidence. On these facts we can not conclude that the petitioner's former husband had any legal liability for mismanagement or any other obligation which would provide the basis for a bad debt deduction. See Philip H. Schaff, 46 B. T. A. 640, 646.

The petitioner has failed to show that she sustained a deductible loss within the taxable year. She has not shown that her former husband was under any legal obligation which would have furnished the basis for1947 U.S. Tax Ct. LEXIS 282">*293 a deductible loss. While the record suggests that she had losses in her stock account, such losses were sustained prior to the taxable year.

The Commissioner committed no error in disallowing the deduction in question. We hold that the petitioner has failed to show that she had either a bad debt or a deductible loss in the taxable year.

Decision will be entered for the respondent.