1956 U.S. Tax Ct. LEXIS 143">*143 Decision will be entered for the respondent.
Business -- Regularly Carried On -- Net Operating Loss Carryover -- Sec. 122 (d) (5). -- Held, upon the facts, that a loss in 1951 from the sale of interests in royalties and mineral leases was not attributable to a business regularly carried on by petitioners, and, therefore, petitioners are not entitled to deductions for net operating loss carryback to 1950 and carryover to 1952, under section 122 (d) (5), 1939 Code.
26 T.C. 680">*681 The Commissioner determined deficiencies in income tax for 1950 and 1952 in the amounts of $ 1,175.10 and $ 8,975.34, respectively. Some of the determinations are not contested. The Commissioner has determined that petitioners are not entitled, under section 122, 1956 U.S. Tax Ct. LEXIS 143">*144 1939 Code, to a "net operating loss" carryback from 1951 to 1950, or to a carryover to 1952. The issue is whether a loss sustained in 1951, in the amount of $ 57,655.40, constitutes a "net operating loss" within the provisions of section 122, and whether it is limited by subsection (d) (5) of that section.
FINDINGS OF FACT.
Petitioners, husband and wife, are residents of Chicago, Illinois. Petitioners filed joint returns with the collector of internal revenue for the first district of Illinois for the calendar years 1950, 1951, and 1952, 2 of which years, 1950 and 1952, are involved here.
Irving Rothbart is a certified public accountant. He attended De Paul University from 1927 to 1931 where he majored in accounting. He received his C. P. A. license in 1932.
From 1932 to 1950, Irving engaged in the practice of accounting in Chicago. Hazel actively aided Irving in his practice. The practice was active and successful, requiring all of Irving's time and attention.
Prior to July 1, 1947, George Vasen (hereinafter referred to as Vasen) acquired certain mineral leases in lands situated in Stone County, Mississippi. In December 1948, an oil and gas well was being drilled by Vasen 1956 U.S. Tax Ct. LEXIS 143">*145 on the southwest quarter of the northeast quarter of section 9, township 2 south, range 11 west, Stone County, and it had reached a depth of 14,038 feet but without production of oil. Vasen had sole management and control of the drilling operations and made decisions respecting them. Paul Platt was associated with Vasen. Platt was a client of Irving. There were no other wells in the immediate vicinity. The well never produced any oil or gas and eventually was abandoned at some time after 1951, 1952, or 1953.
In December 1948, Platt interested petitioners in the well, and on December 30, 1948, the petitioners purchased from Vasen for $ 3,000, a 1/300 interest in the well being drilled, plus a 1/300 interest in mineral leases surrounding the well covering 1,000 acres. In their joint return for 1948, petitioners took a deduction for intangible drilling costs of the $ 3,000 paid Vasen.
26 T.C. 680">*682 Also on December 30, 1948, petitioners purchased from Vasen a one-eighth royalty interest in 10 acres of land adjacent to the well being drilled by Vasen for $ 3,000; and in February 1949, petitioners purchased from Vasen a one-eighth royalty interest in an additional 5 acres of land adjacent1956 U.S. Tax Ct. LEXIS 143">*146 to the well for $ 1,500. Furthermore, in August, October, and November 1949, petitioners extended loans aggregating $ 15,000 to Vasen and Platt under a loan agreement which gave petitioners an option to elect to convert the $ 15,000 loan into a 5/300 interest in the well being drilled by Vasen, plus a 5/300 interest in mineral leases surrounding the well covering 1,000 acres. On January 27, 1950, petitioners exercised this option.
Petitioners in their joint return for 1950, deducted $ 15,000 for intangible drilling costs, which represented the $ 15,000 which was converted from a loan.
In determining the deficiency for 1950, respondent disallowed the deduction for $ 15,000. Petitioners do not contest the disallowance of this deduction.
In January 1950, petitioners went to Mississippi where they met Vasen, Platt, and J. A. Moore. At this time Vasen made a misrepresentation to petitioners telling them that the cores being drawn up from the well in Stone County showed high oil content, and that Moore, vice president of Oil Base, Inc., a California corporation, was interested in the well and wanted to purchase part of the surrounding acreage. As a result of this conference, the petitioners1956 U.S. Tax Ct. LEXIS 143">*147 purchased from Vasen, in January 1950, mineral leases in 2,560 acres (4 sections) of land located in the immediate vicinity of the well being drilled by Vasen for a total consideration of $ 73,000. The entire amount was paid to Vasen by February 7, 1950. This was the last purchase by the petitioners of any oil interests.
Petitioners decided to leave Chicago and to move to Mississippi, and late in January 1950, Irving began negotiating for the sale of his accounting practice. In February 1950, Irving entered into a contract to sell his accounting business. This agreement was consummated on April 30, 1950. In March and April 1950, the petitioners worked with the purchasers of the business to acquaint them with the clients of the business. All income of the accounting business continued to belong to the petitioners until May 1, 1950.
On March 21, 1950, a contract was entered between J. A. Moore, George Vasen, and Paul Platt. Under the contract J. A. Moore was to purchase, and George Vasen and Paul Platt were to sell, mineral leases in 3,200 acres of land in the vicinity of the well being drilled by Vasen in Stone County, Mississippi. The purchase price was set at $ 500 per acre. 1956 U.S. Tax Ct. LEXIS 143">*148 The petitioners were not parties, or signatories, to this contract. George Vasen verbally informed the petitioners that they would be allowed to participate in this contract by selling part of 26 T.C. 680">*683 their mineral lease acreage as a part of the acreage to be sold to J. A. Moore. The contract between J. A. Moore, George Vasen, and Paul Platt was never fulfilled. No mineral leases were ever transferred under it.
Benjamin and Sophia Sherry, the parents of Hazel Rothbart, became interested through the petitioners in the oil well venture in Stone County, Mississippi. In 1950, they purchased from George Vasen mineral leases in the area of the well being drilled. The Sherrys invested $ 60,000.
On May 1, 1950, the petitioners moved to Stone County, Mississippi. They moved all of their personal belongings from Chicago to Mississippi. Before moving from Chicago, Irving purchased books on oil and gas operations such as the following: Patton on Land Titles; Summers on Oil and Gas (8 vols.); Pitcher on Practical Accounting for Oil Producers; and Miller on Tax Problems in the Oil Industry. At first petitioners took up residence in Gulfport, Mississippi. Within a short time they moved1956 U.S. Tax Ct. LEXIS 143">*149 to Wiggins, Mississippi. After arriving in Mississippi, petitioners made daily visits to the drilling site; they spent several hours daily at the recorder's office, running down the chain of title in the surrounding sections of land to determine who had the interest in the mineral leases. This information was turned over to Vasen daily. There were daily conferences and discussions about the operation, the deals pending, and the acquisition of more leases.
During the entire period which petitioners spent in Mississippi, they did not sell any oil interest or any other interest in oil property, and they did not buy any oil interests or any other interests in oil properties in addition to the purchases from Vasen described above.
In July of 1950, the petitioners were informed by the field representatives of an oil laboratory that the well being drilled by Vasen had no possibility of production. The petitioners became convinced that Vasen had made misrepresentations to them concerning the Stone County oil venture. In August 1950, they returned to Chicago, Illinois, where they gave evidence to the United States District Attorney, Chicago, Illinois, and to the Office of the Securities1956 U.S. Tax Ct. LEXIS 143">*150 and Exchange Commission, Chicago, Illinois. The information given by the petitioners and others led to the indictment and conviction of Vasen on the charge of using the United States mails to defraud.
In September 1950, Irving Rothbart began negotiations for the repurchase of the accounting business which he had sold. The negotiations led to the repurchase of the business on October 9, 1950. From October 9, 1950, to date, Irving Rothbart has been continuously engaged in the practice of accounting in Chicago. His practice is successful and requires substantially all of his time and attention.
26 T.C. 680">*684 Early in 1951 the petitioners employed legal counsel to represent them in negotiations with Vasen. In April or May 1951, a settlement was reached between petitioners and Sophia and Benjamin Sherry, and Vasen, and a settlement agreement was executed. Pursuant to the provisions of the settlement agreement, the total sum of $ 58,230 was paid by Vasen to the petitioners and Benjamin and Sophia Sherry; Irving and Hazel Rothbart, and Benjamin and Sophia Sherry each executed a separate release of Vasen and Platt; and the petitioners and Benjamin and Sophia Sherry transferred and assigned1956 U.S. Tax Ct. LEXIS 143">*151 to Vasen all of the mineral leases, royalty interests, and oil well interests which they had purchased from Vasen.
Petitioners received, as their part of the sum of $ 58,230, the sum of $ 36,048. Petitioners expended during 1951, $ 11,216 for legal representation in their negotiations and settlement with Vasen.
Under the provisions of the settlement agreement with Vasen, the Rothbarts and the Sherrys executed proper instruments of conveyance or assignment to Vasen whereby they conveyed back to Vasen all of their interests in mineral leases, royalties, and in the well, it being their intention to reconvey and reassign to Vasen "all interests whatsoever acquired, by said parties from or through him in the State of Mississippi"; and the petitioners and the Sherrys warranted that they had not resold or otherwise disposed or divested themselves of all or any part of the leasehold, royalty, and other rights, titles, interests, and equities, previously acquired by them from Vasen. Under the settlement agreement, several steps were to be taken successively, and at each step Vasen was to deposit part of the total consideration with petitioners' attorney; and if Vasen failed to carry out 1956 U.S. Tax Ct. LEXIS 143">*152 his agreements, then petitioners were entitled to retain money deposited "as liquidated damages." The settlement agreement, joint Exhibit 6-F, is incorporated herein by this reference in its entirety.
In May 1953, another settlement agreement was made between petitioners and Platt for damages caused in 1950 to petitioners' accounting practice, under which agreement Platt paid over to the petitioners the sum of $ 10,012.60 in May of 1953. Petitioners expended during 1953, $ 2,500 for legal representation in their negotiations with Platt.
The only purchases of oil or mineral interests made by the petitioners at any time material to this case were the purchases of royalty and oil well interests and of mineral leases which they purchased from Vasen, as above described, in Stone County, Mississippi. The only sales of oil or mineral interests made by petitioners at any time material to this case were the reconveyances and reassignments which they made in 1951 to Vasen pursuant to the settlement agreement. Petitioners have not at any time material to this case explored, developed, drilled, financed, or invested in any oil or gas well; they have never bought, sold, or leased any royalty1956 U.S. Tax Ct. LEXIS 143">*153 interests, mineral interest, 26 T.C. 680">*685 or any other kind of interest in oil- or gas-producing properties; and they have never engaged in producing, refining, transporting, buying, or selling oil or oil products, with the exception of the above-described purchases from and transactions with Vasen.
During the remainder of 1950, after his return to Chicago in August, and during 1951 and 1952, and since 1952, Irving Rothbart engaged in the practice of accounting in Chicago, which practice has been successful and has required substantially all of his time and attention. In petitioners' joint returns for the years 1950, 1951, and 1952, Irving listed his occupation as accountant. In each of the years 1950, 1951, and 1952, Irving was listed in the classified pages of the Chicago telephone directory as a certified public accountant, and this constituted his only listing in those pages.
The reconveyances and reassignments by the petitioners of all of their royalty interests, mineral leases, and oil well interests to Vasen, pursuant to the settlement agreement of April or May 1951, constituted a complete termination and liquidation of all petitioners' interests in the specific oil properties, 1956 U.S. Tax Ct. LEXIS 143">*154 and in all oil properties, in general. Also, the petitioners' reconveyances and reassignments to Vasen in 1951 of all of the interests in royalties, mineral leases, and all else which they had originally purchased from him constituted sales by petitioners to Vasen in 1951.
Petitioners, in their petition to this Court, computed their loss sustained in 1951 as $ 57,655.40, as follows:
| Total investment in royalty deeds, mineral leases, and oil well | $ 95,500.00 |
| Less $ 3,000 deducted in 1948 return as intangible drilling costs | 1 3,000.00 |
| $ 92,500.00 | |
| Less amount realized in 1951, $ 36,048, from Vasen, and | |
| $ 10,012.60, from Platt | 46,060.60 |
| $ 46,439.40 | |
| Plus legal fees | 11,216.00 |
| "Total net operating loss claimed" | $ 57,655.40 |
The following tabulates in summary1956 U.S. Tax Ct. LEXIS 143">*155 form the investments in Stone County oil properties which were made by petitioners:
| Date | Description | Amount |
| Dec. 30, 1948 | Royalty interest in 10 acres | $ 3,000 |
| 1/300 interest in well and leases | 3,000 | |
| Feb. 14, 1949 | 1/8 royalty interest in 5 acres | 1,500 |
| Aug. 10, 1949 | Loans totaling $ 15,000 converted in Jan. 1950 to | 2,000 |
| Oct. 21, 1949 | 5/300 interest in well and in 1,000 acres | 6,500 |
| Nov. 7, 1949 | 6,500 | |
| Jan. 6, 1950 | Payments totaling $ 73,000 were for mineral leases | 5,000 |
| Jan. 26, 1950 | in 2,560 acres | 7,000 |
| Feb. 2, 1950 | 26,000 | |
| Feb. 7, 1950 | 35,000 | |
| $ 95,500 |
26 T.C. 680">*686 In determining the deficiencies, the Commissioner held that petitioners did not have a net operating loss for the calendar year 1951, and, therefore, that they did not have any net operating loss carryback to deduct for 1950 or any carryover to deduct for 1952.
Petitioners were not regularly engaged in carrying on a business in 1948, 1949, 1950, or 1951 of exploring for oil, or of prospecting for oil or mineral leases, or of "wildcat" oil explorations or operations, or of buying and selling oil royalties, mineral leases, or interests therein, and Irving Rothbart was not so engaged.
The loss1956 U.S. Tax Ct. LEXIS 143">*156 sustained in 1951 as a result of the investments of petitioners in Stone County, Mississippi, was not attributable to the operation of a business regularly carried on by the petitioners, or by Irving Rothbart.
OPINION.
The question is whether the loss which was sustained in 1951 qualifies as a net operating loss under section 122, 1939 Code, which may be carried back to 1950 and carried forward to 1952. The parties are agreed about the facts; the question involves application of section 122. Petitioners claim net operating loss deductions in 1950 and 1952 under section 23 (s).
The facts may be summarized briefly as follows: Petitioner Irving Rothbart is a certified public accountant. In 1948, one of his clients, Platt, interested him in an oil venture in Stone County, Mississippi, where a well was being drilled by Vasen. During the period December 1948 to January 30, 1950, petitioners entered into transactions with Vasen in which they invested $ 95,500 in interests in the well and in mineral leases and royalty interests surrounding the well. Platt and Vasen represented to the petitioners that all of these interests were valuable and that secrecy should be maintained to enable1956 U.S. Tax Ct. LEXIS 143">*157 all interested parties to expand their interests. Petitioners were thus persuaded to invest their money on faith and they did not make investigations first of the validity of the representations made by Platt and Vasen to them. After they moved in May 1950 to the vicinity of the well-digging operation in Mississippi, they then learned that they were the victims of false representations, if not a "confidence" scheme perpetrated by Vasen. Petitioners, while in Mississippi, in addition to using their time to run down titles to parcels of land, collected evidence of Vasen's fraud. In August 1950, 3 months later, petitioners returned to Chicago and in October 1950, Irving repurchased and resumed his accounting business. In 1951, through their attorney, petitioners worked out a settlement with Vasen under which petitioners conveyed back to Vasen all royalty interests, mineral leases, and the interest in the oil well, all of which they had purchased from Vasen, and he paid them $ 36,048.
26 T.C. 680">*687 The parties are agreed that the loss which petitioners sustained in 1951 amounted to $ 57,655.40, and no question about the amount is presented. We are unable to be certain about the amounts, 1956 U.S. Tax Ct. LEXIS 143">*158 respectively, of the "net operating loss" carryback to 1950, and carryover to 1952, which petitioners now claim. In the petition filed in this Court, it appears that petitioners are claiming a net loss carryback to 1950 in the amount of $ 9,103.41 (after "absorption" of $ 20,373.61 in 1951), and a carryover to 1952 of $ 28,178.38. That is the respondent's understanding. In petitioners' brief, other amounts are set forth as the amounts of the claimed carryback and carryover, without explanation. If it became necessary, the doubts about these amounts could be cleared up by the parties later, and no question is raised about them. The seeming discrepancies in the amounts of the carryback and carryover deductions which petitioners claim do not interfere with or impede our consideration of the question to be decided.
The basic question is whether the loss of $ 57,655.40 is attributable to a business regularly carried on by petitioners, or by Irving Rothbart, individually, within the meaning of section 122 (d) (5). If it was not, then petitioners are not entitled to the net operating loss carryback and the net loss carryover for which they contend.
Upon consideration of all of the 1956 U.S. Tax Ct. LEXIS 143">*159 evidence, we are unable to find that either Irving Rothbart, individually, or he and his wife together, were engaged in a business in 1950, or 1951, or before 1950, of prospecting and exploring ("wildcatting") for oil or mineral leases, or of developing an oil well or oil wells, or of financing oil wells or oil properties, of buying and selling oil royalties, mineral leases, or interests therein, or were engaged in any such related business, however it might be described. The facts and the circumstances are conducive to arousing sympathy for the situation in which petitioners found themselves in 1950, after they went to Stone County, Mississippi, and after they had purchased worthless interests in oil royalties and mineral leases, all of which might have been avoided if they had investigated the alluring promotional representations of Platt and Vasen before rather than after they made their investments.
We think it is clear that in 1948 and in 1949, petitioners made some casual investments in interests in the well being drilled by Vasen and in mineral leases in adjacent or nearby lands, and made loans to him. In 1950, petitioners exercised an option to convert loans of $ 15,000 into1956 U.S. Tax Ct. LEXIS 143">*160 an additional interest in Vasen's well and in mineral leases in other lands, and they made four more purchases, for $ 73,000, of interests in mineral leases. All of the investments were made by purchasing interests from Vasen. Also in 1950, petitioners spent about 3 months in Stone County, Mississippi, observing and at Vasen's suggestion, it appears, searching land titles (which also appears to have been Vasen's method of keeping petitioners busy). Neither the purchases 26 T.C. 680">*688 of interests in royalties and mineral leases in 1950, or before, nor petitioners' activities in Stone County for 3 months in 1950 constituted, in our opinion, the operation of a business regularly carried on by Irving or by him and his wife. Petitioners rely on , and , as well as similar cases, 2 all of which have been considered; all are distinguishable on their respective facts. The Sage and Kittle cases are clearly distinguishable on their respective facts. Upon the facts of this case, it must be concluded that the activities and investments of petitioners in Stone County, 1956 U.S. Tax Ct. LEXIS 143">*161 Mississippi, constituted investments and activities in various aspects of what amounted to a particular venture (promoted by Vasen) and were isolated transactions. Cf. . It is true that the petitioners went to Mississippi intending to go into a business of some kind but they were soon disillusioned, and however sympathetic we may be, it all added up to investing in what amounted to one venture, or if not in one venture, then in a few isolated investments. Cf. . In , this Court considered arguments similar to those made by petitioners as well as the applicability of , but we were not able to find that the activities of the taxpayer were such that, on the whole, they could be denominated the operation of a business regularly carried on by the taxpayer. In this case we must come to the same conclusion.
1956 U.S. Tax Ct. LEXIS 143">*162 Petitioners withdrew from any further activity in their venture in Stone County in August 1950, and in 1951 they entered into a settlement agreement with Vasen. With respect to the settlement agreement, petitioners contend that they did not sell their interests back to Vasen. They argue that they simply abandoned them and that the payment they received from Vasen, $ 36,048, represented "damages in connection with misrepresentation." We are unable to agree with this contention. The provisions of the settlement agreement and the performance by petitioners thereunder clearly constituted sales at loss to Vasen of all of the interests in royalties and mineral leases which petitioners had purchased from Vasen. It is held that in 1951, under the settlement agreement, petitioners, or Irving Rothbart, resold and reconveyed all of the interests to Vasen at a loss, and that the loss in question resulted from the sales of the interests in 1951 to Vasen. Since neither petitioners nor Irving Rothbart regularly carried on a business of buying and selling interests in royalties and mineral leases, and since the sales in 1951 were isolated transactions, the loss in question is 26 T.C. 680">*689 not attributable1956 U.S. Tax Ct. LEXIS 143">*163 to a business regularly carried on by them, or by him, and, therefore, the limitations imposed by section 122 (d) (5) must be applied. , affd. , certiorari denied ; ; ; , affirmed per curiam, ; .
No part of the loss sustained in 1951 is subject to carryback to 1950, or carryover to 1952, under section 122 (d) (5). The determinations of the respondent are sustained. "A deduction to be allowed must always be clearly authorized by law." .
Decision will be entered for the respondent.