*1292 1. Where the respondent determined that the petitioner kept his books on the cash receipts and disbursements basis and the evidence does not show that they were kept on the accrual basis, held that the petitioner may not deduct in his return for the taxable year taxes due for that year but not paid in such year.
2. The petitioner was the president and managing officer of a corporation in which he was the principal stockholder. As a result of the bankruptcy of the corporation his stock became worthless. Held, that the loss sustained by him as the result of the stock having become worthless does not constitute a "net loss."
*509 This proceeding is for the redetermination of a deficiency in income tax of $1,443.76 for 1928. The matters put in controversy by the petition are the correctness of the respondent's action (1) in disallowing $102.05 of the amount deducted by the petitioner for depreciation; (2) in disallowing a deduction of $371.25 for automobile expense; (3) in disallowing $5,347.78 of the deduction taken for taxes; and (4) *1293 in disallowing a deduction of $12,658.09 taken for a net loss sustained in 1927. At the hearing the petitioner abandoned the issues raised by (1) and (2) thereby leaving for our determination only the issues presented by (3) and (4).
FINDINGS OF FACT.
Since 1915 the petitioner has been a resident of Miami, Florida, where he went in that year to engage in the furniture business. His first connection with the furniture business in Miami was in 1915 in which year he became president of the Dade County Furniture Company (later the Dade Furniture Company). As president all matters of importance to the company were referred to him, and he assumed the entire responsibility of passing on all the more important matters of the corporation. He owned one-third of the stock of the corporation from 1915 until 1918, when he became the owner of one-half of the stock. During this period he devoted his entire time during business hours to the business of the corporation.
From 1918 until July or August, 1921, the petitioner continued to own one-half of the stock of the Dade Furniture Company. During this period he, Eli McDonald and George Jackby organized another *510 corporation, *1294 known as the Avenue D Furniture Company, which also carried on business in Miami. They each owned one-third of the stock of the corporation. During this time the petitioner devoted his entire time during business hours to the business of the corporations.
In July or August 1921, the petitioner disposed of his one-half of the stock in the Dade Furniture Company to McDonald, and acquired McDonald's one-third of the stock in the Avenue D Furniture Company, thus becoming the owner of two-thirds of the stock of that company.
In 1923 the petitioner organized the Powell Furniture Company, another Florida corporation. This company had a capital stock of $60,000, of which the petitioner owned five-sixths, the other one-sixth being owned equally by T. H. Bagne and J. G. Allcorn. Subsequent to the formation of the Powell Furniture Company the Avenue D Furniture Company (the name having been changed to Home Furniture Company) was merged with the Powell Furniture Company. The petitioner was president of the Powell Furniture Company and devoted practically all of his time to its affairs until in April or May, 1927, when it became bankrupt. As president, the petitioner had his office*1295 at the place of business of the company. Although Allcorn assisted him in the conduct of the business, the petitioner passed on all transactions of importance. He arranged for extensions of credit to the company and when it borrowed money the petitioner endorsed its notes. No other person had authority to obtain loans or transact any other business of importance without the petitioner's approval. The petitioner drew a cash salary regularly from the Powell Furniture Company during the years it was in business and received dividends on his stock, as did the other stockholders.
About 1918 the petitioner and McDonald purchased the Wayne Building, situated in Miami. In 1921 the petitioner acquired McDonald's interest, thereby becoming the sole owner. This property was a two-story building having three stores on the first floor and twenty-two offices on the second floor. In 1924 the building was leased for a term of ninety-nine years, but petitioner regained control of it in 1928, when the lease was canceled. After the failure of the Powell Furniture Company in 1927 the petitioner had his office in the Wayne Building, renting an office from the lessee until he regained control*1296 of the building in 1928.
About 1919 or 1920 the petitioner and McDonald purchased jointly certain warehouse property, together with certain land, with the intention of subdividing the land and selling it in lots. This property was subsequently turned over by them to the Miami Warehouse *511 Company, in which the petitioner acquired 51 per cent of the stock and McDonald 49 per cent. After its formation the corporation subdivided the land into lots and began to sell them. The petitioner and McDonald continued to be stockholders of the Miami Warehouse Company in 1927.
In his income-tax return for 1927 the petitioner took a deduction of $50,000 representing the amount of the loss sustained by him on account of his stock in the Powell Furniture Company having become worthless due to the bankruptcy of the company. This resulted in his return showing a net loss for that year of $13,303.09. In his income-tax return for 1928 the petitioner took as a deduction from the net income shown for that year $12,658.08 representing the amount of the net loss shown on his 1927 return less an amount of $645 for contributions not allowable. In determining the deficiency here involved*1297 the respondent disallowed the deduction thus taken by the petitioner as a net loss brought forward from 1927.
In his income-tax return for 1928 the petitioner took a deduction of $6,518.90 for state, county and city taxes. Of this amount, $1,377.57 represented taxes paid in 1928 for the year 1927 and $5,141.33 represented taxes due for 1928 and entered by the petitioner on its books but not paid during that year. In determining the deficiency here under consideration the respondent disallowed $5,347.78 of the deduction taken, on the ground that the petitioner's books were kept on the cash receipts and disbursements basis.
The books of the petitioner contained an account designated "Accrued Taxes." Under dates of December 31, 1921, 1922, 1923, 1924, 1925 and 1928, the petitioner entered in this account the amount of taxes due but unpaid on the respective dates on certain of his property. With respect to such taxes on certain other of his property he did not make any entry accruing them on his books. The petitioner received his tax bills before the end of the respective calendar years and these bills were the basis of determining the amount of such taxes as he accrued on his*1298 books at the close of the years in which accruals were made. No entry was made on the books in 1926 and 1927 accruing taxes on the Wayne Building, since the taxes on it were being paid by the lessee.
The petitioner's books contained an account designated "Accrued Interest," which apparently was an accrued interest payable account. No entry accruing interest was made in this account from December 31, 1923, until December 31, 1930, and from December 31, 1924, until December 31, 1930, the account stood in balance. The petitioner took deductions for interest in his returns for 1926, 1927 and 1928 of $44.21, $4,286.95 and $1,401.80, respectively.
*512 In his books the petitioner carried an account designated "Rents Received." No amount was entered in the books for rents accrued, since the rents were paid in advance and there were no rents due and unpaid at the end of the year.
OPINION.
TRAMMELL: In his return for 1928 the petitioner took a deduction for taxes of $6,518.90, of which amount $1,377.57 represented taxes paid in that year for 1927 and $5,141.33 represented taxes for 1928 which accrued in that year but which were not paid during the year. Of the deduction*1299 of $6,518.90 taken by the petitioner the respondent disallowed $5,347.78, for the reason that the petitioner kept his books on the cash receipts and disbursements basis. At the hearing the parties stipulated that, if we determine that the petitioner's books were kept on the accrual basis, the deduction allowed by the respondent in 1928 for taxes should be increased by $3,970.21, thus allowing a total deduction of $5,141.33 for taxes for that year, or the amount entered by the petitioner on his books.
The petitioner contends that his books were kept on the accrual basis, while the respondent contends that they were kept on the cash basis.
With respect to income from rents, the petitioner testified that, since these were always paid in advance, there was nothing to be accrued at the end of the year on account of them. This is the explanation offered as to why only "Rents Received" account was carried on his books.
With respect to the account "Accrued Taxes," only the taxes on part of the petitioner's property were entered in it. His testimony indicates that probably the taxes on the remainder of his property were paid as they came due and were taken as deductions in his income-tax*1300 returns for the year in which they were paid. No explanation is offered by the petitioner as to why, if he kept his books on the accrual basis as he contends, he deducted in his return for 1928 taxes paid in that year for the year 1927 which, if he had been on the accrual basis, would have been deducted in 1927.
The petitioner carried in his books an account designated "Accrued Interest," but never made any entry therein from December 31, 1924, until December 31, 1930, notwithstanding the fact that during the years 1926, 1927 and 1928 he took deductions in his returns for interest of a total amount in excess of $5,700. Clearly this account during these years was nothing more than a name since the petitioner made no effective use of it.
*513 The respondent has determined that the petitioner's books were kept on the cash receipts and disbursements basis, and his determination is presumed to be correct until the petitioner has shown it to be otherwise. From a consideration of the evidence submitted we are not able to hold that the respondent's determination in this respect is erroneous. The petitioner therefore is entitled to deduct for taxes in 1928 only the amount paid*1301 in that year, which was $1,377.57, or $206.45 more than was allowed by the respondent.
The remaining question is whether, in computing net income for 1928, the petitioner is entitled to a deduction of the amount of a net loss sustained in 1927 as a result of his stock in the Powell Furniture Company in the amount of $50,000 having become worthless in that year on account of the bankruptcy of the company. The parties stipulated at the hearing that, if the petitioner is entitled to a deduction for a net loss, the amount thereof is $12,658.09, unless we should hold that the petitioner kept its books on the accrual basis, in which event the amount would be $13,371.65. Since we have sustained the respondent's determination that the petitioner's books were kept on the cash receipts and disbursements basis, the amount of the loss involved is, under the stipulation of the parties, $12,658.09. The controversy as to this issue is whether the agreed net loss was incurred in a trade or business regularly carried on by the petitioner.
In his petition the petitioner alleges that the business regularly carried on by him since 1923 was that of investments and that the loss here involved was*1302 sustained in that business.
In 1915 the petitioner acquired stock in the Dade County Furniture Company (later Dade Furniture Company), in which he continued to be a stockholder until July or August, 1921. Sometime between 1918 and 1921 he and two others organized and became stockholders in the Avenue D Furniture Company (later Home Furniture Company). This corporation was later merged with the Powell Furniture Company, a corporation organized by the petitioner in 1923 and in which he became the principal stockholder. In both the Dade County Furniture Company and the Powell Furniture Company the petitioner was president and was active in the conduct of the affairs of all the furniture companies, devoting practically all of his time to their activities. About 1918 the petitioner acquired an interest in the Wayne Building, of which he became sole owner in 1921 and which he leased in 1924 for a period of ninety-nine years. Subsequent to 1919 or 1920 he became a stockholder in the Miami Warehouse Company, a corporation organized to acquire, subdivide and operate certain real estate in which he had theretofore acquired *514 an interest. *1303 Thus from 1915 until 1927, a period of twelve years, the petitioner acquired stock in three furniture companies and in one warehouse company, or a total of four corporations. The petitioner does not contend in his brief that his business was that of investments, but, if he did, we think that in view of the foregoing these occasional stock acquisitions of the petitioner are insufficient to support an allegation that he was regularly carrying on such business. .
In his brief the petitioner contends that in 1927 he was engaged in the furniture business, a business in which he had been engaged continuously since 1915, and that the loss on his stock was sustained by him in the operation of that business, which he regularly carried on. The respondent contends that the loss was not sustained by the petitioner in the operation of a business regularly carried on by him, but was sustained in a stock transaction as a result of the petitioner's investment becoming worthless.
The loss here involved was one resulting from the petitioner's investment in the Powell Furniture Company having become worthless. It was not a loss resulting from any*1304 furniture business carried on by the petitioner. The only connection the petitioner had with any furniture business was that resulting from his being president and stockholder in corporations which carried on the furniture business. The furniture business carried on was the business of the various corporations and not the business of the petitioner. As was said in :
The loss contemplated by the statute is an operating loss, and the party claiming it must be the operator of the trade or business in which the loss occurs. Therefore, a business regularly carried on by the taxpayer means a business regularly operated by the taxpayer on his own behalf.
There is nothing in the record to indicate that the petitioner ever carried on any furniture business on his own behalf. His activities were in the conduct of the furniture business carried on by the various corporations. Although the petitioner owned five-sixths of the stock of the Powell Furniture Company and devoted practically all of his time to its affairs, the corporation was, nevertheless, a separate and distinct entity and the business transacted in its name was not the business*1305 of the petitioner, but of the corporation, and as such was separate and distinct from the affairs of the petitioner. We think the respondent's action in refusing to allow the deduction of $12,658.09 taken by the petitioner for a net loss was correct. See ; affd., ; ; .
Judgment will be entered under Rule 50.