1927 BTA LEXIS 2627">*2627 1. The evidence is insufficient to overcome the presumption in favor of the Commissioner's determination that a loss sustained by the petitioner in 1919 was not a net loss resulting from the operation of any business regularly carried on by the petitioner in 1919.
2. Income from a transaction involving the purchase and sale of a building held to have been income of 1920, when the purchase money was paid, rather than of 1919, when the contract of sale was signed.
9 B.T.A. 270">*270 This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1920 in the amount of $41,282.87. It is alleged that the Commissioner erred in failing to find that the loss realized by this taxpayer during the year 1919 was a net loss from him business of buying, selling, exchanging, and otherwise dealing in bonds, stocks, mortgages, real estate, notes, choses in action, and other like property, which should be used to wipe out the net income of the taxpayer for 1918, and the excess to offset all or a portion of the income of 1920, in accordance1927 BTA LEXIS 2627">*2628 with the net loss provision of the Revenue Act of 1918; and in determining that the net income realized by this taxpayer in connection with the purchase and sale of a building was income of the year 1920 instead of the year 1919.
FINDINGS OF FACT.
The petitioner is an individual residing in New York City. For many years he had been a dealer in ladies' suits and clothing. In 1919 he controlled 16 retail stores in various parts of the United States. The direction and supervision of this business occupied at least one-half of his time.
In about the year 1904 he began to acquire stocks and bonds. Since that time he has continued to buy and sell stocks and bonds not as a broker but merely on his own account. Some of these securities he purchased outright and others he purchased on margin. He usually dealt in blocks of from 200 to 400 units.
In 1919 he received and reported $10,474.89 interest which was free from taxation under Title II and Title III of the Revenue Act of 1918, being interest on Liberty bonds and bonds of the City of New York.
The petitioner's income-tax return for the calendar year 1919 was signed by him and dated March 15, 1920. The return purports1927 BTA LEXIS 2627">*2629 to show income received rather than income accrued.
9 B.T.A. 270">*271 In item "A. Income From Business Or Profession," the only entry is the word "None." The same is true of item B.
Item C is as follows:
C. Income From Partnerships, Personal Service Corporations, and Fiduciaries Reporting On a Calendar Year Basis (not including amounts reported under F and K). (State name and address of partnership, etc.)206 Bway Co. - 4000 Bedell C & S Co. Ohio - 5000 $9000
Item D reports one item only, the sale of a bond of the United States Steel Corporation at $1,100, which bond was purchased on March 1, 1916, at $1,002.50, giving a profit of $97.50.
In item E the only entry is the word "None."
In item "F. Interest On Corporation Bonds Containing Tax-Free Covenant, On Which A Tax of 2% Was Paid By Debtor Corporation," $8,475 is reported.
Item "G. Other Income (not including dividends, which should be reported in Item K)," is as follows:
| Amount paid for you by debtor corporation on tax-free covenant bonds (Item Q, page 1) | 4655 | |
| Dividends Can So Ry 300 - | ||
| Interest Loans | 3461.60 | |
| Banks | 1944.34 | |
| Mortgages | 509.08 | |
| Ambulance Fund | 146.25 | |
| Milton Realty Co | 222.00 | |
| Liberty Bond Dep | 16.00 | |
| 6599.27 | ||
| Total | 11254.27 |
1927 BTA LEXIS 2627">*2630 The total income from the above sources as shown in item H is $28,826.77.
Item K shows $28,165.50 as the amount of dividends received.
In item I a deduction of $254,357.95 is claimed. It is explained in an attached statement as follows:
| Stocks | Sale price | Market value March 1, 1913 | Loss | |
| 500 shares Baltimore & Ohio R.R | 14,405.00 | 100 7/8 | 50,437.50 | 36,032.50 |
| 100 shares Brooklyn Rapid Transit | 1,393.50 | 89 1/4 | 8,925.00 | 7,531.50 |
| 200 shares Chicago & Northwestern R.R | 17,062.00 | 136 1/4 | 27,250.00 | 10,188.00 |
| 200 shares New York New Haven H.R.R | 5,112.00 | 126 1/2 | 25,300.00 | 20,188.00 |
| 660 shares Pennsylvania R.R | 26,287.80 | 120 | 79,200.00 | 52,912.20 |
| 100 shares Illinois Central R.R | 8,781.00 | 126 | 12,600.00 | 3,819.00 |
| 300 shares Union Pacific R.R | 36,093.00 | 152 7/8 | 45,862.50 | 9,769.50 |
| 200 shares Northern Pacific R.R | 15,637.00 | 116 | 23,200.00 | 7,563.00 |
| 300 shares Atchison Topeka & St. F.R.R | 24,543.00 | 102 | 30,600.00 | 6,057.00 |
| 250 shares Great Northern R.R | 19,077.50 | 126 3/4 | 31,687.50 | 12,610.00 |
| 100 shares Pullman Car Co | 11,381.00 | 158 1/2 | 15,850.00 | 4,469.00 |
| 350 shares N.Y. Central Hudson River R.R | 23,558.50 | 106 1/4 | 37,187.50 | 13,629.00 |
| 200 shares Lehigh Valley R.R | 8,166.00 | 156 1/2 | 31,300.00 | 23,134.00 |
| 300 shares Consolidated Gas Co | 25,243.00 | (1) | 37,775.12 | 12,532.00 |
| 100 shares New York New Haven H.R.R | 2,556.00 | 85 7/8 | 8,587.50 | 6,031.50 |
| 200 shares Union Pacific R.R | 24,062.00 | 155 | 31,000.00 | 6,938.00 |
| 20 shares Great Northern R.R | $1,562.20 | 100 | $2,000.00 | $473.80 |
| 2 shares U.S. Govt. redeemed | 2,000.00 | 2,050.00 | 50.00 | |
| Loss on sale of 2 Houses: | ||||
| 168-170 Prospect St. E. Orange, N.J. - | ||||
| Cost Dec. 31, 1915 | 23,894.27 | |||
| Loss in Rental 1919 | 35.68 | |||
| Sold Feb. 1919 | 11,000.00 | 12,929.95 | ||
| Loss on Mtge 528 Riverside Drive - Cost 25,000; present value 17,500 | 7,500.00 | |||
| Total | 254,357.95 |
9 B.T.A. 270">*272 The parties have stipulated as follows:
(1) That if the Board should determine that during 1919, the taxpayer was regularly engaged in carrying on the business of buying, selling, exchanging and otherwise dealing in bonds, stocks, mortgages, real estate, notes, choses in action, and other like property, then
(2) There was during 1919 an excess of deductions allowed by law, for the purpose of computing the net taxable income of such business, over the gross income from such business, plus any interest received free from taxation under Title II and III of the Revenue Act of 1918, and
(3) If the profit from the transaction of purchase and sale described in paragraphs B-1 to B-10, inclusive, of the petition [which paragraphs relate to the purchase and sale of the Morris Building] was a profit of 1919, such excess was the amount of $68,077.17, and
(4) If the profit from the transaction of purchase and sale described in paragraphs B-1 to B-10, inclusive, of the petition was a profit of 1920, such excess was the amount of $152,843.11, and
(5) The taxpayer's net taxable income for 1918 was $47,254.06.
In November, 1919, Elias1927 BTA LEXIS 2627">*2632 A. Cohen, president of Broadway-John Street Corporation, had an opportunity to purchase a building at 64-68 Broad Street, New York, known as the Morris Building, provided he could pay $50,000 in cash upon the signing of a contract of sale. He told the petitioner that he could sell the building at a profit and offered the petitioner a share in the expected profits if the latter would advance the $50,000. The petitioner made some investigation of the matter and told Cohen he would not advance the $50,000 unless he was secured against loss. In order to guarantee the petitioner against loss and to put the agreement in writing Cohen wrote a letter to the petitioner of which the following is a copy:
NEW YORK, November 28th, 1919.
Mr. ALFRED M. BEDELL,
19 West 34th Street, New York, N.Y.
DEAR MR. BEDELL: If you will furnish the $50,000 necessary for the purchase of the Morris Building, I agree that payment of this $50,000, to you will be secured by all of my interest in the Montauk Building and if this $50,000 is lost in the Morris Building transaction then I relinquish all of my interest in the Montauk Building absolutely.
It the Morris Building is resold we are to1927 BTA LEXIS 2627">*2633 divide our profits half in half. If I close with the Polish American Company today without calling upon you for the $50,000, then the profits in the .polish American transaction shall be divided three-quarters to me and one-quarter to you.
9 B.T.A. 270">*273 If the Polish American deal is closed today I am obligated to pay A. Mondell, a broker, commissions for $45,000. on the transaction which must be deducted from the profits in that transaction. A. & H. Bloch to have 10% interest in the profits.
Yours very truly.
(Signed) ELIAS A. COHEN.
P.S. - Our understanding now is that if we use your $50,000 to take contract and re-sell today to the Polish American Company thus reimbursing the $50,000 to you today, the profits in such transaction shall be divided three quarters to me and one quarter to you.
(Signed) ELIAS A. COHEN.
Thereupon the petitioner gave his attorney, Adolph Bloch, a check for $50,000. Bloth made some inquiry about the title to the property and then delivered the check on behalf of the Broadway-John Street Corporation on November 28, 1919, to the Valentine Building Corporation, the owner of the building, upon the signing of a contract whereby it agreed to1927 BTA LEXIS 2627">*2634 sell and the Broadway-John Street Corporation agreed to buy the building for $875,000, payable $50,000 on signing the contract and $825,000 on delivery of a deed on February 28, 1920, conveying the fee simple of the premises free from all encumbrances and restrictions, obligations and variations, except as provided for in the contract.
This contract provided among other things that the date of closing was of the essence of the contract and that should the purchaser because of any defect, encumbrance, restriction, obligation, or variation upon or in connection with the title, not provided for in the contract, lawfully refuse to take title to the premises, the seller on return of the purchase money already paid and a reasonable amount for searching the title should be exempt from further liability.
The petitioner had no interest in the Broadway-John Street Corporation. He was to advance the money and to do nothing more. He advanced the money and did nothing thereafter. If the building was not sold before February 28, 1920, when the deed was to be delivered, then the advance payment of $50,000 was to be forfeited and the petitioner was to be reimbursed from Cohen's interest1927 BTA LEXIS 2627">*2635 in the Montauk Building. After signing this contract the Broadway-John Street Corporation negotiated with several prospective purchasers, including the Polish American Co., but it did not reach any agreement for the sale of the building until December 12, 1919, when a written contract was entered into between it and the White Oil Corporation whereby the former agreed to sell and the latter agreed to buy the Morris Building for $1,075,000, payable $75,000 on signing of the contract and $1,000,000 on delivery of a deed on February 29, 1920, conveying the fee simple of the premises free from all encumbrances and restrictions, obligations and variations, except as provided for in the contract.
9 B.T.A. 270">*274 This contract provided among other things that the date of closing was of the essence of the contract; that should the purchaser because of any defect, encumbrance, restriction, obligation, or variation upon or in connection with the title, not provided for in the contract and not caused by the act of the seller, or because the leases affecting the premises were not substantially as represented, lawfully refuse to take title to the premises, the seller on return of the purchase money1927 BTA LEXIS 2627">*2636 already paid with a reasonable amount for searching the title should be exempt from further liability; that the seller should not be liable for damages for breach of contract without its fault or default, but in such case should only be liable for the return of any of the purchase money already paid and a reasonable amount for examination of the title; and that the purchaser should deliver to the seller's attorneys a correct copy of its title company's report of title, covering the property, together with a written statement whether or not the purchaser would accept title to the premises as to conditions existing at that date and if title was not accepted the statement should set forth the grounds of refusal and the seller thereupon should have the right within 10 days after the delivery of said statement by written notice to the purchaser to cancel the contract making it null and void and should return the deposit to the purchaser, together with the expenses of title examination incurred by the purchaser.
The White Oil Corporation at the time the contract was signed deposited the $75,000 mentioned in the contract with a bank in escrow until the deed was delivered. The balance1927 BTA LEXIS 2627">*2637 sheet of the White Oil Corporation at October 28, 1919, was as follows:
| WHITE OIL CORPORATION | |
| GENERAL BALANCE SHEET, OCTOBER 28, 1919 | |
| Assets | |
| Oil land and leases | $16,233,854 |
| Refinery, gasoline plant and equipment | 555,752 |
| Tank cars | 162,709 |
| Furniture and fixtures | 16,516 |
| Good will | 350,000 |
| Investment in subsidiary companies | 12,929,367 |
| United States Government securities | 71,893 |
| Inventories | 216,522 |
| Accounts and notes receivable (less reserve) | 311,449 |
| Cash | 9,602,625 |
| Deferred charges to operations | 37,558 |
| Total | 40,488,244 |
| Liabilities | |
| Capital stock (630,000 shares) | $39,890,479 |
| Notes and accounts payable | 563,415 |
| Federal taxes (Clarendon Ref. Co., 1918) | 13,933 |
| Dividends due to Clarendon Ref. Co | 20,417 |
| Total | 40,488,244 |
9 B.T.A. 270">*275 On February 2, 1920, a deed was executed and delivered by the Valentine Building Co. directly to the White Oil Corporation as provided in the contract of December 12, 1919. In 1920, from the purchase money paid on February 2, 1920, the petitioner received his share of the profits from the transaction, which share, exclusive of his $50,000, was $84,765.94. He reported no portion of this profit1927 BTA LEXIS 2627">*2638 in his 1919 income-tax return.
The petitioner kept his books of account and reported his income on the cash receipts and disbursements basis.
OPINION.
MURDOCK: In order to decide the net loss issue in the petitioner's favor it would be necessary for us to hold that the petitioner was regularly engaged in carrying on the business of buying, selling, exchanging and otherwise dealing in bonds, stocks, mortgages, real estate, notes, choses in action and other like property. This we can not do.
The petitioner starts with a presumption against him. To prove that he was regularly engaged in 1919 in carrying on the business of buying and selling, exchanging and otherwise dealing in bonds and stocks, he testified in a general way as to what he had done in "1919 and the several preceding years." But he never limited his testimony so that it would apply specifically to the year 1919. He said that during these years he spent about four hours on each of three or four days of each week in some broker's office; that he had large margin accounts with his brokers; that he bought and sold large blocks of various stocks, which he named; that sometimes he would buy in the morning and sell1927 BTA LEXIS 2627">*2639 at night; that frequently he pooled his interest with others; that his purpose in buying was to sell at a profit; and that he did an active business with his brokers, whom he named. These general statements could be truthfully made even though some of them did not apply specifically to the year 1919.
It must be borne in mind that we are concerned primarily with the year 1919. It was to prove that in 1919 he was regularly engaged in this business that the testimony was offered. If it was relevant and material we must assume that all of it applied specifically to the year 1919 and not only to some part of the period "1919 and the several preceding years," and that it was offered to prove that in 1919 the petitioner did an active business with his brokers and bought and sold a considerable number of stocks and bonds.
On cross-examination he was asked to identify his income-tax return for the calendar year 1919. The return was then offered in evidence by the respondent without any objection by the petitioner. This return shows but one profitable sale of a stock or a bond during 9 B.T.A. 270">*276 the year. The bond sold was purchased in 1916. The profit was $97.50. No claim was1927 BTA LEXIS 2627">*2640 made on the return that the petitioner was engaged in any business as an individual. Some interest from Liberty bonds was reported, but the petitioner never claimed that the purchase or sale of Liberty bonds had any bearing on the question before us. Eight thousand four hundred and seventy-five dollars was reported as interest on corporation bonds containing a tax-free covenant, on which a tax of 2 per cent was paid by the debtor corporation. Dividends of $300 from "Can So Ry" were reported. A loss of $254,357.95 was claimed as shown by an attached schedule a copy of which appears in our findings of fact. Twenty-eight thousand one hundred and sixty-five dollars and fifty cents was reported as cash or stock dividends from corporations taxable by the United States upon a portion of their net incomes. The petitioner also testified on cross-examination that the stocks and bonds shown on the schedule attached to the return were owned by him on March 1, 1913, and were turned over by him to the Bank of Manhattan, which sold them for his account.
It seems to us that the facts thus developed on cross-examination seriously challenge the direct testimony of the petitioner in regard to1927 BTA LEXIS 2627">*2641 his 1919 stock and bond purchases and sales. If in 1919 he was doing an active business with brokers, if he was buying and selling stocks and bonds, where is this reflected in his return? The sales at a loss were all made though a bank. These securities had all been held for six years at least. The one profitable sale was of a bond purchased in 1916. The purchase of stocks and bonds in 1919 might be reflected in the amount of interest and dividends reported, it is true. But no attempt was made to explain the apparent inconsistency between his testimony and his return. He did not mention one specific purchase or sale of stocks or bonds made by him during the year. The only other witness did not give any more satisfactory testimony on this point. The petitioner has not sustained his burden, his proof on this point is not convincing and fails to give us sufficient justification for changing the Commissioner's determination.
We are only concerned with the year 1919 in so far as it may affect the petitioner's tax liability for the year 1920, which alone is before us. Having decided that the petitioner has failed to prove facts entitling him to a favorable decision on the question1927 BTA LEXIS 2627">*2642 of whether or not he was in 1919 regularly engaged in carrying on the business of buying, selling, exchanging and otherwise dealing in bonds and stocks, we need not discuss or decide the same question in regard to mortgages, real estate, notes, and choses in action, inasmuch as such discussion and decision would not produce any change in the petitioner's tax liability for the year 1920, in view of the facts stipulated and otherwise in evidence.
9 B.T.A. 270">*277 The petitioner contends that the Commissioner committed error by including a profit of $84,765.94 in the petitioner's 1920 income on account of the sale of the Morris Building; that, so far as he was concerned, the signing of the two contracts resulted in an exchange of personal property for other personal property, to wit, the legal right to compel the Valentine Building Co. to convey title to the building to the Broadway-John Street Corporation in accordance with the terms of the first contract was exchanged for the legal right to compel the White Oil Corporation to take title to the building and to pay therefor the sum of $1,075,000 in accordance with the terms of the second contract; that by reason of this exchange he received1927 BTA LEXIS 2627">*2643 $80,000 income in the year 1919, that amount being the excess of the fair market value of the right he received over the cost of the right he gave up. In support of this contention he claims that he was a joint adventurer in these transactions with the Broadway-John Street Corporation.
There are several reasons why we can neither adopt this reasoning nor reach the conclusion that the Commissioner was in error. In the first place the evidence does not support the claim that the petitioner was a joint adventurer with the Broadway-John Street Corporation. A joint adventure can only exist where the parties to it have voluntarily agreed and intended that it should be created. ; . An agreement to share profits is not of itself sufficient to create the relationship. ; ; ; 1927 BTA LEXIS 2627">*2644 ; . There must be some additional fact such as control over or proprietary interest in the subject matter involved or a share in the risks and burdens incident to the transaction or transactions to be carried forward, showing that the parties intended the relationship. ; . The sharing of profits may be only a measure of compensation for monies loaned to the sole adventurer. If the money is to be returned in any event or is secured against loss should not profit result, the one who advanced the money is ordinarily not a joint adventurer. . It is only when the agreement extends beyond this and makes the person a principal in the prosecution of the enterprise that he becomes a joint adventurer. ;;; 1927 BTA LEXIS 2627">*2645 ; .
Applying these principles to the facts proven in this case and comparing these facts with the facts in the above cases, we reach the conclusion stated at the beginning of this discussion, that the petitioner 9 B.T.A. 270">*278 has failed to prove that he was a joint adventurer with the Broadway-John Street Corporation. This being so, it does not follow that both had the same rights and owned the same property throughout these transactions. We do not express any opinion as to what the tax liability of the Broadway-John Street Corporation would be. As far as the tax liability of this petitioner is concerned the facts do not present a question of an exchange of property in 1919 and consequently no question of the 1919 fair market value of property received in exchange arises.
Regardless of what the petitioner's rights were under the contract between the Valentine Building Co. and the Broadway-John Street Corporation, we do not think that the signing of the agreement between the Boardway-John Street Corporation and the White Oil Corporation changed his existing rights so that1927 BTA LEXIS 2627">*2646 under the Revenue Act he had income in 1919 as a result of these transactions. He advanced his money in consideration of an agreement which secured him against loss of that money and promised him a share of some expected profits when, as, and if there were any. He assumed no liability or responsibility and thereafter did not move in the matter. At no time in 1919 were profits assured and certainly he had no right in 1919 to move so that a share in the specific funds from the contract between the Broadway-John Street Corporation and the White Oil Corporation might be assured for himself. Immediately after this contract was signed he had the same rights and owned the same thing as previously. His rights may have increased in value as a result of the signing of this second contract because thereafter profits were more reasonably to be expected, but neither a mere increase in value nor a fictitious or paper profit is income which was intended to be taxed. ; .
The facts leave us in considerable doubt as to another step in the petitioner's reasoning, which we think is important1927 BTA LEXIS 2627">*2647 although we have decided the case as if the step had been satisfactorily proven. The petitioner had his agreement with Elias R. Cohen, an individual, whereas a corporation made the contract for the purchase and sale of the building. We do not know that this corporation ever authorized Cohen to contract in regard to its expected profits and if it never authorized him to contract, we do not understand how the agreement between Cohen and the petitioner in any way affected the profits which the corporation actually received in 1920. This agreement mentions 50 per cent of the profits as the petitioner's share. The petitioner has mentioned 40 per cent, 45 per cent, and 50 per cent of the profits as being his share. The result is that we are not sure that we know what contract controlled the division of these profits.
9 B.T.A. 270">*279 The determination of the Commissioner, holding that the sum of $84,765.94 received by the petitioner in 1920 as his share of the profits resulting from the transactions involving this building was income to him in 1920, is approved.
Reviewed by the Board.
Judgment will be entered for the respondent.
LITTLETON did not participate.
Footnotes
1. Purchased since Mar. 1, 1919. ↩