*2150 1. Where the petitioner, who operated a garage and automobile sales agency, purchased stock of an automobile manufacturing company in order to acquire an agency contract, which stock later became worthless, held that the loss thus sustained should be included in the computation of a net loss under section 204(a) of the Revenue Act of 1921. Philip Kobbe Co.,4 B.T.A. 663">4 B.T.A. 663, followed.
2. The net loss provided for in section 204 means only net losses resulting from the operation of a trade or business regularly carried on by a taxpayer. A net loss so resulting may not be increased by nonbusiness deductions or losses, but will be decreased by any excess of nonbusiness profits or gains over nonbusiness deductions or losses. H. J. Schlesinger,5 B.T.A. 943">5 B.T.A. 943 followed.
*1309 The respondent has asserted a deficiency in income tax for the calendar year 1923, in the amount of $3,957.57. Two issues are raised in this proceeding, which was instituted for a redetermination of the deficiency*2151 asserted - (1) whether a loss of $40,000 sustained by petitioner in 1922 upon the failure of a corporation in which he owned stock results from the operation of a trade or business regularly carried on within the meaning of section 204(a) of the Revenue Act of 1921, and (2) the correct method of computing a "net loss" under the provisions of section 204(a) of the same Act.
FINDINGS OF FACT.
The petitioner is an individual, residing at Battle Creek, Mich., where during the taxable year and for a number of years prior thereto he has engaged in conducting a garage and automobile sales agency. Since 1917 the petitioner has been agent for Willys-Knight and Willys-Overland automobiles, which line of cars does not include a seven-passenger model. In May, 1920, in order to secure an agency contract for a seven-passenger automobile, petitioner purchased 1,600 shares of stock at a cost of $40,000, in the Handley-Knight Co., which proposed to manufacture a seven-passenger model equipped with a Willys-Knight motor. The petitioner received the agency contract and sold the automobiles until the company's failure in 1922, when its assets were insufficient to pay its creditors, the petitioner*2152 losing his entire investment.
On his income-tax return for 1923 petitioner deducted $2,008.14 as a "net loss" for 1921. Upon audit the respondent disallowed the deduction on the ground that no statutory "net loss" resulted under the provisions of regulations 62, article 1605. Petitioner's income-tax return for 1921 discloses, among other things, the following:
(A) Deductions allowed by Section 214, Revenue Act of 1921, in the total amount of $332,553.89, which were as follows, to wit:
| Business deductions | $327,592.23 |
| Nonbusiness losses | 393.00 |
| Nonbusiness interest paid | 4,446.48 |
| Nonbusiness taxes paid | 122.18 |
| Total | 332,553.89 |
*1310 (B) A gross income of $330,545.75, which was derived as follows, to wit:
| Garage and automobile sales agency business | $321,529.00 |
| Salary (nonbusiness income) | 5,000.00 |
| Interest (nonbusiness income) | 2,016.75 |
| Dividends on stock of domestic corporations (nonbusiness income) | 2,000.00 |
| Total | 330,545.75 |
On his income-tax return for 1923 the petitioner deducted $19,606 as a net loss for 1922. Respondent disallowed the deduction on the ground that the alleged loss upon the failure of the Handley-Knight*2153 Co. was not sustained in the operation of a trade or business. Petitioner's income-tax return for 1922 discloses among other things the following:
(A) Deductions allowed by section 214, Revenue Act of 1921, in the total amount of $72,221.43, which were as follows, to wit:
| Stock loss on Handley-Knight Co. stock | $40,000.00 |
| Business deductions | 23,224.42 |
| Nonbusiness loss | 458.78 |
| Nonbusiness interest paid | 8,535.23 |
| Nonbusiness taxes paid | 3.00 |
| Total | 72,221.43 |
(B) A gross income of $52,615.43, which was derived as follows, to wit:
| Garage and automobile sales agency business | $34,701.72 | |
| Salary (nonbusiness income) | 5,000.00 | |
| Interest (nonbusiness income) | 2,363.71 | |
| Dividends on stock of domestic corporations (nonbusinessincome) | $13,400. | |
| Less erroneous overstatement (H. D. Fellows Co. dividends) | 5,100.00 | |
| 8,300.00 | ||
| Other nonbusiness income | 2,250.00 | |
| Total | 52,615.43 |
OPINION.
LANSDON: We have found from the petitioner's uncontradicted testimony that he purchased stock of the Handley-Knight Co. in order to secure a sales agency for the new automobile to be manufactured. *2154 For several years petitioner had been the agent for Willys-Knight and Willys-Overland automobiles which line did not include a seven-passenger model. The Handley-Knight Co. proposed to manufacture a seven-passenger automobile equipped with a Willys-Knight motor, which petitioner expected to meet a demand for seven-passenger cars which he had been unable to supply. In Philip Kobbe Co.,4 B.T.A. 663">4 B.T.A. 663, we held that a company engaged in conducting an advertising agency, which purchased corporate stock in order to procure valuable advertising contracts, the stock becoming *1311 worthless two years later, was entitled to include the loss thereby sustained as one resulting from the operation of a business regularly carried on within the meaning of section 204(a) of the Revenue Act of 1921. Upon authority of our decision in the Kobbe case, which we think is controlling here, the $40,000 loss sustained by petitioner in 1922 should be included as a loss resulting from the operation of a trade or business regularly carried on.
The petitioner's second claim involves the method of computing a net loss under the provisions of section 204(a) of the Revenue Act of*2155 1921, which provides:
That as used in this section the term "net loss" means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business); and when so resulting means the excess of the deductions allowed by section 214 or 234, as the case may be, over the sum of the following: (1) The gross income of the taxpayer for the taxable year, (2) the amount by which the interest received free from taxation under this title exceeds so much of the interest paid or accrued within the taxable year on indebtedness as is not permitted to be deducted by paragraph (2) of subdivision (a) of section 214 or by paragraph (2) of subdivision (a) of section 234, (3) the amount by which the deductible losses not sustained in such trade or business exceed the taxable gains or profits not derived from such trade or business, (4) amounts received as dividends and allowed as a deduction under paragraph (6) of subdivision (a) of section 234, and (5) so much of the depletion deduction allowed with respect*2156 to any mine, oil or gas well as is based upon discovery value in lieu of cost.
The net loss provided for in the above section means only a net loss resulting from the operation of a trade or business regularly carried on by a taxpayer. A net loss so resulting may not be increased by nonbusiness deductions or losses, but will be decreased by any excess of nonbusiness profits or gains over nonbusiness deductions or losses. H. J. Schlesinger,5 B.T.A. 943">5 B.T.A. 943; cf. W. H. Haskell et al.,7 B.T.A. 697">7 B.T.A. 697; Gerald Hughes,15 B.T.A. 215">15 B.T.A. 215. Applying this interpretation to the facts of the instant proceeding, the following computations result:
| 1921 | ||
| Deductions resulting from the operation of a trade or business and allowed by section 214 | $327,592.23 | |
| Gross business income | 321,529.00 | |
| Net business loss | 6,063.23 | |
| Nonbusiness income | $9,016.75 | |
| Nonbusiness deductions | 4,961.66 | |
| Excess of nonbusiness income over nonbusiness deductions | 4,055.09 | |
| Net loss | 2,008.14 | |
| 1922 | ||
| Deductions resulting from the operation of a trade or business and allowed by section 214 | $63,224.42 | |
| Gross business income | 34,701.72 | |
| Net business loss | 28,522.70 | |
| Nonbusiness income | $17,913.71 | |
| Nonbusiness deductions | 8,997.01 | |
| Excess of nonbusiness income over nonbusiness deductions | 8,916.70 | |
| Net loss | 19,606.00 |
*2157 *1312 Reviewed by the Board.
Decision will be entered under Rule 50.
MARQUETTE, STERNHAGEN, VAN FOSSAN, and MURDOCK dissent on the first point.