*3915 1. The evidence is not sufficient to enable the Board to determine what portion of the expenses incurred by petitioners' decedent during the years 1919, 1920, and 1921, in maintaining and operating an automobile was applicable to the use thereof in carrying on his business during the respective years.
2. Commissioner's action in including in income of petitioners' decedent for the year 1920, the amount of $37,543.58, representing profit from short sales of sugar on the New York Coffee and Sugar Exchange, sustained for lack of evidence to show that such transactions were not carried out in his individual capacity.
*1268 This proceeding is for the redetermination of deficiencies in income-tax for the calendar years 1919, 1920, and 1921 in the amounts of $3,751.36, $31,483.49, and $3,444.14, respectively. The petitioners allege that in determining the deficiencies the Commissioner erred, *1269 first, in disallowing as deductions from gross income for the years 1919, 1920, and 1921, the sums of $3,315, $3,000, and*3916 $3,000, respectively, as the expenses incurred in maintaining and operating an automobile used by petitioners' decedent in his business, and, second, in including in the income of petitioners' decedent for the year 1920 the sum of $37,543.58, representing profit from short sales of sugar on the New York Coffee and Sugar Exchange.
FINDINGS OF FACT.
This proceeding was instituted by Harry M. Wagner, who died prior to the hearing herein. His death having been suggested to the Board, his executor and executrix were substituted as petitioners.
During the years 1919, 1920, and 1921, Harry M. Wagner, petitioners' decedent, who died on June 30, 1926, was an individual residing at Baltimore, Md., and a citizen of the United States.
The decedent, during the years in question herein, owned and operated in his individual capacity a wholesale grocery business in the City of Baltimore, under the trade name of H. M. Wagner & Co. He was also the chief stockholder, owning 396 out of 400 shares outstanding, and president of the H. M. Wagner Co., Inc., of Washington, D.C.
William F. Remmert had been employed by the decedent for many years, and during the years involved herein was manager*3917 of H. M. Wagner & Co., of Baltimore. Charles W. Bohannon, since deceased, was manager of H. M. Wagner Co., Inc., of Washington, D.C. Robert B. Wagner, son of the decedent, was employed in the Baltimore business during the years in question. He was engaged in general office work and assisted in the management of the business in conjunction with Remmert. Upon the death of Harry M. Wagner on June 30, 1926, Robert B. Wagner succeeded him as president of H. M. Wagner Co., Inc., and also became manager of H. M. Wagner & Co. at Baltimore. William F. Remmert, former manager of the Baltimore business, became vice president and took active charge of H. M. Wagner Co., Inc., of Washington.
During the years 1919, 1920, and 1921, petitioners' decedent used an automobile, which he owned, for personal, general and family uses and in going to and from his home to his place of business, which was a distance of seven miles, and, to some extent, in making trips during business hours from his Baltimore office to "downtown" Baltimore, which was about three miles distant, as well as to other points in and around Baltimore. On some occasions the automobile was also used by decedent for business trips*3918 to Washington and New York.
*1270 The total expenditures made by the decedent for the maintenance and operation of the automobile during the years in question, including the salary of a chauffeur at $1,004 per annum, were:
| 1919 | $2,285.98 |
| 1920 | 3,355.66 |
| 1921 | 1,967.17 |
During the year 1920, H. M. Wagner Co., Inc., did not purchase sugar on its own account. All purchases of sugar both for H. M. Wagner & Co. of Baltimore and H. M. Wagner Co., Inc., of Washington, were made by the Baltimore house, or, in other words, H. M. Wagner, individually. H. M. Wagner & Co. of Baltimore was unincorporated and was the individual business of the decedent carried on under that name. All purchase orders were given in the name of the Baltimore house and the shipments when made, were sent direct from the refineries to Baltimore and Washington according to the needs of the respective houses.
During the early part of 1920, the decedent was confined for a considerable time in a hospital and at his home. While he was so confined, Remmert and his son, R. B. Wagner, were in active charge of the business. Remmert kept in touch with decedent by telephone and occasional visits*3919 and his son visited him in the hospital and saw him daily after his return to his home.
At this time sugar was very high in price and very scarce. Remmert and decedent's son purchased as much sugar as they possibly could purchase in order to care for the business of the Baltimore house and Washington corporation, believing this was the proper thing to do. Having made these large purchases of sugar for future delivery, they informed the decedent of their action in this respect. The decedent, upon learning of the large purchases, informed Remmert and R. B. Wagner that it was his opinion that the sugar market was at its height and that the business would be ruined if something were not done to hedge on their purchases. Accordingly, decedent instructed his son to consult with Remmert and to sell options in sugar on the New York Coffee and Sugar Exchange to cover losses which, in his opinion, would undoubtedly occur due to selling high priced sugar as the market declined.
The instructions given by decedent were promptly carried out by his son and Remmert, who placed the orders with the brokers, Minford, Luedor & Co. of New York. The exact amount of options to be sold on the exchange*3920 was left to the judgment of his son and Remmert, but decedent's instructions to his son were to the effect that they should protect themselves on the purchases made.
As a result of selling the options or short sales of sugar a total profit of $102,543.58 was made during the year 1920 due to a decline *1271 in the price of sugar. During the period of the decline in the price of sugar, 24, carloads were received by the Baltimore house and 12 carloads were received by the Washington corporation. These shipments were made in fulfillment of the orders for future delivery which were placed by Remmert and decedent's son while the decedent was ill and away from his business. Of the profit of $102,543.58 made on the short sales, decedent allocated $30,000 to H. M. Wagner Co., Inc., and the balance to his individual business in Baltimore. The allocation of this amount to the Washington corporation was determined upon in the fall of 1920, after delivery of the sugar had been made in the above-described amounts and the profit so divided was substantially in proportion to the deliveries to the respective houses.
During the year 1920, Charles W. Bohannon, since deceased, was manager*3921 of H. M. Wagner Co., Inc. His compensation was in a large part contingent upon the net profits of the corporation, being computed in accordance with the terms of the following agreement between Bohannon and the decedent in the name of his individual business carried on in Baltimore under the name of H. M. Wagner & Co., which agreement was in force, including the year 1920, from the date of its execution until the death of Bohannon.
Agreement entered into this first day of February, 1902, between H. M. Wagner & Co., and C. W. Bohannon - Witnesseth: H. M. Wagner & Co., have employed C. W. Bohannon to manage their business in the city of Washington and C. W. Bohannon agrees to devote his time exclusively to H. M. Wagner & Co.'s business and interest and will not conduct any other business unless with their consent.
The compensation of C. W. Bohannon shall be as follows: If H. M. Wagner & Co., have invested in their Washington business more than 15,000 dollars they are to receive 6 per cent interest on said excess, after this and all expenses and uncollectible debts have been deducted from the profits of said Washington business. C. W. Bohannon is to receive as a salary one-third*3922 of the net profits, but if said one-third is not ascertained to amount to 1,300 dollars then C. W. Bohannon is to receive 1,300 dollars as his salary in lieu of the one-third interest in the profits.
This agreement to terminate on the 31st day of January, 1903, and unless another agreement is substituted for this one, the same arrangements are to continue for a year at the time after the expiration of this one with same conditions.
H. M. WAGNER & CO.CHAS. W. BOHANNON.In adjusting and making the closing entries on the books of H. M. Wagner Co., Inc., for the year 1920, petitioners' decedent gave instructions to his accountant, who had audited the books of both the Baltimore house and the Washington corporation for many years, to give the corporation credit for $30,000 from the profits derived *1272 from the short sales of sugar. Under date of December 31, 1920, the corporation was credited with that amount.
Upon audit of decedent's return for the years 1919, 1920, and 1921, the Commissioner disallowed any deductions for expenses incurred in maintaining and operating his automobile. The Commissioner also determined that as to the year 1920, the amount of $37,543.58*3923 representing profit from the short sales of sugar, which amount the Commissioner determined had been allocated to H. M. Wagner Co., Inc., should be included in decedent's income for that year.
OPINION.
LITTLETON: With respect to the first issue presented, the petitioners take the position that at least 50 per cent of the total expenses incurred by their decedent in maintaining and operating an automobile, in each of the years in question, was a proper deduction from gross income as a business expense for the year in which incurred and paid.
That portion of the expenses incurred by decedent in maintaining and operating his automobile during the years in question which was properly chargeable against its use by decedent in going to and from his home and office, and in other personal and family use, was not an ordinary and necessary business expense and, consequently, not deductible. ; . The evidence as to the extent to which the automobile was used during the years 1919, 1920, and 1921, by decedent strictly in connection with his business is not sufficient to enable the Board to determine*3924 what portion of the total expense incurred in the years in question should be allocated to decedent's business. We, therefore, approve the Commissioner's determination in regard thereto.
The second issue presented is whether the petitioners are required to return as income of their decedent for the year 1920, the amount of $30,000 representing part of the profit realized from short sales in sugar and which amount decedent allocated to the Washington corporation, H. M. Wagner Co., Inc. The petitioners contend that this amount of the profits, in fact and in law, belonged to the Washington corporation and that the decedent received it as an agent or trustee for its benefit. The Commissioner, on the other hand, contends that the short sales in sugar were purely personal speculations of the decedent and that the profits realized therefrom inured to him as an individual and must be reported in his return.
At the outset, it should be observed that we have no evidence in the nature of an express contract which would require H. M. Wagner to turn over any part of these profits to the corporation or to hold *1273 the corporation liable for any losses which H. M. Wagner might have*3925 suffered in the venture. Petitioners rely on the relations and prior dealings of the parties, and contend that, since H. M. Wagner was making purchases for the corporation as sole stockholder, these acts were for the protection of the corporation as well as the individual business and, therefore, the benefit which resulted therefrom should accrue to the benefit of the corporation as well as to H. M. Wagner, individually. Our difficulty lies in determining the extent to which H. M. Wagner's acts were binding on the corporation in the sense of an agent acting for a principal. Beyond the fact that H. M. Wagner was the sole owner of the Baltimore unincorporated business, the owner of the entire stock of the Washington corporation and the fact that he had been making purchases for both businesses, we are without evidence as to the extent of the authority given to him iv connection with these transactions.
From the mere fact that H. M. Wagner owned all the stock of the Washington corporation and was making purchases for this corporation, can we conclude that he was acting for the corporation when he made short sales in his own name on a commodity exchange upon a realization that the*3926 purchases which he had made would prove detrimental? We are of the opinion after a careful consideration of the evidence that we can not so conclude. Certainly no express agreement to this effect is shown or contended for and the prior dealings of the parties do not tend to prove such a fact. Prior to 1920, H. M. Wagner had been accustomed to buying and selling on the New York Coffee and Sugar Exchange in his own name, and in these dealings no part of the profits and losses resulting therefrom was allocated to the Washington corporation. Apparently, these dealings were carried on in his individual capacity in a manner not uncommon to business men who engage in such speculative ventures, and in a similar manner to the transactions in 1920 which we are asked to consider as having been done by the Washington corporation. Of course, as owner of the stock of the Washington corporation, losses or gains of this corporation would indirectly result to the detriment or profit of H. M. Wagner, and, therefore, H. M. Wagner was interested in the success of the corporation. We can not, however, overlook the fact that the corporation was an entity separate and apart from H. M. Wagner, and that*3927 a sole stockholder of a corporation may engage in business on his own behalf which would be as distinct and separate from that of the corporation as if conducted by two separate individuals. Apparently, this was the situation as far as H. M. Wagner's dealings on the commodity exchange were concerned.
*1274 The argument advanced by the petitioners that because of the contractual arrangement between H. M. Wagner and Bohannon, the manager of the Washington corporation, with respect to salary based on profits, the latter could have forced the former to have the corporation's share of the profits on the short sales in question allocated to the corporation, assumes an unproven material fact, namely, ownership of these profits. Admittedly, if they belonged to the corporation when earned and H. M. Wagner was merely the intermediary or conduit through which they flowed to the corporation, such profits would be taxable to the corporation and Bohannon could have forced such an allocation in order to determine the amount of his salary under the contract, but the evidence does not establish these facts. The evidence establishes that Bohannon had a contract under which he was entitled*3928 to receive a salary based upon the profits of the corporation and that profits were made on the short sales in question, but it does not show that any part of such profits belonged to the corporation or that Bohannon could have forced H. M. Wagner to make an allocation in order to determine the amount of Bohannon's salary. From the facts before us, we could equally well say that if losses had resulted on the short sale venture, the corporation would have been responsible for its share of such losses, but certainly, we have no evidence before us which would lead us to conclude that such a liability would have arisen in the contingency assumed.
The Board is, accordingly, of the opinion that, on the evidence presented, it has not been shown that the respondent was in error in considering the entire profits from the short sales in question as income of H. M. Wagner, and, therefore, his action is sustained.
Reviewed by the Board.
Judgment will be entered for the respondent.
LOVE, dissenting: I can not agree with the decision reached in this case. It is true that as a matter of law we are dealing with two separate and distinct entities, one individual, and*3929 the other corporate.
Under ordinary conditions those separate entities should be dealt with as separate entities, but every court in the land, including the United States Supreme Court, has justified and endorsed the procedure, in dealing with tax cases under peculiar conditions, of disregarding the corporate entities, and looking through the insubstantial and transparent partition veil between the individual entity and the corporate entity, or two corporate entities, and treating that which is in law two entities, as in truth and in fact, and for all economic purposes, as one entity.
*1275 It may be said parenthetically that Congress has followed the same idea in providing for consolidated returns of affiliated corporations. The following are some of the cases in which this procedure has been recognized: ; ; ; .
It is true that in most of the cases reported the corporation entity was ignored in order to circumvent the perpetration*3930 of fraud upon the Government, but certainly it will not be contended that those cases do not justify a like course to be pursued in order to do justice to the taxpayer. In the instant case the facts are disclosed by the record that H. M. Wagner owned, in his individual capacity, the entire Baltimore business, and owned 396 out of the 400 shares of stock of the corporation business in Washington; that he dictated the business policy of each business; that he operated both businesses in conjunction by purchasing merchandise in large quantities in his individual name for both houses, in one purchase contract, and only allocated such merchandise by shipping orders; and the facts clearly indicate that in the particular instance of the purchase of "shorts" on the stock market, he bought such shorts to offset losses which his judgment told him would be the result of the unwise action on the part of his son and Remmert in buying too much sugar for future delivery, not alone to the Baltimore house, but to both houses. The loss that did accrue to the corporation by its having to take its proportion of the high priced sugar on those future deliveries was H. M. Wagner's loss, 99 per cent as*3931 much as if the Washington business had been an individual rather than a corporate business.
The Washington house suffered its proportion of loss on the handling of that high priced sugar, 12 cars out of the total 36 cars so purchased, and in equity is entitled to the same proportion of the profits made on the purchase of shorts that was made for the expressed purpose of offsetting that particular loss which Wagner believed would result.
The United States Supreme Court, in , states:
We have no doubt of the power or duty of a court to look through the form of the corporation and determine the question of the stockholder's right in order to ascertain whether he has received income taxable by Congress.
I have not seen a case reported that, in my judgment, more perfectly justifies the disregarding the corporate entity and treating as an entity that which is in fact one man's one business.
TRUSSELL and SIEFKIN concur in the dissent.