*2219 The loss of $91,125, sustained by the petitioner in 1923, resulted from the operation of his business as a textile commission merchant, and he is therefore entitled to the benefit of the net loss provisions of the Revenue Act of 1924.
*1260 The Commissioner determined deficiencies of $1,625.21 and $1,363.69 in the petitioner's income taxes for the years 1924 and 1925, respectively. The petitioner alleges that the Commissioner erred in his determination that a loss of $91,125, sustained by him in 1923, *1261 did not result in a net loss within the meaning of section 206 of the Revenue Act of 1924.
FINDINGS OF FACT.
The petitioner is an individual residing in Taunton, Mass. During the greater portion of his life he has been engaged in the textile business, either as an employee or officer of mills in which textile products are manufactured, or as a commission merchant engaged in selling the products of textile mills. For twenty-four years he was employed by the Whittenton Manufacturing Co., during a part of which*2220 time he was its treasurer. It various times, and including the years, 1923, 1924, and 1925, he was connected with other textile concerns, either in an executive or advisory capacity, or as a commission salesman of their products.
In the year 1914 the petitioner was a partner in the firm of Lawrence & Co., a textile commission house. In that year he severed his relations with the partnership and commenced business as a textile commission merchant in an individual capacity under the firm name of William M. Lovering & Co. This business was operated by him individually from 1914 until the latter part of March or the first part of April, 1923, when he caused it to be incorporated.
During the period that the petitioner was individually engaged in the commission business, he devoted about three-fourths of his time thereto. The commission received for selling the products of textile mills generally ranged from 4 to 7 per cent of the cost of the goods, and the variation depended upon the aid given the mills by the merchant in making designs, producing fabrics, and advantageously selling them. The number of commission merchants eager for business generally exceeded the demand on the*2221 part of the mills and consequently there was keen competition among the merchants to obtain the business of selling the products of the various mills. commission merchants, in order to secure business, customarily endorsed the negotiable paper of the companies whose products they sold. The negotiable paper, so endorsed, of companies operating textile mills, became known throughout New England as "mill paper," and was quoted in that section as is "call money" or any other "time money." The negotiable paper of textile companies was not easily negotiated without such endorsement. It was also common for commission houses or merchants to own stock in textile manufacturing companies in order to aid the broker in securing the business of selling the products of the mill.
Prior to 1917 the petitioner had been selling the products of a woolen mill in Tarkiln, R.I., which was owned and operated by the Oak Valley Manufacturing Co., a Rhode Island corporation. These *1262 sales formed a substantial part of the petitioner's business as a commission merchant. The operations of the Tarkiln mill over a considerable period of years had failed to show a manufacturing profit. In the course*2222 of this business, the Oak Valley Manufacturing Co. became indebted to the petitioner. In 1917 that company became insolvent and was liquidated. The petitioner received the mill at Tarkiln as part payment of the company's indebtedness to him. In order that he might not lose that part of his commission business which consisted of selling the products of the Tarkiln mill, the petitioner caused the business to become incorporated under the name of the Tarkiln Manufacturing Co. He acquired for cash 499 of the 500 shares of the stock of this corporation. He continued to own this stock from the time of incorporation in 1917, until 1923, when the company was liquidated. During this period the petitioner continued to sell the products of the Tarkiln mill, and such sales constituted approximately from 25 to 50 per cent of his commission business. In 1918 his total sales amounted to $1,693,238.34, of which $944,508.99 was derived from sales of the products of the Tarkiln Manufacturing Co.; in 1919 the amounts were $1,079,197.80 and $561,437.20, respectively; and in 1920 they were $1,120,890.58 and $284,530.37, respectively.
During the year 1921 the petitioner endorsed notes of the Tarkiln*2223 Manufacturing Co. in the principal sum of $91,125. He endorsed these notes that the company might operate and thus enable him to continue to collect commissions for selling its goods. The money was used by the company for the purchase of materials and to meet pay rolls. In 1923 the Tarkiln Manufacturing Co., being insolvent, was liquidated. The proceeds realized from the sale of its property were not sufficient to pay any of the notes upon which the petitioner was liable as endorser. In 1923 he was called upon to and did pay these notes, thereby sustaining a loss in the amount of $91,125, which the Commissioner allowed as a deduction from his gross income for that year.
Exclusive of the loss of $91,125, the petitioner reported gross income of $14,171.64 from his individual commission business for the year 1923. He sustained a statutory net loss of $60,299 in the year 1923. For the year 1924 he reported gross income of $42,854.43, and deductions of $10,940.94. He also took as a deduction the amount of $31,913.49, which was explained as follows:
| Total deductions, 1923 | $111,317.38 |
| Gross income | 51,018.38 |
| Net loss | 60,299.00 |
| Amount applied to 1924 | 31,913.49 |
| Balance | 28,385.51 |
*2224 *1263 For the year 1925 the petitioner reported gross income of $41,235.25, and deductions of $10,385.73. He also took as a deduction the amount of $28,385.51, which was explained as a "net business loss as per schedule on last year's return." The petitioner received no nontaxable income in 1923, 1924, or 1925.
The Commissioner disallowed the deductions of $31,913.49 and $28,385.51 taken by the petitioner from his gross income for the years 1924 and 1925, respectively. For 1925 he allowed the petitioner an additional deduction, not taken on his return, in the amount of $581.44. These adjustments resulted in the determination of the deficiencies.
OPINION.
MURDOCK: Section 204(a) of the Revenue Act of 1921 provides in part that the term "net loss" means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer. The respondent contends that the loss sustained by the petitioner in 1923 through the payment of the notes of the Tarkiln Manufacturing Co. was not a loss resulting from the operation of any trade or business regularly carried on by him. He relies upon a series of cases which are distinguishable from this*2225 case. 1
The petitioner was regularly engaged in carrying on a business of his own, separate and distinct from the business of the Tarkiln Manufacturing Co. Prior to 1917 a substantial part of his business consisted of the sale of the products of the mill at Tarkiln. In that year the company owning this mill was indebted to the petitioner, and he received the mill in part payment of such indebtedness. In order that he might not lose that portion of his business which consisted of the sale of the products of the Tarkiln mill, he organized a corporation to operate it. The respondent stresses the petitioner's*2226 ownership of the stock of this corporation and urges that the petitioner endorsed the notes in question merely for the purpose of protecting his investment, and not for the purpose of obtaining the business of selling the corporation's products, because he controlled its output as stockholder without so doing. These contentions are answered by our findings of fact, which are in accordance with the petitioner's testimony, that he endorsed the notes to enable the company to operate so that he could continue to collect commissions for selling its goods. The record discloses no reason to doubt this testimony, and it is corroborated by other evidence in the case. The endorsement of the notes arose as a consequence of the petitioner's business as a commission *1264 merchant, and the loss sustained thereby was a loss resulting from the operation of that business. Cf. ; ; ; ; *2227 . The amount of the net loss for the year 1923, computed in accordance with section 204(a) of the Revenue Act of 1921, should be allowed as a deduction in computing the petitioner's net income for 1924, and the excess of such net loss over such net income (computed without such deduction) should be allowed as a deduction in computing his net income for 1925.
Judgment will be entered under Rule 50.
Footnotes
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