*72 Decision will be entered under Rule 50.
Petitioner entered into an agreement with a corporation, by the terms of which he was given control of its operations and was to receive all of its profits and reimburse it for losses sustained during his operation of its activities. Held, that the petitioner sustained an operating loss incurred in a business conducted by him of performing the services under the contract.
*1203 *73 This proceeding involves deficiencies in income tax and additions thereto as follows: *1204
| Additions to tax under | |||
| Year | Deficiency | Sec. 294 (d) (2) | Sec. 294 (d) (1) (A) |
| 1948 | $ 14,589.00 | $ 843.37 | $ 1,377.03 |
| 1949 | 7,910.38 | 429.73 | 680.40 |
The issues raised by the petition are whether petitioners are entitled to deduct the amount of $ 87,348.68 in 1949 as a business loss sustained under a certain contract with a corporation, and, if so, whether the portion of the loss not absorbed by a carryback to 1947 is deductible as a carryover in 1948, and whether the additions to tax were properly imposed.
FINDINGS OF FACT.
The facts set forth in a stipulation of facts are so found.
The petitioners are husband and wife and reside in Mercedes, Texas. They filed original and amended joint income tax returns for the taxable years on the community property and an accrual basis with the then collector of internal revenue for the first district of Texas. The husband will be referred to hereinafter as the petitioner.
Petitioner was manager of the community during the taxable years and for some of the years prior thereto was engaged in various business ventures, consisting*74 of the purchase and sale of vegetable produce, operating an ice manufacturing plant, conducting a hardware store, and farming. The businesses were conducted by him in his individual capacity or as a member of partnerships. During that period he held stock in corporations engaged in one or more of such businesses. Petitioner operated a profitable vegetable produce business in Mercedes, Texas, from 1931 to 1938, when he transferred the business to Santa Rosa, Texas.
The season for vegetable produce in the Rio Grande Valley of Texas usually starts during the last 2 weeks of October and ends during the first 2 weeks of June. Such a business requires the services of a field representative to contact growers for the purchase of their crops, generally by the acre, with the buyer assuming the risk of production, and a shed or office manager to pack, sell, and ship the produce.
Petitioner employed E. W. Ligon for an undisclosed period prior to about 1943. At times thereafter to 1947, Ligon conducted a produce business on his own behalf in an individual capacity. In view of the fact that Ligon had always confined his activities in the produce business to the purchase of crops and petitioner*75 had worked only as a shed or office manager, petitioner concluded that they would make a good combination for the operation of a produce business in corporate form. Accordingly, in October 1947, petitioner, Ligon, S. M. Young, and W. A. Garner organized Ripley and Ligon, Inc. (name changed to C. A. Ripley, Inc., on January 3, 1949), hereinafter *1205 referred to as the corporation, under the laws of Texas, with an authorized capital stock of 500 shares, par value $ 100 each, of which 249 shares each were issued to petitioner and Ligon and 1 share each to Young and Garner.
The corporation was formed to deal in fruits, fruit juices, and vegetables produced in the United States, and to own and operate cold storage plants and warehouses in connection with the business. The company kept its books and filed its returns on an accrual basis for a fiscal year ending September 30.
The petitioner was at all times after its organization a stockholder, director, and the president of the corporation.
The board of directors of the corporation held nine regular and called meetings between January 6, 1948, and September 1, 1948.
The corporation filed income tax returns for the fiscal years *76 ended September 30 in 1948 and 1949.
The corporation had its checking account with the First National Bank of Mercedes, Texas. The bank discounted for the corporation, without limitation and at the rate of one-fourth of 1 per cent, drafts drawn on buyers for the sales price of carload shipments of produce. Petitioner was required by the bank to endorse all notes given to it for loans made to the corporation.
The marketing of vegetables by the corporation required the use of baskets, boxes, and bags. About 90 per cent of the requirements of the corporation for such supplies was purchased from the Veneer Products Company, from which petitioner had made like purchases prior to the formation of the corporation. Growers of produce required the corporation to pay cash for their crops.
The financial condition of the corporation became weak several months after it was organized. In December 1947, the Veneer Products Company informed the corporation that it would not extend credit to it for supplies unless petitioner guaranteed payment. Other suppliers had expressed unwillingness to extend credit to the corporation without the personal guaranty of petitioner. Later, suppliers insisted*77 upon charging petitioner for all supplies purchased by the corporation.
The corporation's lack of adequate credit and financial condition were discussed at meetings of its directors on and after January 6, 1948. By August 3, 1948, the corporation had exhausted its bank credit and petitioner was the only source available for operating capital. Petitioner requested the other stockholders to save him harmless against loss on further advances on the basis of their stockholdings but they declined to so obligate themselves.
At a directors' meeting held on September 7, 1948, petitioner stated that the corporation then owed him about $ 75,000; that he could not *1206 continue to make advances as by doing so he would place himself in a position to suffer a greater loss than the other stockholders, who would share in dividends in proportion to their stockholdings in the event the corporation realized gain; that he believed that he could profitably operate a vegetable business; that "he should be given full control of the Corporation as if it were his individual business for a full fiscal year," he to take all of its profits to "compensate him" and "absorb all the loss"; and that while*78 the arrangement would protect other stockholders against loss, he wished to have the right to discontinue and liquidate the business any time he believed that he could not continue to operate it without sustaining losses. The directors authorized the execution of an agreement to give petitioner power to "control and operate the business on the terms stated."
On September 20, 1948, the petitioner and the corporation entered into an agreement reading as follows, substituting here, however, the terms "the corporation" and "petitioner" for the words employed in the agreement to describe them:
[The corporation], in consideration of the hereinafter mentioned undertaking and/or payments of the [petitioner], does hereby agree and covenant that [petitioner] shall have full control and operation of [the corporation] as if the assets and liabilities of [the corporation] were the individual assets and liabilities of [petitioner], and [petitioner] shall be entitled to possess and own all the profits earned in the operation of [the corporation] for a term of one year from date of October 1, 1948, with the right to [petitioner] to extend said terms for successive years until the profits of [petitioner] *79 received from the operations of [the corporation] exceed the losses incurred by [petitioner] in the operations of [the corporation] from date of October 1, 1948, and with the right to [petitioner] to terminate said contract prior to the end of the year starting October 1, 1948, or any extension from the end of the said year, when in the opinion of [petitioner] the operation of [the corporation] cannot be conducted profitably or [the corporation] cannot or will not invest more funds in the operations of [the corporation].
[Petitioner], in consideration of the hereinbefore mentioned undertaking of [the corporation], does hereby agree and covenant to take full control and operation of the assets and liabilities of [the corporation] and to conduct the operations of the business as if it was [petitioner's] individual business and the assets and liabilities were [petitioner's] individual assets and liabilities, and [petitioner] shall absorb all losses incurred in the transaction of said business, for a term as hereinbefore expressed.
The board of directors of the corporation held 8 regular and called meetings during the fiscal year ended September 30, 1949, for transaction of business. *80 Reports on financial matters were received at 3 of the meetings and officers were elected at 3 meetings. The directors approved the September 20, 1948, agreement at the meeting held on October 5, 1948. On December 22, 1948, Ligon resigned as a director and officer of the corporation and transferred his 249 shares of stock to petitioner.
*1207 The stockholders of the corporation held meetings on December 4, 1948, and December 22, 1948, for election of directors.
Petitioner acquired Garner's share of stock on May 5, 1948, and Ligon's 249 shares on December 22, 1948. On the latter date petitioner had 10 shares of his stock reissued to each of four individuals. Thereafter to June 1, 1949, petitioner held 459 shares of the corporation's stock. On that date he acquired the 10 shares held by one of the other stockholders and thereafter to the close of the corporation's fiscal year 1949 held 469 shares of its stock.
Petitioner announced at the September 6, 1949, meeting of the directors that "due to the Corporation being without funds, and he having taken all the loss he is able to, he has decided not to operate during the 1949-1950 season." The directors decided at the same meeting
*81 that all business of the Corporation come to a halt, and everything possible be done to clean up its debts, and as C. A. Ripley was solely and personally responsible for its debts, that this board lend him every aid, other than financial, to assist in reducing his loss.
The parties stipulated that during the corporation's fiscal year ended September 30, 1949,
the corporation carried on, transacted and engaged in business as a corporation; that in carrying on, transacting and engaging in its business the corporation entered into contracts with truck farmers for the purpose of obtaining the right to purchase a portion of the truck farmer's produce at a fixed price and part at market price in consideration of the corporation furnishing seed and other financial aid to the produce farmer; the corporation conducted promotional and sales work; the corporation maintained its own corporate books and records and maintained its own bank account; and the corporation had its separate employees and paid them with its funds.
The corporation reported in its return for the year ended September 30, 1949, a net operating loss of $ 87,348.68 and no net profit or loss after reflecting "contractual *82 income from C. A. Ripley" of the same amount. The return disclosed net sales of $ 1,698,435.57, the amount of $ 1,719,466.55 for costs of produce and packing, and $ 4,210.52 of other income. Deductions were claimed in the return for promotional selling and general and administrative expenses of $ 61,554.31, including $ 9,300 for officers' salaries, and miscellaneous other deductions in the amount of $ 8,973.91.
The books of the corporation reflected in an account payable the amount of $ 84,772.23 owed to petitioner on September 30, 1948. On September 30, 1949, the corporation owed him $ 57,240.20 and there was due from him, as reflected in an account receivable, the amount of $ 30,108.48, that figure being the difference between the net operating loss of $ 87,348.68 reported by the corporation in its return for the year ended on that date and the debt of $ 57,240.20 to him. On December 31, *1208 1949, the books of the corporation showed that an account receivable due from petitioner had increased to $ 38,848.68.
The original joint return filed by the petitioners for 1949 contained no deduction for loss sustained under the contract of September 20, 1948. Their amended return*83 for that year contained a deduction of $ 87,348.68 for "Loss on contract with Ripley and Ligon, Inc." and reported the amount of $ 6,450 as salary received from the corporation. The amended return of petitioners for 1948 contained a deduction of $ 54,782.13 as the "Aggregate carry-backs and carry-overs from other taxable years."
The corporation was dissolved on March 9, 1951.
The Commissioner in determining the deficiency for 1949 stated: "It is held that the loss of $ 87,348.68 suffered by the corporation, * * * from its business operations in its fiscal year ended September 1949 is not deductible by you."
OPINION.
Section 23 (e) (1) allows an individual a deduction for a loss sustained during the taxable year and not compensated for by insurance or otherwise if incurred in a trade or business. The petitioner claims the right to deduct for 1949 a loss of $ 87,348.68 incurred by him in that year under the contract which he had with the corporation. It is not disputed that the contract was entered into at arm's length and it is not claimed that it was prompted by any tax avoidance scheme. The contract provided that he was to carry on the operations of the business of the corporation*84 for a 12-month period ended September 30, 1949. That contract was entered into shortly before the beginning of that period of 12 months. The contract provided that he was to have for his own any profits which resulted from the operation of the business of the corporation during that period, but if those operations resulted in a loss he was to sustain the loss. He carried out the terms of the contract, and the operation of the business of the corporation by him for that fiscal period resulted in a loss of $ 87,348.68. The petitioner used an accrual method of accounting and reporting for income purposes. He actually paid during that fiscal period, on behalf of the corporation, a part of the loss from the operation of the business of the corporation, and at the end of the period the remaining portion of that loss was shown on the books of the corporation as an account receivable due from the petitioner. Thus, he actually sustained the loss.
The petitioner operated a trade or business within the meaning of section 23 (e) (1) during the 12 months ended September 30, 1949. His business was different from the business of the corporation. His business during those 12 months was to*85 carry out the terms of the contract *1209 which required him to furnish personal services in carrying on the business of the corporation. ; . The items of income and expense for that period from the operation of the business of the corporation such as gross sales, cost of goods sold, wages, officers' salaries, and like items, were those of the corporation and not of the petitioner because such separate items would not represent income or expense of his business. Cf. . However, he could have had separate expenses of his business such as salary of an assistant, legal or other advisory expenses, etc., pertaining to his operations under the contract as opposed to the operations of the business of the corporation. The computation of the net income or loss of the operation of the business of the corporation measured the income or loss of the petitioner from the conduct of his own business (performance of the required services under the contract). That computation showed the loss in question. The petitioner*86 reported his salary from the corporation and claims the loss. He is entitled to it under section 23 (e) (1).
The petitioner claims the right to a net operating loss deduction for 1948 under sections 23 (s) and 122 based upon the $ 87,348.68 loss allowed for 1949. Those provisions allow a carryback under a situation like the present one. The parties do not indicate any differences in computing it, once the amount of the 1949 loss is determined.
Although the additions to tax were put in issue by pleadings, the questions are not mentioned by petitioner on brief as questions before us for consideration. They may, of course, become moot but, if not, it may be assumed that the issues have been abandoned. If the questions were regarded as still being before us, we would be compelled to sustain the determinations, if there are deficiencies, since no evidence was offered by petitioner to show error.
Decision will be entered under Rule 50.