*1339 Held, that losses sustained by the petitioner in 1927 and 1928 as guarantor of obligations of two corporations, from loans made to one corporation, from his investment in the second mortgage of one corporation, and by virtue of the fact that the stock he held in one corporation became worthless, did not result in net losses within the meaning of section 117 of the Revenue Act of 1928, since they were not attributable to the operation of a trade or business regularly carried on by the petitioner, notwithstanding that he was an officer, director, and dominant factor in these and other corporations engaged in the textile business and received salaries from all of them.
*364 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1929 in the amount of $1,702.64. It is alleged that the respondent erred in disallowing as a deduction under the provisions of section 117(a) and (b) of the Revenue Act of 1928 a net loss of $42,951.48 sustained by the petitioner in a trade or business conducted by him during the taxable*1340 year 1928, and in disallowing as a deduction under the provisions of section 117(e) of the Revenue Act of 1928 a net loss of $8,462.75 sustained by the petitioner in a trade or business conducted by him during 1927.
FINDINGS OF FACT.
At the hearing the parties entered into the following stipulation:
1. Petitioner is an individual, residing at 49 Verry Street, Woonsocket, Rhode Island.
2. For over fifty years the petitioner has been actively engaged in various capacities in the textile industry.
3. In 1904 he was instrumental in organizing the Falls Yarn Mills, a Rhode Island corporation doing business in Woonsocket, Rhode Island. This corporation is engaged in the business of manufacturing yarn. Since some time prior to 1927 the petitioner has been treasurer of said corporation and has owned fifty per cent of the stock of said corporation. In the years 1927 to 1929, inclusive, *365 he received a salary from the corporation in the amount disclosed by his individual income tax returns for said years.
4. In 1917 the petitioner organized the Florence Dye Works, a Rhode Island corporation, for the purpose of dyeing the yarn manufactured by the Falls Yarn Mills. *1341 Since some time prior to 1927 the petitioner has been the treasurer of said corporation and has owned forty per cent of the stock of said corporation. In the years 1927 to 1929, inclusive, he received a salary from the said corporation in the amount disclosed by his individual income tax returns for said years.
5. In 1920 the petitioner organized the Glenbrook Worsted Company for the purpose of weaving cloth. He owned thirty per cent of the stock of the said company and the balance of the stock was owned by members of his family. This corporation, together with those mentioned above, constituted a complete unit for manufacturing cloth, the Falls Yarn Mills spinning the yarn from raw wool, the Florence Dye Works dyeing the yarn and the Glenbrook Worsted Company weaving the colored yarn into cloth. The cloth was sold through selling agents in New York City known as L. Erstein & Brother, Incorporated.
6. The petitioner endorsed and guaranteed all obligations of Glenbrook Worsted Company to L. Erstein & Brother, Incorporated, and the French Worsted Mills.
7. In 1926 Glenbrook Worsted Company became bankrupt and in 1927 the trustee in bankruptcy was discharged. The petitioner*1342 claimed and was allowed in his individual income tax return for 1926 a deduction for a loss of his investment in stock of the said company.
8. The petitioner as endorser on a note due the French Worsted Mills by the Glenbrook Worsted Company paid the sum of $76,000 to that company and received in 1927 as a final liquidating dividend from the bankrupt company the sum of $16,690.16, thus suffering a loss from guaranteeing the obligation of $59,039.84. This loss was claimed and allowed as a deduction in the individual income tax return of the petitioner for the year 1927.
9. At the time of the bankruptcy of the Glenbrook Worsted Company, the Planet Worsted Company was formed for the sole purpose of finishing work in process of the former company. The principal object of this new enterprise was to attempt to reduce an indebtedness of $56,246.66 of the bankrupt company to L. Erstein & Brother, Incorporated, which indebtedness was guaranteed by the petitioner. It was thought that if the work in process was allowed to be completed, more would be realized on the market than would be realized from uncompleted material. The work in process was secured by an agreement with the trustee*1343 in bankruptcy and operations in the new enterprise was started. However, it soon appeared that more money was being lost and, therefore, operations were stopped. In 1928 the petitioner was obliged to make payment of $56,246.66 to L. Erstein & Brother, Incorporated, on account of his guarantee of the Glenbrook account. In addition to said payment, the petitioner invested $30,214.76 in the Planet Worsted Company. A final liquidating dividend of $18.81 was paid in 1928. In his individual income tax return for 1928 the petitioner claimed and was allowed a deduction for a loss in the Planet Worsted Company in the amount of $86,442.61.
10. The petitioner's individual income tax return for the calendar year 1927 disclosing a net loss of $8,662.75 was accepted by the Commissioner of Internal Revenue as correct. The petitioner's individual income tax return for the calendar year 1928 disclosing a net loss of $51,734.23 was accepted by the Commissioner of Internal Revenue as correct, except as to Item 16 thereof, representing the net loss shown by petitioner's individual income tax return for 1927. The petitioner's individual income tax return for 1929 disclosing a *366 net*1344 loss of $16,975.46 was accepted by the Commissioner of Internal Revenue as correct, except as to Item 18 thereof, representing the combined net losses shown by petitioner's individual income tax returns for 1927 and 1928.
The petitioner was a director in the Falls Yarn Co. and the Florence Dye Works in the years 1927, 1928, and 1929. He actively worked for those companies, and was the adviser and moving spirit in each of them. These two companies are still in existence and petitioner is still identified with them.
The petitioner was vice president of the Glenbrook Worsted Co., but since that company was in bankruptcy in 1927 the petitioner technically had no official position with it in that year.
The petitioner owned all of the stock of the Planet Worsted Co. He was the vice president and a director of that company. The petitioner is still engaged in working out the remaining inventory after the bankruptcy of that business.
During 1927 the petitioner was also interested in the Quality Piece Dye Works, a corporation engaged in the dyeing and finishing of cloth. He owned 25 percent of its stock and was its vice president and one of its directors. That corporation was*1345 organized in 1926. The Quality Piece Dye Works went into bankruptcy shortly after its incorporation. L. Erstein & Bro., Inc., held the company's second mortgage in the amount of $106,000, on which the petitioner was endorser. The only asset of the company was the property upon which the mortgage was placed. The petitioner purchased this mortgage from L. Erstein & Bro., Inc., and thereafter the business was operated under the name of the Crown Piece & Dye Works. The succession took place sometime in 1927. The petitioner owned all of the stock of the Crown Piece & Dye Works, which was common stock.
The petitioner's investment in the Crown Piece & Dye Works was $210,291.58, most of which represented loans to that company. Included in that figure is the amount of $106,000 which the petitioner paid to L. Erstein & Bro., Inc., for the mortgage. That figure does not include any amount paid to the company for stock. The petitioner, on October 8, 1928, sold his stock in the Crown Piece & Dye Works for $145,921.31. His loss upon his investment was $64,370.27. Such loss was not claimed as a deduction in petitioner's income tax return for 1928 because even without the deduction of*1346 that loss he had no tax liability for that year. At the time of the sale of his stock in the Crown Piece & Dye Works, the petitioner canceled the obligations of the company to him upon the loans he had made to it. He received nothing upon such loans. If he had pressed the obligations against the company he would have received a lesser amount from the sale of the stock.
*367 The petitioner was nine years old when he went to work in the textile industry. He is 78 years old now. During 1927, 1928, and 1929 he devoted from 8 to 10 hours each day to these various corporations in which he was interested. He was a hard working man and in these years had no business interests other than his activities with regard to the above named corporations. All of his active life has been devoted to the textile industry. The petitioner invested in these corporations for profit. His intention was to operate them solely for gain. He was the motivating factor in them. Other than the sale of his stock in the Crown Piece & Dye Works, the petitioner never sold any stock in any of his enterprises, except to his sons to keep them interested in the business.
The mills in which petitioner*1347 was interested, by successive manufacturing processes, converted the raw product into the finished cloth. Persons in the textile trade referred to these various companies as the Cavedon interests. The petitioner is recognized among the textile trade as the chief executive of all the companies in which he was interested, and the trade looks to him for the financial stability of the Cavedon interests. That is the reason L. Erstein & Bro., Inc., insisted upon petitioner's obligation according to the agreed statement of facts.
The petitioner owned no municipal bonds in 1927 or 1928.
The petitioner's income tax returns for the years 1927, 1928, and 1929 show the following items of income and deductions:
| INCOME | 1927 | 1928 | 1929 |
| Falls Yarn Mills (salary) | $34,999.92 | $34,999.92 | $24,999.96 |
| Florence Dye Works (salary) | 9,333.34 | 10,000.06 | 8,346.00 |
| Interest | 1,527.99 | 1,443.67 | 2,185.86 |
| Rents and royalties | 135.66 | (red) (515.83) | (red) (1,307.90) |
| Dividends | 6,650.00 | 4,050.00 | |
| Total | 52,646.81 | 45,927.82 | 38,273.72 |
| DEDUCTIONS | |||
| Interest paid | 399.22 | 891.69 | 1,137.45 |
| Taxes paid | 1,670.50 | 1,545.00 | 2,127.50 |
| Loss in Glenbrook Worsted Co | 59,039.84 | ||
| Loss in Planet Worsted Co | 86,442.61 | ||
| Net loss of 1927 | 8,662.75 | ||
| Net loss of 1927 and 1928 | 51,734.23 | ||
| Contributions | 200.00 | 120.00 | 250.00 |
| Total | 61,309.56 | 97,662.05 | 55,249.18 |
| Net losses shown by returns | 8,662.75 | 51,734.23 | 16,975.46 |
*1348 By disallowing the claimed net losses for the years 1927 and 1928 totaling $51,734.23, the respondent determined that petitioner derived net income in the year 1929 in the amount of $34,758.77.
OPINION.
MCMAHON: The question here presented is whether the petitioner sustained net losses during the years 1927 and 1928, within the meaning *368 of section 117 of the Revenue Act of 1928, which may be applied as deductions against the petitioner's income for the year 1929. Portions of section 117 of the Revenue Act of 1928 are set forth in the margin. 1 See art. 651, Reg. 71, as amended by T.D. 4349. The definition of "net loss" is substantially the same in the Revenue Act of 1926 as it is in the Revenue Act of 1928.
*1349 The net loss of $8,662.75 shown by petitioner's return for the year 1927 was due to the deduction of an amount of $59,039.84 which represented the petitioner's loss upon endorsement of a note of the Glenbrook Worsted Co. The net loss of $43,071.48 shown by the petitioner's return for the year 1928 (without deducting the net loss of $8,662.75 shown for the year 1927) was due to the deduction of an amount of $86,442.61. This last figure was made up of an item of $56,246.66 representing petitioner's loss upon the endorsement of indebtedness of the Planet Worsted Co. and an item of $30,195.95 representing petitioner's loss of his investment in the Planet Worsted Co. when that company became bankrupt. In addition to such losses in 1928, the petitioner at the hearing showed that he also sustained a loss of $64,370.27 upon his investment in the Crown Piece & Dye Works. Such loss, so far as we can gather from the evidence, was sustained upon loans which he had made to that corporation and upon his investment in its second mortgage.
The respondent concedes that the petitioner has shown that he sustained a loss in the amount of $64,370.27. There is no question as to the deductibility*1350 of these various losses in the years in which they were sustained, 1927 and 1928, for purposes of determining the taxes for those years. The question presented is whether the *369 petitioner sustained net losses in the years 1927 and 1928, within the meaning of section 117 of the Revenue Act of 1928, which may be allowed as deductions in computing the petitioner's net income for the year 1929. This, in turn, depends upon whether the losses sustained by the petitioner as set forth above are "attributable to the operation of a trade or business regularly carried on by the taxpayer."
Petitioner concedes in his brief that he was not a dealer in securities, but contends that he was engaged in the textile industry in its various ramifications during the years 1927 to 1929, inclusive, as a stockholder, officer, director, and organizer and in every other aspect of the industry, and that he has been so engaged for a period of more than 50 years.
Upon consideration of all the facts and circumstances and authorities cited by both parties, it is our opinion that the losses sustained by the petitioner were not attributable to the operation of a trade or business regularly carried*1351 on by the petitioner, within the meaning of the statute. It is our view that the instant proceeding is governed in principle by the decisions in Burnet v. Clark,287 U.S. 410">287 U.S. 410; and Dalton v. Bowers,287 U.S. 404">287 U.S. 404. In both of those cases the Supreme Court stated that the circumstances were not so unusual as to create an exception to the general rule for tax purposes that a corporation is an entity distinct from its stockholders. In our opinion, it has not been shown in the instant proceeding that the circumstances are so unusual as to create an exception to such general rule.
The occupation of the petitioner in the instant proceeding was that of officer and director of the various corporations. The greater part of his income was derived from salary from them. The petitioner was not regularly engaged in endorsing notes, making loans, or buying and selling corporate securities. The transactions resulting in the losses were no part of a trade or business regularly carried on by the petitioner, but were transactions entered into from time to time. There is nothing in the evidence to indicate that the corporations were his agents. The textile*1352 business was that of the corporations, and the petitioner, as director, officer, and dominant factor of such corporations, was merely carrying on the business for the corporations.
In John C. Shaffer,28 B.T.A. 1294">28 B.T.A. 1294, the stipulated facts showed that from 1901 to 1928, inclusive, the taxpayer was engaged in the business of editing and publishing newspapers through the medium of several corporations which he owned and controlled. The taxpayer disposed of his interests in one of such corporations at a loss, in 1924 and 1926. His total investment therein was made up of various items such as cost of stock and bonds, cash advances, and *370 payment of notes held by other companies. In 1926 he disposed of his interests in another of such corporations at a loss. His investment in the second corporation consisted of similar items. We held, among other things, upon authority of Burnet v. Clark, supra, that such losses were not sustained in the operation of a trade or business regularly carried on by the taxpayer and hence were not deductible in computing statutory net losses for those years. We there stated in part:
He was not a dealer*1353 in securities; and he was not engaged in buying and selling newspaper publishing corporations as a business. The stipulation states that the petitioner "was engaged in the trade or business of editing and publishing newspapers through the medium of several corporations which he owned and controlled."
See Benjamin I. Powell,26 B.T.A. 509">26 B.T.A. 509; Winthrop Ames,27 B.T.A. 729">27 B.T.A. 729; affd., Ames v. Commissioner, 68 Fed.(2d) 801; and Philip Rhinelander,30 B.T.A. 121">30 B.T.A. 121.
We have not overlooked Security First Nat. Bank of Los Angeles et al., Executors,28 B.T.A. 289">28 B.T.A. 289, which is relied upon by the petitioner.
However, it is our view that that case is not controlling here. Obviously, the facts in all cases of this character are somewhat different, and each case must be decided upon its own peculiar facts.
The determination of the respondent is approved.
Reviewed by the Board.
Decision will be entered for the respondent.
Footnotes
1. SEC. 117. VET LOSSES.
(a) Definition of "net loss." - As used in this section the term "net loss" means the excess of the deductions allowed by this title over the gross income, with the following exceptions and limitations:
(1) NON-BUSINESS DEDUCTIONS. - Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business;
* * *
(b) Net loss as a deduction. - If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called "second year"), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called "third year"); the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.
* * *
(e) Net loss for 1926 or 1927. - If for the taxable year 1926 or 1927 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1926, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.
* * * ↩