*2865 1. The petitioner expended amounts for reconstruction of old canal boats to be used as dwellings, and the boats were finally abandoned due to the fact that it was impracticable to keep them afloat. Held that since petitioner, himself, intended to occupy one of the boats and since there is no segregation of the amounts expended on the various boats, no deduction for loss is allowable under section 214(a)(4) of the Revenue Act of 1921.
2. Claimed deduction for rent paid disallowed for lack of evidence of amount paid.
*426 These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies in income and profits taxes for the years 1921, 1922, 1923, and 1925 in the respective amounts of $4,497.42, $5,712.33, $726.72, and $236.01.
Docket No. 17447, covering the year 1921, contains the following allegations of error:
(a) The improper addition to income by the respondent of the sum of $18,902.62, which was deducted from gross income in petitioner's tax return on account of expenditures to houseboats*2866 and loss thereof;
(b) The improper addition to income by the respondent of the sum of $454.76, which was deducted in petitioner's tax return from gross income, as being one-seventh of $3,183.35 contract with L. V. LeMoyne through LeMoyne trust.
The respondent in his answer admits that he erred in the manner set forth in allegation (b).
Docket No. 34941, covering the years 1922, 1923, and 1925, contains the following allegations of error:
(a) The improper addition to income by the respondent of the sum of $20,015.80, which was deducted from gross income in petitioner's tax return on account of expenditures on houseboats and loss thereby;
(b) The improper addition to income by the respondent of the sum of $27,100, which was deducted from gross income in petitioner's tax return for rent paid by petitioner to the Park Fire Proof Storage Co. in 1922, pursuant to lease by that company to petitioner made in 1920.
FINDINGS OF FACT.
The petitioner is an individual residing at Chicago, Ill. During the years 1920 and 1921 and prior thereto, he was president of the Park Fire Proof Storage Co. and the Chicago Shipping & Storage Co., and owned all the capital stock of that corporation. *2867 During 1920 and 1921 there existed a shortage in living quarters in Chicago and the petitioner, who was fond of houseboats, purchased, in December, 1920, eight old canal boats, with the object of converting them into houseboats and renting them to employees of the Park Fire Proof Storage Co. at a reasonable rental. He also intended to occupy one of them himself. The boats were delivered to petitioner on the north *427 branch of the Chicago river. The boats were about 105 feet long and 16 or 18 feet wide and were about 50 years old. The total cost of the boats was less than $500. One of the boats sank and three others were given away before any further expense was incurred. Some time during the winter of 1920-1921, one of the four remaining boats sank. Work on the others was commenced in January, 1921. The hulls were caulked by petitioner, but entire success was never attained and it was necessary to pump water from the boats each day. During part of 1921 petitioner believed the boats could be made tight and he continued the work of converting them into living quarters. Between January 1, 1921, and September 30, 1921, the petitioner spent $13,956.42 in cash for labor*2868 and materials and other items in connection with the boats. In the late fall of 1921 petitioner discovered that caulking the boats was practically useless, and he definitely concluded that the idea of converting the boats into houses was not feasible. Petitioner did continue to spend money on the boats to keep them afloat, with the idea that they might be salvaged. All the boats sank in 1925 and, by order of the Harbor Master of Chicago, petitioner was compelled to remove them from the river. The removal cost the petitioner $5,500. No rent or salvage was ever received by petitioner from the boats.
On his return for the year 1921 the petitioner claimed as a loss on account of the expenditure on the boats an amount of $18,902.62. The respondent disallowed the whole amount of the claimed deduction.
In 1911 William M. LeMoyne made a contract with the Chicago City Railway Co. to purchase its old car barn located at 3900 S. Wabash Avenue, Chicago, Ill., and in April, 1920, LeMoyne made his final payment under that contract and received title to the property. Immediately after entering into the contract. LeMoyne began to repair, alter and reconstruct the car barn into a suitable*2869 storage warehouse. He installed a sprinkler system that cost about $6,700, and a railroad switch track that cost about $25,000. All this was done at his own expense.
The Chicago Shipping & Storage Co. was incorporated under the laws of Illinois in 1913. During the years 1920, 1921, and 1922, and prior thereto LeMoyne was owner of all its capital stock except directors' qualifying shares, and was its president. From the date of its incorporation the Chicago Shipping & Storage Co. occupied the Wabash Avenue property continuously to April, 1920. During this time LeMoyne, under an oral agreement with the corporation, was to receive all the corporation's receipts over and above corporation's operating expenses. LeMoyne made this arrangement with the bookkeeper of the corporation. The directors of the Chicago *428 Shipping & Storage Co., at the time the agreement as to rent was made, were LeMoyne, M. O. Peterson and Charles A. Reinhart. Peterson and LeMoyne talked the matter over and informally arrived at an agreement.
The Park Fire Proof Storage Co. was incorporated under the laws of Illinois in 1900, and owned and operated its own storage plant at 1750 N. Clark Street, *2870 Chicago, Ill.Both corporations have operated as separate entities and have had separate personnel. The capital stock of this corporation was owned by the father of Wm. M. LeMoyne, who died in 1918. Wm. M. LeMoyne, in the fall of 1918, purchased this stock from the executors of the estate. He has continued to hold all the stock of this corporation except a few directors' qualifying shares.
In April, 1920, the Park Fire Proof Storage Co. increased its capital stock and also issued first mortgage bonds secured by all its property. As a part of that transaction, and as additional security for the bonds, LeMoyne transferred the property, 3900 S. Wabash Avenue, to the Park Fire Proof Storage Co. An oral agreement was entered into between LeMoyne and the Park Fire Proof Storage Co. which provided that LeMoyne should rent the Wabash Street property from the corporation for $18,000 per year. The directors of the corporation at that time were Samuel T. Mosser, J. Gist Search, M. O. Peterson and C. A. Reinhart. The first two named were also associated with the brokerage company which handled the Park Fire Proof Storage Co.'s bonds. When the arrangement was made Mosser, Peterson, *2871 and LeMoyne were present. By the agreement LeMoyne was to assume and pay the cost of all repairs. The Park Fire Proof Storage Co. had regular directors' meetings yearly, but there is no record in any corporate minutes as to the oral lease to LeMoyne for $18,000 yearly.
LeMoyne then entered into an oral agreement with the Chicago Shipping & Storage Co. to sublet the warehouse to that corporation, that company to pay him $60,000 per year. This agreement was entered into about April 1, 1920, but it was retroactive to January 1, 1920. The directors of this corporation at that time were C. A. Reinhart, LeMoyne, and Peterson. Peterson and LeMoyne were present when the agreement was made. LeMoyne then informed Charles G. Gardner, bookkeeper of the Chicago Shipping & Storage Co., that the rent from that time on was to be $60,000 per year. The bond house which had advanced money to the Park Fire Proof Storage Co. stipulated with LeMoyne that there should be received by the Park Fire Proof Storage Co. $18,000 yearly as rent on the property, and that whatever surplus the Chicago Shipping & Storage Co. had above that, LeMoyne might have. LeMoyne, therefore, instructed *429 the*2872 bookkeeper at the Chicago Shipping & Storage Co. that $18,000 was to be paid over to the Park Fire Proof Storage Co. yearly and all profits above that were to be credited and paid to him.
The ledger account of Wm. M. LeMoyne on the books of the Chicago Shipping & Storage Co. shows for the year 1920, a total credit of $60,781.20, and a total debit of $39,195.89. Subsequently, under date of December 31, 1920, this total debit was increased by $7,000. This amount was also credited to the account of the Park Fire Proof Storage Co. on the books of the Chicago Shipping & Storage Co. This entry was for the purpose of adjusting the rental. The rent account was debited $60,000. The amount of $39,195.89 was paid either directly to LeMoyne or to other parties and charged to his account. Payments were sometimes by cash and sometimes by check.
LeMoyne issued the following checks to the Park Fire Proof Storage Co. in payment of rent:
| May 29, 1920 | $2,200 |
| August 9, 1920 | 500 |
These two items are included in the credit column of the Chicago Shipping & Storage Co.'s account and on the books of the Park Fire Proof Storage Co. This account, in reality, represents the rent*2873 account between LeMoyne and the Park Fire Proof Storage Co. Other credits for payment to this account were $800 paid by the Chicago Shipping & Storage Co. and $3,000 by Bulger, Morser & Willaman, the bond house. These are all the items in the credit column for 1920. The account contains charges of $1,500 each month. At the end of the year there was a balance of $7,000 unpaid.
The Wabash Avenue property, exclusive of the buildings thereon, was appraised at $233,750 by the Chicago Real Estate Board on December 4, 1919.
The respondent classed the Park Fire Proof Storage Co. and the Chicago Shipping & Storage Co. as affiliated corporations for the years 1920, 1921, and 1922, and for the year 1920 allowed only $18,000 of the total amount of $60,000 claimed by the Chicago Shipping & Storage Co. as rent paid to Wm. M. LeMoyne, thereby adding to the net income of both corporations the sum of $42,000.
No dividends were formally declared by the Chicago Shipping & Storage Co. in 1920.
The Park Fire Proof Storage Co. kept its books on the basis of a fiscal year ended March 31 and showed that each month during the year 1922, $1,500 was charged to the account of the Chicago Shipping*2874 & Storage Co.
*430 OPINION.
SIEFKIN: The respondent, in his answer, admits that he erred in adding to petitioner's income for 1921 the amount of $454.76 as set forth in petitioner's assignment of error. This should be deducted from gross income.
On his return for the year 1921 the petitioner claimed a deduction in the amount of $18,902.62 as a loss upon houseboats. At the time of taking the deposition in the case, the petitioner abandoned his claim to a deduction of $4,946.20 of that amount and confined his claim to the amount of $13,956.42, the amount which the evidence discloses was actually spent in 1921 on account of the boats. In his brief the petitioner also abandoned his claim for deduction on account of loss on boats in the years 1922, 1923, and 1925.
The evidence discloses that the expenditures were made on four of the total of five boats which petitioner had purchased for the purpose of converting them into house boats. The petitioner, himself, intended to occupy one of them as a dwelling and intended to rent the other three to his employees at a reasonable rental.
The petitioner testified that these boats, in spite of constant caulking of the hulls, *2875 continued to leak and that in the latter part of the year 1921, he finally determined that they could not be used as dwellings. He contends that this determination entitles him to a deduction for a loss sustained on the boats.
Section 214(a)(4) of the Revenue Act of 1921 provides in part:
That in computing net income there shall be allowed as deductions:
* * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.
Here the petitioner himself intended to occupy one of the boats as his private dwelling. It is obvious that with regard to the one boat he was going to occupy, the enterprise did not amount to a trade or business carried on by petitioner. The evidence does not show what portion of the total amount expended was for the boat to be occupied by petitioner, and we can not speculate upon what that amount was. This being true, the whole amount claimed as a deduction must be disallowed.
For the year 1922 the respondent disallowed as a deduction for rent the amount of $27,100 claimed by the petitioner to have been paid by him to the Park Fire Proof Storage Co. The respondent held that no*2876 rent was paid to the Park Fire Proof Storage Co., the amount of $27,100 being a book entry only. This action of the respondent was assigned as error.
*431 The books of the Park Fire Proof Storage Co. show that each month during the year 1922, $1,500 was charged to the account of the Chicago Shipping & Storage Co., which the testimony showed really represented the rent account of Wm. M. LeMoyne, but the petitioner has not shown how much was paid during that year by or on behalf of the petitioner. The action of the respondent in disallowing the amount of $27,100 as a deduction is approved.
Judgment will be entered under Rule 50.