*3339 Petitioner, an employee of a corporation, relinquished his claim against the corporation for underdrawn salary and a share of the profits credited to him and received in cash an amount less than the amount to his credit. Held, that the transaction did not result in a statutory net loss under the Revenue Act of 1921.
*1399 The respondent disallowed a claimed net loss deduction and found a deficiency in income tax for the year 1923 in the amount of $193.86. The petitioner claims that this action of the respondent was erroneous and asks a redetermination.
*1400 FINDINGS OF FACT.
In 1896 petitioner entered the employ of the National Gum & Mica Co., a corporation, hereinafter called the Mica Company, which had been organized in the preceding year and was capitalized at $5,000. All of the stock, except a small amount which was issued to the petitioner, was owned by his brother. The stock issued to petitioner was indorsed by him and given back to his brother. The petitioner never regarded himself as a stockholder.
At the time petitioner entered the*3340 Mica Company's employ, it was a small establishment and he performed all sorts of odd jobs around its place of business. Later the Mica Company prospered and petitioner was made treasurer and chief chemist. He was paid a salary, and in addition, there was credited to his account on the company's books a portion of the profits, at first 10 per cent and then 20 per cent. As he withdrew funds they were charged to his account, and certain personal expenses which the company paid were likewise charged. He did not withdraw the full amount credited to him and on the excess of the credits over the charges the company allowed him interest.
During the late World War the petitioner, at the request of the United States Government, served on a chemistry committee of the National Research Council, dividing his time between that work in Washington and his duties with the Mica Company in New York. In 1919, while in one of the Government laboratories in Washington, petitioner inhaled a poisonous gas which produced a hemorrhage of the lungs. As a result he was confined to his bed for five months and partially incapacitated for about two years. During the period of petitioner's illness one*3341 of the Mica Company's subsidiary corporations, the Great Western Products Co., Inc., suffered heavy losses in the postwar deflation. Petitioner was treasurer of this corporation and his brother, Alexander Alexander, was president. The president of the corporation became worried about its financial condition and asked the petitioner to indorse a demand note of the corporation for $26,265, payable to the Mica Company. The note was dated January 2, 1921, and signed by petitioner and his brother in their official capacities, and, on or about the date of the note, petitioner indorsed it in his individual capacity. About the same time petitioner signed a note for $9,000 payable in one year to the Mica Company. This note was given for 50 shares of stock of the Great Western Products Co., Inc. It was petitioner's understanding that he would never be called upon to pay either of these notes. However, the notes were negotiated and on December 29, 1921, were presented *1401 at the office of the Mica Company for payment, which was refused, whereupon the notes were formally protested. There was at that time a credit of $41,667 in favor of the petitioner in his account on the books*3342 of the Mica Company. This, it was claimed by the company, had been completely absorbed by losses sustained and that in addition the petitioner owed the company a large sum due to arrangement he had made with his brother to share losses of the company.
On April 17, 1922, the Mica Company, Alexander Alexander, the petitioner, and Walter Alexander, entered into a written agreement for the settlement of all their financial differences. This agreement, so far as material here, after reciting that petitioner had discontinued a suit he had instituted against the Mica Company and that it was the desire of the parties to settle their differences amicably, provided that he should release the Mica Company, Alexander Alexander and Josephine Alexander from any and all of his claims against them, that he should relinquish any claim he might have to being a stockholder, and that the Mica Company and Alexander Alexander should pay to petitioner and Walter Alexander the sum of $25,000, which sum was to be divided equally between them. The $25,000 was payable in installments, $10,000 at the time of the execution of the agreement and $5,000 on April 17 of each of the years 1923, 1924, and 1925.
*3343 In his income-tax return for 1922 petitioner reported as gross income the sum of $3,556.51, consisting of salary, royalties, and dividends. From this he deducted $29,167, this amount being the difference between the credit of $41,667 to his account on the books of the Mica Company, and the $12,500 which he was to receive under the agreement of April 17, 1922. The difference between gross income reported and the deduction claimed for 1922 amounted to $25,610.49, which he deducted in his return for 1923 as a net loss and which was disallowed by the respondent.
OPINION.
ARUNDELL: The issue is whether petitioner sustained a net loss in 1922 which he may carry forward and take as a 1923 deduction. If this issue is to be resolved in favor of petitioner we must find, first, that he sustained a loss in 1922 and, second, that the loss was a statutory net loss. The claim is that the difference between the amount of $41,667 which was credited to petitioner on the books of his corporate employer and the amount of $12,500 that he received under the 1922 settlement constituted a loss.
*1402 We do not see how the transaction can be said to result in a loss within the meaning*3344 of the taxing statute. We can not tell from the evidence what the credit was - whether it was an amount really owing to the petitioner or whether it was merely an interim book entry, subject to final adjustment. If it were the latter, petitioner plainly sustained no loss when upon adjustment he received $12,500. Even if we assume that the credit represented an amount actually due to petitioner, we are still without evidence as to the basis upon which he kept his accounts and reported income, and we do not know whether the amount of the credit was ever return as income so as to render it deductible under the principle laid down in the case of .
Aside from these considerations, and assuming that petitioner actually sustained a loss, he has not shown that it was such as to come within the net loss provisions of the statute. See section 204 of the Revenue Act of 1921. Merely allowing credits to accumulate can not be said to be a "trade or business regularly carried on."
Judgment will be entered for the respondent.