*3667 1. DEDUCTION. - C. H. Fuller and Nellie A. Fuller executed a deed in 1919 transferring title to certain property to petitioner in consideration of the latter's assumption of the mortgage on the property and an unsecured $20,000 promissory note of C. H. Fuller and for the further consideration of petitioner's payment of an annuity to C. H. Fuller and/or Nellie A. Fuller. During 1921 petitioner transferred the property to a corporation. Held, that the annuity amounting to $15,000 per annum constituted a part of the purchase price for the property acquired by petitioner and is not deductible from gross income as an expense in the nature of rent for the use of the property during the life of C. H. Fuller and/or his wife, Nellie A. Fuller.
2. SAME - LOSS. - Petitioner purchased bus operating rights for $21,333.33, leased same for seven months at rental of $18,447.05, then transferred same in consideration of one dollar to Motor Transit Co., of which he was the majority stockholder. Held, not to be a bona fide sale for value, that petitioner retained the same beneficial interest in and control of the said operating rights and sustained no deductible loss.
3. SAME - LOSS. *3668 - During 1921 petitioner paid $10,483.38 for an interest in certain operating rights of the United Stages, Inc., and prior to the end of the year 1921 it was determined that the operating rights which he purchased did not exist and had no value. Held, petitioner sustained a deductible loss in 1921 in the amount of $10,483.38.
4. INCOME. - Where petitioner sustained a loss, held, no profit realized on same transaction.
5. DEDUCTION FOR LOSS. - Disallowed for lack of proof as to amount or year in which sustained.
*1025 In this proceeding petitioner seeks a redetermination of tax deficiencies in the amount of $22,434.88 for the calendar year 1920; $10,405.65 for the calendar year 1921, and $12,556.35 for the calendar *1026 year 1922, as asserted by respondent in his final determination of petitioner's income tax liability for said years.
Petitioner alleges that respondent erred, (1) in disallowing for each of said years a deduction in the amount of $15,000, representing payments made by petitioner*3669 to his father under the terms of a written contract; (2) in disallowing for the year 1920 a deduction in the amount of $21,333.33, representing the sum petitioner paid to the A.R.G. Bus Co. for motor bus operating rights or permits; (3) in disallowing for the year 1921 a deduction in the amount of $10,483.38, representing the sum paid by petitioner to United Stages, Inc., for bus operating rights; (4) in adding to petitioner's net income for the year 1921 the amount of $2,849.96 as profit realized on the transfer of automobiles to the United Stages, Inc., in exchange for operating rights; and (5) in disallowing for the year 1922 a deduction as a loss in the amount of $6,666.66, representing cost to petitioner of capital stock of the G. & W. Stage Line.
The total amount of the deficiency, namely, $45,396.88, is not in dispute.
FINDINGS OF FACT.
Petitioner is an individual and a resident of Los Angeles, Calif. He is engaged in several business enterprises and was so engaged during the years here in question.
1. Petitioner's father, C. H. Fuller, owned certain property in Los Angeles, which was not being used at a time when petitioner was desirous of securing property for*3670 use as a garage and C. H. Fuller offered to lease his property to petitioner. Petitioner found that he could not operate successfully under a lease because of the necessity of making a substantial expenditure for improvements and alterations to convert the property for use as a garage and C. H. Fuller agreed that petitioner should have the possession and use of the property upon the payment of $1,250 per month to C. H. Fuller during his lifetime and with the understanding that if petitioner should predecease C. H. Fuller the latter should regain the property. After several conferences between petitioner, C. H. Fuller and their respective attorneys, the following written contract was entered into:
THIS AGREEMENT entered into in duplicate at Los Angeles, California, this 25th day of November, 1919, between Charles H. Fuller (sometimes known as C. H. Fuller) and Nellie A. Fuller (sometimes also known as Nell Fuller), his wife both of Los Angeles County, California, as first parties, and O. R. Fuller, a single man, of the same place, as second party, -
WITNESSETH:
THAT WHEREAS first parties are desirous of selling to second party that certain real property hereinafter described, *3671 and second party is desirous of purchasing same property from first parties; and,
*1027 WHEREAS the parties hereto are desirous of defining herein the terms and conditions of said sale, -
NOW, THEREFORE, IN CONSIDERATION OF the faithful performance by second party of the terms, convenants, and conditions of this agreement on his part to be performed, the first parties agree upon the execution of this agreement to execute, acknowledge, and deliver to second party a grant deed conveying to second party all of the real property hereinafter described, free and clear of all encumbrances, clouds, and liens, excepting taxes for the last one-half of the fiscal year 1919-1920, and excepting a certain first mortgage made by the first parties hereto as mortgagors upon said realty or portions thereof to Security Trust and Savings Bank, a corporation, as mortgagee, said mortgage being recorded in Book 4413 of Mortgages, at Page 271 thereof, records of Los Angeles CountyCalifornia.
AS CONSIDERATION for the foregoing covenants and agreements on the part of first parties, and for the execution and delivery to him of the said grant deed, second party hereby agrees as follows: (1) That*3672 he will assume and pay when due all taxes and assessments hereafter levied or payable upon said property.
(2) That he will assume and pay when due said mortgage recorded in Book 4413 of Mortgages, at Page 271 thereof, records of Los Angeles County, California.
(3) That he will assume and pay when due a certain unsecured promissory note of Twenty Thousand ($20,000.00) Dollars, with interest as therein provided for, made by the said Charles H. Fuller as maker, to the First National Bank of Los Angeles, California, as payee.
(4) That commencing with the date when second party obtains possession of all of said property and continuing thereafter, so long as said Charles H. Fuller and the second party remain alive, second party will pay monthly in advance to said Charles H. Fuller, the sum of Twelve Hundred Fifty ($1250.00) Dollars. Upon the death of said Charles H. Fuller the obligation to make such monthly payments shall cease, provided, however, that if the said Nellie A. Fuller is then alive, the second party will pay to her, so long as she remains alive, the sum of Five Hundred ($500.00) Dollars per month, monthly in advance. The said payments shall be made at number 422*3673 North Alameda Street, Los Angeles, California, unless otherwise directed by first parties. Should second party predecease the first parties, the obligation to make the said monthly payments shall terminate with the death of second party and said obligation shall not be binding upon the heirs, administrators, executors, or personal representatives of second party.
(5) Second party agrees that in any and all Last Wills and Testaments made by him, or in any codicils thereto, he will specifically devise and bequeath the said property and all thereof to the said Charles H. Fuller, the said bequest to be conditioned, however, upon said Charles H. Fuller being alive at the time of the distribution of second party's estate, and to further provide that if said Charles H. Fuller be not alive at said last mentioned time, then the said legacy shall lapse.
The SAID real property hereinbefore and in said grant deed described, is situated in the City of Los Angeles, County of Los Angeles, State of California, and is more particularly described in Exhibit A, attached to and forming a part of this agreement.
In WITNESS WHEREOF the parties hereto have hereunto signed their names the day and*3674 year first above written.
*1028 At the same time the following "grant deed" was executed:
CHARLES H. FULLER (sometimes also known as C. H. Fuller) and NELLIE A. FULLER (sometimes also known as Nell Fuller), his wife, both of the County of Los Angeles, California, in consideration of Ten ($10.00) Dollars to them in hand paid, the receipt of which is hereby acknowledged, do hereby grant to O. R. FULLER, a single man, of the County of Los Angeles, California, all that real property situate in the City of Los Angeles, County of Los Angeles, State of California, described as follows:
* * *
Subject to the last one-half of taxes for the fiscal year 1919-1920, and to a certain first mortgage dated September 18th, 1919, and recorded in Book 4413 of Mortgages, at Page 271 thereof, records of Los Angeles County, California. The grantee hereby assumes and agrees to pay the said taxes and the said mortgage.
TO HAVE AND TO HOLD to the said grantee, his heirs or assigns forever.
WITNESS our hands this 25th day of November, 1919.
At the time petitioner acquired title to the property in question in November, 1919, it was understood between father and son that the latter should*3675 retain possession of the property so that he could carry out the terms of the fifth paragraph of the contract of November 25, 1919, but in 1921 when petitioner desired to transfer the property to the Motor Transit Terminal Co., a holding corporation, the entire stock of which was owned by petitioner, a supplemental agreement was entered into as follows:
THIS SUPPLEMENTAL AGREEMENT, entered into at Los Angeles, California, this 1st day of February, 1921, between CHARLES H. FULLER (sometimes also known as C. H. Fuller), and NELLIE A. FULLER (sometimes also known as Nell Fuller), his wife, both of Los Angeles County, California, as first parties, and O. R. Fuller, of the same county, as second party, -
WITNESSETH:
That by consent of all of the parties hereto, and in consideration of the sum of one dollar by each of the parties hereto to each of the other parties hereto this day paid (receipt of which sums is hereby acknowledged by each of the parties hereto), that certain agreement entered into at Los Angeles, California, on November 25, 1919, between the first parties herein as first parties therein, and the second party herein as second party therein, shall be, and is hereby modified, *3676 altered, and changed in the following respects only:
By eliminating and striking out from said agreement of November 25, 1919, all of paragraph (5) thereof, commencing with line 26 on page 2 thereof, and ending with line one on page 3 thereof, said paragraph reading as follows:
* * *
And for the same consideration, and the further consideration of love and affection, said Charles H. Fuller has sold, assigned, transferred and set over, and does hereby sell, assign, transfer and set over to said Nellie A. Fuller, all of said Charles H. Fuller's right, title, and interest in, under, and pursuant to the terms of said agreement of November 25, 1919; and it is further agreed that from and after the date of this supplemental agreement said second party shall pay and deliver to said Nellie A. Fuller all of the moneys provided under the terms of said agreement of November 25, 1919, to be paid by said second party to said Charles H. Fuller; and from and after the date of this instrument *1029 all such moneys shall belong to, be, and become the separate property and estate of said Nellie A. Fuller, and said Charles H. Fuller does hereby expressly waive, relinquish, and set over to*3677 said Nellie A. Fuller, all of his right, title, and interest in and to such moneys, and to the right to receive the same pursuant to the terms of said agreement of November 25, 1919.
IN WITNESS WHEREOF, the parties hereto have hereunto signed their names the day and year first above written.
The Motor Transit Terminal Co. was incorporated prior to 1921 and its activities constituted a substantial part of petitioner's business activities. The property in question was transferred by petitioner to the said corporation subsequent to February 1, 1921. The profits which petitioner and the said corporation derived from the property in question were considerably in excess of the $15,000 petitioner was required to pay per annum under the terms of the abovequoted agreements.
In each of his income-tax returns for the years 1920, 1921, and 1922, petitioner deducted the amount of $15,000 from gross income and claimed that such payments made to C. H. Fuller and/or Nellie A. Fuller were in the nature of rentals for the use of the property in question and a charge upon the profits derived from said property. The Commissioner disallowed the deductions in each of the said years.
2. Under*3678 date of February 5, 1920, the Railroad Commission of the State of California (hereinafter referred to as the Railroad Commission) issued an order approving the petitioner's purchase of the A.R.G. Bus Co.'s operative rights to operate motor bus transportation between Los Angeles and San Diego via the so-called "Coast Highway" and serving the intermediate communities including Santa Ana. For the said operative rights or permits, petitioner paid in 1920 the sum of $21,333.33 for a two-thirds interest in the operative rights, and his business associate, S. Cahn, paid the balance of the purchase price for a one-third interest. Subsequent to the acquisition of the said operating rights petitioner leased the same to the White Bus Lines at $4,200 per month with an option to purchase. The White Bus Lines paid rent in the amount of $4,200 in the month of December, 1919, and $25,200, during the months from January to June, inclusive, 1920, of which total sum of $29,400 rentals, petitioner received $18,447.05 as his share. The name of the White Bus Lines was changed to the Motor Transit Co. and petitioner held two-thirds and S. Cahn held one-third of its capital stock, except for one or two*3679 qualifying shares. On November 27, 1920, the Railroad Commission approved the transfer by petitioner to the Motor Transit Co. of the said operative rights from Los Angeles via the Whittier Road to Santa Ana; from Los Angeles via the Telegraph Road to Santa Ana, and thence to San Diego via the Coast Highway, including *1030 certain intermediate communities. That transfer was made in consideration of one dollar.
Petitioner returned as income the amount he received as his share of the rentals derived from the so-called A.R.G. operating rights. Petitioner claims that he is entitled to a deduction of the sum of $21,333.33 from his gross income for the year 1920, as the amount of the loss sustained by him upon his transfer of the so-called A. R.G. operating rights to the Motor Transit Co. The Commissioner disallowed the deduction of that amount and contends that the amount of petitioner's loss on the transaction is the difference between $18,447.05 received as rentals and $21,333.33, the amount petitioner paid for his share of the operating rights.
3. The United Stages, Inc., operated bus lines between Los Angeles to Santa Ana via Whittier Road, via Telegraph Road and via*3680 Long Beach, and thence from Santa Ana to San Diego via the Coast Road. Under date of May 5, 1920, petitioner entered into a contract with United Stages, Inc., for the purchase of its operating rights over the above-mentioned routes in consideration of seven automobiles of an agreed value of $20,451. Upon application to the Railroad Commission for approval of the transfer of the said operating rights the Commission of its own motion instituted an investigation as to the existence of any such operative rights of the United Stages, Inc. During the investigation United Stages, Inc., with the assent of the Motor Transit Co. and the Pickwick Stages, Inc., which operated competing lines, applied to the Commission for authority to discontinue its routes and schedules between Los Angeles and Santa Ana via Whittier Road and via Telegraph Road, which authority was granted by order of the Commission dated October 28, 1920. At that time the Commission still had before it the question of whether United Stages, Inc., owned an operative right over the route from Los Angeles to Santa Ana via Long Beach. In 1921 petitioner transferred the seven cars to United Stages, Inc., in accordance with his*3681 contract. Those cars so transferred cost petitioner and his associate, S. Cahn, $15,725.06, of which $10,483.39 was petitioner's share of the cost. Under date of December 27, 1921, the Railroad Commission issued an order declaring inter alia that United Stages, Inc., had no operative rights over the route from Los Angeles to Santa Ana via Long Beach and intermediate points. Upon the rendition of that order of December 27, 1921, petitioner discovered that he had paid a purchase price for certain operative rights, but had acquired nothing. Petitioner deducted his loss from his 1921 gross income but the Commissioner disallowed the same.
4. Due to the transaction above described, wherein petitioner contracted for the purchase of the United Stages, Inc., operating rights *1031 for a consideration of his transfer to that company of seven automobiles of an agreed value of $20,000, the Commissioner determined that petitioner and his associate, S. Cahn, realized a profit equal to the difference between $20,000 and $15,725.06, the cost of the said automobiles. For the year 1921 the Commissioner added $2,849.96 to petitioner's net income as profit realized from the said transaction*3682 which in fact resulted in a loss to petitioner.
5. In 1920 petitioner and his associate, S. Cahn, paid $10,000 for the capital stock of the G. & W. Stage Line which owned certain operating rights. The stage line leased all of its equipment from the Motor Transit Co. and became indebted to the latter company in the amount of about $10,000. The G. & W. Stage Line had no assets except its operating right or permit, which it transferred to the Motor Transit Co. in settlement of its indebtedness. Petitioner owned two-thirds of the outstanding capital stock of the Motor Transit Co. The G. & W. Stage Line was incorporated on December 22, 1919, and on March 3, 1923, its corporate rights, privileges and powers were suspended by the State of California because of its failure to pay the corporation tax which became due and payable on January 1, 1923. Its corporate rights, privileges and powers have remained suspended to date but it has not been formally dissolved.
OPINION.
TRUSSELL: The first issue presents a question of the nature of the annual payments of $15,000 made by petitioner under the terms of his contract of November 25, 1919, and supplemental agreement of February 1, 1921. *3683 Petitioner claims that the annual payments of $15,000 were made as, or in the nature of, rent for the use of the property. The Commissioner determined that the said payments constituted a part of the purchase price, a capital expenditure, and therefore not deductible as an expense.
The grant deed from C. H. Fuller and Nellie A. Fuller to O. R. Fuller, petitioner, contains a grant of certain described land to O. R. Fuller followed by the words "To Have and To Hold to the said grantee, his heirs or assigns forever." C. H. Fuller and Nellie A. Fuller transferred title to the property in question to petitioner in consideration of the latter's assumption of the existing mortgage on the property and an unsecured $20,000 promissory note of C. H. Fuller and also for the further consideration of petitioner's payment of an annuity amounting to $15,000 per annum to C. H. Fuller and/or Nellie A. Fuller. C. H. Fuller relieved himself of certain obligations and secured an annuity for himself and his wife in consideration for the transfer of his property. In view of all the facts of record, we are of the opinion that the payment of the annuity, *1032 amounting to $15,000 annually, constituted*3684 a part of the purchase price paid by petitioner for the interest which he acquired in the property, and the action of the Commissioner in disallowing a deduction for the said payment as an expense in each of the years here in question is sustained. Compare ; ; and .
The second issue presents the question of whether petitioner sustained a loss in the amount of $21,333.33, or in any other amount, during the taxable year 1920, in the transaction involving his purchase of a two-thirds interest in the so-called A.R.G. Bus Co.'s operating rights for $21,333.33 and his transfer of the same to the Motor Transit Co. in consideration of one dollar. The entire operative rights in question were held in the name of petitioner, but he only paid for a two-thirds interest while his associate, S. Cahn, paid for a one-third interest. Petitioner owned two-thirds and S. Cahn owned one-third of the Motor Transit Co.'s outstanding capital stock, except for one or two qualifying shares. Petitioner's transfer of the operative rights to the Motor Transit Co. *3685 was not a bona fide sale for value. The operating rights transferred in consideration of one dollar had been leased to the transferee at $4,200 per month rental for seven months preceding the transfer. The facts and circumstances do not establish a loss, but instead show that after the transfer, petitioner still retained the dame beneficial interest in and control of the operating rights. We are of the opinion that petitioner sustained no deductible loss through the said transaction. Compare , and .
The third issue presents a question of fact and we are of the opinion that the above findings of fact relative to this issue lead to the conclusion that petitioner sustained a deductible loss of $10,483.38 during the year 1921. Petitioner paid that amount for an operative right which was declared void by the Railroad Commission of California at the close of the year 1921. The rights petitioner purchased ceased to exist and accordingly lost whatever value they may have had, if any.
The fourth issue involves the correctness of the action of the Commissioner in adding $2,849.96 to petitioner's*3686 net income for the year 1921, as profit realized in the transaction involving petitioner's purchase of the operative rights of United Stages, Inc. We have heretofore decided that that transaction resulted in a loss to petitioner, and the Commissioner erred in adding to petitioner's net income the amount of $2,849.96 as profits realized.
The last issue presented involves the question of whether petitioner sustained a loss in the year 1922, due to his purchase in 1920 of stock in the G. & W. Stage Lines, which company subsequently transferred *1033 all its assets to the Motor Transit Co. in settlement of its debts to the latter company. The petition alleges that $6,666.66 was petitioner's share of the total purchase price of $10,000 paid by petitioner and S. Cahn for the stock, but no evidence has been adduced in support of that allegation, nor has there been adduced any evidence to show the date on which the G. & W. Stage Line disposed of its assets to the Motor Transit Co. The evidence failed to establish when the loss, if any, occurred and we must sustain the Commissioner's determination disallowing any deduction for the year 1922 for the alleged loss on G. & W. Stage*3687 Line stock.
The deficiency should be recomputed in accord with the foregoing findings of fact and opinion.
Judgment will be entered upon 20 days' notice, pursuant to Rule 50.