*1487 1. The petitioner, with her husband, owned large property interests under the community property laws of the State of Texas, consisting mostly of stocks and bonds in corporations, and, upon her husband's death in 1921, inherited all of his interest in such property and continued the management and control of such property interests as nearly as possible as it was carried on in his lifetime, and through the failure of one of the associations in which she was interested, sustained a loss in 1922. Held, that such loss was an investment loss and not a loss incurred by petitioner in operating a trade or business regularly carried on by her, within the meaning of section 204, Revenue Act of 1921, and can not be used in computing a "net" loss as provided in said section.
2. In 1921 the petitioner exchanged her stock in the Security National Bank of Dallas, Texas, for stock in the Southwest National Bank of Dallas and shares of interest in the Liberty Investment Company. At the time of such exchange, the stock in the Southwest National Bank which she received had a fair market value, but it was impossible to fix any fair market value for the shares in the Liberty Investment Company. *1488 Held, that as there was no basis for apportioning the cost between the two stocks, petitioner is entitled to take as a loss in 1925 the entire cost of her original shares in the Security National Bank, less the amount received on sale of shares in Liberty Investment Company, 1925 being the year in which petitioner's stock in the Southwest Bank became worthless and also when petitioner sold her interest in the Liberty Investment Company for a nominal amount.
*713 In these proceedings, which have been consolidated, the petitioner seeks a redetermination of her income-tax liability for the years 1923 and 1925, for which years the respondent has asserted deficiencies of $11,447.03 and $3,797.72, respectively.
Each appeal involves a single issue. In Docket No. 28093 the question is whether the petitioner's loss for 1922 may be used in computing *714 a "net" loss under the provisions of section 204 of the Revenue Act of 1921 and carried forward and applied to reduce her net income for 1923. In Docket No. 40258 the*1489 petitioner is claiming a loss in 1925 on account of the sale and worthlessness of certain securities owned by her which were either sold or became worthless in that year.
FINDINGS OF FACT.
Docket No. 28093.
From 1889 until his death on May 21, 1921, J. F. Strickland was the husband of the petitioner, and they resided in Taxas. Strickland was a promoter, capitalist and investor, and prior to his death accumulated a fortune of about a million dollars, one-half of which was the property of the petitioner under the Texas community property laws. His principal business activities were in connection with public utilities. He was one of the organizers of the Texas Power and Light Company and was its president at the time of his death. He was also president of the Dallas Railway Company, which operates the street railway system of the city of Dallas, Texas; was also president of the Dallas Power and Light Company and president of the Texas Electric Railway, which owns and operates extensive interurban railway lines in the State of Texas. He also organized the Dallas Union Trust Company and the Dallas Securities Company and was the president of each at the time of his death. *1490 While president of the several companies above named, Strickland gave their affairs his personal attention and immediate supervision. His office was in the Interurban building in the city of Dallas, Texas. Strickland's methods were to organize various corporations and take stock in them and induce others to do so and realize his profits from the development and progress of such corporations. Most of the enterprises which he promoted and organized were successful.
At the time of his death he was engaged in and had his money invested in many enterprises, a few of which were highly speculative. Part of his business consisted of trading in various speculative securities. One of the business enterprises which he promoted was the Hidalgo Land Securities Syndicate, a land development and irrigation enterprise. It consisted of between thirteen and fourteen thousand acres of land located in the Rio Grande River Valley of Texas and adjoining an irrigated section of the State. The plan was to develop the land by irrigation and subdivide it into small tracts and sell these small tracts to farmers who would settle on the land. He was one of the principal shareholders in this enterprise, *1491 investing about $375,000 therein and making subscriptions under which he was subject *715 to call for further investment. He was a member of the board of managers of the syndicate and vice chairman of that board. He also was active in inducing others to subscribe for shares in the syndicate. There were two other large shareholders, who with Strickland managed and carried on the business of the syndicate. They were J. H. Sharry and D. E. Wagonner. There were thirty or forty other stockholders of the syndicate owning much smaller interests than did Strickland, Wagonner and Sharry. The capital which Strickland invested in the Hidalgo Syndicate was community property, one-half belonging to petitioner.
Petitioner was the sole beneficiary named in Strickland's will, but, because they had no children, she was also his sole heir under intestacy laws, and the will was never probated. So far as the record shows, no proceedings were had in the probate court and upon her husband's death, petitioner took charge of the property owned by herself and husband as community property and dealt with it as her own. Upon Strickland's death, petitioner indicated her intention of carrying*1492 on her husband's various activities as nearly as she could. She selected as her aides, her brother in-law, Jack Beall, and her brother, Burr Martin, both of whom had been closely associated with her husband during his lifetime. She executed powers of attorney to these two men to act for and in her stead in the transaction of business matters. She caused her brother, Burr Martin, to be elected as one of the board of managers of the Hidalgo Land Securities Syndicate, to fill the vacancy occasioned by the death of her husband and represent her interests. She consulted with her brother and with her brother-in-law, Jack Beall, who had been elected to office in Strickland's place in some of the other corporations in which he was largely interested, and with C. L. Cox, who had been Strickland's secretary, in respect to various business matters, including those connected with the Hidalgo Syndicate, almost daily through 1921 and 1922. Petitioner did not establish any office for the transaction of business, but consulted her advisers at her place of residence. She signed an agreement to meet calls for further capital in the Hidalgo Syndicate and did meet several calls during 1921 and early*1493 part of 1922, for substantial amounts, not only on the subscriptions originally signed by Strickland, but on those signed by other subscribers and underwritten by Strickland. The amounts paid by her in 1921 and 1922 for her own account and the account of other subscribers aggregated between $90,000 and $100,000.
Because of the inability of other subscribers, including D. E. Wagonner, one of the large subscribers, to continue meeting calls for capital, it became apparent that the Hidalgo Syndicate would have *716 to be refinanced in 1922, and petitioner, along with other stockholders, to avoid further losses, consented that the managers sell the concern out to J. H. Sharry. This transaction resulted in a loss to petitioner of $319,387 in 1922. Petitioner deducted on her incometax return filed for the year 1922 only a part of the loss which she had suffered on account of the Hidalgo Land Securities Syndicate investments becoming worthless and took most of such loss as a deduction in determining her net income for 1923. Petitioner remarried on December 31, 1925, and since the has resided at Los Angeles, California.
Respondent, in an audit of petitioner's 1922 and 1923*1494 returns, disallowed the loss for 1923, holding that it all took place in 1922 and placed the entire loss in that year, and as a result of this adjustment determined a deficiency for 1923 against petitioner of $11,447.03.
Petitioner acquiesced in respondent's action in transferring the loss resulting from the Syndicate transaction from 1923 to 1922, but now contends that such loss was a loss incurred in the operation of a trade or business regularly carried on by petitioner in the year 1922, and that petitioner is entitled to carry forward a net loss under the provisions of section 204, Revenue Act of 1921, and use it as a deduction in computing her net income for 1923, and that when this is done, there will be no deficiency. Respondent disputes the correctness of this contention.
It has been stipulated that if there is a "net loss" for 1922 within the meaning of section 204 of the Revenue Act of 1921, the amount thereof is $236,736.82.
Docket No. 40258.
Prior to 1921 petitioner and her then husband, J. F. Strickland, acquired as community property 200 shares of the stock of the Security National Bank of Dallas, Texas, hereinafter referred to as the Security Bank. Of*1495 this stock 50 shares were acquired in 1912, and the market value thereof on March 1, 1913, was $150 a share. The cost of the other 150 shares acquired subsequent to March 1, 1913, was $23,387.50.
At the time of Mr. Strickland's death on May 21, 1921, petitioner inherited his half of the community property, including 100 shares of such stock or an undivided half interest in 200 shares. At that time the market value of said stock was $155 per share.
In the summer of 1921 the Security Bank became involved in financial difficulties so great that the national bank examiners condemned three-quarters in amount of its total book assets and directed that remedial action be taken.
*717 Under circumstances fully detailed in , petitioner's stock in the Security National Bank was exchanged for stock in the Southwest National Bank and certificates of interest in the Security Investment Company.
The parties have stipulated that findings of fact in , shall also be findings of fact in this proceeding.
This contract of exchange, fully detailed in *1496 , was carried out by the parties in interest, and under its provisions and intent, the petitioner surrendered her 200 shares of stock in the Security Bank and received in exchange therefor 50 shares in the Southwest Bank, on the basis of one share in the Southwest Bank for each four shares owned in the Security Bank, and for her equity in the remaining assets turned over for liquidation to the Liberty Investment Company (a Texas corporation) she received a certificate of interest on the basis of three shares in the Liberty Investment Company for each four shares owned in the Security Bank.
The assets conveyed to the Southwest Bank were treated as being worth dollar for dollar and its stock had a book value at the time of its organization of $125 per $100 share. Its fair market value when the petitioner's tax return for 1921 was prepared was $150 per share. The evidence does not enable us to fix any value of the certificates of the Liberty Investment Company except to say they had but little value.
Petitioner waived her right to subscribe to stock in the Southwest Bank in excess of what she was receiving in exchange. In her income-tax*1497 return for 1921 petitioner reported an item of loss amounting to $25,943.75, connected with her ownership of 200 shares of Security National Bank stock. This claim for loss was based on treating the 50 shares of stock which she had received in the Southwest Bank as worth par value of $100 a share and subtracting that value from the cost of the 200 shares of stock in the Security Bank, $30,943.75. No value was assigned to the interest which petitioner had received in the Liberty Investment Company. Respondent disallowed the claimed loss on the ground that it was deemed impractical to allocate the original cost of the 200 shares of stock in the Security Bank between the interest received in the Liberty Investment Company and the stock of the Southwest Bank and that no gain or loss would be recognized until both were disposed of.
The Southwest Bank continued actively in business until some time in 1925. All the assets of the Southwest Bank were transferred to and its liabilities assumed by the North Texas National Bank in May, 1925. After said transfer, the stock of the Southwest Bank was worthless. Petitioner has never received anything in liquidation *718 of said stock. *1498 During 1925 petitioner sold her interest in the Liberty Investment Company for the nominal price of $3. In her income-tax return for 1925 petitioner claimed a deduction of $25,940.75 for loss on the Liberty Investment Company rights, which loss was disallowed by the Commissioner. The Commissioner in a statement attached to the deficiency notice of July 11, 1928, gave his reasons for disallowing the claimed deduction as follows:
Prior to the year 1921 you invested in stock of the Security National Bank. In 1921 the bank experienced financial difficulties and a reorganization took place in which the newly organized Southwest National Bank acquired all of the apparently good assets of the Security National Bank. All questionable assets of the Security National Bank were turned into the Liberty Investment Company for liquidation, if possible, for the benefit of the stockholders of the old Security National Bank.
In the reorganization you received stock in the newly organized Southwest National Bank, together with an interest in the above named questionable assets held by the Liberty Investment Company.
In 1925, you transferred your interest in the Liberty Investment Company*1499 to Mr. C. F. McAuliff for $3,00. In your 1925 return you claimed a deduction of $25,940.75 computed as follows:
| Cost of Security National Bank stock | $30,943.75 | |
| Value of the Southwest National Bank stock received in reorganization in 1921 | $5,000.00 | |
| Amount realized on the sale of your interest in the Liberty Investment Company in 1925 | 3.00 | |
| 5,003.00 | ||
| Loss | $25,940.75 |
At the present time you still hold your stock in the Southwest National Bank, which corporation is functioning although the degree of its success is not reflected in the data on file.
At the time of the reorganization in 1921 it was held impracticable to allocate the original cost of the old Security National Bank stock between the interest received in the Liberty Investment Company and the stock of the Southwest National Bank.
It is, accordingly, held that no loss may be allowed until the stock of the Southwest National Bank has been disposed of.
Petitioner now, by amendment to her petition, claims the right to deduct the entire original cost of the stock in the Security National Bank, amounting to $30,943.75 less the $3 which she received from the sale of her interest in the*1500 Security Investment Company, on the ground that in the taxable year 1925 she definitely disposed of her interest in the Security Investment Company and in that year her stock in the Southwest Bank became worthless.
OPINION.
BLACK: The first issue which he have to decide is whether petitioner is entitled to deduct from her income of 1923 a "net" loss *719 for the year 1922 amounting to $236,736.82. Section 204(a) of the Revenue Act of 1921 provides that the term "net loss" means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer.
If the petitioner's husband, J. F. Strickland, had been living in 1922 when the loss in the Hidalgo Land Securities Syndicate occurred, it seems clear that under the doctrine announced in , he would have been entitled to take advantage of the "net" loss provisions provided in the 1921 Act. In , we pointed out that the promotion of the Berteschey Engineering Company was not an isolated venture, but typical of the manner in which petitioner carried out his business plans. So it was in the case of J. *1501 F. Strickland. The promotion and organization of the Hidalgo Land Securities Syndicate was not an isolated venture, but typical of the method which he used in promoting and organizing and financing many corporations and business ventures with which he was connected. Most of the corporations and business ventures which he promoted and organized were successful and made large profits, but the Hidalgo irrigation enterprise was an exception. Certainly as to him any loss in this Hidalgo Land Syndicate venture would have come under the net loss provisions of section 204, 1921 Act, as interpreted in the , decision, and other decisions of the Board. That J. F. Strickland was engaged in the business of promoting and financing corporations, there seems to be no doubt. The doctrine announced by the Board in the Averill case was approved by the Circuit Court of Appeals for the Eighth Circuit in . Cf. ; *1502 ; .
But J. F. Strickland, who promoted and organized the Hidalgo Land Securities Syndicate and many other Texas corporations and business ventures, died in 1921. Petitioner, who owned a one-half interest of the interest which stood in the name of J. F. Strickland in these various business enterprises, because of the community property laws of the State of Texas, succeeded to his interest at his death.
The petitioner, after the death of her huband, took charge of the property which had been accumulated by herself and husband during his lifetime and which he had managed prior to his death, and undertook the management of same. Since her husband's death she has continued this management, selling her interest in some of the corporations in which she and her husband were investors at the time of his death and buying interests in other corporations. Petitioner has kept a regular set of books each year since her husband's death, in which these transactions have been recorded.
*720 The record shows that on several occasions prior to her husband's death, petitioner visited the Hidalgo*1503 Syndicate property and after her husband's death was in regular conference with her advisers in regard to its affairs. She caused her brother, Burr Martin, to be elected as one of the board of managers to fill the vacancy occasioned by the death of her husband. She met calls for further capital, not only on subscriptions made by her husband, but on guarantees of other subscribers. She advanced $90,000 to $100,000 to the Hidalgo Land Securities Syndicate in 1921 to 1922 in an effort to keep it going. She continued to advance money to the syndicate until it became apparent that it could not continue under the original contract, but would have to be refinanced. In this process of refinancing, petitioner's loss occurred in 1922. Can it be said that this loss is such a loss as petitioner is entitled to use in determining a "net loss" within the meaning of section 204 of the Revenue Act of 1921 and bring forward and use as a deduction in determining her net income for 1923? We do not think so.
It must be remembered that the business of the Hidalgo Syndicate was not petitioner's business. It was an association taxable as a corporation and therefore the business it conducted was*1504 the same as other corporate enterprises. The business itself was the syndicate's business. Petitioner had an investment in it and it was this investment which she lost in 1922. But mere investment losses do not constitute "losses incurred in operating a trade or business regularly carried on" by the taxpayer. ; ; affd., ; . Such losses, to be used in determining a "net loss" within the meaning of the statute, must be of such character as to constitute a loss incurred in operating a trade or business regularly carried on by the taxpayer. ;;;
It is clear petitioner was not engaged in any trade. Was she operating a business in 1922 within the meaning of the statute? There is nothing to show that after the death of J. F. Strickland petitioner became the organizer and promoter of corporations as he was*1505 in his lifetime. Up to his death she was engaged in no business at all, and after his death she looked after and cared for her investments, of which she became sole owner at his death. But merely safeguarding investments is not operating a business within the meaning of the statute.
As pointed out by the court in , "A party may have investments in corporate stock, have no particular occupation and live on the return of his investments. That *721 would not constitute business under the statute in question." Cf. .
The evidence shows that after the death of J. F. Strickland and in the intervening years between the date of his death and the hearing in this proceeding, petitioner bought and sold a considerable number of stocks and bonds of corporations and other securities - not much during the first two or three years after Strickland's death, but more later as time went on. Even if it be conceded that these purchases and sale were sufficient in frequency and manner of dealing to constitute petitioner, in these later years, a dealer in securities, that fact would*1506 not help her any in this proceeding. The fact would still remain that the loss which she incurred in Hidalgo Land Securities Syndicate was an investment loss and not connected with any securities which she bought and sold in her business as a dealer in securities (if indeed she ever established any such business). .
We sustain respondent in his disallowance of petitioner's claimed "net" loss.
The next issue which we have to decide is what loss, if any, is petitioner entitled to deduct in determining her net income for 1925 because of her disposition in that year of her interest in the Liberty Investment Company and of 50 shares of stock in the Southwest National Bank, which she alleges became worthless in 1925. The circumstances by which petitioner acquired her interest in the Liberty Investment Company and her stock in Southwest Bank have all been stated in our findings of fact and will not be repeated here.
Petitioner's exchange of 200 shares of stock in Security National Bank for 150 units of interest in the Liberty Investment Company and 50 shares of stock in Southwest Bank took place under the Revenue Act of 1921 and is*1507 governed thereby, but whatever loss, if any, she is entitled to deduct in the year 1925 is governed by the Revenue Act of 1926, and the basis for determining such loss, if any, we think is governed by section 204(a)(6) of that act, printed in margin. 1
*1508 *722 Recently we had before us in , the question whether a taxpayer had the right to have the profit or loss from the sale of stock received in 1917 under a reorganization computed under the provisions of section 204(a)(6) of the Revenue Act of 1924 (a section very similar to section 204(a)(6) of the Revenue Act of 1926). We held against petitioner's contention and held that said section did not apply because the taxpayer in that case not only exchanged his common stock share for share for common stock of the new company, but, as a condition precedent to such exchange, he had to purchase $50 face value of bonds of the new company and pay cash therefor. We said, therefore, that section 204(a)(6) did not apply. In the instant case the facts show that the stockholders of the Security Bank exchanged their shares for shares in the Liberty Investment Company and the Southwest Bank and did not have to purchase anything as a condition precedent to such exchange of stock. True, each stockholder of the Security Bank was given the privilege to purchase other stock in the Southwest Bank in addition to that which he was to receive under*1509 the exchange plan, but many of the stockholders did not avail themselves of such option and petitioner was one who did not avail herself of such privilege and received only the shares which were allotted to her in the exchange. Such a situation it seems to us comes squarely within section 204(a)(6) of the Revenue Act of 1926, and was very similar to the situation which we had before us in , in which we held that section 204(a)(6) of the 1924 Act applied. In that case, one share of preferred stock in the Curtiss Aeroplane and Motor Corporation was exchanged for one-half share of preferred stock in the Curtiss Aeroplane and Motor Company, Inc., and one-half certificate of beneficial interest in the Curtiss Assets Company, and we held it was possible to apportion the cost of a share in the original corporation between the shares received in exchange in the two separate corporations, because we had evidence as to the fair market value of the respective shares of stock in the new corporations.
In the instant case the Commissioner refused to allow petitioner to take any loss on the Liberty Investment Company shares in 1921 because it was*1510 impossible to apportion the cost of the original shares in the Security Bank between the shares of the Liberty Investment Company and the shares in the Southwest Bank, and held that no gain or loss would be recognized on the disposition of either until all was disposed of. Respondent's counsel now argues that petitioner should have taken her loss on her shares of interest in the Liberty Investment Company in 1921, because it never had any value and became worthless in that year. We do not agree with this contention. *723 The evidence shows that at the time stock in the Security Bank was exchanged for stock in the Southwest Bank and the Liberty Investment Company, the stock in the Southwest Bank had a book value of $125 per share and a fair market value in 1921 of $150 per share, but the shares in the Liberty Investment Company had no fair market value and what value, if any, such shares had was altogether uncertain. In this state of facts, it was impossible to apportion the cost of the original shares between the two classes of shares received in exchange. No gain or loss could be recognized to petitioner on the disposition of any of the stock until all was disposed of. *1511 Article 1567 of Regulations 62, reads in part as follows:
If property is exchanged for two kinds of property and no gain or loss is recognized under Articles 1564 and 1566, the cost of the original property shall be apportioned, if possible, between the two kinds of property received in exchange for the purpose of determining gain or loss upon subsequent sale, or if no fair apportionment is practicable, no profit on any subsequent sale of any part of the property received in exchange is realized until, out of the proceeds of sale, shall have been recovered the entire cost of the original property.
In , we held that while Regulations 65 (Revenue Act of 1924) and Regulations 69 (Revenue Act of 1926) do not contain any provisions corresponding to article 1567 of Regulations 62 (Revenue Act of 1921), nevertheless, the provisions of said article lay down a principle which is equally applicable to reorganization provisions of subsequent acts.
In 1925 petitioner sold her 150 shares in the Liberty Investment Company for $3, and her stock in the Southwest National Bank became worthless in the same year. In view of these facts, we hold that petitioner's*1512 claim for loss on account of disposition of shares in the Liberty Investment Company and on account of worthlessness of stock in the Southwest National Bank should be allowed. The deficiency for 1925 will be computed accordingly.
In , we had before us the question of a loss arising through the sale of some Liberty Investment stock in 1921 (same sort of stock as involved herein). We there held that the taxpayer was entitled to take his loss on such shares in 1921 because he had disposed of the shares in that year.
The rules for determining loss in that case came under the Revenue Act of 1921, whereas the basis for determining gain or loss in the instant case is determined by section 204(a)(6) of the Revenue Act of 1926, as we have already explained. The Revenue Act of 1921 had no provisions similar to section 204(a)(6).
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -
* * *
(6) If the property was acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. If the property so acquired consisted in part of the type of property permitted by paragraph (1), (2), (3), or (4) of subdivision (d) of section 203 to be received without the recognition of gain or loss, and in part of other property, the basis provided in this paragraph shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it. ↩