*4037 1. Year of loss on stock of a corporation determined.
2. Loss incurred in certain mining operations held to be a "net loss" under section 204 of the Revenue Act of 1921.
3. Where taxpayer leased for the term of 99 years a plot of ground on which stood a building and where under the terms of the lease the lessee was to raze the building and erect a more costly one and where the lessee, after paying the rent for one year, forfeited his rights, and the taxpayer recovered possession in 1923 and in the same year sold the property, held, that a loss was not sustained in the year the building was razed, but that in computing the gain from the sale, the depreciated value of the old building, less one ninety-nineth of the depreciated value recovered, was a part of the cost of the property.
*716 This proceeding involves the redetermination of a deficiency in income tax for the year 1923, in the amount of $7,515.29, plus a penalty of 25 per cent, amounting to $1,878.82. Petitioner contends that respondent committed*4038 the following errors: (a) That he refused petitioner the right to deduct from gross income a loss of $27,500 on stock in the Tennessee Marble Co.; (b) that he refused petitioner the right to deduct from gross income for 1923 a loss of $67,000 on stock in the Choctaw Portland Cement Co., and in the alternative that if this loss was sustained in the year 1921, as determined by respondent, then such loss was a net loss as defined in section 204 of the Revenue Act of 1921; (c) that respondent refused to permit petitioner to deduct from gross income in 1923, a loss in certain zinc and lead mining operations sustained during the year 1921, such loss being a net loss within the meaning of section *717 204 of the Revenue Act of 1921; and (d) that respondent erred in computing the gain arising from the sale of a house and lot, in that he excluded from the cost of the property the depreciated value of a house erected thereon.
At the hearing respondent confessed error as to item (a).
FINDINGS OF FACT.
Petitioner is an individual who resides and has his office at Tulsa, Okla. He was a stockholder, director or officer in several corporations. He, for himself, or in connection*4039 with others, purchased oil, gas, zinc and lead leases and extracted and sold the minerals.
The Choctaw Portland Cement Co. was a corporation. It erected its plant in 1916 and renovated and enlarged it in 1918 and 1919. Its capital stock was $1,000,000. Prior to 1920, the corporation had issued two series of bonds, aggregating about $200,000. In 1918, petitioner bought $37,500 of these bonds, which he thereafter exchanged for stock in order to permit a new bond issue. Subsequently, he purchased additional stock, for which he paid $29,500. The total cost of petitioner's stock in said corporation was $67,000. The corporation had labor troubles, which caused it to shut down its plant on November 15, 1920. It never reopened. On February 14, 1921, an involuntary petition in bankruptcy was filed against it. The corporation, in its pleading, denied the allegations of the petition. On April 13, 1922, W. D. Ege was appointed temporary receiver, and on the 25th day of July, 1922, he was elected trustee. The total indebtedness of the corporation, bonded and general, was something over $400,000. Beginning in 1922, and continuing through the summer of 1923, numerous efforts were*4040 made to sell the plant or to reorganize the corporation. There was good reason to believe that any one of several of these negotiations would be successful. On one of the occasions, the sale price discussed was $1,000,000, and at another, $600,000. If a sale had been made at $1,000,000, about 60 cents on a dollar would have been paid on the stock. If a sale had been made at $600,000, the stockholders would have received about 20 cents on the dollar. In the autumn of 1923, all such attempts were abandoned and the stockholders and officers of the corporation and the creditors, who held the bonded or general indebtedness of the corporations, entered into negotiations looking to a judicial sale. At this time, the stockholders abandoned any expectation of getting any returns on the stock. The court on December 28, 1923, ordered a sale. The sale was made in February, 1924, and did not realize enough to pay the bonded indebtedness.
*718 In 1916 and 1917, petitioner, in conjunction with others, purchased leases on property near Miami, Okla., granting them right to extract zinc and lead. Lead and zinc were discovered in paying quantities on a lease known as the Catholic Mission*4041 Lease, and in that year petitioner entered into an agreement with his coowners to sink a shaft. He was to pay all the expenses of sinking the shaft and make other necessary improvements for the purpose of extracting the zinc and lead, and was to be repaid solely out of the proceeds of the zinc and lead mined. In sinking the shaft, he encountered water in such quantities as to render his efforts futile. In 1921, he abandoned all efforts to complete the shaft and abandoned the project. The total cost of these operations was $30,000. Petitioner exercised supervision over this operation and was on the ground often as much as twice a week.
Petitioner acquired a one-third interest in a plot of ground. Subsequently, in 1913, a brick building was erected on said property, which cost $50,000, of which he paid one-third. In the latter part of 1917, petitioner and the other owners granted to Oscar W. Edwards a 99-year lease on said property, effective January 1, 1918. Under the terms of the lease, Edwards was to raze the brick building and erect a building to cost not less than $100,000. The annual rental was $18,000 per year. Edwards entered into possession on January 1, 1918, and*4042 in the early part of that year razed the building. This building had a life of 30 years, and the depreciation sustained at date of razing was $8,333.33. He then proceeded with the erection of the building required by his lease. After erecting part of it, and having expended thereon between $57,000 and $58,000, he ceased operations; he paid the first year's rental, to wit, $18,000, and no more. Litigation thereupon ensued and petitioner and his coowners recovered possession in the year 1923, and in that year sold the property. On this sale respondent determined petitioner's net gain to be $80,163.01. In determining such gain, respondent excluded from the cost of the property, the cost of the brick building and determined that petitioner's loss arising from the razing of the brick building occurred in the year 1918, the year in which it was demolished.
Petitioner filed no income-tax returns for the years 1921, 1922, and 1923. His failure to file these returns was occasioned by the fact that he believed that after taking into consideration his losses during said years, he had realized no net income. On May 1, 1926, the collector made out returns for petitioner for said years, *4043 and he on that date executed them under protest. There was attached to each of these returns a schedule covering all of said years. These schedules read as follows:
*719
| O. K. Eysenbach, 210 North Main, Tulsa, Okla. - Schedule of gross receipts ofincome | |||
| 1921 | 1922 | 1923 | |
| Scudder lease | $25,132.44 | $24,618.44 | $14,827.42 |
| Mackey lease | 1,789.92 | 1,683.93 | 1,094.12 |
| Oswalt lease | 434.95 | 398.50 | 290.89 |
| Marshall lease | 3,681.84 | 926.71 | 445.30 |
| Anna Fee allotment | 218.55 | 230.43 | 171.25 |
| Sadler lease | 2,582.79 | 1,562.89 | 1,028.23 |
| Salaries: | |||
| Robinson Packer Co | 10,000.00 | 10,000.00 | |
| Western Natural Gas Co | 3,000.00 | 3,000.00 | 3,000.00 |
| Commission on estate deals | |||
| Dividends: | |||
| Robinson Packer Co | 2,625.00 | 2,625.00 | |
| Tidal Oil | 1,000.00 | 130.00 | |
| Exchange National Bank | 432.00 | 432.00 | 432.00 |
| Interest: | |||
| Western Natural Gas Co | 2,000.00 | 1,500.00 | |
| Hotel rent | 6,500.00 | 1,950.00 | 3,000.00 |
| Garage rent (hotel storerooms) | 11,700.00 | 10,800.00 | 10,800.00 |
| Oil runs to Mrs. Eysenbach | 174.19 | 103.06 | 46.52 |
| Rentals on 3 frame dwellings to Mrs. Eysenbach estimated on basis of being occupied 11/12 of time | 1,155.00 | 1,155.00 | 1,155.00 |
| Totals | $69,801.68 | $60,985.96 | $39,045.73 |
| O. K. Eysenbach, 210 North Main, Tulsa, Okla. - Schedule of Expenditures forincome tax returns | |||
| 1921 | 1922 | 1923 | |
| Scudder Oil Lease Expense 1 | $16,340.36 | $16,466.23 | $9,382.81 |
| Repair & Upkeep of rental prop | 4,300.87 | 1,015.54 | 2,017.31 |
| Operating expenses on oil leases | 4,075.00 | 9,316.23 | 3,807.12 |
| Dry hole expenditures | 4,930.67 | 428.50 | 5,900.73 |
| General taxes | 3,532.37 | 9,154.81 | 24.65 |
| Interest | 5,749.04 | 2,896.59 | 4,654.78 |
| Business car expense and upkeep | 1,153.97 | 759.40 | 314.13 |
| Office and general expense | 1,550.60 | 789.85 | 3,612.03 |
| Loss on lease | 300.00 | ||
| Loss on La. leases | 5,953.59 | ||
| Miami, Okla., Losses | 2,064.07 | 3,625.22 | 100.00 |
| Choctaw Portland Cement Co. notes and interest paid on account of endorsement for this company | 3,930.39 | 4,197.08 | 5,356.47 |
| Depreciation - Schedule attached | 15,902.00 | 15,902.00 | 21,037.30 |
| Totals | $69,482.93 | $64,851.45 | $56,207.33 |
| O. K. Eysenbach, 210 North Main, Tulsa, Okla. - Depreciation Schedule | ||||||
| Acquired | Cost | Rate | 1921 | 1922 | 1923 | |
| Scudder Lease Eqpt. one-half interest | 1920 | $40,400.00 | 10% | $2,020.00 | $2,020.00 | $2,020.00 |
| Marshall Lease Eqpt | 1917 | 20,800.00 | 10% | 2,080.00 | 2,080.00 | 2,080.00 |
| Sadler Lease Eqpt | 1917 | 18,200.00 | 10% | 1,820.00 | 1,820.00 | 1,820.00 |
| Oswalt Lease Eqpt | 1917 | 39,000.00 | 10%$3,900.00 | 3,900.00 | 688.24 | |
| 3 Frame rental houses | 1914 | 8,200.00 | 5% | 410.00 | 410.00 | 410.00 |
| Brick Hotel Bldg | 1920 | 133,600.00 | 2% | 2,672.00 | 2,672.00 | 2,672.00 |
| Hotel Furniture | 1920 | 30,000.00 | 10% | 3,000.00 | 3,000.00 | 3,000.00 |
| Loss on Oswalt Eqpt. 14 of 17 wells or 14/17 of $39,000.00. | ||||||
| Cost of Equipment salvaged | $32,117.65 | |||||
| Salvage estimated | $4,500. | |||||
| 6 years depr | 19,270.59 | |||||
| 23,770.59 | ||||||
| Loss for 1923 on equipment | 8,347.06 | |||||
| Totals | $15,902.00 | $15,902.00 | $21,037.30 |
*4045 *720 The return for 1921 reports the following income and deductions:
| Loss from the sale of stocks and bonds | $1,325.00 |
| Gain as shown by above schedule | 69,801.68 |
| Total income | 68,476.68 |
| Deductions as shown by schedule above | 69,482.93 |
| Loss on Choctaw Portland Cement Co. stock | 67,000.00 |
| Total deductions | 136,482.93 |
| Loss | 68,006.25 |
Petitioner, during these years, was a married man with one dependent and was entitled to personal exemption and credit for dependency of $2,900. The return for 1922 reports income as shown by schedules above, of $60,985.96, and deductions as shown by schedules above of $64,851.45, and a loss of $3,865.49. The return for 1923 reports income as shown by schedules above of $39,045.73, and deductions as shown above of $56,207.33, and a loss on these items of $17,161.60. It also shows a capital gain arising from the sale of the real estate above set forth of $80,163.01, upon which respondent computed the tax at the rate of 12 1/2 per cent, added a penalty of 25 per cent, and deducted therefrom the 25 per cent credit provided by section 1200 of the Revenue Act of 1924, leaving a tax and penalty by $9,394.10. These returns correctly*4046 disclose the petitioner's gross income and deductions for the years 1921, 1922, and 1923, except as shown herein.
OPINION.
MILLIKEN: It is admitted by respondent that petitioner incurred a loss of $67,000 on his stock in the Choctaw Portland Cement Co. The only issue between the parties is in what year loss was sustained. Petitioner contends that the loss was sustained in the year 1923, while respondent asserts that it was sustained in the year 1921. It clearly appears from the facts found that this loss was not incurred in 1921. Although bankruptcy proceedings were begun in that year, the stockholders then hoped and had reasonable grounds to hope that they would realize something on their stock. Up to the early autumn of 1923, they were making vigorous efforts either to sell the property at private sale or to reorganize the corporation. If the contemplated sales had been effected, or if the corporation had been reorganized, the stock would not have been valueless. In the autumn of 1923, the representatives of the banks which held a large amount of the bonds of the corporation, and also some of its other indebtedness, were called in and it was then determined by all parties*4047 concerned that a sale or reorganization of the corporation was an impossibility and that the court should order a judicial sale. The sale was ordered *721 by the court on December 28, 1923. Although the final terms upon which the representative of the creditors was to purchase were not agreed upon until just prior to the sale, which occurred in February, 1924, the testimony shows that it was not then contemplated that the creditors would protect the stockholders, or that it was hoped that the properties would bring a price which would accomplish more than pay the debts, if that much. The vice president of one of the creditor banks testified:
Q. Do you know whether or not the directors claimed or anybody else claimed at those meetings that there would be a surplus over the debts, for the stockholders, out of this suggested plan?
* * *
A. There was not any suggestion made that the stockholders would realize anything on the stock at any conference I was in, in the latter part of 1923.
Q. That point never entered into any of these negotiations at any time?
A. It was a question of trying to cover the bonds and notes. That is all we were interested in.
It is*4048 apparent that when the sale was ordered in December, 1923, the stockholders had no reasonable basis for hope that they would realize anything upon their stock. The optimism of the stockholders of the corporation continued through 1921 and 1922, but in the month of December, 1923, it was their well considered opinion that nothing could be recovered, which opinion is amply justified by the facts of record. On the facts as presented, we are of the opinion that petitioner sustained a deductible loss on this stock in the year 1923.
For several years prior to 1923, petitioner was engaged in the business of purchasing and developing mineral leases. The majority of these leases were oil and gas leases. In this line of business, petitioner prior to and in 1921 purchased interests in the lead and zinc leases referred to in the findings of fact and proceeded to develop one of these properties. This effort failed in 1921, after petitioner had expended $30,000. The question presented is, Was this loss a "net loss" as that term is defined in section 204 of the Revenue Act of 1921? The pertinent parts of that section read:
(a) That as used in this section the term "net loss" means only*4049 net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business); and when so resulting means the excess of the deductions allowed by section 214 or 234, as the case may be, over the sum of the following: * * * (Italics ours.)
It is to be noted that in order to constitute a "net loss," it is not necessary that taxpayer should sustain the loss in his principal business or vocation. The word "business" is qualified by the word *722 "any." The taxpayer is entitled to this benefit where the loss is incurred in "any trade or business regularly carried on" by him. That petitioner's activities in oil, gas, zinc and lead constitute a business seems clear. They fall within the definition of "business" given in ; 3 Am.Fed. Tax Rep. 2834, where it was said:
* * * It remains to consider whether these corporations are engaged in business. "Business" is a very comprehensive term and embraces everything about which*4050 a person can be employed. Black's Law Dict. 158, citing . "That which occupies the time, attention, and labor of men for the purpose of a livelihood or profit." 1 Bouvier's Law Dict. p. 273.
See ; 3 Am.Fed.Tax.Rep. 2947, and ; 5 Am.Fed. Tax Rep. 5855.
That petitioner "regularly carried on" the business of purchasing and developing zinc and lead leases is equally clear. It was not an isolated enterprise. His zinc and lead operations dovetailed with his other mineral operations. On this point petitioner is sustained.
Petitioner did not sustain a loss in 1921 by reason of the razing of the brick building on the land which he and his coowners sold in 1923. By the terms of the lease to Edwards, the latter expressly agreed to tear down the old building and erect a much more valuable one in its stead and to pay rental at the rate of $18,000 a year. This was a mere substitution of one asset for another. *4051 The value of the old building was to be paid for in the annual rental of $18,000. If Edwards had carried out his contract the loss sustained by petitioner by reason of the destruction of the building, would have been amortized over the whole term of the lease. . Since Edwards paid only one installment of the rent, the lessors have recovered in this respect only 1/99th of the value of the building. The loss was incurred in the year in which the sale was made, to wit, 1923. This loss amounted to the depreciated value of the building when razed, less one ninety-ninth of the depreciated value recovered in the one year's rental paid.
The respondent has imposed a penalty of 25 per cent by reason of the failure to file a return for the calendar year 1923. It being clearly evident from the decision here made that the petitioner realized no taxable net income for said year, there is no basis for the imposition of the penalty.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.
Footnotes
1. The taxpayer has a one-half interest in this property. This item represents the operating expense and one-half of the net proceeds paid to party owning other interests. ↩