*1818 Upon the evidence held that a boat built by the petitioner and others was not built and used for purposes of pleasure, but was built for the purpose of deriving a profit from the sale thereof, and that any loss sustained upon its sale is deductible. Held, further, that in computing the amount of loss the cost should not be reduced by the depreciation sustained during the time it was owned by the petitioner.
*792 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1923 in the amount of $2,241.19, not all of which is in controversy. It is alleged that the respondent erred in disallowing as a deduction from gross income a loss sustained by the petitioner during the year 1923 as the result of the sale of a boat in which the petitioner had a 50 per cent interest.
FINDINGS OF FACT.
The petitioner is an individual with residence and place of business in Los Angeles, Calif. During 1920 he was head of the Western Pipe & Steel Company, vice president and general manager*1819 of Schaw-Batcher Shipyards at South San Francisco, Calif., and vice president and general manager of the Southwestern Ship Building Company at San Pedro, Calif. During that year petitioner and some of his friends and business associates, namely, L. H. Johnson, Frank McInnis, Albert Wilkes, Thomas Wilkes, W. G. Talbot, and one Tallerday, conceived the idea that it might be possible to develop a profitable industry in the building of motor boats and pleasure yachts. They therefore agreed among themselves to build a boat of this type, demonstrate and sell it, and if a sufficient demand could be developed, to engage in the business of the manufacture and sale of boats of this type as well as a general line of pleasure boats. Of the above named persons Johnson, McInnis, Thomas Wilkes and Alfred Wilkes had no financial interest in the Schaw-Batcher Shipyards.
Pursuant to this plan there was built in 1920 at the Schaw-Batcher Shipyards a boat named Miss Snip. The yacht license was issued at *793 the port of Los Angeles, Calif., on September 20, 1920. The cost of construction of the boat was as follows:
| Motors | $13,913.96 |
| Hull | 10,000.00 |
| Furniture, rugs, etc | 710.89 |
| Total | 24,624.86 |
*1820 From the time the boat was constructed until it was sold, it was covered by marine insurance against fire, wreckage or loss at sea. The insurance premium over this period was $2,429.24.
The petitioner owned a one-half interest in this boat.
The boat was equipped with two Hall-Scot motors, model L-N-6, of 200 horsepower each. These motors each had a useful life of five years. The hull of the boat had a useful life of fifteen years.
Immediately after the Miss Snip was constructed at San Francisco, it was taken by water to San Pedro where it was kept at the Southwestern Ship Yards until that yard was closed in the latter part of 1922. There it was used in the most general way for the purpose of demonstration. It was also used by the Southwestern Ship Building Company for whatever use was required in the yard. It was often used to transport customers of the Southwestern Ship Yard Company and Government officials to the yards which were located on Terminal Island, which is about 1 1/2 miles from the mainland. Petitioner himself often used it for this purpose. The company paid the expenses incident to the running of the boat during the time it was used. After the*1821 Southwestern Ship Yards were closed and at the time of the change of the base of the proposed small boat operation, the boat was kept at the Seacraft Corporation Yard, which was a short distance from the Southwestern Ship Yards. It was there laid up at the yard. No crew was maintained on board, but it was available for demonstration. Other motor boats were subsequently built at the Seacraft Yards. Petitioner was president of the Seacraft Corporation, but did not own a controlling interest in either that company or the Southwestern Ship Yards. Petitioner allowed both of the companies to use the boat in their business because he was the executive officer of each.
During the time the boat was owned by the petitioner and his partners in the venture, petitioner used it to a very limited degree for pleasure. From the time it was constructed until it was sold petitioner used it about half a dozen times for the purpose of entertaining his associates. Sometimes trips would be taken to Catalina Island, starting a Saturday afternoon and returning Sunday afternoon. L. H. Johnson, who owned an interest in the boat, also took about half a dozen week-end trips on it, entertaining persons*1822 connected *794 with the Southwestern Ship Building Company and customers of the Penzoil Company, of which Johnson was president. The others who owned a part interest in the boat did not often use it for purposes of pleasure.
During the whole period from 1920 to 1923, the boat was held for sale. It was listed with the Seacraft Corporation for sale. After it was moved to the Seacraft Yards about August, 1921, it was shown to several persons, some of whom were interested in the purchase of it and some of whom were interested in buying other yachts which the Seacraft Corporation built.
It was found that there was not a sufficient commercial demand for this type of boat to make its manufacture profitable. As a consequence the investment in this boat as well as the subsequent considerably larger investment in the Seacraft Corporation in an attempt to make good on this venture was a failure. The corporation took a considerable loss. No customer could be found for the purchase of the Miss Snip until March 1, 1923, when Tom Mix purchased the boat. The sale price was $12,000. After acquiring the boat Mix rebuilt it. He added to its length.
In his income-tax return*1823 for the year 1923 the petitioner claimed as a deduction $7,500 as his 50 per cent of the loss upon the sale of the Miss Snip. The respondent disallowed the claimed deduction upon the ground that the boat was constructed and used by the petitioner and the other partners in interest for purposes of pleasure.
OPINION.
MCMAHON: The question we have here for determination is the amount of loss, if any, which the petitioner is entitled to deduct from his gross income for the year 1923 on account of the sale in that year of a boat in which he owned a one-half interest. The evidence discloses that the cost of the boat and equipment was $24,624.85 and that the selling price was $12,000. In his return the petitioner claimed a deduction of $7,500, but this the respondent disallowed upon the ground that the boat was constructed and used by the petitioner and the other parties in interest for purposes of pleasure.
The Revenue Act of 1921 provides:
SEC. 214. (a) 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;
(5) Losses*1824 sustained during the taxable year and not compensated for by insurance of otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *
*795 That the boat was not constructed for purposes of pleasure is clearly shown by the evidence. It was constructed with the idea of deriving a gain from the sale of it. It is true that from September, 1920, the time the boat was constructed, until March 1, 1923, the date it was sold, the petitioner and the other joint venturers did, to a very limited degree, use the boat for purposes of pleasure, but this, in our opinion, does not change the true character of the undertaking.
It will be noted that section 214 quoted above permits the deduction of two types of losses. It is not contended by the petitioner that the loss was incurred in trade or business and, therefore, deductible under subdivision (4) of section 214(a). On the contrary petitioner refers to the transaction as a venture, and both petitioner and respondent devote their attention to discussing the question of whether the boat was constructed and used for purposes of pleasure. *1825 In any event it seems clear to us that the construction and sale of this boat did not constitute a business of petitioner. So far as the evidence shows, this was the only boat constructed. For a discussion of the distinction between an isolated transaction and a "trade or business," see .
It seems clear to us that this was a transaction entered into for profit and that any loss which petitioner is entitled to deduct is deductible under the provisions of subdivision (5) of section 214(a).
While the respondent based his disallowance of the claimed deduction upon the ground that the boat was constructed and used for purposes of pleasure, at the hearing it was contended on his behalf that the claimed deduction should not be allowed for the reason that depreciation upon the boat would operate to decrease the amount of the alleged loss. The petitioner, on the other hand, contends that the boat was not depreciable property within the meaning of the Revenue Act of 1921, and that no adjustment should be made on account of depreciation in computing gain or loss upon the sale thereof.
*1826 In , we held that in determining the gain or loss from the sale of property the basis should not be reduced by depreciation where the taxpayer was not privileged, under the statute, to take depreciation deductions thereon in computing net income during the time the property was held by the taxpayer. See also . It therefore becomes necessary to determine whether the owners of this boat would have been entitled to depreciation deductions thereon in the computation of net income during the years 1920 to 1923, inclusive, the period during which they owned it.
Section 214(a) of the Revenue Acts of 1918 and 1921 provides that in computing net income there shall be allowed as deductions:
*796 (8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence, * * *
This is the only provision in those revenue acts allowing deductions on account of depreciation. Can it be said that this boat was "used" in a trade or business and that petitioner would, therefore, be allowed to take*1827 depreciation deductions thereon? We believe not. As pointed out above, the petitioner and his co-adventurers were not engaged in a trade or business within the meaning of the statute. A somewhat analogous situation existed in , in which we stated:
The second question is whether the petitioner is entitled to make a deduction from income on account of depreciation of the premises known as 23 West 54th Street, New York City. This property had been used as a home by petitioner's father and was purchased by her from the trustees. Though probably purchased with the hope of profitable resale, the property was used for no purpose during the taxable years.
To be allowable depreciation must have occurred to property "used in a trade or business." The evidence does not indicate that this property was so used or that, in fact, petitioner was engaged in any trade or business. We must, therefore, disallow the deduction.
See also , and *1828 .
It follows that, since the petitioner was not entitled to deductions for depreciation upon the boat during the time it was held in computing the loss sustained upon the sale thereof, the basis should not be reduced on account of depreciation. Petitioner is entitled to a deduction in the amount of $6,312.43.
Reviewed by the Board.
Judgment will be entered under Rule 50.