*2315 1. In 1921 the petitioner, who was the majority stockholder and president of a corporation, sustained a loss as a result of having to pay certain notes of the corporation which he had endorsed. In 1921 and 1922 he sustained losses on the sale of stock of the corporation. Held that such losses do not constitute net losses within the meaning of section 204(a) of the Revenue Act of 1921.
2. Loss on the exchange of an automobile determined.
*859 This proceeding is for the redetermination of deficiencies in income tax of $2,722.41 and $473.24 for 1923 and 1925, respectively. The matters in controversy are the action of the respondent (1) in failing to allow as a deduction in computing net income for 1923 the amount of $17,768.51 representing a net loss sustained in 1921 in excess of taxable income for 1922, (2) in failing to allow as a deduction from 1923 net income a net loss of $4,985.18 sustained by the petitioner in 1922, (3) in refusing to allow as a deduction for 1925 as a loss the amount of $950 sustained by the petitioner on the*2316 *860 exchange of an old automobile for a new one. An admission made by counsel for the respondent at the hearing has eliminated the issue raised by No. 3.
FINDINGS OF FACT.
The petitioner is an individual residing at Miami, Fla. Since 1888 he has been engaged in the business of dredging and supervising dredging operations off the coast of Florida and elsewhere. He was associated with the Bowers Southern Dredging Co., hereinafter referred to as the Bowers Co., from the time of its organization in 1899 until about September, 1922, when the Clark Dredging Co., hereinafter referred to as the Clark Co., was organized, and took over the business of the Bowers Co. Clark became president of the Bowers Co. in 1905 and continued in that capacity as long as it continued to operate. In that capacity he was the active directing head of the corporation and devoted all of his time to its operation. During 1921 and in 1922 until the business was taken over by the Clark Co. the petitioner, who was the majority stockholder in the Bowers Co., was the managing operator of the corporation for a committee of its creditors. He was president of the Clark Co. after its formation. The Bowers*2317 Co. was engaged in dredging and other river, harbor, and jetty work.
In addition to his association with the Bowers Co., the petitioner in 1921 and 1922 was a member of the partnerships of D. M. Picton & Co., Port Arthur, Tex., the Florida Dredging Co., Miami, Fla., and Megathlin & Clark, Miami, Fla. Megathlin & Clark and the Florida Dredging Co. were engaged in the dredging business and D. M. Picton & Co. was engaged in river and harbor work and jetty building. The petitioner took an active advisory interest in these partnerships whose work was mostly in connection with the work of the Bowers Co. In 1921 and 1922 the petitioner also owned stock in a number of corporations which he held as investments.
The authorized capital stock of the Bowers Co. when organized in 1899 was $600,000, divided into shares of a par value of $100 each. At the time of organization the petitioner received about 1,800 shares of the company's stock for assets delivered to it. In 1910 the company's capital stock was increased to $750,000 par value. The entire amount of the additional stock was subscribed to by the stockholders and paid for in cash at par by them. By 1922 the petitioner's stockholdings*2318 in the company had increased to more than 3,000 shares. The additional shares of stock were acquired by petitioner at $100 per share from time to time, some having been acquired as late as 1914. Prior to 1920, the company paid dividends regularly and from *861 1907 to 1917 its stock had a value in excess of par. In 1917 when the war began the stock ceased to have a value equivalent to par.
At the beginning of the war in 1917 the Bowers Co. had many contracts to complete and began to have financial difficulties. This finally resulted in its business being placed in the hands of a creditors' committee under which it was operated in 1921. The company was unable to borrow money from banks without the individual endorsement of petitioner.
In a desire to protect his investment in the stock of the company the petitioner at various times thereafter endorsed notes of the company.
In 1921, as a result of his endorsement of the notes of the Bowers Co., the petitioner had to pay $68,000 on them. This amount he took as a deduction for losses in his 1921 income-tax return and it was allowed in the final audit of the return by the respondent.
In his return for 1921 the petitioner*2319 reported a loss of $7,000 from the sale of stocks which was explained on the return as follows:
| Cost | Mar. 1, 1913, value | Amount received | |
| Stock (Bowers Sou. Dredging Company) | $10,000 | $500 | |
| Stock (Galveston Indemnity Co.) | $3,500 | 1,500 | |
| Stock (Galveston Hotel Company) | 1,000 | 500 | |
| Stock (Belcher Asphalt Paving Co.) | 5,000 | ||
| 4,500 | 10,000 | 1 7,500 |
The loss reported by the petitioner was allowed by the respondent in the final audit of the return. The Bowers Co. stock on which a loss of $9,500 was shown represented 100 shares of the stock that the petitioner had purchased at $100 a share and which was sold in 1921 for $5 a share, or for $500.
For 1921 the petitioner reported the following items of income:
| Salaries, wages, commissions, etc.: | |
| D. M. Picton & Co. | $4,333.34 |
| Creditors' committee, Bowers Co | 9,000.00 |
| Income from partnerships: | |
| D. M. Picton & Co | 39,646.51 |
| Megathlin & Clark | 707.14 |
| Florida Dredging Co | 7,367.94 |
| Dividends on stock of domestic corporations | 91.00 |
In addition to reporting the losses referred to above the petitioner took a deduction of $1,480 as interest paid. In the final*2320 audit of the return the respondent found that the petitioner had overstated his income from the partnership of D. M. Picton & Co. by *862 $1,727.30. This results in a net loss for 1921 of $17,768.51 instead of $16,041.21 reported by the petitioner.
The petitioner in 1922, being desirous of having someone who was strong financially associated with the business of the Bowers Co., sold 1,000 shares of the stock he owned in that company to George H. Nolan for $7,500. In his return for 1922 the petitioner accordingly took as a deduction for a loss sustained on the sale of the stock the amount of $92,500, which represented the difference between its cost of $100,000 and the selling price. In the final audit of the return the loss was allowed by the respondent.
About September 1, 1922, the Clark Co. was organized by the petitioner and took over the assets and liabilities of the Bowers Co. The stock of the Clark Co. was distributed to the stockholders of the Bowers Co. on the basis of one share in the Clark Co. for each two held in the Bowers Co. The Clark Co. issued bonds to cover all the liabilities of the Bowers Co. These bonds have since been paid and retired. In 1922*2321 the petitioner received bonds for the amount of money paid by him personally for the benefit of the Bowers Co. and in his return for that year reported as income from this source the amount of $58,000.
Upon the organization of the Clark Co. the stock acquired by Nolan in the Bowers Co. was exchanged for stock in the Clark Co., Nolan becoming vice president and a director in the latter named company. By July 15, 1923, the net earnings of the Clark Co. amounted to $20 per share. As Nolan had decided to withdraw from the company the petitioner purchased his stock at what it had cost him (Nolan) plus the earnings thereon of $20 per share.
In his 1922 return the petitioner reported income as follows:
| Salaries, wages, commissions etc.: | |
| Creditors committee, Bowers Co | $6,000.00 |
| Clark Co | 3,000.00 |
| Interest | 6,292.00 |
| Income from partnerships: | |
| Megathlin & Clark | 100.99 |
| Rent | 400.00 |
| Other income: | |
| First mortgage bonds, Clark Co. in payment of interest | 20,500.00 |
| Second mortgage bonds, Clark Co. in payment of losses sustained as endorser on notes of the Bowers Co. and deducted as bad | |
| debts in prior years | 58,000.00 |
In addition to the loss of $92,500 sustained*2322 on the sale of Bowers Co. stock the petitioner reported losses of $5,215.02 and $178.45 from the partnerships of D. M. Picton & Co. and the Florida Dredging Co. He also took deductions of $1,360 and $24.70 for interest and taxes, respectively, making a net loss reported of $4,985.18. No *863 deduction was taken on the 1922 return for the net loss for 1921 or any part of it.
For 1923 the petitioner reported a total net income of $24,727.82, which the respondent in determining the deficiency for that year increased to $43,037.93. The petitioner took as a deduction in his 1923 return the 1922 net loss of $4,985.10, but this was disallowed by the respondent. While the petitioner did not take any deduction in his 1923 return on account of the net loss for 1921, he requested allowance of such deduction prior to the final determination of his tax liability for 1923. The respondent in determining the deficiency did not allow the deduction.
In his return for 1925 the petitioner took a deduction of $1,850 as a loss sustained on the exchange of an old auto for a new one. In determining the deficiency for 1925 the respondent disallowed the deduction. The petitioner is entitled*2323 to $950 of the deduction taken.
OPINION.
TRAMMELL: Counsel for the respondent admitted at the hearing that the petitioner is entitled to a deduction of $950 as a loss sustained on the exchange of an automobile. This loss should, therefore, be allowed.
The remaining issue involves the consideration of two matters, namely, whether the loss of $68,000 resulting from the petitioner's payment in 1921 of notes of the Bowers Co. on which he was endorser, and the losses resulting in 1921 and 1922 from the sale of the stock owned by him in the Bowers Co., constitute net losses within the meaning of the term as used in the Act.
Section 204 of the Revenue Act of 1921 provides in part as follows:
(a) That as used in this section the term "net loss" means only 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); * * *
(b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer*2324 has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.
The petitioner contends that the losses here involved were losses resulting from the operation and conduct of a trade or business *864 regularly carried on by him and that the excess thereof over the income for 1921 and 1922 is deductible in determining taxable income for 1923.
In order for the losses here involved to be deductible in determining taxable income for 1923 they must be net losses resulting from the operation of a trade or business regularly carried on by the petitioner and not from isolated and occasional transactions. ; *2325 .
With respect to the loss of $68,000 resulting from the petitioner's endorsement of the Bowers Co. notes, he testified that in endorsing the notes he was seeking to protect his investment in its stock. Aside from endorsing an undisclosed number of notes of this company there is nothing in the record to indicate that acting as endorser or guarantor constituted a business or trade with the petitioner. So far as the record shows these were the only notes ever endorsed by the petitioner for the Bowers Co. or for any other company or person. From the facts in the case we are of the opinion that the loss did not result from the operation of a trade or business regularly carried on by the petitioner, but resulted from isolated or occasional transactions. The petitioner's contention as to this item is denied. See , and .
With respect to the remaining losses resulting from the sale of the Bowers Co. stock in 1921 and 1922, we do not think the petitioner's ownership of stock in a number of corporations which he held as an investment during 1921 and 1922*2326 or the sale of some of such stock in those years constituted a business or trade regularly carried on by him. As to his being in the investment business, the petitioner testified as follows:
Q. Would you say you were in the investment business, Mr. Clark?
A. No, sir.Since the petitioner was not in the investment business or engaged in the business of a dealer in securities, we think the losses resulting from the sale of the Bowers Co. stock in 1921 and 1922 constituted losses arising from occasional or isolated transactions and not from the operation of a business regularly carried on. The petitioner's contention as to them must also be denied. ,
Judgment will be entered under Rule 50.
Footnotes
1. Loss, $7,000. ↩