*2019 1. NET LOSS. - Upon the evidence petitioner is held to have sustained for the calendar year 1923 a net loss, as defined by section 204 of the Revenue Act of 1921, in the regular carrying on of his business of organizing, incorporating, capitalizing and actively conducting and operating hotel properties, and to be entitled, under section 206 of the Revenue Act of 1924, to deduct the amount thereof in computing net income for the calendar years 1924 and 1925.
2. EXPENSES. - Certain expenses of travel by petitioner in the years 1924 and 1925 found to be reasonable and necessary for business purposes and the amounts thereof subject to deduction in computing net income for those years.
*549 The petitioner seeks a redetermination of deficiencies in income taxes amounting as follows: for 1924, $2,019.29; for 1925, $1,839.21, and alleges error with respect to the following issues: (1) a failure to allow as a deduction in the taxable years a loss on the sale of capital assets in 1923, (2) a failure to allow the deduction*2020 of certain traveling expenses, and (3) a failure to allow the deduction *550 of attorney's fees and expenses incurred in defense of a suit against the Clarendon Hotel, Sea Breeze, Fla.
FINDINGS OF FACT.
The petitioner is a resident of Daytona Beach, Fla. For a period of at least 28 years prior to 1924 he was actively interested as owner, stockholder and/or bondholder and/or manager or managing director in various hotel enterprises conducted in the early years in his individual capacity as owner and latterly through the medium of corporations organized for the purpose.
During this period the petitioner operated the Van Nuys Hotel at Los Angeles, Calif., as lessee in his individual capacity, under the name of E. L. Potter & Co., for a term of 14 years.
The Ansley Hotel at Atlanta, Ga., the petitioner operated for a period of about four years prior to the close of the World War, being a stockholder in the Southern Hotel Co., the corporation which owned the hotel, and being also during this same period managing director of this hotel at a salary of $6,000 per annum, his presence at the hotel being required for part of his time, usually about two days out of every ten, *2021 for which purpose he made trips to Atlanta.
The Clarendon Hotel at Sea Breeze, Fla., the petitioner owned and operated in his individual capacity from 1903 until it was burned down in 1909. Thereafter, for about two years, operations were not resumed. In 1911 a corporation was formed for the purpose of building and operating an hotel of the same name on the same site. The petitioner acquired all of the common stock of this corporation excepting $25,000 par value, which was issued to two other individuals. The $250,000 par value issued preferred stock of this corporation was held as follows: by the petitioner, $100,000; by the Bond Lumber Co. and the Conrad interests, $150,000. The preferred stock was originally issued in payment for materials and supplies incident to the building of the hotel. The hotel was of reinforced concrete construction, with a capacity of 196 bedrooms, and was operated by the corporation from 1911 until 1924. The petitioner was actively engaged in the management as a member of the board of directors, president of the corporation, and managing director having as his assistant what is known as a details manager. During the period he received a salary*2022 of $3,000 per year from the corporation, this being merely nominal compensation, the purpose being to conserve expense and so build up the property. At a time during this period it became necessary to borrow additional capital. A loan to the corporation of $150,000 was obtained, secured by a second mortgage on the hotel property bearing interest at 6 per cent per annum. As a condition for making the loan to the corporation, the lender *551 required that 50 per cent of the outstanding common stock belonging to petitioner personally be turned over to him, and this was done. Subsequently the parties became involved in litigation relative to this loan, the outcome of which was the sale in 1923 by the petitioner to his opponents of his stock holdings at a considerable loss. Certain attorney's fees and expenses incident to the litigation have been disallowed by the respondent as deductions from income.
For several years after the sale of his stock in the Clarendon Hotel and the severing of his activities there, the sole source of any considerable amount of income to the petitioner was the U.S. Grant Hotel and Office Building Co., a corporation owning and conducting an hotel*2023 and office building at San Diego, Calif. The petitioner had owned a one-fourth interest in the capital stock of this corporation and also one-fourth of the corporation's bonds for a period of about nine years. The holdings of the petitioner during the taxable years amounted to $250,000 par value of the bonds and $400,000 par value of the capital stock. The petitioner was a director in this corporation. He usually attended one directors' meeting each year at San Diego, unless specially called. At these times he conferred with his fellow stockholders relative to policies and management details and he also satisfied himself that his personal interests were protected. The traveling expenses incident to these trips have been disallowed as deductions from income by the respondent.
In determining the deficiencies the respondent has adjusted net income as follows:
| 1924 | ||
| Net loss reported on the return | ($98,283.40) | |
| Add: | ||
| 1. Other deductions disallowed | $1,894.90 | |
| 2. Loss from 1923 disallowed | 125,597.72 | |
| 127,492.62 | ||
| 29,209.22 | ||
| Deduct: | ||
| 3. Decrease in rental income | 2,000.00 | |
| Net income adjusted | 27,209.22 | |
| 1925 | ||
| Net loss reported on the return | ($71,678.34) | |
| Add: | ||
| 1. Taxes disallowed | $360.00 | |
| 2. Other deductions disallowed | 1,661.70 | |
| 3. Loss from 1924 return disallowed | 98,283.40 | |
| 100,305.10 | ||
| 28,626.76 | ||
| Deduct: | ||
| 4. Decrease in rental income | 804.22 | |
| Net income adjusted | 27,822.54 |
*2024 *552 OPINION.
TRUSSELL: Under the first issue we have for consideration the character of a loss sustained in 1923 by petitioner in the sale of certain stock, the amount of the loss carried forward to 1924 and 1925 by petitioner being shown and the correctness of this amount and the fact that it is 1923 loss allowed by respondent for that year not being in issue. The sole question on this issue is whether the loss sustained in 1923 was a net loss subject to the carried forward and deducted over the two succeeding taxable years 1924 and 1925. In determining this question of law the applicable provision is contained in section 206(f) of the Revenue Act of 1924, which provides as follows:
If for the taxable year 1923 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1921, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.
In this connection section 204(a) of the Revenue Act of 1921 is material in providing:
*2025 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) * * *.
The net loss provision of the statute therefore is limited to losses resulting from the "operation of a business regularly carried on by the taxpayer." It is the contention of the respondent that the loss did not result from the operation of a business of the petitioner.
What constitutes a business within the purview of the statute has been previously considered a number of times. Perhaps the most satisfactory definitions are those cited in , as follows:
"Business" is a very comprehensive term and embraces everything about which a person can be employed, Black's Law Dict. citing . That which occupies the time, attention and labor of men for the purpose of a livelihood or profit. Bouvier's Law Dist. p. 273. *2026 Approved in ; .
See, also, .
It is not thought subject to question that the loss sustained by petitioner in 1923 was a business loss, but this fact does not in itself show it to be a net loss subject to be carried forward and deducted over the next two succeeding years, for such loss, under section 204*553 (a) above quoted, must be one incurred in business "regularly carried on by the taxpayer." In construing this provision of the Act we have consistently followed the rule originally laid down by us in , that the business in which the loss was incurred must have been carried on to the extent of constituting a vocation.
So the question here presented is whether the facts proven show petitioner's loss in business in respect to the Clarendon Hotel was an incident in his following of a regular vocation, or was a loss sustained in an isolated business transaction.
On this question the record shows that petitioner was an expert in hotel financing, management*2027 and operation. For nearly 30 years prior to the year in question his time had been occupied in actively managing and operating various hotels in which he held an interest either as stockholder or bondholder. In these enterprises he was not a mere investor, but made the business in which his funds were invested the subject of his personal and individual attention and effort, receiving for this a salary in addition to the increase in his return from the investment, due to his knowledge of the business and efficient operation of the various enterprises. The picture presented shows clearly that the investment and the personal management were closely related, each dependent on the other, the two combined producing the income received by this taxpayer, and that the knowledge, experience, work and investment were all in respect to one definite and distinct line of business, namely, hotel organization and operation. In this line of business he was in the year 1923 employing jointly his time and his capital, as he had done continuously for many years. During all this period this had been his sole business.
In this connection it is noted that the circumstances of the loss in question, *2028 in themselves, illustrate the personal character of the work and investment of petitioner, and the fact that it was not limited to that of a mere stockholder in the corporate enterprise. The Clarendon Hotel had formerly been owned and operated by petitioner and after its destruction by fire he organized a corporation and rebuilt it. In this corporation he owned $100,000 of the $250,000 issued preferred stock and $275,000 of the $300,000 issued common stock and actively operated the hotel as managing director. When additional funds were necessary, petitioner secured a loan of $150,000 to the corporation, for which it gave its note secured by a mortgage and for which petitioner gave individually to the lender $150,000 of his common stock.
Subsequently, as a result of disputes and litigation, he withdrew from the enterprise, sustaining the loss in question in so doing.
*554 As we see it, this petitioner is shown to have been carrying on for many years a definite and distinct business constituting a regular vocation, in which he employed jointly and consistently both his capital and his professional knowledge of hotel operation and management; from the business consisting*2029 of the use of these together, his income was produced, and in the carrying on of this business he incurred the loss in question during 1923. ; ; ; ; . It follows that the net loss thus occasioned should be carried forward successively to the years 1924 and 1925.
The second issue is a question of the deductibility of expenses incurred by the petitioner in traveling to San Diego, Calif., where he had large interests in an hotel and office building which afforded the main source of income to him during the taxable years. After careful consideration of the testimony of the petitioner we are satisfied that there was a business necessity in his trips to San Diego in preserving and safeguarding his interests and property. It naturally follows that the expense is properly allowable as a deduction from income. *2030 ; .
The third issue relates to attorney fees and expenses of which there is practically no evidence before us save that they were incurred in the defense of a suit against a corporation in which the petitioner was interested. In the deficiency letter the respondent disallowed them for the reason that he considered them to be involved in the 1923 loss. We leave the situation as we find it.
Judgment will be entered pursuant to Rule 50.