*1787 1. Claimed deductions for bad debts disallowed.
2. Loss sustained by petitioner, as a result of the failure of a corporation of which he was president and a stockholder, held not to constitute a "net loss."
*946 These are proceedings, duly consolidated for hearing, for the redetermination of deficiencies in income taxes of Ida A. Van Dyke in Docket No. 18868 for the years 1921, 1923 and 1924, in the amount of $4,480.62, and of Cleve W. Van Dyke in Docket No. 18870 for the years 1920, 1921, 1922, 1923 and 1924 in the amount of $5,039.03.
For the year 1920, in Docket No. 18870, it is alleged that the Commissioner erred in disallowing certain bad debt deductions. The assignments of error for the remaining years are the same in both dockets. For the year 1921 the assignments of error are that the Commissioner erred in disallowing certain bad debt deductions and in disallowing a debit adjustment in the pay-roll account in the amount of $3,650. For the years 1923 and 1924 the only assignment of error is the Commissioner's refusal to allow a*1788 loss sustained in 1922 to be deducted from net incomes of 1923 and 1924 as a statutory net loss.
*947 FINDINGS OF FACT.
The petitioners are husband and wife, residents of the State of Arizona, and filed returns on the community property basis, each returning one-half of the income thereon.
The petitioner, Cleve W. Van Dyke, from about 1896 has been engaged in promoting various enterprises mostly in undeveloped communities. His first activities were buying and selling real properties. He later began to develop town sites, organizing utility companies to which he advanced funds. In Warren and Miami, Ariz., he put in street railways, lighting systems, sewerage and water systems. Among his other activities were the promotion and development of the Daily Arizona Silver Belt, a newspaper; the Roosevelt Air Development Company; the Van Dyke Copper Company; the Sho Me Copper Company; and the Bluestone Copper Company, of Ajo, Ariz.
The Calhoun Timber Company was a corporation owning large tracts of land in Florida. Part of this was covered with forests, part of it had fishery beds thereon, and part of it was adapted for fruit and vegetable raising. It contained two*1789 town sites. There was also a railroad on the property. In 1916 the company had need of additional funds. Van Dyke became interested in the town site possibilities of this property and the development of public utilities to serve these towns. He agreed to furnish funds to the company, in consideration of which each of the three stockholders was to give him some of his stock. He was to be repaid whenever the company was able to do so. In accordance with this agreement he advanced $110,000 to the company in 1916 and received 5,000 shares of stock. From about 1916 to 1922 Van Dyke devoted approximately two-thirds of his time to the Calhoun Timber Company. From 1918 to 1922 he was president of the company. His activities consisted of supervising the operation of sawmills, timber cruises, examining the property from an agricultural standpoint and from the standpoint of establishing towns thereon. He had a manager in full and complete charge of his interests in Miami, Ariz.
In 1922 the properties of the Calhoun Timber Company were sold at foreclosure proceedings. Bonds in the amount of $750,000 were outstanding. Van Dyke sustained a loss for the year 1922 as a result of these*1790 proceedings in the amount of $190,609, one-half of which is assignable to each petitioner.
No towns were ever developed on the property after Van Dyke became interested therein. Surveys for towns were made but any further developments were stopped when the foreclosure proceedings were instituted.
*948 The net incomes of the petitioners for the calendar year 1923, without any deduction for the loss sustained in 1922, were as follows:
| Cleve W. Van Dyke | $28,795.26 |
| Ida A. Van Dyke | 28,795.25 |
The net incomes of the petitioners for the calendar year 1924, before any deduction for a net loss, were as follows:
| Cleve W. Van Dyke | $29,544.88 |
| Ida A. Van Dyke | 25,978.45 |
The parties have stipulated that the amount charged to expense for adjustment on the pay-roll account should be reduced to $1,400,26 and is deductible in that amount.
The following accounts were charged off to profit and loss as bad debts on the books of Cleve W. Van Dyke in December, 1921:
| Joseph Chisholm | $175.00 |
| Wm. Stephens | 12.50 |
| Thos. Burns | 160.00 |
| Wm. Nash | 50.00 |
| W. P. Taylor | $40.00 |
| Fred B. Clark | 850.00 |
| Lucile Overdeer | 25.00 |
The petitioner, *1791 Cleve Van Dyke, deducted the debts of Burns, Nash, Stephens and Taylor from his gross income for 1920; and the petitioners deducted the debts of Chisholm, Clark and Overdeer from their gross incomes for 1921, one-half on each return. The respondent disallowed the deductions. The petitioners also deducted other amounts as bad debts which were disallowed by the respondent but they have abandoned their claims as to such amounts.
OPINION.
MATTHEWS: The petition in Docket No. 18870 seeks a redetermination of deficiencies for several years including the year 1922. However, there is no assignment of error for that year and the respondent has not determined a deficiency for that year. This proceeding therefore, in so far as the year 1922 is concerned, is hereby dismissed.
The petitioners are claiming the right to deduct certain amounts as bad debts for the years 1920 and 1921. As shown in our findings of fact, the claimed deductions for 1920, the debts of Thos. Burns, Wm. Nash, Wm. Stephens and W. P. Taylor, were not charged off the books until 1921. With regard to the remaining debts which the petitioners are claiming as deductions for 1921, they represent in some instances*1792 advances by a corporation of which the petitioner, Cleve W. Van Dyke, was an officer. Although evidence was presented as to the circumstances surrounding the creation of these debts, some of which had been created many years prior to 1921, there was no evidence presented as to the ascertainment of worthlessness in either 1920 or 1921, or as to the basis for charging these *949 amounts off in 1921. Upon this state of the evidence we can not find that these debts were ascertained to be worthless in that year. The action of the respondent in disallowing these deductions for both 1920 and 1921 is sustained.
The petitioners contend that the loss resulting from the investment of Cleve W. Van Dyke in the Calhoun Timber Company is a "net loss" within the meaning of section 204 of the Revenue Act of 1921. That section provides:
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 evidence shows*1793 that Van Dyke's activities for a number of years had been the development and promotion of town sites, particularly with regard to organizing public utilities. He was not instrumental in organizing the Calhoun Timber Company but some years after its organization advanced money to it, apparently receiving stock as security for the advances. The company was engaged mainly in the timber business and Van Dyke's duties as president were to a large extent in connection with such activities. We fail to see how these activities, as officer and stockholder, were a part of his trade or business. It is true that he testified that he was interested in the town site possibilities, but as a matter of fact he did not promote any town sites on the property and we believe that this purpose was merely incidental to his purpose of making an investment in the company for a profit. In , on appeal, we said:
This railroad corporation was not a business carried on by the petitioner, but merely a business in which he had an investment. Whatever loss may have been suffered by the corporation through the sale of its capital assets was its loss as a separate*1794 entity and this was not the same thing as the loss sustained by the petitioner on account of his investment in the stock of the corporation which carried on the business. A loss thus incurred is not a loss from a business regularly carried on by the petitioner, even though he was the principal stockholder and was active in the conduct of the corporation's business. ; ; ; .
The loss resulting from the failure of the Calhoun Timber Company was not a loss incurred by Van Dyke in a trade or business and is not deductible from the petitioners' net incomes of 1923 and 1924 as a net loss.
In accordance with the stipulation set forth in our findings of fact, the petitioners are entitled to a deduction of $1,400.26 for payroll expenses, one-half of which is allocable to each petitioner.
Judgment will be entered under Rule 50.