*2866 1. Allowance as a deduction for rent paid by a corporation to its sole stockholder, of a greater amount than was allowed by the respondent, denied in the absence of evidence showing that the additional amount paid was in fact rent.
2. The taxable year in question is not within the terms of section 204(b) of the Revenue Act of 1918, and, consequently, a loss sustained during such period can not be deemed a "net loss" which can be applied against the income of other years.
*431 These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies in income and profits taxes. Docket No. 15758 covers the year 1920, for which year the respondent found a deficiency of $2,252.43. Docket No. 15759 covers the fiscal years ending March 31, 1920, and March 31, 1922, for which years the respondent determined deficiencies of $3,273.03 and $348.14, respectively. The full amounts of all deficiencies are contested.
Under Docket No. 15758, the Chicago Shipping & Storage Co. assigns as error:
(1) The improper addition*2867 to income by the respondent of the sum of $42,000 which was deducted on petitioner's tax return from gross income on account of rent paid on petitioner's buildings in 1920.
Under Docket No. 15759 the Park Fire Proof Storage Co. alleges the following errors:
(1) The wrongful rejection by the respondent of petitioner's net loss for the years ended March 31, 1919, and March 31, 1920, deductible *432 under section 204, article 1601, Regulations 45, as disclosed and allowed by the revenue agent's report of July 6, 1923;
(2) And the improper addition to income by the respondent of the sum of $42,000 which was deducted on petitioner's tax return from gross income on account of rent paid on petitioner's buildings in 1920.
FINDINGS OF FACT.
In 1911 William M. LeMoyne made a contract with the Chicago City Railway Co. to purchase its old car barn located at 3900 S. Wabash Avenue, Chicago, Ill., and in April, 1920, LeMoyne made his final payment under that contract and received title to the property. Immediately after entering into the contract LeMoyne began to repair, alter and reconstruct the car barn into a suitable storage warehouse. He installed a sprinkler system that*2868 cost about $6,700 and a railroad switch track that cost about $25,000. All this was done at his own expense.
The Chicago Shipping & Storage Co. was incorporated under the laws of Illinois in 1913. During the years 1920, 1921, and 1922 and prior thereto LeMoyne was owner of all its capital stock except directors' qualifying shares, and was its president. From the date of its incorporation the Chicago Shipping & Storage Co. occupied the Wabash Avenue property continuously to April, 1920. During this time LeMoyne, under an oral agreement with the corporation, was to receive all the corporation's receipts over and above the corporation's operating expenses. LeMoyne made this arrangement with the bookkeeper of the corporation. The directors of the Chicago Shipping & Storage Co. at the time the agreement as to rent was made were LeMoyne, M. O. Peterson, and Charles A. Reinhart. Peterson and LeMoyne talked the matter over and informally arrived at an agreement.
The Park Fire Proof Storage Co. was incorporated under the laws of Illinois in 1900, and owned and operated its own storage plant at 1750 N. Clark Street, Chicago, Ill.Both corporations have operated as separate entities*2869 and have and separate personnel. The capital stock of this corporation was owned by the father of Wm. M. LeMoyne, who died in 1918. Wm. M. LeMoyne, in the fall of 1918, purchased this stock from the executors of the estate. He has continued to hold all the stock of this corporation except a few directors' qualifying shares.
In April, 1920, the Park Fire Proof Storage Co. increased its capital stock and also issued first mortgage bonds secured by all its property. As a part of that transaction, and as additional security for the bonds, LeMoyne transferred the property, 3900 S. Wabash Avenue, to the Park Fire Proof Storage Co. An oral agreement *433 was entered into between LeMoyne and the Park Fire Proof Storage Co. which provided that LeMoyne should rent the Wabash Street property from the corporation for $18,000 per year. The directors of the corporation at that time were Samuel T. Mosser, J. Gist Search, M. O. Peterson, and C. A. Reinhart. The first two named were also associated with the brokerage company which handled the Park Fire Proof Storage Co.'s bonds. When the arrangement was made Mosser, Peterson, and LeMoyne were present. By the agreement LeMoyne was*2870 to assume and pay the cost of all repairs. The Park Fire Proof Storage Co. had regular directors' meetings yearly, but there is no record in any corporate minutes as to the oral lease to LeMoyne for $18,000 yearly.
LeMoyne then entered into an oral agreement with the Chicago Shipping & Storage Co. to sublet the warehouse to that corporation, the company to pay him $60,000 per year. This agreement was entered into about April 1, 1920, but it was retroactive to January 1, 1920. The directors of this corporation at that time were C. A. Reinhart, LeMoyne, and Peterson. Peterson and LeMoyne were present when the agreement was made. LeMoyne then informed Charles G. Gardner, bookkeeper of the Chicago Shipping & Storage Co., that the rent from that time on was to be $60,000 per year. The bond house which had advanced money to the Park Fire Proof Storage Co. stipulated with LeMoyne that there should be received by the Park Fire Proof Storage Co. $18,000 yearly as rent on the property, and that whatever surplus the Chicago Shipping & Storage Co. had above that, LeMoyne might have. LeMoyne, therefore, instructed the bookkeeper at the Chicago Shipping & Storage co. that $18,000 was to*2871 be paid over to the Park Fire Proof Storage Co. yearly and all profit above that was to be credited and paid to him.
The ledger account of Wm. M. LeMoyne on the books of the Chicago Shipping & Storage Co. shows for the year 1920 a total credit of $60,781.20, and a total debit of $39,195.89. Subsequently, under date of December 31, 1920, this total debit was increased by $7,000. This amount was also credited to the account of the Park Fire Proof Storage Co. on the books of the Chicago Shipping & Storage Co. This entry was for the purpose of adjusting the rental. The rent account was debited $60,000. The amount of $39,195.89 was paid either directly to LeMoyne or to other parties and charged to his account. Payments were sometimes by cash and sometimes by check.
LeMoyne issued the following checks to the Park Fire Proof Storage Co. in payment of rent:
| May 29, 1920 | $2,200 |
| Aug. 9, 1920 | 500 |
*434 These two items are included in the credit column of the Chicago Shipping & Storage Co.'s account and on the books of the Park Fire Proof Storage Co. This account, in reality, represents the rent account between LeMoyne and the Park Fire Proof Storage Co. *2872 Other credits for payment to this account were $800 paid by the Chicago Shipping & Storage Co. and $3,000 by Bulger, Morser & Willaman, the bond house. These are all the items in the credit column for 1920. The account contains charges of $1,500 each month. At the end of the year there was a balance of $7,000 unpaid.
The Wabash Avenue property, exclusive of the buildings thereon, was appraised at $233,750 by the Chicago Real Estate Board on December 4, 1919.
The respondent classed the petitioners as affiliated corporations for the years 1920, 1921 and 1922, and for the year 1920 allowed only $18,000 of the total amount of $60,000 claimed by the Chicago Shipping & Storage Co. as rent paid to Wm. M. LeMoyne, thereby adding to the net income of both corporations the sum of $42,000.
No dividends were formally declared by the Chicago Shipping & Storage Co. in 1920.
The Park Fire Proof Storage Co. kept its books on the basis of a fiscal year ended March 31.
OPINION.
SIEFKIN: From all of the evidence in this proceeding it is our opinion that the additional $42,000 a year alleged to have been paid as credited to LeMoyne was by virtue of his control of the two corporations. *2873 We have no adequate evidence which clearly indicates that the excess amount was rental and not a distribution of profits in the guise of rental even if clearly paid or credited. In , we denied a deduction of rental to a corporation owned by a single stockholder on a building owned by the stockholder and occupied by the corporation. There no evidence was introduced of payment or obligation to pay. Here we are not convinced that the amount was rental. We conclude that the determination of the respondent in that respect must be sustained.
The substance of the other error assigned by the Park Fire Proof Storage Co. in Docket No. 15759 is that it is entitled to have a net loss for the fiscal year ended March 31, 1919, applied to reduce net income for the fiscal year ended March 31, 1920. It is conceded that the petitioner had a net loss of $28,780.04 for the fiscal year ended March 31, 1919, and one for the fiscal year ended March 31, 1918, of $198.16. The applicable provision of the statute is section 204(b) of the Revenue Act of 1918, which provides:
*435 If for any taxable year beginning after October 31, 1918, and*2874 ending prior to January 1, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the taxes imposed by this title and by Title III for such preceding taxable year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. If such net loss is in excess of the net income for such preceding taxable year, the amount of such excess shall under regulations prescribed by the Commissioner with the approval of the Secretary be allowed as a deduction in computing the net income for the succeeding taxable year.
The petitioners' fiscal year, April 1, 1918, to March 31, 1919, in which the loss was suffered does not come within the terms of the statute, nor does it come within section 204(b) of the Revenue Act of 1921 which deals with net losses in taxable years beginning*2875 after December 31, 1920. No deduction is allowable.
Judgment will be entered for the respondent.