*1392 The respondent's refusal to allow a deduction in 1928 for a net loss brought forward from the preceding year is approved, where the evidence does not show that a statutory net loss was sustained in such preceding year.
*1331 This proceeding is for the redetermination of a deficiency in income tax of $2,780.32 for 1928. The only matter in controversy is the correctness of the respondent's action in refusing to allow as a statutory net loss the amount of $56,287 alleged to represent a loss sustained by the petitioner in 1927 on account of the bankruptcy of a corporation in which the petitioner was a stockholder and of which he was treasurer and general manager.
FINDINGS OF FACT.
Prior to 1919 the W. D. Andrews Company of Syracuse, New York, conducted a wholesale, retail and jobbing business in sporting goods, marine hardware, bicycles, bicycle sundries and related lines and in Victor and Edison talking machines and records. By 1919 the talking-machine part of the business had become so large that it was decided to separate the somewhat unrelated*1393 activities of the company. Accordingly the talking-machine part of the business was retained by the W. D. Andrews Company and the Andrews Sporting Goods Company was formed to take over the other lines of business. At that time the petitioner became a stockholder in as well as manager and treasurer of the Andrews Sporting Goods Company, but he was neither interested in nor active in the W. D. Andrews Company.
*1332 The petitioner had complete charge of the Andrews Sporting Goods Company and decided the policies with reference to purchases, sales, credit and the like. He made all decisions with reference to discontinuing or adding lines of merchandise and in employing and discharging help. He devoted his entire time to the business every business day of the week and sometimes at night. He had no other business or occupation nor did he engage in the financing or promoting of corporations. The petitioner traveled over the State of New York to call on golf professionals, who at that time carried the best golf merchandise and the bulk of it. The Andrews Sporting Goods Company was distributor for Wright & Ditson and had exclusive distribution of Silver King and Dunlop golf*1394 balls in New York State outside of the Metropolitan District. In addition, it handled several lines of golf merchandise made by other domestic manufacturers, as well as imported golf merchandise. The petitioner sold a substantial amount of merchandise to every golf professional in every golf club in the state outside of the Metropolitan District.
When the Andrews Sporting Goods Company was organized and the petitioner took charge, the gross sales were about $38,000 per year. By the third year the petitioner had built the sales up to about $400,000 annually and kept the sales around $350,000 annually for several years.
The only other stockholder who devoted time to the business was Harry R. Shell, who owned one share of stock and who was an assistant to the petitioner. In 1919 the petitioner's salary as an officer and employee was $50 per week and about 1920 it was increased to $75 per week, at which amount it remained until 1926. The petitioner could have drawn more salary if he had desired to, but it was his idea to take the money out in profits of the business.
Changes occurred in the distribution of the merchandise handled by the Andrews Sporting Goods Company which*1395 made it increasingly difficult to make a profit. Competition between manufacturers became so keen that the margin of profit to distributors was either cut down or the distributors were eliminated entirely, the manufacturer selling directly to the retailer. All dealers who purchased in quantity bought direct from the manufacturers. The development of good roads resulted in purchasers driving to big cities to get their merchandise. This eliminated sales by the Andrews Sporting Goods Company to dealers in small towns.
To meet changing conditions the Andrews Sporting Goods Company discontinued some lines of merchandise and added others. First marine hardware and boats were discontinued, and then the bicycles and bicycle sundries. Radios, radio supplies and electric refrigerators were added to increase sales.
*1333 On July 3, 1926, the Andrews Sporting Goods Company was adjudicated bankrupt. On that date the 788 shares of stock of the company were held as follows: W. D. Andrews, 192 shares; R. L. Andrews, 102 shares; James W. Pennock, 186 shares; James W. Pennock, Jr., 299 shares; Roy Scroxton, 7 shares; Rebecca H. Pennock and Harry R. Shell, one share each. The 299*1396 shares of stock owned by the petitioner were acquired during the first two or three years following the organization of the company in 1919. The petitioner bought some of his stock for cash and the remainder he received as a gift from his father, James W. Pennock, who was a man of considerable wealth and who had set petitioner up in his business. The petitioner's father never took an active interest in the business of the company and several times indicated an intention of giving his stock holdings in the company to the petitioner. The petitioner's investment in the capital stock of the company was $56,287.
The receiver in bankruptcy of the Andrews Sporting Goods Company paid to creditors of the company dividends as follows: 10 per cent on November 10, 1926; 5 per cent on January 3, 1927; 1 1/4 per cent on March 29, 1927. No payments were ever made to stockholders.
In his income-tax return for 1928 the petitioner took as a deduction for a statutory net loss deductible from income for that year the amount of $56,287. This amount represented the amount of petitioner's investment in the capital stock of the Andrews Sporting Goods Company. In determining the deficiency here*1397 involved the respondent disallowed the deduction on the ground that the loss was sustained on an investment and not in a trade or business.
OPINION.
TRAMMELL: The only error assigned in the petition is as follows: "The Commissioner erred in determining that the loss of $56,287.00 incurred in 1927 on account of the bankruptcy of the Andrews Sporting Goods Company is not a statutory net loss which is deductible in computing 1928 income." This allegation of error was denied by the respondent in his answer.
In his brief the petitioner, apparently relying on the reason given by the respondent for disallowing the deduction, contends that the only question in the case is whether the loss here involved was attributable to the operation of a trade or business regularly carried on by him. He further contends that such loss was clearly attributable to the operation of a trade or business regularly carried on by him. The respondent in his brief contends that the evidence indicates that the stock became worthless in 1926; that the petitioner has not established that he had a net loss in 1927 within the meaning of the *1334 statutes; and that, conceding for the sake of argument*1398 that the stock became worthless in 1927 and that he had a net loss in that year within the meaning of the statute due to the stock becoming worthless, he has not established a statutory net loss for 1928, because his business was that of an employee of a corporation and his loss, if any, was the loss of an investment.
We think the petitioner has taken a too limited view of the burden assumed by him in seeking to have the respondent's determination set aside. It is the respondent's denial of the deduction taken by the petitioner that gave rise to a cause of action, and not the respondent's reason for the disallowance. The respondent's reason for the disallowance does not in any wise lessen the burden assumed by the petitioner when he comes before this Board to have the determination reversed. In , we said:
If the Commissioner finds one fact or reason which he believes supports his adverse determination, he is not required to express his views on any or all other matters relating to the item, and his failure to deal with them carries no implication as to their treatment. *1399 It is not the Commissioner's method of determination or computation which is the substance of the proceeding, for the deficiency may be correct despite a weakness in arriving at it or explaining it. ; . "It is immaterial whether the Commissioner proceeded upon the wrong theory in determining the deficiencies. In any event the burden was on petitioner to show that the assessment was wrong." .
From the pleadings we think that in order to prevail it is incumbent on the petitioner not only to establish that the loss claimed was a loss sustained in the operation of a trade or business regularly carried on by him, but also that the amount contended for is the proper amount, if any, to be allowed.
Section 117 of the Revenue Act of 1928 provides for the deduction in that year of a net loss sustained in 1926 and 1927, and coming within the meaning of that term as used in the Revenue Act of 1926, to the same extent and in the same manner as a net loss sustained under the Revenue Act of 1928. Sections 117*1400 of the Revenue Act of 1928 and 206 of the Revenue Act of 1926 specify the manner in which a net loss must be computed and it is obvious that the amount may not be the same as the amount of loss shown on a correct return. ; . With the exception of the fact that the petitioner had an investment of $56,287 in the stock of the Andrews Sporting Goods Company, which was adjudicated a bankrupt on July 3, 1926, and that the petitioner never received anything from his investment upon the liquidation of the assets of the company, we are wholly without evidence upon which to compute any possible statutory net loss. These facts are not sufficient to show that the loss was sustained in *1335 1927 instead of in 1926 as contended by the respondent, and, more especially, do not show a statutory net loss in 1927. We know nothing as to items of income for any of the years 1926, 1927, or 1928, or as to the deductions applicable thereto. Nor are we informed as to what extent the amount of the loss sought as a deduction in 1928, if sustained in 1926, was absorbed or was properly applicable to 1927*1401 income. We are therefore unable to determine any statutory net loss to be deducted in 1928.
In view of the foregoing it is unnecessary for us to discuss the question argued by petitioner as to whether the net loss claimed was sustained in a trade or business regularly carried on.
Judgment will be entered for the respondent.