*2015 Where liabilities incurred by the taxpayer, in the ordinary course of the operation of a partnership of which he was an active member, are paid by him two years after its dissolution during the liquidation of its affairs, any losses sustained thereby are losses resulting from the operation of a business regularly carried on within the meaning of section 204(a) of the Revenue Act of 1921, the benefits of the section not being limited to losses resulting from the operation of a business within the taxable period during which the losses were sustained.
*558 The respondent has determined a deficiency of $30,994.20 for the year 1923, in connection with which the petitioner alleges he erred in disallowing as a deduction a net business loss for the year 1922.
FINDINGS OF FACT.
From 1893 until its dissolution some time in 1920, the petitioner was a member of the firm of Blair & Co., a partnership engaged in the business of buying and selling securities, financing corporations, lending money, and dealing in*2016 foreign exchange, with offices at 24 Broad Street, New York City. The other members of the firm were Ledyard C. Blair and John B. Bennis. Petitioner's interest in the partnership was 22 per cent.
Among the corporations financed by the partnership during the time it was actively engaged in business were the Clinchfield Railroad, Carolina, Clinchfield & Ohio Railroad, Terre Haute & Peoria Railroad, Otis Elevator Co., Royal Baking Powder Co., Borden *559 Milk Co., Moose Mountain Co., and the International Coal Products Co. and its subsidiary, the General Oil & Gas Co. The International Coal Products Co. was organized by the partnership to produce a by-product of coal known as carbo coal. The partnership held all of its outstanding capital stock and bonds. In or about 1918 the Products Co. expended four or five million dollars in constructing and equipping a plant at Clinchfield, Va. In addition to the funds received from the partnership, in 1918 the Products Co. obtained a loan of $2,750,000 from the United States with which to erect the plant. The partnership guaranteed payments of the loan from the United States and pledged its credit for other large amounts obtained*2017 by the Products Co. to conduct its affairs.
In 1919 or the early part of 1920 the Products Co. became financially involved and, as a result, the partnership sustained heavy losses.
In the spring of 1920 the partnership combined its business with Solomon & Co., and two corporations were organized, one under the name of Blair & Co., Inc., (hereinafter referred to as the corporation) and the other known as the Blair Securities Co. All of the quick assets of the partnership were sold to the corporation for stock of the latter, and its remaining assets were sold to the Blair Securities Co. Neither corporation assumed any of the liabilities of the partnership.
Thereafter the partnership ceased business as a going concern and the former partners started to liquidate the firm's outstanding liabilities. Its liabilities at that time were about $1,000,000, exclusive of its liability on the loan of $2,750,000 made by the United States to the Products Co.
In 1921 the claim of the United States against the petitioner and other members of the former partnership as guarantors of the loan of $2,750,000 made to the Products Co. was placed in the hands of counsel for collection, and demands*2018 were made upon the guarantors for payment. In 1922 the petitioner frequently conferred with his attorney, the Secretary of War, and other officials of the Government with reference to the subject. Negotiations commenced for a compromise of the claim ended with a settlement without court action in 1925. During and after 1922 the petitioner held numerous conferences with the other members of the former partnership and firm creditors in connection with matters relating to the liquidation of the concern and his personal liability for its debts. His business affairs were conducted with the assistance of a secretary from an office he maintained at 24 Broad Street, New York City. During 1922 practically all of the petitioner's time was devoted to winding up the affairs of the former partnership and his liability as a member of the firm.
*560 In 1922 the petitioner and his former partners, due to the financial condition of the Products Co., were obliged to make good their endorsements on notes given by the latter in connection with money borrowed from the partnership and from a bank. Five of these notes, each in the principal amount of $100,000, were transferred to the corporation*2019 at the time of its organization, with the understanding that they would be paid within three months. The notes were held by the corporation until some time in 1922 prior to March 9, when upon demand of the holder the endorsers paid the obligations, plus accrued interest. The amount paid by the petitioner, computed on the basis of his interest in the former partnership, was $128,578.69, for which the Products Co. gave the petitioner a demand note dated March 9, 1922. The amount of the note, incorrectly stated by the petitioner in his return for 1923 as $128,527.69, was claimed as a bad debt deduction in 1923. The note was worthless in the year 1922.
In connection with the partnership's financing of the Products Co. the members of the firm endorsed six notes, totaling $785,714.28, issued by the former to a bank for loans. In 1922 demand was made upon the endorsers for payment. Dennis, one of the endorsers, was unable to meet his portion of the liability and as a result the petitioner and Blair were required to, and did, pay the full amount due under the notes. The loss sustained by the petitioner, after deducting sums realized on the sale of collateral deposited by the Products*2020 Co. with the bank as security for the payment of the notes, amounted to $399,399.28. The claim the petitioner acquired against the Products Co. as the result of his payment had no value in the year 1922.
At the time of the organization of Blair & Co., Inc., and the Blair Securities Co., the old partnership was indebted to James A. Blair, at one time a member of the firm, in the principal amount of $900,000. A settlement was reached by the old partnership with James A. Blair, whereby he agreed to accept stock in the Blair Securities Co. in payment for the partnership's indebtedness to him, provided the partners, including petitioner, would guarantee him against any loss. In 1922 the guarantors were required to make good their guarantee and petitioner paid to James A. Blair, as petitioner's share, $197,496.02. This amount was claimed by petitioner as a loss in his 1922 return and the amount so claimed was allowed by respondent and is not in controversy in this proceeding other than it is respondent's position that none of the loss incurred by the petitioner within the year 1922, including this amount, constituted a net loss within the meaning of the Revenue Act.
The petitioner*2021 in 1922, in order to raise funds with which to meet his financial obligations as a member of the former partnership, sold certain stocks, bonds, and notes owned by him individually and *561 jointly with other members of the firm. He realized a net profit of $513,005.16 on the sale of the securities.
The petitioner in 1922 sustained an operating loss of $539.71 in connection with the rental of the Marston Building located at Ranger, Tex.
The petitioner in 1922 held stock in the corporation and the Blair Securities Co., and, in addition to being an officer of the latter corporation and chairman of the board of directors of the Texas Pacific Coal & Oil Co., he was a director of not less than eight other corporations.
In his return for the year 1922 the petitioner reported income, and claimed deductions therefrom, as follows:
| Income | Deductions | ||
| Salary | $24,000.00 | Interest | $45,402.33 |
| Directors' fees | 2,215.58 | Taxes | 465.40 |
| Interest | 5,011.67 | Bad debts | 596,895.30 |
| Blair & Co. (loss) | 9,638.10 | Contributions | 500.00 |
| Rents and royalties (loss) | 1 591.71 | Office expenses | 292.03 |
| Sale of stocks | 522,643.26 | ||
| Dividends | 89,139.06 | ||
| Total (net) | 632,779.76 | 643,555.06 |
On an audit of the return the respondent increased the loss of $10,775.30 reported therein to $138,750.99, due principally to a transfer of the bad debt item of $128,578.69 from 1923 to 1922. The respondent declined to allow any part of the loss as a deduction from net income in the year 1923.
OPINION.
ARUNDELL: Respondent's position is that the losses sustained by petitioner within the year 1922, the amounts of which are not in controversy, may not be carried forward into subsequent years as net losses under section 204 of the Revenue Act of 1921, because during the year 1922 petitioner was not engaged in the carrying on of a trade or business. The contention apparently finds its basis in article 1601 of Regulations 62, wherein it is stated:
The term "net loss" as used in the statute means only a net loss resulting from the operation during the taxable year of any trade or business regularly carried on by the taxpayer. (Italics ours.)
We find nothing in section 204, however, which limits its application to instances where the net loss resulted from the operation of a trade or business within the year in which the loss was sustained. *2023 It is sufficient under the statute if the loss results from the operation of a trade or business, whether the taxpayer was so engaged during *562 the particular year or not. The purpose of section 204 was to relieve from the harsh rule that required one's tax liability to be determined solely from the happenings of a 12-month period. It is a relief provision and should be liberally construed.
There is no question that the petitioner during the year 1922 sustained certain losses which, as stated before, the respondent has accepted as properly deductible by petitioner within that year. It is equally clear from the evidence that the losses we propose to include in determining petitioner's net loss for the year 1922 were losses which resulted from the operations of Blair & Co., a partnership, which before its dissolution in 1920 was regularly engaged in carrying on a trade or business. It is our opinion that these facts bring the case squarely within the terms of section 204 and that any losses sustained by petitioner in 1922, resulting from the operation in prior years of Blair & Co., constitute a net loss within the meaning of the Act, and as such may be carried forward*2024 and used as a deduction against petitioner's 1923 net income.
There is no dispute about the amount of the items of gross income. The petitioner reported in his 1922 return, a gross profit from the sale of securities in the amount of $549,847.20, which amount was accepted by the respondent as correct. Losses totaling $27,203.94 were allowed by respondent as an offset to the profits leaving a net figure of $522,643.26. Petitioner, however, also sold at a loss certain securities owned by him jointly with other members of the former partnership. Petitioner's share of the losses on these transactions amounted to $9,638.10, and in our opinion these losses must be taken into consideration in determining the total net profit from the sale of all of the securities disposed of by the petitioner within the year 1922, which amount we have found to be $513,005.16.
The items of $128,578.69, $399,399.28, and $197,496.02, a total of $725,473.99, representing payments made by the petitioner in 1922 for liabilities incurred by him as a member of the former partnership, are losses sustained in the operation of a business regularly carried on within the meaning of section 204 of the taxing statute*2025 and should be considered in a determination of the petitioner's "net loss" for deduction purposes in the taxable year.
No evidence was offered to show whether the items of $45,402.33 and $465.40 claimed as deductions for interest and taxes, respectively, were paid in connection with any business regularly carried on by the petitioner. Accordingly, these items should not be considered in the computation of any net business loss.
As allowable contributions are based upon net income, and the petitioner did not have such income in the year 1922, the item of $500 claimed as a deduction for contributions may not be used to *563 increase the net business loss for the year. .
The testimony on the item of $292.02, claimed in the return as a deduction for office expenses, is too indefinite to make any findings of fact. It is, therefore, disallowed as a business expense.
The facts as to the item of $539.71 are insufficient to reach a conclusion that the loss was sustained in connection with a business regularly carried on by the petitioner. We have no information concerning the acquisition of the property or the purpose for which*2026 it was acquired. All we know is that in 1922 the expenses of operating the property exceeded the rents by $539.71.
The net loss of the petitioner for the year 1922, deductible from his net income for the taxable year, should be computed in accordance with the foregoing disposition of the various items.
Reviewed by the Board.
Decision will be entered under Rule 50.
TRAMMELL and BLACK dissent.
Footnotes
1. Correct loss $539.71. ↩