*610 1. In 1924 petitioner deducted as a bad debt his claim against a corporation organized and financed by petitioner and his brothers. Including such deduction, the deductions allowable to petitioner for 1924 exceeded his gross income. Held, petitioner was not regularly engaged in the business of promoting, managing, and financing corporations, and the excess of his deductions over income for 1924 is not allowable as a net loss deductible from income for 1925, under the provisions of section 206 of the Revenue Act of 1926.
2. On the facts, held that petitioner received no taxable income in 1926 from the acquisition of paper equities in certain Florida real estate, where it is shown that such equities had no fair market value in excess of encumbrances at the time of acquisition.
*1019 This is a proceeding for the redetermination of deficiencies in income tax for the years 1925 and 1926 in the amounts of $6,630.62 and $10,642.01, respectively. The issues are (1) whether petitioner sustained a statutory net loss in the amount of $44,433.54 in*611 the year 1924 which may be carried forward and deducted from gross income for 1925, and (2) whether petitioner realized in 1926 taxable income in the amount of $80,000 from certain transactions in Florida real estate.
FINDINGS OF FACT.
The petitioner is an individual, residing in Chicago, Illinois. During the year 1924 he was president and treasurer of the I. Lanski & Son Scrap Iron Co., hereinafter referred to as the Iron Co. or iron business, which was organized approximately 40 years ago by *1020 petitioner's father. His duties in connection with this business were to finance and manage the company and to negotiate the outstanding purchases and sales. The amount of time which petitioner gave to this company was limited by the attention which he was required to give to other enterprises in which he was interested, and also depended upon the amount of his time which the business needed. On some days he would devote several hours to its affairs; on other days he would not appear at the offices of the company. The business was wound up and liquidated about five or six years ago. In 1924 petitioner received a salary of $5,200 as an officer of this corporation.
*612 The petitioner had two brothers who were also interested in the Iron Co., and they operated the business under petitioner's general advice and supervision. At various times, particularly before the World War and during the depression when the company was in bad financial condition, petitioner made loans to it. In addition, the company used bank credit amounting to as high as $250,000, which was secured upon the personal endorsement of petitioner.
During the year 1924 petitioner was also interested in the Illinois Pipe & Manufacturing Co., which bought old pipe and sold it in accordance with specifications in orders received, certain finishing operations being done, if necessary. This business was begun about 25 years ago. It was owned by the Iron Co., the name Illinois Pipe & Manufacturing Co. being merely a trade name. This particular enterprise was promoted by petitioner, who made a connection through which used pipe could be acquired and worked into useable condition.
About 1920 or 1921 petitioner, with his two brothers, organized the Republic Pipe & Supply Co., a corporation which was engaged in the business of buying and selling new pipe and supplies as a jobber. This*613 enterprise was formed through the efforts of the petitioner and was organized for the purpose of capitalizing upon his personal connection with one of the largest manufacturers of pipe in the Chicago district. The petitioner was president and treasurer of this corporation, and as such received a salary of $10,000 in 1924. He owned about one-third of the stock. Two of his brothers owned the remainder of the stock in this company. It was the petitioner's function to make the proper business connections in buying merchandise and to supervise the business and see that it was properly managed. This company was operated upon credit obtained at the banks running from $200,000 to $250,000, all of which was obtained upon the personal guarantee of the petitioner. Petitioner has been held responsible upon his guarantee of this corporation's credit. The company was in existence during the year 1924, and was *1021 liquidated about five or six years ago, at the same time as the iron business.
In 1921 or 1922 petitioner, Frank Neal, and one Larson organized the Red Point Manufacturing Co., which engaged in the manufacture of points for well-drilling machinery. Neal and Larson were*614 formerly connected with the company from which petitioner and his companies purchased a large amount of supplies. About one-third of the stock was owned by petitioner, and he was an officer of this corporation. One of the other individuals was placed in active charge of operations and petitioner gave only such time to the company as was necessary to confer with his associates in the management of its affairs. This company continued in business about one year and was liquidated in 1925.
About 30 years ago petitioner became interested in real estate, his principal activity in that line being to acquire vacant property and erect buildings for purposes of investment or sale. Homes, stores, apartment buildings and factory buildings were erected, depending upon the location of the vacant property purchased. Prior to 1924 petitioner had acquired from 25 to 30 pieces of property for these purposes, and had sold a number of them.
With few exceptions up to 1924, no one was associated with petitioner in his real estate transactions. On most of the new structures loans were made to finance the erection of the buildings. Petitioner employed architects and had the work of construction*615 done by contractors. A substantial amount of petitioner's time was not required in supervision of the work. After completion, a building would be rented by petitioner's agent on the premises. All of these real estate ventures were in and around Chicago. About 1916 petitioner traded a number of pieces of Chicago property for 12,000 acres of land in Florida, which he held until it was sold in 1925. Subsequent to 1924 he was also interested in other real estate transactions in Florida.
During the World War petitioner initiated a venture in the mining of manganese as a part of the business of I. Lanski & Son Iron Co. There were two mines, one in Georgia and one in Tennessee. Petitioner placed two men in charge of the operations, and about once or twice a month, if necessary, he would go to the mines. He had the general management of this venture, and was in charge of the financial affairs.
About 1917 the petitioner became interested, through the purchase of stock, in the Great Eastern Manufacturing Co., which was engaged in selling phonographs. At the time petitioner became interested in this company it had just been started and was without capital. Petitioner owned all*616 the stock of the company, except that which another party had the right to purchase. All the capital *1022 employed by the company was furnished by petitioner, who also arranged for a line of credit of about $25,000 at one of the banks. This bank credit was secured through the personal endorsement of the petitioner, who was later called upon to make good on his endorsement. The company continued in operation for about three or four years. Petitioner was president of this corporation.
In 1919 the petitioner and two of his brothers organized the Fort Dearborn Furniture Co. to manufacture phonographs. The idea of starting this business was originated by petitioner because of his connection with the Great Eastern Manufacturing Co., which was engaged in selling phonographs but could not obtain enough to meet its demands. Because of these conditions petitioner decided to go into the business of manufacturing phonographs. When the business became unprofitable, the Fort Dearborn Furniture Co. began the manufacture of tables, and later bedroom furniture. One of petitioner's brothers was in charge of the plant. Petitioner was president, treasurer, and manager of the company, *617 and arranged the finances and generally supervised the management of the business. Petitioner owned about one-third of the stock of this company and his two brothers owned the remainder of the stock. In financing its operations petitioner obtained credit for the company at banks in the amount of about $150,000. This credit was secured upon the personal endorsement or guarantee of petitioner. Petitioner also advanced money to this company. His two brothers, who were stockholders therein, also advanced money to this company.
In the year 1924, the petitioner deducted as a bad debt $104,024.32 on account of the worthlessness of his claim in that amount against the Fort Dearborn Furniture Co. for money theretofore loaned and advanced to the company. Including the said deduction, the excess of the deductions allowable to petitioner for the year 1924, under section 214 of the Revenue Act of 1924, over the income of the petitioner for that year, amounted to $44,433.54.
In 1924 and prior thereto petitioner was continuously looking for business opportunities which he might promote and finance, and ran advertisements in newspapers to secure propositions that might be of interest to*618 him. These advertisements usually stated that he desired to become connected with ventures that might be of interest to a person having ability and financial support or resources. He accepted no opportunity, if any, offered in response to such advertisements. None of the corporations mentioned, other than the iron company and the Republic Pipe & Supply Co., was a going concern during or subsequent to 1924.
Petitioner did not hold himself out to the public as being engaged in the business of loaning money, and he made loans only to companies in which he was a stockholder and officer.
*1023 In June 1925 the petitioner entered into three agreements with one Isaac T. Cook for the purchase of certain lands in Glades and Hendry Counties, Florida, consisting of one tract of 4,520 acres, a second tract of 6,880 acres, and a third tract of 10,000 acres. Petitioner paid as earnest money to apply on the purchases when consummated, under the three contracts, the total amount of $5,000.
On September 8, 1925, petitioner entered into a written agreement to sell the 4,520-acre tract and the 6,880-acre tract to one B. G. Dahlberg. Under this contract petitioner was to receive a*619 certain amount of cash and the purchaser was to assume certain mortgage payments and to deliver to petitioner a second mortgage and preferred stock of a corporation to be organized to take title to the property.
Subsequent to the execution of this agreement it developed that Dahlberg was financially unable to carry out his contract with the petitioner, and in that situation petitioner was unable to discharge his obligations under the contracts with Cook. Furthermore, Cook was depending on the money which he was to receive from petitioner to enable him to deliver title to the lands which he had agreed to sell to petitioner.
When Dahlberg refused to go through with his contract with petitioner the entire transaction failed and a new deal was worked out by Cook. Under the new arrangement entered into on February 1, 1926, the petitioner received a book or paper equity in 3,040 acres of land and a one-half interest in a like equity in 10,100 acres of land, and Dahlberg acquired a certain portion of the land for which he paid $80,000 in notes and securities to Cook
Petitioner did not receive $80,000 or any other amount as a commission in the transaction. Petitioner received only*620 the equities above mentioned in lands encumbered by mortgages equal to or in excess of their fair market values. The equities so received by petitioner had no fair market value in 1926.
OPINION.
HILL: The first issue in this case is whether petitioner sustained a statutory net loss in 1924 which may be carried forward and deducted from gross income for 1925. The parties have stipulated that the petitioner sustained a deductible bad debt loss of $104,024.32 in 1924 on account of the worthlessness of his claim in that amount against the Fort Dearborn Furniture Co. for money loaned and advanced to the company, and that including such loss the excess of the deductions allowable to petitioner for 1924 over income amounted to $44,433.54. The parties further stipulated that if petitioner is entitled to deduct from his income for 1925 any net loss sustained in 1924 the amount is $44,433.54.
*1024 Under section 206(a) and (b) of the Revenue Act of 1926, if a taxpayer has sustained a net loss attributable to the operations of a trade or business regularly carried on by him the amount is allowable as a deduction in computing net income for the succeeding taxable year. And*621 subdivision (e) of the same section provides that if for the taxable year 1924 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1924, which are substantially the same as in the 1926 Act, the amount of such loss shall be allowed as a deduction in computing net income for 1925. Thus, the sole point in controversy here is whether or not the net loss admittedly sustained by petitioner in 1924 was "attributable to the operation of a trade or business regularly carried on" by him.
Respondent disallowed the claimed deduction as not within the terms of the statute, substantially taking the position that petitioner's regular business was that of a corporate executive; that he was not regularly engaged in the business of lending money, and that the loans to the furniture company, which resulted in the loss in controversy, constituted a casual transaction made to protect his investment in the corporation's stock.
The determinative questions are, first, Was petitioner engaged in promoting, managing, and financing corporate enterprises? and, second, If he was so engaged, was that a trade or business regularly carried on by him on his own behalf?
It is not sufficient*622 that the loss be sustained in a business transaction. It must be sustained in a trade or business regularly carried on by the taxpayer. This Board has, therefore, distinguished between a business regularly carried on and a single, isolated transaction. * * *
The loss contemplated by the statute is an operating loss, and the party claiming it must be the operator of the trade or business in which the loss occurs. Therefore, a business regularly carried on by the taxpayer means a business regularly operated by the taxpayer on his own behalf. [
In , this Board said:
What constitutes a business has previously been considered in a number of cases. In , we approved definitions of "business" which we will repeat here:
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. 1 Bouvier's Law Dict. *623 p. 273. Approved in ; .
Over a period of about 25 years up to and including the year 1924, the petitioner was connected with a number of corporations as a stockholder and officer. These corporations were I. Lanski & Son *1025 Scrap Iron Co., Great Eastern Manufacturing Co., Fort Dearborn Furniture Co., Republic Pipe & Supply Co., and the Red Point Manufacturing Co. The Illinois Pipe & Manufacturing Co. was not a corporation but a trade name established about 25 years ago and used by I. Lanski & Son Scrap Iron Co. for certain subsidiary trade purposes. Of these corporations the petitioner and two of his brothers organized the Fort Dearborn Furniture Co. in 1919, and the Republic Pipe & Supply Co. in 1920 or 1921. The Red Point Manufacturing Co. was organized by the petitioner and two other persons in 1921 or 1922. Petitioner acquired stock in the Great Eastern Manufacturing Co. in 1917, but did not organize it. The I. Lanski & Son Scrap Iron Co. was organized about 40 years ago by petitioner's father. The petitioner was a stockholder and officer*624 in each of the corporations named, and was president and treasurer of I. Lanski & Son Scrap Iron Co., Republic Pipe & Supply Co., and the Fort Dearborn Furniture Co. He was president of the Great Eastern Manufacturing Co. and was manager of the four corporations last named. It was his duty as such officer and manager to arrange for the financing of the operations of these corporations. As an officer of the I. Lanski & Son Scrap Iron Co. petitioner received in 1924 a salary of $5,200, and in the same year he received a salary of $10,000 as an officer of the Republic Pipe & Supply Co. Neither of the other corporations was a going concern in 1924.
Petitioner initiated the idea and brought about the organization of the Fort Dearborn Furniture Co., the Republic Pipe & Supply Co., and the Red Point Manufacturing Co. He owned one-third of the stock in each of these three corporations. His two brothers owned the remainder of the stock in the Fort Dearborn Furniture Co. and the Republic Pipe & Supply Co. Frank Neal and one Larson owned the remainder of the stock in the Red Point Manufacturing Co. The petitioner owned practically all of the stock of the Great Eastern Manufacturing*625 Co.
Pursuant to his duty as an officer petitioner arranged for bank credit to carry on the operations of all the corporations hereinabove named, except the Red Point Manufacturing Co., which continued in business for about one year only on the capital furnished therefor by petitioner at its organization. Such bank credit was secured on the personal guaranty or endorsement of the petitioner.
During the depression before the World War, petitioner personally advanced moneys to the Lanski Co. and subsequently advanced moneys to the Furniture Co. for its operations. It is the loss sustained by reason of the advancements to the Furniture Co. which is herein claimed by the petitioner as a net loss deductible from his 1925 income.
*1026 The record discloses no advancement or loan by petitioner to any other corporation. In some instances petitioner was required to repay the loans from banks secured on his personal guaranty.
In addition to his activities in connection with corporate enterprises the petitioner, over a period of about 30 years, was engaged in buying vacant real property, erecting buildings thereon, and either renting or selling same for profit. His activities*626 in this line were on his individual account and had no connection with the business of the corporations and had no relation to his corporate connections. The petitioner neither promoted, managed, nor financed any corporations other than those in which he was a substantial stockholder; he neither guaranteed nor made loans other than to such corporations. In all of the corporations with which the petitioner was connected, except Great Eastern Manufacturing Co., persons other than petitioner had substantial stockholdings. Petitioner's two brothers, who were stockholders with him in the Fort Dearborn Furniture Co., him in making loans to that company.
The petitioner had two lines of business in which he was employed for profit or a livelihood. One was the management as a salaried executive officer, of certain corporations in which he was a stockholder; the other was his real estate operations. His activities in securing operating credit and in advancing money to the corporations in question were merely incidental to his obligations and duties as a corporation executive, and as such afforded him neither profit nor expectation of profit separate and apart from the business of the*627 corporations. It is not claimed by petitioner, nor does it appear, that he received any compensation for financing corporations other than that which may have inured to him from his investments in the corporations. It does not appear that petitioner received any bonus, fee, commission or other compensation for promoting the organization of corporations.
It can not be said, therefore, that he was engaged in promoting or financing corporate enterprises for a livelihood or profit; hence, such activity of the petitioner did not constitute a trade or business. His means of livelihood or profit, as to his activities in connection with corporations, came from the salaries he received as an executive officer thereof, and his proportionate part of the earnings of such corporations, distributed as dividends, if any. His employment was that of a corporation official - that was the business regularly carried on by him; that was the employment in connection with corporations which occupied his time, attention and labor for the purpose of a livelihood or profit. We conclude, therefore, that the loss which petitioner sustained in 1924 through advancements theretofore made *1027 to*628 the furniture company was not sustained in a trade or business regularly carried on by him.
Respondent's action on the first issue is approved. ; ; ; ; affd., ; ; ; affd., ; certiorari denied, ; ; ; .
The second issue involves the action of the respondent in including in petitioner's income for 1926 the amount of $80,000 alleged to have been received by petitioner in that year from one Isaac T. Cook as commissions on the sale of Florida real estate. The evidence conclusively shows that the $80,000 of securities passed in the transaction in question was received by Cook and not by or for the petitioner; that petitioner received only a paper equity in 3,040 acres of land*629 and a one-half interest in a like equity in another tract of 10,100 acres. Cook held the remaining interest in the equity in the latter tract of land.
On brief respondent does not seriously contend that petitioner received the $80,000 as commissions, except possibly by constructive receipt as payment for his equities in the above mentioned lands, but respondent urges in the alternative that petitioner received taxable income in the same amount represented by the fair market value of his interest in the lands for the cancellation and release of certain contracts referred to in our findings of fact. The correctness of respondent's contention depends upon whether the interest in the lands received by petitioner had a fair market value at the time of receipt. Concededly petitioner received taxable income only to the extent of the fair market value, if any, of the equities acquired.
The evidence shows that the lands in question were encumbered by mortgages; that at the time of the transaction in 1926 the Florida land "boom" had broken and that the paper interests received by petitioner then had no fair market value in excess of the mortgages. We have so found as a fact, and there*630 is no persuasive evidence in the record to the contrary. Neither petitioner nor Cook considered his interest in the lands of sufficient value to justify the payment of taxes.
Respondent's action on the second issue is reversed.
Reviewed by the Board.
Judgment will be entered under Rule 50.