1928 BTA LEXIS 3640">*3640 1. Where an individual owner of a business incorporated the business on April 24, 1917, and the corporation in filing its return for the fiscal year ended January 31, 1918, reported the full amount of earnings of the business from February 1, 1917, to January 31, 1918, it is held that the Commissioner's action in prorating the earnings for the year, so as to determine the amount of earnings from February 1, 1917, to April 24, 1917, the date of incorporation, and in allocating the amount so determined to the individual, is correct.
2. A corporation, practically all of the stock of which was owned by petitioner, sustained in 1923 and loss of $15,068.42. Petitioner in his return for 1923 deducted the amount of $14,721.99 on account of the loss sustained by the corporation. The Commissioner disallowed the deduction. It is held that section 220 of the Revenue Act of 1921 does not authorize the deduction taken by petitioner and that the Commissioner's action must be approved.
11 B.T.A. 1309">*1309 These proceedings are for the redetermination of deficiencies in income1928 BTA LEXIS 3640">*3641 tax for the calendar years 1917 and 1923, in the amounts of $159.82 and $199.58, respectively.
11 B.T.A. 1309">*1310 With respect to the deficiency determined for the year 1917, the petitioner alleges that the Commissioner erred in restoring to his taxable income a portion of the earnings reported by a corporation, successor to a business theretofore conducted by him, for the fiscal year beginning February 1, 1917, and ending January 31, 1918.
With respect to the deficiency determined for the year 1923, the petitioner alleges that the Commissioner erred in disallowing as a deduction from gross income for that year his distributive share of a loss sustained by a corporation of which he was practically the sole stockholder.
FINDINGS OF FACT.
Petitioner is an individual who resides at Joliet, Ill.
Prior to April 24, 1917, petitioner, as an individual, conducted a business of Joliet. The business was operated on a fiscal year basis ending January 31.
On April 24, 1917, a corporation was formed and took over the business theretofore conducted by petitioner. The first return of income filed by the corporation covered the period from February 1, 1917, to January 31, 1918.
1928 BTA LEXIS 3640">*3642 Upon audit of the return of the corporation for the fiscal period from February 1, 1917, to January 31, 1918, and the return of petitioner for the calendar year 1917, the Commissioner allocated to the income of petitioner the earnings from February 1, 1917, to April 24, 1917, the date of incorporation.
During the year 1923, a corporation, of which petitioner was the principal stockholder, sustained a loss of $15,068.42, of which amount the petitioner in his return for the year 1923 deducted $14,721.99 as his distributive share thereof. Upon audit of petitioner's return the Commissioner disallowed the deduction.
OPINION.
LOVE: The only question raised by the pleadings with respect to the deficiency for the year 1917 was the date of incorporation of the company which took over the business theretofore conducted by petitioner.
The corporation made a return covering the period from February 1, 1917, to January 31, 1918, and upon audit thereof the Commissioner determined that the date of incorporation was April 24, 1917, and, accordingly, that portion of the earnings attributed to the period from February 1, 1917, to April 24, 1917, was restored to petitioner's income.
1928 BTA LEXIS 3640">*3643 At the hearing petitioner stated that April 24, 1917, was the date of incorporation. We approve, therefore, the Commissioner's determination 11 B.T.A. 1309">*1311 with respect to the year 1917. See .
The question with respect to the year 1923 is whether petitioner may deduct in his return part of a loss sustained by a corporation of which he was the principal stockholder. The petitioner, in contending that he is so entitled, relies upon section 220 of the Revenue Act of 1921, which in part provides:
That if any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders or members through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 25 per centum of the amount thereof, which shall be in addition to the tax imposed by section 230 of this title and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including1928 BTA LEXIS 3640">*3644 penalties, as that tax: Provided, that if all the stockholders or members of such corporation agree thereto, the Commissioner may, in lieu of all income war-profits and excess-profits taxes imposed upon the corporation for the taxable year, tax the stockholders or members of such corporation upon their distributive shares in the net income of the corporation for the taxable year in the same manner as provided in subdivision (a) of section 218 in the case of members of a partnership.
This section becomes operative only when the corporation has withheld distribution of its earnings and has become liable to the 25 per cent additional tax provided therein, and has no application to a loss such as involved in this proceeding and does not entitle a stockholder to deduct any part of the corporate loss.
The Commissioner's determination with respect to the year 1923 is approved.
Judgment will be entered for the respondent.