Harrisburg Hospital, Inc. v. Commissioner

HARRISBURG HOSPITAL, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Harrisburg Hospital, Inc. v. Commissioner Docket No. 19625. United States Board of Tax Appeals 15 B.T.A. 1014; 1929 BTA LEXIS 2751; March 21, 1929, Promulgated *2751 1. An amount was paid by a corporation for selling its capital stock. Although the amount paid was in excess of the amount received from the sale of capital stock, held, no deductible loss resulted. 2. During the years 1922 and 1923 petitioner made expenditures for stenographic hire, miscellaneous office supplies, insurance, advertising and taxes amounting to $1,200.47, of which amount $227.54 represented county and municipal taxes. Held, that all the items except taxes were expenditures in connection with the erection of the hospital and the sale of capital stock, and were not ordinary and necessary expenses of doing business, and, therefore, were not deductible in the years 1922 and 1923. The item of $227.54 for taxes was not a capital item but was deductible during the years when paid or accrued. However, the petitioner in 1922 and 1923 was not engaged in the operation of any trade or business regularly carried on by it and, therefore, does not come within the provisions of section 206(e) and (f) of the Revenue Act of 1924. Allen H. Gardner, Esq., for the petitioner. L. A. Luce, Esq., for the respondent. TRAMMELL *1014 *2752 In this proceeding the petitioner seeks a redetermination of a deficiency in income tax for the year 1924 in the amount of $648.32. It alleges error on the part of the Commissioner: (1) In failing to allow as a deduction from gross income in the year 1924 an amount of $3,332.90 representing the difference between the amount of *1015 $4,243.90 paid the Edward J. McCormick Co. for conducting a stock-selling campaign in 1922, and the amount of $911 which was finally collected by the petitioner from the subscribers; (2) in failing to find that the petitioner sustained net losses in the years 1922 and 1923 in the aggregate amount of $1,200.47, and to allow that amount as a deduction from gross income for the year 1924; (3) in failing to find that the petitioner sustained the net loss of $3,330.90 in the year 1924, which amount represents the difference between $4,243.90, the amount paid the Edward J. McCormick Co. for conducting a stock-selling campaign in 1922, and $911, the amount collected by the petitioner from subscribers to capital stock resulting from the campaign. FINDINGS OF FACT. The petitioner is a corporation organized in the year 1921 under the laws of the State*2753 of Illinois for the purpose of operating a hospital for profit. Its address was Harrisburg, Ill. During the period from 1922 until February, 1924, the hospital was in process of construction and arrangements were being perfected looking toward the operation thereof. No income, gross, net or otherwise, was received by the petitioner until February, 1924, at which time the construction of the hospital building was completed and the operation of the hospital begun. In the year 1922 the petitioner, in order to raise additional capital, entered into a contract with the Edward J. McCormick Co., Chicago, Ill., in which it was agreed that the petitioner would pay the said Edward J. McCormick Co. the sum of $3,000 to conduct a campaign for the sale of the petitioner's capital stock and, further, that the petitioner would pay certain other expenses of the campaign in an additional amount not to exceed $1,800. Pursuant to this contract the Edward J. McCormick Co. conducted a stock-selling campaign during the months of May and June, 1922. The petitioner during the year 1922 paid out pursuant to the contract the amount of $4,243.90. The total amount of stock subscriptions secured through*2754 the efforts of the Edward J. McCormick Co. aggregated $1,310. Of this amount only $911 was ever collected by the petitioner from the subscribers. The payments comprising this amount were collected during the years 1922, 1923, and 1924, the last payment being made in February, 1924. It was determined by the petitioner in the year 1924 that no further amounts could be realized as a result of the stock-selling campaign and that the above-mentioned contract had no further value. The amount of $3,332.90, the difference between the amount paid under the contract, or $4,243.90, and the amount realized therefrom or $911, was included in a deduction from gross income of $6,489.97 *1016 claimed by the petitioner in its return of income for 1924. This deduction was disallowed by the respondent in determining the deficiency. During the years 1922 and 1923 the petitioner paid the following amounts: Stenographic hire $595.00 Miscellaneous supplies 117.53 Stationery and printing 133.37 Postage 61.30 Insurance 42.50 Advertising 17.00 Telegrams $4.98 Safety deposit box rental 1.25 County and municipal taxes 227.54 Total 1,200.47 None of the above*2755 amounts were allowed as deductions by the respondent in determining the petitioner's net income for 1924. The stenographer's duties included the writing of letters to obtain information relating to the erection of the hospital and the outfitting thereof and keeping a record of stock subscriptions that were being paid for by partial payments, giving receipts, and performing general office work. The item of miscellaneous supplies, $117.53, covered supplies that were needed during the period of construction, including office furniture and the cost of removing an old house from the hospital lot and mowing the weeds from the lot in accordance with instructions from the chief of police; the item of $61.30 postage represented the cost of stamps; item for insurance, $42.50, was paid for tornado insurance during the erection of the building; advertising, $17, represented the cost of newspaper announcements relating to the erection of the hospital; telegrams, $4.98, represented the amount spent for telegrams to contractors and to supply houses to get quotations on the costs; the item of $227.54 for taxes represented county and municipal taxes, no part of which represented taxes assessed*2756 against local benefits of the kind tending to increase the value of the property assessed. The expenditures made in 1922 and 1923, consisting of stenographic hire and all other items, except taxes, and amounting to $972.93, were expenditures connected with stock subscriptions and the construction of the hospital. OPINION. TRAMMELL: The expenditure of $4,243.90 to the Edward J. McCormick Co. as compensation for services in carrying on the selling campaign in an effort to sell the petitioner's capital stock is not an ordinary and necessary expense. See ; ; . Nor in our opinion does the difference between the amount paid for conducting the stock-selling campaign and the *1017 amount received from the stock subscriptions constitute a deductible loss. The fact that the results of the services failed to reach the expectations of the petitioner is not material and does not alter the legal principles involved. The services performed were in connection with capital and the expenditures were capital expenditures. We see*2757 no legal distinction between the payment of commissions for the sale of stock and the payment for services in selling stock or undertaking to sell it. In either case the payment is in connection with the acquisition of capital. The mere fact that the result sought was not obtained is not a basis for a deductible loss. A taxpayer might purchase a capital asset at an amount in excess of its actual value, but this does not give rise to a deductible loss in the acquisition. We are, therefore, of the opinion that no loss resulted from this transaction which is deductible from gross income either in 1922, 1923, or 1924. During the years 1922 and 1923 the hospital was in the course of construction and the petitioner expended $972.93 for stenographic hire, office supplies, etc., which related directly to the construction of the hospital or to the collection of stock subscriptions. The expenditures were for correspondence with contractors and architects, and other miscellaneous items which are an additional cost of the building. That portion of the expenditures which related to collection of stock subscriptions also deals with capital to the same extent as expenses incurred in the*2758 sale of the stock, and is not a deductible item of expense. We, therefore, are of the opinion that of the $1,200.47, $972.93 consisted of items which were not ordinary and necessary expenses or losses and, therefore, were not deductible in 1922 or 1923. The balance of $227.54 was expended for state, county and municipal taxes. We have held that taxes are deductible in the year when paid or accrued. ; . The only question then remaining is whether or not such expenditures resulted in net losses contemplated by section 206(e) and (f) of the Revenue Act of 1924 as computed under the Revenue Act of 1921. Section 204(a) of the Revenue Act of 1921 provides: That as used in this section the term "net loss" means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer. Section 206(d)(1) of the Revenue Act of 1924 provides: As used in this section the term "net loss" means the excess of the deductions allowed by section 214 or 234 over the gross income, with the following exceptions and limitations: *1018 (1) Deductions*2759 otherwise allowed by law not attributable to the operations of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. From the above provisions of the Revenue Acts of 1921 and 1924 it is clear that the loss must result from the "operation of a trade or business regularly carried on by the taxpayer." The petitioner during the years 1922 and 1923 was not actually engaged in carrying on a trade or business. It was merely making preparations to carry on its business and was in the process of erecting a hospital for that purpose. Under these conditions in our opinion the petitioner does not come within the provisions of section 206(e) and (f) of the Revenue Act of 1924 and may not deduct in the year 1924 any amounts expended during the years 1922 and 1923 for taxes which may have been deductible from income in those years under the Revenue Act of 1921. Accordingly, the action of the Commissioner in refusing to permit the petitioner to deduct as a net loss from income during the year 1924 either $3,332.90, or $1,200.47, or any part thereof is approved. Reviewed by the*2760 Board. Judgment will be entered under Rule 50. PHILLIPS AND MILLIKEN dissent.