Rehm v. Commissioner

OSCAR E. REHM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Rehm v. Commissioner Docket No. 20633. United States Board of Tax Appeals 16 B.T.A. 1045; 1929 BTA LEXIS 2462; June 13, 1929, Promulgated *2462 The net loss sustained by the petitioner in 1921 did not result from the operation of a trade or business regularly carried on and may not be deducted in 1922 under section 204 of the Revenue Act of 1921. Camden R. McAtee, Esq., for the petitioner. Edwin M. Niess, Esq., for the respondent. MARQUETTE *1045 This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent for the year 1922 in the amount of $893.38. The petitioner alleges that the respondent erred in refusing to allow as a deduction from gross income for 1922, a net loss sustained by the petitioner in 1921. FINDINGS OF FACT. The petitioner is an individual residing at Louisville, Ky. During the year 1921 he was president, acting manager, and the principal stockholder of the Rehm, Zeiher Co., a corporation which was engaged in buying and selling stocks and bonds on the commission basis, and was thus enabled to maintain a close watch on the stock market. The petitioner gave his constant attention to the business of the Rehm, Zeiher Co. and received a salary for his services of about $10,000 per year. His duties required at least three-fourths*2463 of his time. Since 1903 the petitioner has from time to time traded in the stock market. In 1919, 1920, and 1921 he purchased certain shares of stock at a cost of $106,363 and sold them in 1921 for $81,667.50, thereby sustaining a loss of $24,695.50, as follows: Stock of - Acquired Cost Sale price Profit or loss American Refining Co [1919] $6,300.00 $4,276.00 $2,024.00 Pan American [1921] 5,720.00 5,278.00 442.00 Union Pacific 1920-1921 24,140.00 22,352.00 1,788.00 Tobacco Products Co [1921] 5,520.00 5,051.00 469.00 American Sugar Ref. Co [1921] 7,520.00 6,938.50 581.50 American Inter. Corp [1920] 9,225.00 3,476.00 5,749.00 City Service [1919] 26,598.00 11,520.00 15,078.00 City Service Pref [1921] 10,440.00 10,400.00 40.00 Do [1921] 5,130.00 5,400.00 270.00 General Asphalt Co [1921] 5,770.00 6,976.00 1,206.00 106,363.00 81,667.50 24,695.50 *1046 This loss was allowed as a deduction on the petitioner's return for 1921, which resulted in a net loss being shown for that year in the amount of $9,374.17. The respondent refused to allow said loss as a deduction from the petitioner's income for 1922. OPINION. *2464 MARQUETTE: The petitioner claimed that in computing his net income for 1922 he has the right to deduct the net loss of $9,374.17 sustained by him in 1921, under authority of section 204 of the Revenue Act of 1921, which provides: (a) 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 (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business); * * * (b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary. The*2465 amount of the loss for 1921 is not in dispute. We are unable to agree with the petitioner that he is entitled to the deduction claimed, for the reason that his dealing in stocks on his own account, which gave rise to the loss in question, did not, in our opinion, constitute a trade or business regularly carried on by him. On the contrary, they appear to be isolated and occasional transactions outside the scope of his regular trade or business. As he testified, he had for many years traded in the market "off and on." We have held that the term "trade or business regularly carried on" used in section 204 of the Revenue Act of 1921, means a vocation and not occasional or isolated transactions. J. J. Harrington,1 B.T.A. 11, and Fridolin Pabst,6 B.T.A. 843. In the Harrington case we said: The expression "in trade" in paragraph (b) of the Revenue Act of 1913, which allowed as a deduction losses actually sustained during the year incurred in trade, and the expression a "trade or business" contained in section 209 of the Revenue Act of 1917, which imposes a profits tax of 8 per cent on trades or businesses having no invested capital, *2466 or only a nominal capital, have been defined by the United States District Court in the case of Woods v. Lewellyn,289 Fed. 498, and by the United States Circuit Court of Appeals in the case of Mente v. Eisner,266 Fed. 161. In the case of Mente v. Eisner, supra, the court quoted Treasury Decision 2090 and approved it, stating as follows: *1047 We think that the language "losses incurred in trade" is correctly construed by the Treasury Department as meaning in the actual business of the taxpayer as distinguished from isolated transactions. If it had been intended to permit all losses to be deducted it would have been easy to say so. Some effect must be given to the words "in trade." In the case of Woods v. Lewellyn, supra, the court referred to and approved article 8 of Regulations No. 41, interpreting section 209 of the 1917 Act, in the following language: In effect it interprets that section as placing a tax upon the vocation of a man who had done business during the year without invested capital. It taxes only income derived from activities in the exercise of the regular occupation, *2467 not sums earned incidentally by activities outside that regular occupation. The expression trade or business as used in section 204 of the 1921 Act with reference to net losses is more limited and restricted than the word trade as used in the 1913 Act or the expression trade or business as used in the 1917 Act. The statute provides that the loss, in order to be deductible as a net loss, must not only have been incurred from the operation of a trade or business but from a trade or business regularly carried on. A trade or business regularly carried on must be held to mean a vocation and not occasional or isolated transactions. Judgment will be entered for the respondent.