Averill v. Commissioner

GLENN M. AVERILL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Averill v. Commissioner Docket Nos. 28787, 40075. United States Board of Tax Appeals 20 B.T.A. 1196; 1930 BTA LEXIS 1959; October 8, 1930, Promulgated *1959 The petitioner, a man of large resources and actively interested in many businesses operated in his city, devoted the usual business hours of each day to his affairs, maintaining an office and employees. It was his practice to operate each business venture through a corporation and not as a personal venture. Through the failure of one of such corporations he sustained a loss. Held that such loss resulted from the business of petitioner and may be considered in computing the amount of a net loss under section 204 of the Revenue Act of 1921. Calvin Clark, Esq., for the petitioner. W. R. Langford, Esq., for the respondent. PHILLIPS *1196 The Commissioner determined a deficiency in income tax in the amount of $4,900.87 for the year 1923 (Docket No. 28787), and $1,229.57 for the year 1924 (Docket No. 40075). The petitioner brings these proceedings, which were consolidated at the hearing, for a redetermination of his tax liability. It is alleged that the respondent erred in (1) refusing to allow as a deduction from income for the years 1923 and 1924 the balance of a loss sustained in petitioner's trade or business for the calendar year 1922; *1960 (2) ruling that a loss sustained in 1922 through the liquidation of the Berteschey Engineering Co. was not a loss sustained in petitioner's trade or business. FINDINGS OF FACT. The petitioner is an individual residing on a farm at Cedar Rapids, Iowa. In 1889 petitioner became associated with his father, who had large and varied financial interests in Cedar Rapids, Iowa, and was engaged in looking after and promoting these interests. It was the *1197 policy of the father to handle his business ventures through corporations in which he was a principal stockholder, rather than to handle them in his individual name. Petitioner assisted in looking after his father's interests and had small stockholdings in some of the corporations. In 1910 his father died, leaving an estate of approximately $1,500,000. Petitioner thereafter actively assumed the management of the estate, in which his sister also had an interest, and increased its value to over $4,000,000 in 1929. He maintained an office at 606 Security Building, Cedar Rapids, Iowa, and was assisted by his son and one George B. Dutton, who had worked for his father. He continued the policy of his father of handling his*1961 business ventures through corporations. In 1922 the only property, other than corporate stocks, which petitioner owned was his farm residence. He was interested in approximately 35 corporations of which he was a stockholder. In some corporations he owned both stock and bonds and in a few corporations he owned only bonds. He devoted his entire time to the management of his investments in these various enterprises and actively promoted the interests of the corporations in which he had investments. He was not obligated to spend any specific amount of time with any particular corporation, but spent such time as he thought necessary in looking after each investment. If any business investment was lagging he spent more time on it trying to find out why it did not pay and to build it up. He directed his efforts to getting good men to run the businesses and to so diversify the businesses that one would help another. Petitioner did not promote a corporation for the sake of promoting it, but organized and promoted and financed new corporations in order to enhance his own interests. He did not engage in any other business than that of promoting his investments. He was not engaged*1962 in the business of buying and selling securities. Petitioner received salaries from certain of the corporations of which he was an officer or director and in which he was financially interested, but did not devote more than an hour a day to his routine duties as such officer. He was president of the Cedar Rapids National Bank, but did not assume routine duties and had no desk there. Petitioner and his son and one Berteschey organized and promoted the Berteschey Engineering Co. of Cedar Rapids, Iowa, and petitioner financed it. A factory site consisting of ground and buildings formerly owned by petitioner and his son were put into the venture against certain machinery owned by Berteschey, petitioner receiving stock for his interests. The Berteschey Engineering Co. went into receivership and was liquidated in 1922, and petitioner thereby sustained a loss of $160,419.26. *1198 The income of petitioner for 1922 and the deductions therefrom attributable to his business were as follows: Income Amount Deductions Amount Dividends $ 23,856.65 Interest $ 3,348.32 Interest 18,799.77 Loss, Berteschey Engineering Co 160,419.26 Profit sale of: Bonds 250.00 Stock 2,075.00 Land 1,375.00 Salaries 35,350.00 Farm 583.99 Interest, United States bonds 403.75 Interest, municipal bonds 1,687.98 Total 84,382.14 163,767.58 Net loss 79,385.44 *1963 The Commissioner determined the net income for 1923 to be $52,886.56 and for 1924 to be $35,001.28. In his income-tax return for 1922 petitioner claimed a net loss of $89,583.56, which he carried forward and applied against the net income for 1923; the balance of such net loss he carried forward and applied in computing the net income for 1924. The Commissioner disallowed the amount claimed as a net loss for 1922, holding that there had been no net loss within the meaning of section 204 of the Revenue Act of 1921. OPINION. PHILLIPS: The sole issue in this proceeding is whether petitioner sustained a "net loss" in 1922 which may be carried forward and applied in 1923 and 1924 under the provisions of section 204 of the Revenue Act of 1921 and section 206 of the Revenue Act of 1924. The applicable provisions of these sections are as follows: SEC. 204. (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 * * *. (b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any*1964 taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; * * * SEC. 206. (f) If for the taxable year 1923 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1921, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years. There is no dispute as to the amount of the loss sustained through the liquidation of the Berteschey Engineering Co. The issue is whether the loss sustained by the petitioner through the liquidation *1199 of the Berteschey Engineering Co. resulted from the operation of any trade or business regularly carried on by him, or from an isolated venture as contended by the Commissioner. In , we said "a trade or business regularly carried on must be held to mean a vocation and not an occasional isolated transaction." *1965 In , we pointed out that "in order to constitute a 'net loss' it is not necessary that the taxpayer should sustain the loss in his principal business or vocation * * *. The taxpayer is entitled to the benefit where the loss is incurred in any trade or business regularly carried on by him." The legal conception of a "trade or business regularly carried on" would seem to embrace those activities in which one regularly engages for the purpose of a livlihood or profit. See ; . To come within the intendment of the statute it is not sufficient that the loss sustained 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. Such was When an activity ceases to be isolated and assumes a continuity and importance that characterize it as an activity regularly engaged in must necessarily depend on the facts of each particular*1966 case. Obviously in every case a business to be regularly carried on must be characterized by a continuing activity in some field of business endeavor. 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. Relief to stockholders in a corporation who suffer loss through the liquidation of the corporation must often be denied upon the ground that theirs is not an operating loss, but an investment loss. An operating loss in the business carried on by a corporation is obviously sustained by the corporation operating the business; no loss of which the revenue acts take cognizance has then been sustained by a person whose relation to the business is that of a stockholder or bondholder. On the other hand, upon the sale of such stock or bonds or upon the failure or liquidation of the corporation the stockholder or bondholder may sustain an operating loss. This is entirely different from the operating loss of the corporation, and must rest upon the ground*1967 that investments in such stocks or bonds is a part of, or incident to, the operation of a trade or business regularly carried on by the taxpayer. It is obvious that an individual may suffer a "net loss" within the meaning of the statute upon *1200 the failure of a corporation or a sale or other disposition of his interest therein. See ; ; W. H. Ostenberg et al., supra;; ; ;. It appears from the evidence that petitioner was possessed of large resources. It was his policy to direct his business through corporations instead of as personal ventures. When he decided upon a business venture he would promote a corporation, become a stockholder in it and perhaps finance it. Sometimes he took over defunct corporations and reorganized and financed them. In the taxable year he was interested in approximately thirty-five corporations and he devoted his entire time and attention to*1968 promoting their interests in order that he might increase his profits. He was not content merely to invest his money in stocks and bonds in corporations managed by others, taking the inactive interest generally shown by such investors. He directed his efforts to getting good men to manage the various enterprises in which he was interested and to so diversify and carry on the businesses that one would help another. He received salaries from several of these corporations as an officer, and he frequently consulted and advised with all of them. These activities constituted petitioner's business. He devoted the usual business hours of each day to these activities. He has been so engaged during many years, in fact, throughout his entire business career. He maintained an office and employed sufficient help to carry on his business. It appears that petitioner was a substantial stockholder in the public utility companies of Cedar Rapids. Anything which served to help the growth of the city helped his investments. Practically every enterprise which he undertook or in which he became interested was in that city. The promotion of the Berteschey Engineering Co. was not an isolated*1969 venture, but typical of the manner in which petitioner carried out his business plans. The petitioner and his son owned a factory site, ground and building, for which they were interested in getting a tenant. As the petitioner describes it in his testimony. A. * * * There was a man in Omaha, who had the Berteschey Manufacturing Company, and we brought him to Cedar Rapids and formed another corporation, called the "Berteschey Engineering Company," putting our ground and building in against his machinery; and then we increased it and made it into a manufacturing plant for the manufacture of precision machinery. We were making shapers right after the war, until the demand for shapers dropped off until we couldn't sell any. Q. What happened to the Berteschey Engineering Company in 1922? A. It had to go into the hands of a receiver; it never made any money. I furnished all of the money, all of the capital, and took stock for the ground and building * * *. The *1201 line between one who invests in corporations and another whose dealings with corporations is so broad that it may be said to be his trade or business is not one which may be drawn clearly. See *1970 ; ;;;. It is difficult to distinguish the decision in the Washburn case from the later cases. We believe, however, that the principle upon which these later cases were decided is sound, that they should be followed, and that the instant case falls within them. The claim of petitioner is allowed. The amount of the net loss should be computed in accordance with the findings of fact. Reviewed by the Board. Decision will be entered under Rule 50. MURDOCK dissents.