Bivin v. Commissioner

WILLIAM T. BIVIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bivin v. Commissioner Docket No. 39025. United States Board of Tax Appeals 21 B.T.A. 1051; 1930 BTA LEXIS 1755; December 31, 1930, Promulgated *1755 1. Deduction for loss resulting from sale of residence at sheriff's sale disallowed. 2. Where the petitioner acquired stock of a corporation in return for services, the fair market value of the stock at the time acquired represents the cost of the stock and on a subsequent sale or exchange of the stock the measure of profit is the difference between the cost and the sale or exchange price of the stock. 3. From the evidence, held that the loss sustained by the petitioner on his stock in the First National Bank of Thermopolis, Wyo., which was liquidated in 1925, was not a loss "resulting from the operation of any trade or business regularly carried on by the taxpayer" within the provisions of section 206(a) of the Revenue Act of 1926. William T. Bivin pro se. T. M. Mather, Esq., for the respondent. BLACK *1051 In this proceeding the petitioner seeks a redetermination of his income-tax liability for the calendar year 1926, for which year the respondent has determined a deficiency in the amount of $408.96. The petition alleges that the respondent erred (1) in failing to allow as a loss the sum of $9,028.19, resulting from the foreclosure*1756 of a mortgage on the petitioner's residence; (2) in allocating no cost to $20,000 par value of stock in the Thermopolis Gas Co. which was exchanged for bonds of $10,000 par value in the Buffalo Northwestern Electric Co. and the Northwest Gas & Pipe Line Co. in 1926, and then applied in payment of petitioner's note of $10,000; and (3) in failing to allow as a deduction in computing petitioner's 1926 net income the amount of $4,128.30 as a net loss for the year 1925. FINDINGS OF FACT. The petitioner is an individual residing in Thermopolis, Wyo., where he was during the taxable years employed as cashier of the First National Bank of that place at $3,600 per annum. About 1924 he constructed a house in Thermopolis at a cost of $15,352.12, which he has occupied as a residence from that time. In July, 1924, he executed a mortgage on this property of $6,000 in favor of the Occidental *1052 Building & Loan Co. of Omaha, Nebr. The petitioner was unable to meet the payments due on this mortgage and the Building & Loan Co. instituted foreclosure proceedings which matured into a sheriff's deed on August 21, 1926. The petitioner in his income-tax return for 1926 claimed a deduction*1757 of $8,750 as a loss on this forced sale of his residence. This deduction the Commissioner disallowed. In 1922 the petitioner received $20,000 par value common stock in the Thermopolis Gas Co. in consideration of some services he had rendered the company in helping to sell its stock and finance its operations in 1922. In his income-tax return for the year 1922 the acquisition of this stock was not reflected as income. The fair market value of this stock at the time it was issued to petitioner was not less than $5,000. At the time he built his home in Thermopolis in 1924 petitioner deposited the stock as collateral with the First National Bank of Thermopolis as security for a $10,000 loan and used the proceeds in the construction of his home. The successor to this bank in 1926, with the consent of the petitioner, exchanged the Thermopolis Gas Co. stock for $10,000 of bonds in the Buffalo Northwestern Electric Co. and the Northerwest Gas & Pipeline Co. These bonds at the time of exchange were worth $10,000. In 1926 the petitioner surrendered the collateral in return for the payment and cancellation of his $10,000 indebtedness due the bank and in reporting his income for the*1758 year 1926 treated the transaction as a sale resulting in a profit of $10,000. He now claims that this profit was erroneously computed. In 1924 the petitioner was the owner of 30 shares of the capital stock of the First National Bank of Thermopolis, Wyo., of which he was cashier. The stock was acquired at a cost of $5,100. During the year 1924 the directors of the bank levied an assessment of $3,000 on the petitioner's stock, which he paid. In making his income-tax return for 1924 the amount of this assessment was claimed and allowed as a deduction from income. In 1925 the First National Bank of Thermopolis was liquidated and the stockholders received nothing in return for their investment. The stock became worthless in 1925 and petitioner in his income-tax return for 1925 claimed a loss of $5,100 on this stock, the same representing its original cost to him. This loss was allowed by the Commissioner. The respondent refused to allow as a deduction in computing petitioner's net income for the year 1926 the alleged net loss resulting to petitioner in 1925 from the stock of the bank becoming worthless in that year. OPINION. BLACK: In his petition the petitioner alleges*1759 that the respondent made three errors in his redetermination of petitioner's income tax liability for the calendar year 1926. *1053 The first alleged error relates to the respondent's refusal to allow as a deduction from income the loss sustained by reason of the sale of petitioner's residence through foreclosure of a mortgage. The property in question was acquired for and at all times used by the petitioner as his residence. From consideration of the record we are of the opinion that the transaction was not one entered into for profit within the meaning of section 214(a)(5) of the Revenue Act of 1926 and accordingly, as to this issue, the respondent's determination should be sustained. See ; affirmed by the Circuit Court of Appeals for the First Circuit in ; and . As to the next issue the petitioner is now contending that he acquired the $20,000 of stock in the Thermopolis Gas Co. at a cost of $5,000 paid for in services. We have examined the evidence carefully and think that it sustains petitioner in this contention. *1760 Therefore, the profit which petitioner realized on the exchange in 1926 was $5,000, being the difference between a cost of $5,000 and the sale price of $10,000. The remaining issue relates to the loss sustained by the petitioner on his 30 shares of stock in the First National Bank of Thermopolis, which he acquired at a cost of $5,100 and subsequently paid an assessment of $3,000, making a total cost of $8,100. The loss incurred on the bank stock in 1925 may only be carried forward as a net loss if the requirements of section 206 of the Revenue Act of 1926 are met. The statute provides that the loss, in order to be carried forward as a net loss and be used as a deduction in computing petitioner's net income for the following year, must not only have been incurred from the operation of a trade or business, but from a trade or business regularly carried on by the taxpayer. A trade or business regularly carried on must be held to mean a vocation and not occasional or isolated transactions. See . In the instant proceeding, the evidence shows that petitioner was engaged in the business of bank cashier. Prior to the liquidation of the*1761 first National Bank of Thermopolis, Wyo., he was cashier of that bank. When it failed he became the cashier of the new bank, the First National Bank in Thermopolis, Wyo. The loss which may be carried forward as a statutory net loss under section 206 of the Revenue Act of 1926 must be an operating loss. A mere investment loss will not suffice. We think the distinction is correctly stated in . In that case we said: 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 *1054 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*1762 corporation, and must rest upon the ground 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 the failure of a corporation or a sale or other disposition of his interest therein. Was the loss sustained by petitioner in 1925 an operating net loss which he is entitled to carry forward under the provisions of the statute? We think not. True, petitioner's business was that of bank cashier, but that fact does not make his loss resulting from his investment of 30 shares of stock in the bank an operating net loss. If it did, then almost every loss of a stockholder in a corporation could be carried forward as a statutory net loss. There must be something more than an investment loss. True, it is sometimes difficult to draw the line of distinction. As we said in : The 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. *1763 See ; T. I. Crane, supra; W. H. Ostenberg, supra; Elmore L. Potter, supra;. Petitioner's loss in 1925 on his bank stock, while of course a deductible loss in determining net income for that particular year, was not a statutory net loss incurred in any trade or business regularly carried on by petitioner and therefore respondent's action in disallowing it as a deduction in determining petitioner's net income for 1926 is approved. The situation of the petitioner in the instant case is very similar to that of the petitioner in , wherein we said: In the instant proceeding there is no evidence that the petitioner was carrying on a construction business and that his investment in stock of the W. C. Hedrick Construction Co. was made in the furtherance of his individual business. So far as the record discloses, the construction business was carried on by the corporation which was a separate and distinct taxable entity from the petitioners. The petitioner was president and general manager of the construction company. He was*1764 an employee of the construction company. There is nothing to indicate that the business of the construction company was his individual business. The business as regularly carried on was carried on by the corporation and not by the petitioner. See also . Judgment will be entered under Rule 50.