Raiss v. Commissioner

ALBERT RAISS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. CARL RAISS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Raiss v. Commissioner Docket Nos. 37955, 37956, 33908, 33909. United States Board of Tax Appeals 21 B.T.A. 593; 1930 BTA LEXIS 1828; December 9, 1930 Promulgated *1828 1. Certain securities involved herein held to have been the personal property of the petitioners for more than two years prior to the dates on which they were sold in 1923, 1924, and 1925, and the profits from the sales should be taxed under section 206 of the Revenue Act of 1921, and section 208 of the Revenue Act of 1924. 2. The petitioners in 1923 sustained losses of $975 each on the liquidation of a certain corporation in which they were stockholders, which are allowable as deductions from ordinary income for that year. John C. Altman, Esq., for the petitioners. John E. Marshall, Esq., for the respondent. MARQUETTE *593 In these proceedings, which have been consolidated for hearing and decision, the petitioners ask for the redetermination of deficiencies in income tax which the respondent has asserted, as follows: [1925] Albert Raiss 1,702.53 5,480.35 $205.13 Carl Raiss 1,330.61 4,944.45 184.42 The petitioners allege that the respondent erred in failing to compute the tax liability to the petitioners under section 206 of the Revenue Act of 1924 with respect to the gain realized from the*1829 sale of certain securities in 1923, 1924, and 1925. By amendment to the petitions made at the hearing, they also claimed that they are each entitled to a deduction for 1923 in the amount of $975 on account of a loss sustained on certain stock. FINDINGS OF FACT. The petitioners are brothers, who are and have been for many years residents of San Francisco, Calif. In the year 1908 the petitioner Carl Raiss purchased a seat upon the San Francisco Stock & Bond Exchange for the purpose of engaging as a broker in the buying and selling of stocks and bonds for customers, on commission, and from that time until the end of the year 1911 he was individually engaged in the brokerage business at San Francisco, and in connection with that business participated, in a limited way, in underwritings of bonds. During that period Carl Raiss was also the *594 owner of various stocks and bonds which were his own personal investment and which neither were used in nor constituted any part of the capital of his brokerage business. However, for convenience he kept only one ledger or set of books, in which he netered, or caused to be entered, not only the transactions pertaining to his brokerage*1830 business, but also all his personal investments and the income therefrom. Only one capital account was carried in said books, which included both the assets used in the brokerage business and the private investments of Carl Raiss. On January 1, 1912, the petitioners entered into an oral agreement of partnership, whereby they agreed to carry on as partners the brokerage business theretofore carried on by Carl Raiss as an individual, and to share equally in the profits and losses of the business, which was understood to include whatever participation might be had in underwritings of bonds. It was also agreed that each of them would have an undivided one-half interest in the profits or losses of the private investments then belonging to Carl Raiss, and that each of them would have an equal interest in any private investments which might thereafter be made or acquired by them. For convenience the books of the partnership were kept on the same basis as the books of Carl Raiss had been kept prior to January 1, 1912, that is, the accounts of the brokerage business and the private investments of the petitioners were kept in a single ledger or set of books, and the said private investments*1831 were reflected in the capital account carried in such book or books. From time to time beginning with the year 1912, the petitioners made purchases of securities as personal or private investments. Each of these securities was purchased on the particular exchange on which it was dealt in, and none of them were purchased from a customer of the partnership. When the petitioners deemed it advisable to sell any of said securities it was sold on the exchange on which it was dealt in, and at no time was any such security sold or offered for sale to any customer of the partnership. During the years 1923, 1924, and 1925 the petitioner sold certain of the securities purchased as personal or private investments, and realized therefrom profits of $55,673 in 1923; $87,043.64 in 1924, and $27,454.81 in 1925. The securities sold had been acquired by the petitioners more than two years prior to the dates of sale. On February 4, 1911, Carl Raiss purchased as his private investment 5,000 shares of the capital stock of the Crown-Graphite Co. of Mexico, a California corporation, for $1,000. Prior to March 1, 1913, the petitioners paid assessments on this stock in the amount of $2,250, and*1832 subsequent to March 1, 1913, they paid assessments thereon in the amount of $1,950. On May 29, 1923, the stockholders of the *595 Crown-Graphite Co. of Mexico, by appropriate corporate action, authorized and directed the institution of proceedings for the dissolution of the corporation, as provided by the laws of the State of California. On September 28, 1923, the Superior Court of the City and County of San Francisco, State of California, made an order in a proceeding entitled "In the matter of the application of Crown-Graphite Company of Mexico, a corporation, for dissolution" that said corporation "be and the same is hereby dissolved." On December 22, 1923, the trustees of Crown-Graphite Co. of Mexico, a dissolved corporation, duly met and by appropriate resolution directed that no proceedings or steps of any kind be taken to pay any taxes or incur any expense whatsoever in connection with the mining property owned by said corporation, which was its only asset, and that said property be forfeited to the Republic of Mexico for nonpayment of taxes. The petitioners never received any money or other property from the stock in this corporation. The amounts of $55,673, $87,043.64, *1833 and $27,454.81 realized by the petitioners as profits from the sales of the securities in 1923, 1924, and 1925 were reported in the partnership returns for those years under Schedule D as capital net gains from the sale of assets held for more than two years, and were returned by the petitioners in equal amounts in their individual returns for those years. In the partnership return for 1924 there was also reported a loss of $450 in connection with the shares of capital stock of the Crown-Graphite Co. of Mexico. The respondent, upon audit of the petitioners' returns, determined that the profits were ordinary income and not capital gains. He allowed the loss of $450 in 1924 as an ordinary loss and not as a capital loss, and upon the basis of such adjustments in petitioners' income, computed deficiencies as above set forth OPINION. MARQUETTE: It is the position of the petitioners that the securities which they sold in 1923, 1924, and 1925, set forth in the findings of fact, were their personal and private property as distinguished from their interest in the partnership, and that the profits or gains realized on the sale should be taxed as capital gain, under section 206 of the*1834 Revenue Act of 1921 and section 208 of the Revenue Act of 1924. They also say that they are entitled to deductions in 1923 in the amount of $1,950 on account of a loss sustained on their shares of the capital stock of the Crown-Graphite Co. of Mexico, instead of a loss of $450 for 1924 as heretofore claimed. The respondent denies that the securities in question were the separate property of the petitioners and contends that they were the property of the partnership, which should be included in inventory if on hand at *596 the close of the taxable year, and, hence, that the capital gain provisions of the Revenue Acts of 1921 and 1924 are not applicable. With respect to the loss on the Crown-Graphite Co. stock, the respondent denies that the loss was more than $450, or that it was a capital loss. The evidence establishes to our satisfaction that the stocks and bonds in question were owned by the petitioners in their individual capacities, and were acquired by them as investments, although for convenience they were carried on the partnership books and were mentioned in the information returns filed by the partnership. The stocks and bonds sold in 1923, 1924, and 1925 had*1835 been owned by the petitioners for more than two years prior to dates of sale, and it follows that the gains should be taxed under section 206 of the Revenue Act of 1921, and section 208 of the Revenue Act of 1924. It is clear from the evidence that the petitioners sustained a total loss in 1923 on their investment in the capital stock of the Crown-Graphite Co. of Mexico. The stock had cost $1,000 and the petitioners had paid several thousand dollars in assessments thereon. In 1923 the corporation was dissolved and the petitioners received nothing in liquidation. At the hearing petitioners stated that they were unable to establish the March 1, 1913, value of the stock, and admitted that the deductible loss is limited to the amount of the assessments paid by them after March 1, 1913, to wit $1,950. Under the Revenue Act of 1921 the loss is allowable as a deduction from ordinary income, but not as a capital loss. . Decision will be entered under Rule 50.