Schwinn v. Commissioner

IGNAZ SCHWINN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Schwinn v. Commissioner Docket No. 8441. United States Board of Tax Appeals 9 B.T.A. 1304; 1928 BTA LEXIS 4262; January 14, 1928, Promulgated *4262 Loss resulting from a sale of certain shares of stock held to be a loss sustained in the petitioner's trade or business. John E. Hughes, Esq., for the petitioner. J. W. Fisher, Esq., for the respondent. LANSDON *1304 The respondent has asserted a deficiency in income tax for the year 1924 in the amount of $22,408.95. The issues raised by the petitioner are (1) whether certain stock sold at a loss was held by the petitioner primarily for sale in the course of his business and thus was not a capital asset within the meaning of section 208 of the Revenue Act of 1924; (2) whether the stock in question was in fact held by the petitioner for more than two years; and (3) whether the provisions of section 208(c) of the Revenue Act of 1924, limiting the deduction for loss on the sale of capital assets within the meaning of that section to 12 1/2 per cent, is constitutional. FINDINGS OF FACT. Ignaz Schwinn is a resident of the State of Illinois, residing at 2128 Humboldt Boulevard, Chicago. Mr. Schwinn immigrated to *1305 the United States in April, 1891. He had previously been in the bicycle business. In 1892 and 1893 he worked*4263 as a bicycle mechanic for a firm called Moffett Cycle Co., the name of which was later changed to Fowler Cycle Co. In the latter part of 1893 or the first part of 1894, he started in business for himself, making bicycles, as a one-third owner of the capital stock of a corporation called the International Manufacturing Co. In the middle of 1895 he sold out his interest in that concern. Arnold Schwinn & Co. was organized by him in 1895. Its business was and is the manufacturing of bicycles. For a time he was secretary, vice president, and treasurer of that company. In 1906 or 1907 he bought out the other interest in the company and since that time has been and still is its president. In 1911 Schwinn bought the Excelsior Supply Co. from a creditors' committee and in the latter part of that year incorporated the Excelsior Motor Manufacturing & Supply Co. He has been the president of that company since its inception. Each of said companies has continued in existence and in 1919 Schwinn was a one-fifth stockholder in each. The remaining four-fifths of the stock of each company was in 1919, and is now, held by the members of his family; namely, his wife, son and two daughters. *4264 The Excelsior Company and Arnold Schwinn & Co. are organized concerns having their sales managers, traveling salesmen and purchasing agents, with their assistants. Schwinn's son was vice president and production manager of the Excelsior Company in 1917. From 1919 to 1924 inclusive, the entire management of the two companies devolved upon Schwinn and his son. The Excelsior Company had losses from 1920 to 1925. Arnold Schwinn & Co. during the same period came out even some of the years and suffered losses the other years. The bicycle and motorcycle businesses of both companies have been diminishing since 1919. Beginning with the early part of 1919, Schwinn was forced to put his time to something else to make money. Since the latter part of 1919 he has devoted the largest part of his time to stock and bond transactions. From 1919 to 1924, inclusive, one-third of his business time was devoted to the affairs of the Excelsior and Schwinn companies, and the other two-thirds of his business time was devoted to studying the market to see where he could make money and to the buying and selling of stocks, bonds, wheat, cotton and other commodities. In those activities is where the*4265 petitioner makes the most money. He had no separate office for this purpose. He transacted this business mostly at his home, and also in his private office at the Excelsior Company and at his broker's office. In 1924 and prior to June of that year, Schwinn was around his stockbroker's office sometimes daily, sometimes not for three or four days, depending mostly *1306 upon the market and also upon his state of mind. He bought and sold almost entirely on speculation and for no one but himself. From 1919 to 1924, inclusive, Schwinn was engaged in the business of speculating in stocks, bonds, grains, and other commodities. In December, 1919, the petitioner purchased 2,300 shares of the common stock of the Anaconda Copper Co. at a cost of $141,982.50. He sold said shares of stock in June, 1924, for $68,510.50. One Albert Stein, a stockbroker with Wm. H. Colvin & Co., executed the order for Schwinn for the purchase of this stock. Schwinn gave the order on Stein's advice. The certificates for the stock were never registered in Schwinn's name nor were they delivered to him. The stock was bought on margin for speculation purposes and was held in New York City. Stein has*4266 been a stockbroker for about 35 years and has been an advisor to Schwinn with regard to purchases of investments and speculations for the last 15 or 16 years. Schwinn bought some bonds for investment but most of the securities he bought were for speculation purposes. On March 30, 1921, the account of Ignaz Schwinn with Wm. H. Colvin & Co. was transferred to Lamson Bros. & Co. The 2,300 shares of Anaconda copper stock were part of his marginal account considered as collateral at the time they were taken over by Lamson Bros. & Co. from Wm. H. Colvin & Co. To pay in full for all these securities that Lamson Bros. & Co. received from Wm. H. Colvin & Co. on March 30, 1921, for the account of Ignaz Schwinn, it would have been necessary that Schwinn pay Lamson Bros. & Co. $133,643.52. To take up and pay for the securities carried on Schwinn's account with Lamson Bros. & Co., on May 31, 1924, which included the 2,300 shares of Anaconda stock, it would have been necessary for Schwinn to pay them $399,889.41. The number of transactions which the petitioner transacted at Lamson Bros. & Co. in 1923 was approximately 112 in grain and other commodities and about 15 in securities; and in*4267 1924, approximately 91 in grain and other commodities and about 30 in securities. Schwinn paid interest to stockbrokers in 1924 in the total amount of $23,726.41. In 1923, Lamson Bros. & Co. were clients of the firm of A. A. Housman & Co., of New York City. On February 23, 1923, Lamson Bros. & Co. were "long" with A. A. Housman & Co. 3,133 shares of Anaconda stock. On February 23, 1923, A. A. Housman & Co. were carrying for their customers 13,287 shares of Anaconda copper stock, of which they were loaning 1,500 shares. A. A. Housman & Co. did not allocate any part of such stock which they loaned to any one account. A. A. Housman & Co. had written authority from Lamson Bros. & Co. to loan out the latter's stock. *1307 OPINION. LANSDON: The petitioner purchased 2,300 shares of stock of the Anaconda Copper Co. in December, 1919, and sold the same in June, 1924, at a loss of $73,472. The respondent treated said stock as "capital assets" within the meaning of section 208 of the Revenue Act of 1924, and determined the petitioner's income-tax liability for the year in question by subjecting said loss to the 12 1/2 per cent limitation prescribed by subdivision (c) of*4268 that section and Act. The petitioner claims that said stock was property held by him primarily for sale in the course of his trade or business, and that from December, 1919, to the present time one of his businesses and, in fact, his principal business, has been that of speculating in stocks, grain and other commodities. Section 208(a)(8) of the Revenue Act of 1924 provides in full as follows: The term "capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. The particular portion of the statute brought into consideration by the facts of this case is the phrase, "or property held by the taxpayer primarily for sale in the course of his trade or business." In other words, are the petitioner's speculations in stocks, grains and other commodities of such a nature as properly to be regarded as his trade or business? *4269 It has been said that the word "business" has a wider scope than the word "trade." Edgin v. Bell-Wayland Co. (1915), 149 Pac. 1145, 1146. However, the word "trade" used in the Revenue Act of 1913 in connection with the deduction of losses, was construed as being synonymous with "business." See Mente v. Eisner (1920), 266 Fed. 161, certiorari denied, 254 U.S. 635; 41 Sup.Ct. 8. The statute under consideration uses the expression "his trade or business." As the two terms are used disjunctively in the Act, it will serve for the present to ascertain the legal significance of the word "business." The word "business" is one which is used with widely varying meanings. It becomes necessary to determine, as best we may, the meaning in which it is used in the statute involved. The Revenue Act of 1924, under the heading of "Deductions Allowed Individuals" (section 214), allows as deductions, among others, in computing net income, losses incurred in trade or business, and also losses incurred in any transaction entered into for profit, though not connected with the trade or business. It is apparent from its description *1308 *4270 of deductible losses, that the statute differentiates between certain types of losses sustained. Losses from isolated transactions entered into for profit are separately considered from those incurred in trade or business. When the expression "trade or business" is used in the statute in connection with losses it would seem to refer to a regular occupation or calling of the taxpayer, for the purpose of livelihood or profit. This is one of the accepted definitions of the term "business" and is probably its most usual legal sense. Flint v. Stone Tracy Co. (1911), 220 U.S. 107, 171; 31 Sup.Ct. 342; Hewin v. Atlanta (1905), 121 Ga. 723; 49 S.E. 765, 768; Easterbrook v. Hebrew Ladies' Orphan Society (1912), 85 Conn. 289; 82 Atl. 561, 563; Allen v. Commonwealth (1905), 188 Mass. 59; 74 N.E. 287, 288. As to a similar conception of the word "trade," see May v. Sloan (1879), 101 U.S. 231, 237; *4271 In re Charles Town Light & Power Co. (1910), 183 Fed. 160, 163; United States v. Douglas (1911), 190 Fed. 482, 484. It has been recognized by the courts and by the Bureau of Internal Revenue that a person can be engaged in more than one trade or business. Mente v. Eisner, supra; see, also, 17 Ruling Case Law, 487. It is not necessary under the language of the 1924 Act that the activities in question form the taxpayer's principal trade or business. It is sufficient that they may of themselves be regarded as an occupation or business. It is recognized that a single, isolated activity or transaction is not sufficient to constitute a business or vocation. Cooper Manufacturing Co. v. Ferguson (1885), 113 U.S. 727; Woods v. Lewellyn (1921), 289 Fed. 498; Lederer v. Cadwalader (1921), 274 Fed. 753. In the instant case, however, the petitioner devoted the largest part of his business time to, and made the most money from, speculating in stocks, grain and other commodities. Large sums of money were involved in his marginal dealings. *4272 In 1923 he had with Lamson Bros. & Co. some 112 transactions in grain and other commodities and 15 in securities; similarly in 1924, he made with the same broker approximately 91 transactions in grain and other commodities and about 30 in securities. These facts and circumstances would seem to meet the test of the reported decisions as to the principal business or occupation of an individual. In the case of In re Mackey (1901), 110 Fed. 355, the court said (pp. 358-359): The chief occupation or business of one, so far as worldly pursuits are concerned, is that which is of principal concern to him, of some permanency in its nature, and on which he chiefly relies for his livelihood or as the means of acquiring wealth, great or small. That one may principally devote his physical exertions or his time to a given pursuit while one of the factors entitled to consideration, is not in all cases determinative of the question whether that pursuit is his chief occupation or business. One may own, reside on and operate *1309 a farm and at the same time be engaged in the business of buying and selling stocks and other securities. The latter occupation may consume*4273 only an hour or two and the balance of the day be devoted by him to his farm, yet it does not follow that his chief occupation or business is not dealing in stocks or other securities. If such dealing is of principal concern to him and chiefly relied on by him for his subsistence and financial advancement, and if he treats it as of paramount importance to his welfare, he would not be within the category of persons chiefly engaged in farming, even were his farm to yield him some profit. Nor does the amount of capital invested necessarily determine in all cases what one's chief occupation or business is. It, like the amount of time devoted, is undoubtedly a factor to be considered, but often is not conclusive. One may erect a palatial residence in the country, and own the farm on which it stands. It becomes part of the farm, and the farm may be skillfully operated and yet not yield in profits a hundredth part of the interest on the investment. The owner may be engaged in profitable manufacturing or mercantile pursuits which enable him to pay in full the cost of his house, and thereafter maintain it from the profits on his business capital, though less than such cost. No one would*4274 in such case contend that the owner of the farm was chiefly engaged in farming because most of his capital was invested in it. It is evident that it is impracticable, if not impossible, to define with precision the facts which will in all cases determine whether one in engaged chiefly in farming, and that each case must be decided on its own circumstances. It may, however, legitimately be stated, generally, that, if it appears in a given case that one's occupation or business which is of principal concern to him, not ephemeral, but of some degree of permanency, and on which he mainly relies, for his livelihood and financial welfare, be other than farming, he is not "a person engaged chiefly in farming." In view of the unimpeached and uncontradicted testimony of the petitioner to the effect that his principal business from 1919 to 1924 was speculating in stocks, and in further consideration of the legal authorities hereinabove mentioned, we have no hesitancy in holding that the loss resulting from the purchase and sale of the 2,300 shares of Anaconda copper stock was a loss sustained in 1924 with respect to property held primarily for sale in the course of the petitioner's trade*4275 or business. See Bryce v. Keith (1919), 257 Fed. 133; Penrose v. Skinner (1923), 298 Fed. 335, 338. Cf. Wilson v. Eisner (1922), 282 Fed. 38. The respondent was therefore in error in determining the petitioner's income-tax liability under section 208(c) of the Revenue Act of 1924. Under this view of the case it becomes unnecessary to pass upon the remaining issues raised by the petitioner and no opinion is expressed thereon. Judgment will be entered for the petitioner on 15 days' notice, under Rule 50.