Case Name: JUNIPER INVESTMENT COMPANY, A DELAWARE CORPORATION v. THE UNITED STATES
Court: United States Court of Claims
Jurisdiction: United States
Decision Date: 1964-11-13
Citations: 168 Ct. Cl. 160
Docket Number: No. 397-60
Parties: JUNIPER INVESTMENT COMPANY, A DELAWARE CORPORATION v. THE UNITED STATES
Judges: Before Cowen, Chief Judge, Laramoee, Dtteeee, Davis and Coleins, Judges.
Reporter: United States Court of Claims Reports
Volume: 168
Pages: 160–176

Head Matter:
JUNIPER INVESTMENT COMPANY, A DELAWARE CORPORATION v. THE UNITED STATES
[No. 397-60.
Decided November 13, 1964]
Roy M. Tolleson, Jr., for plaintiff.
Philip R. Miller, with whom was Assistant Attorney General Louis F. Oberdorfer, for defendant. G. Moxley Feath-erston, Lyle M. Turner and Mitchell Banmelson were on the brief.
Before Cowen, Chief Judge, Laramoee, Dtteeee, Davis and Coleins, Judges.

Opinion:
Pek Curiam :
This case was referred pursuant to former Buie 45(a) (now Buie 57(a)) to Trial Commissioner Herbert N. Maletz, with directions to make findings of fact and recommendations for a conclusion of law. The Commissioner has done so in an opinion and report filed on December 2, 1963. The plaintiff has excepted to the opinion and certain of the findings of facts; defendant has excepted only to one of the findings. The parties have filed briefs and the case has been argued orally. The court agrees with the Commissioner's findings, his opinion, and his recommended conclusion of law.
The court is also of the view that, if the corporate veil is not to be pierced, there is still a sound ground upon which the denial of plaintiff's claim can be based. The plaintiff is not entitled to deduct a loss under Section 165(a) of the Internal Bevenue Code of 1954 unless it actually suffered a loss which was not reasonably recoverable from someone else. East Coast Equipment Co. v. Commissioner, 22 F. 2d 676, 678 (C.A. 3, 1955); Whitney v. Commissioner, 13 T.C. 897, 901 (1949); cf. Allen-Bradley Co. v. Commissioner, 112 F. 2d 333, 335 (C.A. 7, 1940). The findings in this case show that the value of the legacies acquired by plaintiff was lost in 1956, but they fail to show that plaintiff could not have recovered this loss.
The court adopts the Trial Commissioner's findings and his opinion, as supplemented by the preceding paragraph of this opinion, as the basis for its Judgment in this case. Plaintiff is not entitled to recover and the petition is dismissed.
The issue in this case is whether the plaintiff is entitled to a $70,000 loss deduction for the 1956 taxable year.
Plaintiff, Juniper Investment Company (Juniper), is a personal holding company. During the years 1951 through 1956 (which are the years pertinent to the case), Wendell W. Anderson and his sister, Suzanne A. Gardner, each owned 2,475 of Juniper's total outstanding issue of 5,000 shares. The remaining 50 shares were owned by the estate of their mother, Gustava D. Anderson, but were to pass to them under her will. Wendell W. Anderson controlled the business activities and decisions of Juniper, as well as being its president and a member of the board of directors. The other directors were Suzanne A. Gardner, who was also vice president of the company, and Clark A. Swart, the corporate treasurer. Mr. Swart had also served as business manager for Gustava D. Anderson.
In March 1951 Gustava D. Anderson died leaving an estate that had a gross value of over $3,000,000. She left a will naming her son, Wendell W. Anderson, as executor. Included in her will were a number of cash legacies, totaling $70,000, to certain of her friends, relatives and long-standing employees. In the fall of 1951, her son and daughter, Mr. Anderson and Mrs. Gardner, decided to pay these legacies prior to settlement of the estate. This was occasioned by a humanitarian desire on their part to allow the specified beneficiaries under their mother's will to receive the full amount of their legacies immediately rather than to wait for the final disposition of the estate which, it appeared, would take two or three years. To this end, Mr. Anderson and Mrs. Gardner arranged to have payment of the $70,000 in legacies made though Juniper, their personal holding company, upon the legacies being assigned to Juniper. On December 14, 1951, Juniper's board of directors voted to authorize the transaction and on the same day, Mr. Anderson, as executor of the estate, sent a letter to each of the legatees enclosing Juniper's check for the full amount of the legacy and an unsigned assignment to it of the legacy. This letter stated in part:
. . . (M)y sister and I felt that you would like to have (the legacy) now rather than wait for the final disposition of the estate, which it appears will take two or three years to finally determine.
We, therefore, have made arrangements though our personal family holding company to pay this legacy to you in exchange for having you assign to it all your right, title and interest to same. . . .
Each person who received the legacy accepted the check and executed the assignment. No business or corporate purpose of Juniper was served by the transaction; the company was under no obligation to acquire the legacies; and it did not expect to make a profit therefrom. Despite the size of the estate, when the legacies were acquired by Juniper, it did not reasonably appear that the estate's assets would be sufficient to pay the face amount of the $70,000 in legacies; it appeared rather that such assets would be adequate to pay only about $54,500 of this amount. Nor did it seem likely that the income from the estate during the expected period of probate would provide enough additional funds to make up the deficit.
The estate filed a Federal estate tax return in June 1952. In 1955 the Internal Eevenue Service, after audit of the return, proposed to assess a gross estate tax deficiency of some $3,400,000 — a circumstance which apparently had not been foreseen when the legacies were acquired by Juniper. The proposed deficiency was contested and settled in 1956 by payment of an estate tax deficiency which, with interest, amounted to approximately $1,400,000. After this deficiency payment was made, the remaining assets of the estate were insufficient to pay Juniper all or any part of the $70,000 in legacies and it has never been compensated for any portion of this amount by insurance or otherwise.
Against this background, plaintiff claims it is entitled to a loss deduction of $70,000 for the year 1956 pursuant to section 165(a) of the Internal Eevenue Code of 1954 which in respect to taxes on income, provides:
Sec. 165. Losses
(a) General Buie. — There shall be allowed as a deduc tion any loss sustained during tbe taxable year and not compensated for by insurance or otherwise.
Plaintiff contends that as a matter of law a corporate taxpayer is entitled under the specific language of section 165(a) to deduct any loss, provided such loss has been sustained by the taxpayer during the taxable year involved and has not been compensated for by insurance or otherwise. Defendant, on the other hand, says that there is support for the view that deduction of losses incurred by a corporate taxpayer is limited to those which arise out of the corporate business. As the basis for their respective positions, both sides rely on Caldwell & Co. v. Commissioner, 24 T.C. 597 (1955), reversed per curiam 234 F. 2d 660 (6th Cir. 1956). That case involved a closely held corporation which was required to pay a judgment obtained against it, its stockholders, and others on the ground that they had fraudulently "milked the assets" of a second corporation. The majority of the Tax Court was of the opinion that the payment of the judgment was neither an ordinary and necessary business expense under section 23(a), nor a loss under section 23(f) of the Internal Eevenue Code of 1939 because it was not incurred in a transaction that was pertinent to the conduct of the corporation's business. Judge Bruce, dissenting, was of the view that the expenditure was deductible as a business expense under section 23(a). He also stated that Congress had not imposed a requirement that losses, in order to be deductible, must have been incurred in a transaction incident to the normal and ordinary conduct of a corporate taxpayer's business. However, he added (24 T.C. 621) that the conclusion he had reached that the expenditure was deductible as a business expense "makes unnecessary a determination of the question whether the sum paid was deductible as a loss under section 23(f)." On appeal, the Court of Appeals reversed per curiam, "for the reasons expressed in Judge Bruce's dissenting opinion." Supra. In these circumstances it would seem that the basis of the holding in Oaldwell is that the expenditure in question was a business expense deductible under 23(a) so that the case cannot be regarded as a firm precedent with respect to the deductibility of losses not related to a corporation's business. Cf. 5 Mertens Law of Federal Income Taxation (Rev. ed.) § 28.04, p. 9.
What is more, there is support for the view that section 165(a) allows the deduction of any uncompensated loss sustained by a corporate taxpayer, whether or not it was incurred in a transaction pertinent to the conduct of its business. However, it is unnecessary to reach that ques tion here; for even assuming that this is the proper construction of the section, the circumstances of the present case make it evident that the corporate entity should be disregarded and the loss attributed to Juniper's controlling stockholders, Mr. Anderson and Mrs. Gardner. It is the general rule, of course, that a corporation and its stockholders must be considered separate and distinct entities for Federal tax purposes. Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943); New Colonial Co. v. Helvering, 292 U.S. 435 (1934); Higgins v. Smith, 308 U.S. 473 (1940); Burnet v. Commonwealth Imp. Co., 287 U.S. 415 (1932). But there is an exception in the case of "sham transactions and situations involving transactions or matters that lack a business purpose and are a mere formality." The Town of Fairhaven, Mass. v. United States, 135 Ct. Cl. 782, 788, 142 F. Supp. 590 (1956). See also Black, Starr & Frost-Gorham, Inc. v. United States, 94 Ct. Cl. 87, 39 F. Supp. 109 (1941). Thus, in Higgins v. Smith, the Supreme Court stated (308 U.S. at 477):
A taxpayer is free to adopt such organization for his affairs as he may choose and having elected to do some business as a corporation, he must accept the tax disadvantages.
On the other hand, the Government may not be required to acquiesce in the taxpayer's election of that form for doing business which is most advantageous to him. The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purpose of the tax statute. To hold otherwise would permit the schemes of taxpayers to supersede legislation in the determination of the time and manner of taxation. It is command of income and its benefits which marks the real owner of property.
"It is also well settled . . . that for" the purpose of the proper administration' of the taxing statutes, transactions between close or family corporations and its stockholders are subject to special scrutiny to determine their true purpose and effect; that transitory phases of an arrangement that add nothing o.f substance to the completed affair should be disregai'ded for tax purposes, and that substance and reality should prevail over form and sham." Ingle Coal Corp. v. United States, 131 Ct. Cl. 121, 129, 127 F. Supp. 573, 578-79 (1955) and cases there cited; cert. den. 350 U.S. 842.
Here it is apparent that Juniper, a closely held personal holding company, did not engage in the transaction in question on its own behalf, but rather acted as an alter ego on behalf of its two controlling stockholders who wanted for personal reasons to expedite payment of legacies from their mother's estate. In short, the transaction was undertaken by Juniper not for its own corporate or business reasons but solely for personal reasons of its shareholders; and they, it is clear, did not treat Juniper as a legal entity distinct and apart from themselves. Thus, it seems evident that the interposition of the corporate entity into the transaction was a mere formality.
Further, the reasonable inference from the record is that Juniper was utilized in this fashion as a means for tax minimization in respect to the transaction in issue. See e.g., Gregory v. Helvering, 293 U.S. 465 (1935); Griffiths v. Commissioner, 308 U.S. 355 (1939); National Investors Corp v. Hoey, 144 F. 2d 466 (2d Cir. 1944); J. R. Wood & Sons, Inc. v. United States, 97 Ct. Cl. 140, 46 F. Supp. 877 (1942). It is significant in this connection that when the two stockholders, Mr. Anderson and Mrs. Gardner, arranged to have the corporate entity pay the face amount of the legacies in return for an assignment to it of the legatees' interest in the estate, it did not appear that the assets of the estate would be sufficient to pay the legacies in full. Hence, the stockholders must be deemed to have known at the time the legacies were paid that at least a partial loss would result to the person entitled to the legacies when the administration of the estate was completed. In addition, the payment of the legacies and the assignment of them to Juniper was passed upon by Mr. Anderson's personal attorney before the transaction was consummated. So it would seem that Mr. Anderson was not unaware of the tax consequences if he and Mrs. Gardner should pay the legacies personally rather than through Juniper. The consequences would be, of course, that as individuals they would obtain no loss deduction because of the limitations imposed by section 165 (c) of the Code upon losses by individuals but that Juniper might obtain a deduction under the more liberal provisions in section 165(a) with respect to corporate losses — a deduction which would obviously benefit , them indirectly as the shareholders of the company. Thus, the reasonable conclusion from the record is that Mr. Anderson and Mrs. Gardner arranged for payment of the legacies through Juniper as a method to reduce taxes upon the corporate taxpayer by way of a loss deduction to the extent that the legacies were not paid in full by the estate, which deduction would not have been available to them had they paid the legacies personally.
EINDINGS OP PACT
X. Plaintiff is a Delaware corporation organized in 1923, with its principal office located at Watch Hill, Rhode Island. At all times here involved, it has been a personal holding company within the meaning of section 501 of the 1939 Internal Revenue Code, as amended, and of section 542 of the 1954 Internal Revenue Code.
¡2. During the period 1951 through 1956 the principal Stockholders of plaintiff were Wendell W. Anderson and Suzanne A. Gardner, brother and sister, each of whom owned 2,475 shares out of the total outstanding issue of 5,000 shares. The Estate of Gustava D. Anderson, who was the mother of Wendell W. Anderson and Suzanne A. Gardner, owned the remaining 50 shares. These shares were to pass to Wendell W. Anderson and Suzanne A. Gardner under the residuary clause of the will of Gustava D. Anderson. During the period from 1951 through 1956, plaintiff's directors were Wendell W. Anderson, Suzanne A. Gardner and Clark A. Swart. The officers of plaintiff in this period were Wendell W. Anderson, president; Suzanne A. Gardner, vice-president; Clark A. Swart, treasurer; and Virginia Eobinson, secretary. During the period from 1951 through 1956, Wendell W. Anderson controlled the business activities and decisions of plaintiff.
3. (a) Gustava D. Anderson died on March 26,1951, leaving a Last Will and Testament which was admitted to probate by the Probate Court for the County of Wayne, State of Michigan. The gross value of the estate was reported as $3,022,998.80 in the Federal Estate Tax Eetum filed for the estate in June 1952.
(b) Wendell W. Anderson was named in the will as executor and served in that capacity from April 1951 until his death in October 1959.
(c) Clark A. Swart, the treasurer of plaintiff, was appointed as appraiser of the estate. Prior to Mrs. Anderson's death, Mr. Swart had managed her business affairs.
4. (a) Article IX of Mrs. Anderson's will provided for the following legacies, among others:
(a) Francis B. Creamer (pastor)-$20,000
(b) Bertba Hobl (employee)_ 10,000
(c) Charlotte Hitchcock (niece)_ 5,000
(d) Katherine M. Hendrie (friend)- 5,000
(e) Gertrude Lederle (niece)_ 5,000
(f) Margaret L. Fisher (niece)_ 5,000
(g) Frances L. Laine (niece)_ 5,000
(h) Marie L. Meyers (neiee)_ 5,000
(i) Ida Wells (friend)- 2, 000
(b) Article IX of the will also provided for a cash legacy of $1,000 to each employee of Mrs. Anderson who had been in her employ for five years or more at the time of her death. These legacies were, as follows:
(a) Elsie Corke_$1, 000
(b) Geoffrey Corke_ 1,000
(e) Agnes Lines_ 1,000
(d) Paul Meldrum_ 1, 000
(e) John Anderson___ 1, 000
(f) Franck Tickle_ 1,000
(g) Bertha Hohl_ 1,000
(h) Regina Grobshornyon_ 1, 000
(c) The total amount of the legacies described in findings 4 (a) and (b) was $70,000.
5. In the fall of 1951, Wendell W. Anderson and his sister, Suzanne A. Gardner, decided to pay these legacies totaling $70,000 prior to final settlement of the estate. To this end they arranged to have the payment of the legacies made through plaintiff herein, their personal family holding company, upon assignment of the legacies to plaintiff. On December 14, 1951, plaintiff's board of directors, consisting of the two above-named persons and Mr. Swart, authorized payment of the face amount of these legacies totaling $70,000 upon assignment of the legacies to plaintiff.
6. (a) On the same day, December 14, 1951, Wendell W. Anderson, as executor of the Estate of Gustava D. Anderson, wrote the following letter to Elsie Corke and letters of similar import to each of the other legatees named in finding 4, supra:
As you know, you were specifically mentioned in my mother's will to receive a legacy of $1,000.00. This legacy in the natural course of events would be paid after the entire estate had been settled and inheritance taxes determined.
However, my sister and I felt that you would like to have it now rather than wait for the final disposition of the estate, which it appears will take two or three years to finally determine.
We, therefore, have made arrangements through our personal family holding company to pay this legacy to you in exchange for having you assign to it all your right, title and interest to same. In the end we feel it will simplify the ultimate settlement of the estate. Accordingly, I am enclosing herewith check of Juniper Investment Company for $1,000.00, together with an Assignment and copy of same, which I believe is self-explanatory. I would appreciate your signing it and returning it to me in the enclosed stamped envelope. Will you please be sure to have the Assignment witnessed. You may retain the copy for your records.
Enclosed with each letter was a check of plaintiff for the full amount of each legacy and a blank assignment form for assignment of the legacy to plaintiff. The form of the assignment was, as follows:
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, _, do herewith acknowledge the receipt from JUNIPER INVESTMENT COMPANY, a Delaware corporation, of the sum of_ ($_) and in consid-ation thereof I do hereby assign, transfer and set over to said JUNIPER INVESTMENT COMPANY all my right, title and interest as legatee in and to the ESTATE OF GUSTAVA D. ANDERSON, deceased, formerly of Grosse Pointe Farms, Michigan, and particularly all my right, title and interest in and to the legacy of $_to which I am entitled under and by virtue of the provisions of Article IX of the Last Will and Testament of said Gustava D. Anderson, and I further order and direct that payment of said legacy, when ordered, be made to said JUNIPER INVESTMENT COMPANY in my place and stead.
DATED:_
WITNESSES:
(b) Each legatee who received the foregoing letter accepted the check and returned to Wendell W. Anderson, as executor of the Estate of Gustava D. Anderson, an executed assignment and direction that his or her legacy be paid to plaintiff.
(c) Mr. Anderson's letter and the assignment form were approved before mailing by his personal attorney.
7. At the time these payments totaling $70,000 were.made by plaintiff and the assignments of the legacies received, it did not reasonably appear that the estate would have sufficient assets to pay the legacies in full. Rather, it reasonably appeared that the estate's assets would be sufficient to pay about $54,558 or 78 per cent of the face amount of the legacies. Nor did it reasonably appear at - this time that the income from the estate during the expected period of probate would provide sufficient additional, funds to pay the legacies in full, even were it to be assumed that the entire income from the estate would be tax-free and thus available for distribution.
8. Plaintiff was under no obligation to acquire the legacies, nor did it expect to make a profit from their acquisition. No business or corporate purpose of plaintiff was served by acquisition of the legacies. The legacies were acquired due to a humanitarian desire on the part of plaintiff's two principal stockholders to allow the beneficiaries, long-time friends and employees of their mother, to receive their legacies sooner than the approximate two or three years it appeared would be required to settle the estate.
•9. In his petition accompanying his first account as executor of the Last Will and Téstament of Gustava D. Anderson, Wendell W. Anderson reported the assignment of the bequests involved to the Probate Court for the County of Wayne (Michigan).
10. During the period 1951 through 1956, there was considerable interrelation between the activities of plaintiff and the administration of the Estate of Gustava D. Anderson due to the fact that Wendell W. Anderson not only was executor of the estate but also controlled the activities of plaintiff.
11. On July 1,1931, Gustava D. Anderson created a trust in the amount of $4,002,000, the income from which was payable to her husband, John W. Anderson, for life, and then to the settlor, Gustava D. Anderson, for life, and then into trusts for the benefit of their children. On that same date John W. Anderson created a trust in the same amount, the income from which was payable to Gustava D. Anderson for her life. The trusts were handled by the same trustee, had the same witnesses to the instruments, and the same officer of the Continental Illinois National Bank of Chicago signed for the bank, which was the trustee. John W. Anderson died in 1945 and Wendell W. Anderson was appointed executor of his estate. On December 29, 1950, Gustava D. Anderson relinquished her right to the income from her trust in favor of the Anderson Family Fund, a charitable foundation. She died on March 26,1951, within three months after she relinquished her right to the income from her trust. These facts were known to Wendell W. Anderson, and to Clark Swart, in the fall of 1951 when the bequests were paid by plaintiff.
12. The Federal estate tax return for the Estate of Gustava D. Anderson was timely filed on June 25, 1952, by Wendell W. Anderson. The gross value of the estate as of the date of death was reported to be $3,022,998.80. The value of the trust created by Gustava D. Anderson in 1981 was not reported as being included in the estate. The amount of the estate tax, as reported by the executor, Wendell W. Anderson, was $852,347.06 after credit for the Michigan inheritance tax in the amount of $143,160.40.
13. (a) In 1955, following audit of the estate tax return of the Estate of Gustava D. Anderson, the Director of Internal Nevenue proposed to assess a gross estate tax deficiency in the amount of $3,426,134.81. The proposed deficiency was based on the inclusion in the taxable Estate of Gustava D. Anderson of a trust created in 1931 upon either of two grounds: (1) the trusts created in 1931 by Gustava D. Anderson and John W. Anderson were reciprocal; (2) the relinquishment by Gustava D. Anderson of the income from her trust was a transfer in contemplation of death. The proposed deficiency was contested and settled in 1956 by payment of an estate tax deficiency of $1,128,000 with interest thereon in the sum of $288,916.29.
(b) It does not appear that the deficiency was foreseen by plaintiff or its shareholders at the time the former acquired the legacies.
14. After payment of the estate tax deficiency of $1,128,000, together with interest of $288,916.29, the Estate of Gustava D. Anderson did not have sufficient assets with which to pay administration expenses and satisfy in full legacies and devises, consisting of specifically devised real estate and specifically bequeathed personal property, all of which have priority over general or demonstrative bequests of personal property under the laws of the State of Michigan, and thus had no funds with which to pay all or any portion of the legacies acquired by plaintiff.
15. The value of the legacies acquired by plaintiff was lost in 1956 when the assets of the estate were reduced to a point where no funds were available to pay them. Plaintiff has never been compensated for any portion of the legacies, by insurance or otherwise.
16. Plaintiff filed a timely 1956 corporate tax return showing income tax due in the amount of $170,048.03 and paid therewith the sum of $85,024.02, constituting one-half of the income tax shown due.
,17. On June 17, 1957, plaintiff filed an amended 1956 income tax return in which it claimed a deduction of $70,000 representing its loss on the legacies acquired from various beneficiaries, thereby reducing its income tax by $17,500.11 to $152,547.92. At the same time it filed its amended return plaintiff paid $67,523.90, representing the balance of its 1956 income tax as reflected by the amended return.
18. On February 24, 1958, pursuant to demand by the District Director of Internal Revenue, plaintiff paid the balance of the tax due and remaining unpaid as shown in its original tax return for 1956. This added amount was $17,-500.11, together with interest in the sum of $742.20.
19. On March 26,1959, plaintiff was advised by the District Director of Internal Revenue that the claim for refund arising out of the filing of the amended return would be disallowed and that the statutory notice of disallowance of the claim would be forwarded at a later date by registered mail, pursuant to Section 6532(a) (1) of the internal Revenue Code of 1954. No such statutory notice has ever been sent to plaintiff.
20. On February 19, 1960, plaintiff filed a claim for a refund of $18,242.31, together with interest thereon, on the basis that it was entitled to deduct a loss of $70,000 in computing its 1956 income tax return.
21. No action on the claim for refund has been taken by the District Director of Internal Revenue or any other agency of the Government. No refund has been made of any portion of the tax and interest paid by the plaintiff on February 24,1958.
22. More than six months elapsed between the date the claim for refund was filed by plaintiff and the date of filing the petition in this case.
23. Plaintiff is the sole owner of the claim sued upon.
CONCLUSION OF LAW
On tbe foregoing findings of fact, which, are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover, and its petition is dismissed.
By contrast, section 165(c) of the Internal Revenue Code of 1954 provides for the following limitations on the losses of individuals:
(c) Limitation on Losses of Individuals. — In the case of an individual, the deduction under subsection (a) shall be limited to— ,
(1) losses incurred in a trade or business;
(2), losses incurred in any transaction entered into for profit, though not connected with a trade or business ;
All previous income tax laws have similarly differentiated between individual and corporate losses. See Internal Revenue Code of 1939, Sec. 23(e), See. 23(f) ; Revenue Act of 19.38, Sec. 23(e), Sec. 23(f), 52 Stat. 461; Revenue Act of 1936, Sec. 23(e), Sec. 23(f), 49 Stat. 1659; Revenue Act of 1934, Sec. 23(e), Sec. 23(f), 48 Stat. 689; Revenue Act of 1932, 4T Stat. 180; Revenue Act of 1928, See. 23(e), Sec. 23(f), 45 Stat. 800; Revenue Act of 1926, Sec. 214(a), (4), (5), 44 Stat. 26-7, Sec. 234(a),(4), 44 Stat. 41-2; Revenue Act of 1924, Sec. 214(a) (4), (5), 43 Stat. 270, See. 234(a)(4), 43 Stat. 283-84; Internal Revenue Act of 1921, Sec. 214(a) (4)i, (5), 42 Stat. 240, Sec. 234(a) (4), 42 Stat. 254-55 ; Internal Revenue Act of 1918, Sec. 214(a) (4), (5), 40 Stat. 1067, See. 234(a)(4), 40 Stat. 1078; Revenue Act of 1916, Sec. 5(a), 39 Stat. 759, Sec. 12(a), 39 Stat.'767-68 ; Revenue Act of 1913, Sec. II.B., 38 Stat. 167, Sec. II.G., 38 Stat. 172; Revenue Act of 1909 (applicable only to corporations), See. 38, 36 Stat. 113; Revenue Act of 1894, Sec. 27, 28 Stat. 553, Sec. 32, 28 Stat. 556.
In reaching this conclusion, the majority of the Tax Court cited (24i T.C. 611) the following statement made by Congressman Hull during the floor debate on the Revenue Act of 1913, 50 Cong. Rec. 506:
"As to losses, these provisions primarily contemplate allowance for losses growing out of the trade or business from which the taxable income is derived, and generally termed trade losses, as distinguished from losses of capital or principal or losses incurred entirely apart from business transactions from which income is derived. A similar rule governs deductions for expenses."
Careful reading of the Congressional Record (50 Cong. Rec., pp. 505-09) makes it clear, however, that the above statement was made in connection with Sec. II.B. of the Act of 1913, 38 Stat. 167, dealing with the tax on individuals rather than Sec. II.G., 38 Stat. 172, dealing with the tax on corporations. In fact, the legislative history of section 165(a) and its predecessor sections is devoid of any indication as to whether or not Congress intended to restrict its applicability to losses pertinent to the conduct of the taxpayer's business. See Seidman Legislative History of Federal Income Tax Laws, 1938-1861 (1938).
Judges Arundell and Johnson joined in the dissent.
See Law Op. 1092, CB June 1922, p. 270, modifying Law Op. 968, CB June 1920, p. 212. There the president and principal stockholder of a corporation used the funds of the company to speculate in shares of stock purchased on margin, and in certain instances used the stock of the corporation to cover his own marginal account. These activities were apparently known to the other stockholders and acquiesced in by them. The Solicitor of Internal Revenue ruled that even though the corporation had no power to trade in stocks on margin, it was nevertheless entitled under section 12(a) of the Revenue Act of 1916 to a deduction for losses sustained by it as a result of such trading. That section (which was similar in import to section 165(a)) allowed corporations to deduct from income "All losses actually sustained and charged off within the year . ."