Court Opinion

ID: 4609949
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:45:48.365519+00
Date Added: 2024-06-11T07:53:59.418444
License: Public Domain

ROY C. CLARK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Clark v. CommissionerDocket No. 34191.United States Board of Tax Appeals19 B.T.A. 736; 1930 BTA LEXIS 2332; April 28, 1930, Promulgated 1930 BTA LEXIS 2332">*2332  1.  Where the respondent has computed the taxable income on the net worth basis, certain additions to income made by respondent are approved in part and rejected in part.  2.  Net loss of petitioner for 1921 disallowed as deductions in determining 1923 net income because not substantiated.  Net loss for 1922 allowed as a deduction from 1923 net income.  3.  On the evidence, held that the respondent erred in not allowing as a deduction loss sustained on stock ascertained to be worthless in 1924.  4.  Net losses of petitioner for 1924, if any, allowed as a deduction in computing petitioner's net income for 1925 in accordance with the terms of section 206 of the Revenue Act of 1926.  George E. H. Goodner, Esq., for the petitioner.  Arthur Carnduff, Esq., and S. P. Anderson, Esq., for the respondent.  BLACK 19 B.T.A. 736">*737  In this proceeding petitioner seeks a redetermination of his income-tax liability for the calendar years 1923 to 1925, inclusive, for which years the respondent has determined the following deficiencies: 1923, $1,834.05; 1924, $521.04; 1925, $798.56.  The petitioner alleges that the respondent has made the following errors: (1) 1930 BTA LEXIS 2332">*2333  In computing the net income for the year 1923 the respondent erroneously increased same in the amount of $1,979.17 by understating petitioner's net worth at the beginning of the year by $1,979.17, and failed to deduct net losses sustained by petitioner in his business in 1921 and 1922 in the amounts of $5,180.50 and $18,372.95, respectively; (2) in computing net income for 1924 the respondent failed to allow losses sustained on worthless stock in the amount of $26,500, a loss of $1,800 on construction work, and included certain investments as income which were not income; and (3) in computing net income for 1925, the respondent erred in failing to deduct the petitioner's alleged net loss for the year 1924.  FINDINGS OF FACT.  The petitioner is an individual residing in East Chicago, Ind., where since 1914 he has been engaged in the general contracting business.  During the years 1921 to 1925 he filed timely income-tax returns.  For the years 1921 to 1923, inclusive, he reported no taxable income and reported and paid taxes in the amounts of $328.13 and $1,351.35 for the years 1924 and 1925, respectively.  For a considerable period prior to January, 1922, the petitioner's books1930 BTA LEXIS 2332">*2334  of account in connection with his contracting business were kept by one Palmer, who died early in 1922.  These books of account for the year 1921 were at Palmer's home at the time of his death.  The petitioner employed an accountant named Volk to prepare the income-tax return for the year 1921.  Volk was unable to find the books of account at Palmer's home and from checks, vouchers, deposit tickets, contracts and other data, which had been used by 19 B.T.A. 736">*738  Palmer in posting the books, prepared the return for the year 1921.  The 1921 return as prepared and filed showed a business net loss of $5,180.50.  The checks, deposit tickets, vouchers and other data from which this return was prepared have been lost or destroyed.  Volk prepared the subsequent returns for the petitioner.  In all these years he computed the petitioner's income on what he termed an accrued profit and loss basis.  Volk opened a new set of books for the petitioner in 1922, which books were kept on the accrued profit and loss basis, with adjustments to the capital account to reflect omissions made in setting up the assets and liabilities at the beginning.  For the calendar year 1922 the petitioner filed both an1930 BTA LEXIS 2332">*2335  original and an amended return.  The original return showed a loss of $18,429.27 and the amended return showed a loss of $14,700.47.  The details showing this loss as embodied in profit and loss statement attached to petitioner's amended return for 1922 are as follows: Income from jobs and contracts$74,978.87Less total cost of jobs and contracts87,041.07Gross loss12,062.20Less rent income74.12Gross operating loss11,988.08ExpensesOffice salaries$332.62Insurance272.42Interest795.78Taxes329.15Gasoline and oil274.24Trucks and auto repairs93.44Loss on service garage183.63Commissions100.00Telephones78.55Advertising27.60Stationery14.95Loss on Clark Imp210.00Total expense2,712.39Net business loss14,700.47In the year 1923, the respondent computed the petitioner's net income on the net worth basis and determined his income to be $24,718.92.  The petitioner's books kept on the accrued profit and loss basis showed a net income of $22,739.75.  The difference shown between petitioner's books and that determined by the respondent is $1,979.17, which amount reflects the following1930 BTA LEXIS 2332">*2336  capital adjustments made by the petitioner on his books during the year: 19 B.T.A. 736">*739 CREDITSChecks drawn in 1920 and never cashed$779.17Mortgage liabilities set up by mistake on books 5/1/22, which had been assumed by the purchaser of the property1,500.002,279.17DEBITSNotes payable of petitioner outstanding 5/1/22 and erroneously omitted in opening books at the time300.00Net credit to capital account for the year1,979.17For the year 1924 the respondent determined petitioner's net income to be $19,196.67.  This computation was made on the net worth basis and included profits from business in the amount of $16,678.67.  The petitioner's business income for 1924, according to his books, was $10,605.36 after deducting salary paid to himself of $2,600.  The salary was reported separately and is not included in the statement of income from business as determined by the respondent.  The difference between the business income, according to the books and that determined by the respondent is $6,073.31 and is made up of certain items which respondent has listed as follows: Cash invested in business by petitioner derived from private assets and credited to capital account on 8/31/24$2,000.00Automobile purchased by petitioner in 1924 from private assets and used in business, credited to capital account 12/31/242,500.00Inventory adjustment at end of year2,500.00Total7,000.00Less:Net excess of sundry debits to capital account over sundry credits to capital account926.69Net difference6,073.311930 BTA LEXIS 2332">*2337  The books used in the preparation of the returns under consideration reflected only the petitioner's contracting business and if he had any private transactions they were not included in the books.  Petitioner's income-tax returns for the respective years included any personal income he may have had, as well as income from his business.  At the hearing the adjustments of the latter $2,500 and $926.69 for the year 1924 were admitted to be proper by both parties.  The petitioner in 1919, 1920, and 1921 acquired a total of 33,300 shares of stock in the Elmore Copper Co., a corporation operating a copper mine at Mountain Home, Idaho, at a total cost of $16,650.  Part of this stock was acquired purely as a personal investment for profit and part of it was acquired in connection with transactions in petitioner's business as a building contractor.  The part acquired by petitioner in the course of his business as a building contractor was 18,900 shares at a total cost of $10,440; 14,400 shares at a total 19 B.T.A. 736">*740  cost of $6,210 were acquired by petitioner as an investment and had no connection with his business transactions as a building contractor.  The petitioner was awarded a contract1930 BTA LEXIS 2332">*2338  by the Elmore Copper Co., which provided for the erection of ten dwellings, a hotel and the shaft building at the mouth of the mine.  The estimated cost of the work was $100,000.  The petitioner's compensation was to be 10 per cent but was to be payable in stock of the company at par, that is, he was to receive 10,000 shares of stock.  Under the contract the company was to pay for all material and labor.  In July, 1920, the petitioner with five or six of his regular men commenced work on the contract.  At first the company paid the men and expenses, but later became short of funds and the petitioner was compelled to pay the men.  In October, 1920, he returned to his home, leaving the men there to continue the work.  In November they wrote the petitioner that they had not been paid and had no money to come home on.  The petitioner sent them money.  Thereafter, he did no more work but held himself ready to go to work as soon as the company had funds.  At the time of discontinuing the work the construction was one-half completed.  After the construction work was abandoned the company continued its mining operations and was attempting to sell its stock at $1 per share, the previous sales1930 BTA LEXIS 2332">*2339  of the stock having been at 60 cents per share.  The petitioner, although he demanded it several times, never received a certificate for the 10,000 shares of stock promised to him on the construction contract.  In paying the men's expenses and amounts due for labor in 1920 under the contract the petitioner expended $1,800, no part of which has ever been recovered.  The Elmore Copper Co. tried to raise money in 1921 to carry on but was unsuccessful.  Creditors filed suit and a judgment was entered in their favor in October, 1921, which matured into a sheriff's certificate in December, 1922.  An unsuccessful attempt at reorganization was made in November, 1923, at which time the petitioner forwarded his shares for exchange and asked to be taken care of on his advances under the contract.  In January, 1924, sheriff's deeds were executed conveying all of the property of the Elmore Copper Co. to its creditors, and it was left without assets.  Petitioner's stock in the corporation became worthless in 1924 and his claim of $1,800 against the corporation became worthless in the same year.  The respondent in his determination for the year 1923 determined petitioner's net income to be $24,718.921930 BTA LEXIS 2332">*2340  and disallowed the net losses claimed for the years 1921 and 1922 for lack of verification, resulting in deficiencies for the year 1923 in the amount of $1,834.05, for the year 1924 of $521.08, and for the year 1925 he determined a deficiency in tax in the amount of $798.56, which the petitioner contends is in error by reason of the respondent's failure to allow a net loss 19 B.T.A. 736">*741  in 1924 arising from the worthlessness of the stock in the Elmore Copper Co., and loss of his claim of $1,800.  OPINION.  BLACK: The issues in this proceeding are largely matters of fact.  The petitioner is a general contractor in the construction business and his income has been computed by the Government on the net worth basis on account of his method of bookkeeping.  As stated in the findings of fact, petitioner has no books for 1921 and the first four months of 1922.  He had books for 1921 but they were lost at the time of the death of his former bookkeeper, Palmer.  For the year 1923 the petitioner contends that the respondent erred in not deducting from net income alleged losses for the two prior years and that respondent overstated petitioner's income for 1923 by $1,979.17 on account of understating1930 BTA LEXIS 2332">*2341  petitioner's net worth at the beginning of the year by $1,979.17.  We think this latter contention of petitioner must be sustained.  The evidence introduced at the hearing establishes to our satisfaction that the items aggregating $1,979.17 as shown in our findings of fact were not income for the year 1923.  The alleged losses for the years 1921 and 1922 were disallowed by the respondent on the ground that they had not been substantiated.  Section 204(b) of the 1921 Act very properly requires that net losses of one year to be carried forward and used as a deduction from net income of a succeeding year, must be well authenticated.  In the instant case petitioner's income-tax return for 1921 showed a loss of $5,180.50.  Respondent does not seek to disturb the return for that year in so far as income taxes for 1921 are concerned, but when petitioner seeks to carry forward such loss and use it as a deduction in determining 1923 net income, respondent asks for authentication.  Petitioner is unable to furnish satisfactory authentication.  The books for 1921 are lost.  The bank deposit slips, contracts, bills payable, invoices for materials, etc., from which the witness Volk prepared1930 BTA LEXIS 2332">*2342  the 1921 return are lost or destroyed.  Petitioner filed an amended return for 1922 which showed a loss of $14,700.47, which he designates on his return as "net business loss." It must be remembered, however, that the loss shown on taxpayer's income-tax return is not necessarily the statutory net loss which may be carried forward and used as a deduction from petitioner's net income for the following year.  There are certain deductions, for example, which are allowed to the individual taxpayer under section 214 of the Revenue Act of 1921, in computing his net income for the taxable year, which have nothing to do with his business.  19 B.T.A. 736">*742  These deductions have the effect of increasing taxpayer's loss on his return, but may not be used in increasing the statutory net loss of his business, for they have nothing to do with his business.  For example, in the instant case, in determining petitioner's losses for 1922, there are included an item of $183.63 loss on service garage, and an item of $210, loss on "Clark Imp." These items of deduction appear to have nothing to do with petitioner's business, which was that of a general contractor.  They were personal losses.  Therefore, whereas1930 BTA LEXIS 2332">*2343  his loss as shown by his income-tax return for 1922 was $14,700.47, his statutory net loss would be his actual loss reduced by the two foregoing items of deduction aggregating $393.63, leaving a statutory net loss $14,406.84.  We therefore hold that respondent correctly disallowed as a deduction in determining 1923 net income the 1921 loss of $5,180.50, because not properly substantiated.  We hold that respondent erred in refusing to allow petitioner's statutory net loss for 1922, which we hold to be $14,406.84, as a deduction from petitioner's 1923 net income.  This loss was satisfactorily substantiated by taxpayer's books.  For the year 1924 inventory adjustments of $4,500 are also in dispute.  This amount represents $2,000 in cash and the cost of an automobile, $2,500, both of which were paid into the construction account by the petitioner and increased petitioner's net worth by the respective amounts.  Respondent added these items to income for 1924.  Since the petitioner has failed to show that these amounts were not income during the year in question, the respondent's determination should not be disturbed.  The remaining issues relate to petitioner's transactions with the1930 BTA LEXIS 2332">*2344  Elmore Copper Co., of which he was the owner of 33,300 shares costing $16,650.  From the record it is apparent that this stock became worthless in 1924 and accordingly the cost is deductible from net income in that year.  We are of the opinion that since no profit was reflected on the petitioner's books in 1920 for the work done under the construction contract with the Elmore Copper Co., for which he was to receive 10,000 shares of stock, but never did receive them, any deduction for a loss on account of this transaction would result in a distortion of income, and accordingly petitioner's contention as to this item should be denied.  The $1,800 advancements to employees engaged on the copper contract represents a bad debt and is deductible in the year 1924, when it was determined to be worthless.  The only issue as to the year 1925 is the failure of the respondent to allow net losses sustained in the year 1924.  In final determination of petitioner's tax under Rule 50, we are of the opinion there will be no net loss for 1924.  We have held, however, in the appeals of 1930 BTA LEXIS 2332">*2345 , and , that where to 19 B.T.A. 736">*743  further his regular business taxpayer purchased stock in a corporation and stock subsequently became worthless, that loss was one sustained in operation of regular business and should be included in computing net loss, as defined by the statute.  Therefore, if petitioner had any net loss for 1924 it should be used as a deduction from his 1925 net income in the manner prescribed by section 206 of the Revenue Act of 1926, because the Revenue Act of 1926 is made applicable by its terms to 1925 income.  Judgment will be entered under Rule 50.