Court Opinion

ID: 4622789
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:50:12.303359+00
Date Added: 2024-06-11T07:56:14.730814
License: Public Domain

FAITOUTE IRON & STEEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Faitoute Iron & Steel Co. v. CommissionerDocket No. 10547.United States Board of Tax Appeals11 B.T.A. 818; 1928 BTA LEXIS 3712; April 25, 1928, Promulgated *3712  1.  In 1919 petitioner purchased certain stock which it sold in 1920.  Under the circumstances, it is held that petitioner suffered a deductible loss of $17,550.  2.  The Commissioner's action in disallowing as a deduction from gross income for the year 1920 the amount of $8,050 as a business expense is reversed.  John A. Conlin, Esq., for the petitioner.  W. H. Lawder, Esq., for the respondent.  LOVE *818  This proceeding is for the redetermination of a deficiency in income and profits taxes for the calendar year 1920 in the amount of $10,214.19.  The petitioner alleges that, in determining the deficiency, the Commissioner erred (1) in disallowing as a deduction a loss sustained from the sale of stock in Bloomingdale Farms, Inc., and (2) in disallowing as a deduction the amount of $8,050 representing traveling expenses of the petitioner's president.  FINDINGS OF FACT.  The petitioner is a New Jersey corporation with its principal office and place of business as 182 Frelinghuysen Avenue, Newark.  It is and was during the year 1920 and prior thereto engaged in business as a jobber and dealer of iron and steel.  On May 3, 1919, petitioner*3713  acquired a one-half interest in the Bloomingdale Farms, Inc., a corporation which owned and operated a live stock farm on which were bred and raised the finest Holstein-Friesian cattle.  The one-half interest in Bloomingdale Farms, Inc., was represented by 325 shares of stock for which the petitioner paid $32,500.  Hamilton Kean owned the remaining 325 shares for which he had paid the amount of $32,500.  Subsequent to the acquisition of the stock of the Bloomingdale Farms, Inc., and during the year 1919, the petitioner and Kean each *819  invested, as additional contributions of capital, various sums in equal and like proportion for the purpose of acquiring new live stock, installing an electric-light plant, and other improvements of a capital nature.  The amount contributed by the petitioner and Kean was $35,100, the share of each being $17,550.  The petitioner's investment in the Bloomingdale Farms, Inc., was, therefore, $50,050.  However, no additional shares of stock were issued as additional investments were made for the reason that the owners of the stock did not deem such action necessary.  About September, 1919, it was discovered that the production records of the*3714  Holstein-Friesian Association had been dishonestly made.  This discovery resulted in the immediate depreciation of the market value of the live stock owned by Bloomingdale Farms, Inc.  In view of the serious decline in the market value of the live stock and as the business of the farm did not measure up to the expectations, the petitioner in September, 1920, sold the 325 shares of stock of the Bloomingdale Farms, Inc., to Moses Faitoute, its president, for $32,500, which was a fair and reasonable price for the stock at that time.  Faitoute, petitioner's president, gave his individual note to petitioner for $32,500.  He was then, and at all times has been, financially able to make full payment thereof at any time demand for payment was made upon him.  The note for the purchase price of the stock has always been carried by the petitioner as an asset in accounts receivable.  Upon the execution of the note in the amount stated, the petitioner, by proper endorsement, transferred the stock of the Bloomingdale Farms, Inc., to Faitoute.  In its return for 1920, petitioner claimed as a loss the amount of $17,500 resulting from the sale of the stock of the Bloomingdale Farms, Inc.  The Commissioner, *3715  however, disallowed the amount as a deduction.  During the year 1920, petitioner exported to South America through brokers, considerable iron and steel.  With a view of saving brokerage charges, petitioner sent its president, Faitoute, to South America in order that he might survey trade conditions and ascertain the feasibility of dealing with South American merchants on credit.  Faitoute, accompanied by his wife, visited South America and there studied trade conditions.  As a result of his observations, petitioner withdrew from the export business.  In making the trip Faitoute incurred expenses in the amount of $8,050 and he was some time in 1920 reimbursed in that amount by petitioner.  In its return for the year 1920, petitioner claimed as a deduction for business expense the amount of $8,050 paid to Faitoute to reimburse *820  him for expenses incurred on his South American trip.  Upon audit of the return, the Commissioner disallowed the deduction.  OPINION.  LOVE: With respect to the first contention advanced by the petitioner, the evidence shows that during the year 1919 the petitioner invested in the Bloomingdale Farms, Inc., the amount of $50,050 and that in*3716  September, 1920, the 325 shares of stock representing the investment theretofore made were sold for $32,500 to Faitoute, its president.  However, in view of all of the facts, it is evident that the sale was bona fide and we see no reason why the petitioner should not deduct the loss sustained.  Accordingly, the Commissioner's action in disallowing as a deduction from gross income for 1920 the amount of $17,500 representing the loss sustained by reason of the sale of the stock in question is reversed.  Petitioner's second contention is that it is entitled to deduct the amount of $8,050 as a business expense incurred and paid in 1920 The Commissioner takes the position, however, that so much of the expense as was incurred by Mrs. Faitoute is not deductible.  It is clear that Faitoute went to South America on a mission connected with petitioner's business.  It is true that his wife accompanied him.  Upon his return, he was reimbursed by petitioner in the amount of $8,050 for expenses incurred on the trip.  Obviously, the amount paid by petitioner was a business expense to it and as such properly deductible from gross income.  Of course, the amount of $8,050 constituted gross*3717  income to Faitoute and his wife's expenses on the trip are not deductible therefrom in computing his net income.  However, petitioner's right to deduct the amount in question is not altered or affected thereby.  The amount in question is none the less a business expnse merely because Faitoute's wife accompanied him.  Judgment will be entered on 15 days' notice, under Rule 50.