Court Opinion

ID: 4616982
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:35:36.858046+00
Date Added: 2024-06-11T07:55:13.110114
License: Public Domain

WINTHROP AMES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ames v. CommissionerDocket No. 42288.United States Board of Tax Appeals27 B.T.A. 729; 1933 BTA LEXIS 1315; February 11, 1933, Promulgated *1315  Petitioner owned all the outstanding stock of a corporation which he had organized to carry on his individual business of producing plays.  No one else was associated with the petitioner in managing the affairs of the corporation and he devoted all his working hours to the business.  Petitioner supplied the necessary capital by making personal loans to the corporation.  In 1922 the corporation, being unable to repay these loans, confessed judgment in favor of the petitioner in the sum of $719,223.68, which amount was subsequently reduced to $504,372.18.  Petitioner took over all the assets of the corporation and it was liquidated.  Held, the loss thus sustained by the petitioner in 1922 did not result from the operation of a business regularly carried on by the petitioner in that year, within the meaning of section 204 of the Revenue Act of 1921, and the unabsorbed portion thereof may not be deducted as a net loss in computing petitioner's taxable income for 1924.  Burnet v. Clark,287 U.S. 410">287 U.S. 410; and Dalton v. Bowers,287 U.S. 404">287 U.S. 404, followed.  Burton E. Eames, Esq., for the petitioner.  Arthur Carnduff, Esq., for the respondent. *1316 MATTHEWS *730  The respondent has asserted a deficiency in income tax for the year 1924 in the amount of $21,436.74.  The only issue is whether the balance of a loss sustained in 1922 is deductible as a net loss in computing taxable income for 1924.  At the hearing counsel for both parties agreed that the facts as stated in the appeal of the taxpayer reported at 1 B.T.A. 63">1 B.T.A. 63 should be taken to be true, so far as material to the instant proceeding.  The facts set out in that appeal, the further stipulation entered into by the parties and the disposition of the petitioner form the basis of our findings of fact in this proceeding.  FINDINGS OF FACT.  1.  Winthrop Ames, the taxpayer in this case, was during the year 1924, and for many years theretofore, engaged in the business of producing plays.  This business was conducted by petitioner as an individual for approximately two years prior to 1912.  In the latter part of the year 1912 petitioner had under consideration plans for the construction and operation of what subsequently became the Little Theater in New York City, and for the purpose of protecting himself against unlimited liability in the event*1317  of fire or other casualty in that theater, he caused the corporation, Office of Winthrop Ames, Inc., to be duly organized under the laws of the State of New York.  The authorized capital stock of this corporation was $10,000, being divided into 100 shares of $100 par value each, of which stock only 10 shares were ever issued, 6 of these being issued in the name of petitioner and 4 in the names of qualifying directors, petitioner being at all times the actual owner of all the stock.  From the date of organization of the corporation to and including a portion of the year 1922, in which year it was liquidated on confession of a judgment in favor of petitioner, the corporation was the medium through which the business of selecting and producing plays was carried on, its original purpose to operate as the owner of the Little Theater having been abandoned and a separate corporation formed for that purpose.  All of the expenses connected with the business of producing plays and all of the income *731  derived from it were accounted for upon the books of the corporation.  Prior to the time the corporation was organized petitioner kept a set of books for the business of producing plays*1318  which was separate and apart from the record kept of his investments and his income from other sources.  2.  Throughout the period of its existence the validity of the corporate existence was never brought into question; the New York State franchise tax was regularly paid; a separate bank account was kept; its funds were disbursed on separate checks signed by duly authorized officers of the corporation; and there were maintained in its name regular offices and an office staff.  The corporate by-laws required directors to be stockholders, but in fact the actual ownership of all shares of stock was at all times vested in petitioner.  3.  During all the years from the date of the organization of the corporation to and including the year 1920 the corporation sustained continuous losses; that is, the sums expended in the production of plays exceeded the revenue derived therefrom after due allowance was made at the close of each year for the costs of all plays in process of production, the ultimate financial results of which were not then ascertained.  At the close of each year there was carried to the account of petitioner on the corporation books a charge in the amount of the estimated*1319  loss for that year.  4.  In the year 1921 the corporation books showed a profit, and for 1922, 1923 and 1924, the business as conducted by petitioner was profitable.  5.  The corporation was financed in all of these undertakings by advances from petitioner, these advances being credited to him on the books of the corporation as moneys loaned, he charging the corporation in his personal books for the sums advanced.  6.  The entire management of the corporation and of its business of producing plays was solely in the control of petitioner and he was solely responsible for the business carried on by the corporation, personally directed its affairs, and his time was actively, continuously, and almost exclusively devoted to its affairs and to the business of play production through the medium of the corporation.  His work consisted of selecting, producing and financing theatrical productions.  7.  No change was made in petitioner's office staff after the organization of the corporation.  The business was carried on exactly the same after the corporation was organized except that the financial part was transacted in the name of the corporation.  Whenever bills came in and there was*1320  not enough money in the corporation to pay them, petitioner advanced whatever amounts were needed *732  from his personal funds.  These amounts were charged on his personal books to the theatrical production business and on the books of the corporation they were credited to him as loans, under the heading "Advanced from Winthrop Ames", and the bills were then paid by the check of the corporation.  Contracts with actors were signed by petitioner in the name of the corporation.  Petitioner individually made all final decisions relating to selection, revision, casting, rehearsing, etc., and also made all final decisions relating to contracts or business policy.  No one else was associated with him either in managing or financing the corporation.  He was president of the corporation, but at no time did he receive any salary from the corporation.  The losses of the business were substantial down through the year 1920.  8.  There was not charged off on petitioner's personal books at any time prior to 1922 any loss on account of the advances made by him to the corporation.  The entire total net amount so advanced remained an open account upon these personal books throughout the period*1321  of the life of the corporation and up to the time when it was liquidated, at which time the amounts advanced totaled $719,223.68.  At all times prior to 1922 petitioner expected the corporation ultimately to become profitable.  9.  In the year 1922 the petitioner suffered a loss as a result of the liquidation of said corporation.  The corporation confessed judgment in the fall of that year in favor of the petitioner in the sum of $719,223.68, which was reduced by him to the sum of $504,372.18, first by crediting the fair value of all the assets of the corporation which were taken over by the petitioner individually, and later by a credit on account of certain errors which were discovered in the accounting after the judgment had been entered.  These deductions left an unsatisfied satisfied judgment in favor of the petitioner against the corporation in the said sum of $504,372.18, and the corporation was left entirely without assets and entirely ceased to function.  10.  In his return of income for the calendar year 1922 the petitioner claimed as a deduction against his income of $87,796.20 the said loss of $504,372.18, leaving an unabsorbed loss in the amount of $416,575.98.  In*1322  his return for the calendar year 1923 petitioner claimed as a deduction against income a further portion of this loss, to wit, $95,683.83, under the contention that the loss sustained in 1922 was a "net loss" under section 204 of the Revenue Act of 1921.  The deduction of $109,474.95, being a further portion of said $416,575.98, which is claimed by the petitioner against income for the calendar year 1924 and which is in issue in this case, is claimed under the provisions of section 206 of the Revenue Act of 1924.  *733  OPINION.  MATTHEWS: There is no dispute as to the facts in this case or as to the computation of the deficiency.  The sole question presented is whether the loss sustained by the petitioner in 1922 is a net loss within the meaning of section 204 of the Revenue Act of 1921 so that the unabsorbed portion thereof may be deducted in computing petitioner's taxable income for 1924.  In order to constitute a net loss which may be applied against petitioner's income of succeeding years in accordance with the provisions of the statute it must be shown that the loss resulted from the operation of a business regularly carried on by the petitioner.  It is pertinent to*1323  determine what was the business of the petitioner in 1922 and whether the loss which the petitioner is here seeking to deduct arose from the operation of the petitioner's business in that year.  We have found that in 1912 petitioner organized a corporation, Office of Winthrop Ames, Inc., to engage in the business of producing plays, which business he had been conducting as an individual.  From the time of organization of the corporation until it was liquidated in 1922 the corporation was the medium through which the petitioner carried on his work of selecting, producing and financing theatrical productions.  Petitioner owned all of the outstanding stock of the corporation and no one else was associated with him in managing the affairs of the corporation.  Petitioner financed the corporation in all its undertaking, supplying the necessary capital for the business by making personal loans to the corporation.  There was not charged off on petitioner's books at any time prior to 1922 any loss on account of advances made by him to the corporation.  The corporation sustained continuous losses from the date it was organized to and including the year 1920.  In 1921 the corporation books*1324  showed a profit.  In 1922 the corporation, being unable to repay the advances made by petitioner, confessed judgment in favor of the petitioner in the sum of $719,223.68.  The amount of the judgment was subsequently reduced to $504,372.18.  Petitioner took over all the assets of the corporation and the corporation was liquidated.  For 1922, 1923 and 1924 the business as conducted by the petitioner was profitable.  The respondent does not deny that the corporation was the medium through which the business of selecting and producing plays was carried on, but argues that the loss sustained by the petitioner in 1922 was a loss on account of a bad debt or from an investment that became worthless in that year and did not represent a net loss which might be carried over as a deduction from income of succeeding years.  We agree with respondent's contention that the *734  loss suffered by the petitioner in 1922 as a result of the liquidation of the corporation, Office of Winthrop Ames, Inc., does not represent a loss incurred in the operation of the petitioner's business within the purview of the statute.  This loss did not result from the production of plays in 1922 by either the petitioner*1325  or the corporation, but grew out of the inability of the corporation to repay the loans made to it by the petitioner over a period of eleven years.  The corporation had operated at a loss each year through 1920, but the business was profitable from 1921 to 1924, inclusive.  After the petitioner took over the corporation's assets in 1922 he continued the business in his own name.  Petitioner was not regularly engaged in organizing and financing corporations or in buying and selling corporate securities.  He was the sole stockholder of Office of Winthrop Ames, Inc.; only $1,000 in stock was ever issued of a total authorized capital of $10,000.  As stated above, when the corporation was liquidated petitioner's loss was not limited to that of a mere stockholder in a corporate enterprise, but included the entire net amount advanced by him to the corporation, which had remained an open account upon his personal books throughout the life of the corporation.  Until 1922 petitioner expected the corporation ultimately to become profitable.  It is clear that this total amount owing to him by the corporation in 1922 can not be considered to be a business loss sustained by the petitioner in that*1326  year.  Since the hearing of this proceeding the Supreme Court of the United States has decided three cases in each of which the point is made that a corporation and its stockholders are generally to be treated as separate entities: Burnet v. Clark,287 U.S. 410">287 U.S. 410; Dalton v. Bowers,287 U.S. 404">287 U.S. 404; and Burnet v. Commonwealth Improvement Co.,287 U.S. 415">287 U.S. 415. The first two involved claims for net losses by stockholders.  In the Clark case it was held by the Supreme Court that certain losses which the taxpayer sustained by reason of having to pay corporate notes which he had endorsed and from selling corporate stocks did not give rise to a net loss under the Revenue Act of 1921.  In the Dalton case it was held that the loss sustained by the taxpayer upon the dissolution of a corporation organized by him represented a loss of his investment in the stock of the corporation and was not attributable to the operation of a trade or business within the meaning of the net loss provisions of the statute.  Although the facts of those cases are not identical with the facts of the instant case, we consider that the circumstance of*1327  the instant *735  case are not such as to remove it from the application of the principles laid down in those decisions.  We conclude that the petitioner is not entitled to the deduction which he is claiming herein.  Reviewed by the Board.  Judgment will be entered for the respondent.