Court Opinion

ID: 4610921
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:47:55.487042+00
Date Added: 2024-06-11T07:54:09.352011
License: Public Domain

ELI STROUSE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Strouse v. CommissionerDocket No. 36273.United States Board of Tax Appeals24 B.T.A. 748; 1931 BTA LEXIS 1605; November 11, 1931, Promulgated *1605 Ernest E. Wooden, C.P.A., for the petitioner.  Eugene Harpole, Esq., and Edwin M. Niess, Esq., for the respondent.  SMITH *748  This proceeding involves a proposed deficiency in income tax for the calendar year 1924 of $1,421.17.  The petitioner alleges that the respondent erred in disallowing a deduction of $135,797.96 claimed as a net loss sustained in 1923.  FINDINGS OF FACT.  The petitioner was a member of the former partnership of Strouse & Bros., which conducted a wholesale clothing business in Baltimore, Md.  The partnership was originally composed of the petitioner's father and his three brothers.  In January, 1917, the business was incorporated under the name of Strouse Bros., Inc., and the petitioner at that time became its president, which position he held up to and during the year 1924.  The former partners were issued shares of stock of the corporation for their interests in the dissolved partnership.  The petitioner received 1,536 shares of preferred stock for his partnership interest and subsequently purchased 52 shares, making a total of 1,588 shares, which represented a cost to him of $158,072.  The petitioner was also the largest*1606  common stock holder of the corporation.  Benjamin Strouse and the estate of Isaac Strouse had approximately $525,000 of capital in the partnership, for which they agreed to take preferred stock on condition that the corporation would provide in its charter for the redemption of a certain amount of the preferred stock each year.  The corporation agreed, so far as material here, to pay into a sinking fund, to be used in redeeming the preferred stock, $60,000 each year for four years from January 31, 1917, and $30,000 each year thereafter for eight years.  The petitioner and others personally guaranteed to protect Benjamin Strouse and the estate of Isaac Strouse from any loss due *749  to the corporation's failure to carry out its agreement with respect to the redemption of the preferred stock.  This agreement was made in order to preserve the working capital in the business.  It would have caused a liquidation at the time of the dissolution of the partnership if the retiring partners had withdrawn their capital at that time.  In 1919 the corporation became involved financially and defaulted in the redemption of the preferred stock.  As a result, Benjamin Strouse and the estate*1607  of Isaac Strouse called upon the petitioner to make good his guaranty to them against loss.  This the petitioner did by surrendering to them all of his preferred stock in the corporation.  This took place in January, 1923.  It is admitted by the respondent that the petitioner thereby sustained a loss of $135,797.96 in the year 1923.  The petitioner received a salary from the corporation of $15,000 and dividends on his preferred stock of $8,000 or $9,000 a year.  During 1923 and 1924, the petitioner was president of the Regatta Manufacturing Company, with which he had been connected since August, 1921.  In his return for 1924 the petitioner reported income in salary, wages, and commissions from that company in the amount of $22,354.52.  Strouse Bros., Inc., is still in process of liquidation.  OPINION.  SMITH: The respondent admits that the petitioner, by surrendering his preferred stock to the other preferred stockholders in 1923, sustained a loss in that year of $135,797.96.  The only question left for our determination is whether the loss thus sustained was a statutory net loss of 1923 which the petitioner may deduct from his gross income of the year 1924.  Section 206(f) *1608  of the Revenue Act of 1924 provides as follows: If for the taxable year 1923 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1921, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.  A net loss is defined in section 204(a) of the Revenue Act of 1921 as one "resulting from the operation of any trade or business regularly carried on by the taxpayer." What was the trade or business carried on by the petitioner during the year 1923?  The petitioner testified that by reason of agreements made by him in 1917 with Benjamin Strouse and the executors of the estate *750  of Isaac Strouse he had guaranteed the redemption of their preferred stock in Strouse Bros., Inc., by that corporation.  The corporation ran into financial difficulties in 1919, and, during that and subsequent years, was not able to redeem as much of the preferred stock of the corporation as it had agreed to redeem.  In January, 1923, the petitioner*1609  turned over his preferred stock to the other stockholders in pursuance of his guaranty.  He thereby sustained a loss upon his preferred stock of $135,797.96.  The petitioner continued as president of Strouse Bros., Inc., which in fact had not been fully liquidated up to the date of hearing of this proceeding.  The record is not clear as to when the petitioner started to liquidate the business of the corporation.  On direct examination he testified that he transferred his shares of the preferred stock to Benjamin Strouse and the estate of Isaac Strouse in order that he might continue to receive his salary as president of the corporation.  On cross-examination he testified that he became president of the Regatta Manufacturing Company in August, 1921, after the liquidation of the business of Strouse Bros., Inc.  His testimony upon this point is as follows: Q.  I notice here [income-tax return of 1924] you say you are an official of the Regatta Manufacturing Company?  A.  At the present time, after our liquidation.  Q.  This was in 1924?  A.  Oh, yes.  I am president today of the Regatta Manufacturing Company.  After we liquidated our business I went into another business.*1610  Q.  When did you go into this other business?  A.  August, 1921.  Q.  And you were in the business in 1923?  A.  In the Regatta business?  Q.  Yes.  A.  Yes, sir.  I think that was the date.  A serious question arises as to whether the loss of the petitioner's investment in the preferred stock of Strouse Bros., Inc., was sustained in 1923 "from the operation of any trade or business regularly carried on by the taxpayer." As was said by the Circuit Court of Appeals for the Fifth Circuit in : It is apparent that the net loss sought to be deducted by appellant did not result from the operation of any trade or business regularly carried on by him.  It is evident that Congress intended to give relief to persons engaged in an established business for losses incurred during a year of depression in order to equalize taxation in the two succeeding more profitable years.  It was not intended to apply to isolated or occasional losses such as here shown.  Why the same privilege was not accorded to all taxpayers is a matter that addresses itself to Congress and not to the courts.  The definition can not be stretched*1611  to cover the case before us.  ; ; ; ; . *751  The case of , is in point in this proceeding.  Cunningham endorsed the note of a corporation that was not in financially sound condition and, as a result of the endorsement, was required in 1925 to pay the obligations of the corporation.  He had also devoted approximately 50 per cent of his time to its affairs.  The Board held, however, that the taxpayer's loss was not one resulting from the operation of a trade or business regularly carried on by him and that he was not entitled to carry forward the loss.  Compare also . It is to be noted that the petitioner was not engaged in the business of promoting, organizing or financing corporation.  In this particular the instant case differs from *1612 , where we held that the loss sustained in financing, promoting, and investing in corporations by petitioner, who for several years had regularly engaged in these things as a business, was a net loss.  There we found that the petitioner devoted an hour a day to consideration of stock transactions and from three to five hours a day to the consideration of financing corporations and individuals.  The facts were similar in , and , where we held that the losses sustained were deductible as net losses, and in . In , cited by the petitioner, we held that a net loss had been sustained.  The evidence showed that the petitioner for several years had conducted a business of textile commission merchant.  A substantial part of his commissions was earned upon sales of the products of a certain mill, which, in 1917, the petitioner took over in partial satisfaction of the mill's indebtedness to him.  Thereafter he reorganized and incorporated the business*1613  and continued to sell its products.  In 1923 he sustained a loss upon his endorsement of the notes of the corporation.  In holding that the loss was a net loss we pointed out that the evidence was uncontradicted that the petitioner endorsed notes upon which he sustained a loss in order to keep the mill in operation so that he could sell its products and receive his commissions and that the loss was therefore incidental to the petitioner's business as a commission merchant.  The facts in this proceeding are substantially different.  Strouse Bros., Inc., was in process of liquidation from some time in 1921.  The petitioner in 1923 simply turned over his preferred stock to satisfy his guaranty to Benjamin Strouse and the executors of the estate of Isaac Strouse in 1917 and subsequent years.  More succinctly stated, we think that where an officer or stockholder of a corporation sustains a loss upon his endorsement or *752  guaranty of an obligation of the corporation and the loss is not otherwise related to any business regularly carried on by him, it is not a net loss within the meaning of the statute.  Reviewed by the Board.  Judgment will be entered for the respondent.*1614 LANSDON, ARUNDELL, BLACK, and GOODRICH dissent.