Court Opinion

ID: 4612379
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:51:00.953302+00
Date Added: 2024-06-11T07:54:25.696414
License: Public Domain

J. T. M. JOHNSTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Johnston v. CommissionerDocket Nos. 8466, 10928.United States Board of Tax Appeals9 B.T.A. 325; 1927 BTA LEXIS 2617; November 25, 1927, Promulgated *2617  Amounts of losses deductible from gross income of 1919 and 1920 determined.  Don Q. Haynes, Esq., for the petitioner.  Wm. H. Lawder, Esq., for the respondent.  SMITH *325  These appeals are from deficiencies in income tax for the years 1919 and 1920 in the respective amounts of $40,093.73 and $3,389.48.  The appeals were consolidated for the purpose of hearing and decision.  The issues for each year relate to the deduction from gross income of losses claimed to have been sustained.  *326  FINDINGS OF FACT.  1.  The petitioner is a resident of St. Louis, Mo.  During the years 1919 and 1920 the principal business was investing in oil and mining and other speculative enterprises.  2.  During 1912 and 1913 the petitioner made an investment in the Diamond Concrete Silo Co., which was organized at that time to manufacture concrete silos under a patent.  The petitioner was induced to make the investment by a personal friend who also invested in the company.  The company never had any profits and in the year 1919 permanently ceased operations.  Its assets had been lost through operations.  The petitioner had invested a total of $10,000 up*2618  to 1919.  He sustained a loss in 1919 of the entire amount invested, namely, $10,000.  3.  During 1914 and 1915, the petitioner purchased stock of the Theo. Photiades Corporation, paying $5,400 therefor.  The corporation had been recently organized to manufacture cigarettes.  Petitioner was induced to make the investment by the son of a business associate who promised the petitioner that he would personally make good any loss resulting from the investment.  The corporation later became insolvent.  It had no assets of value.  In 1919 the petitioner called upon the son of the petitioner's business associate who had promised to make good any loss which might be sustained by the petitioner in respect of his investment but the son refused to make good his promise.  The petitioner consulted a lawyer and was advised that no part of the amount could be recovered.  4.  Several years prior to 1919 the petitioner sold 200 shares of stock of the Bankers Trust Co. of St. Louis to one Henry Carter, secretary of the aforesaid company, receiving therefor part cash and a note for $32,750 secured by stock of the Bankers Trust Co. of St. Louis.  The petitioner received interest upon the note for*2619  a number of years prior to 1919.  In 1919 the petitioner sold the note of a face value of $32,750, to one J. L. Johnston, president of the Liberty Central Trust Co. of St. Louis, for $10,000.  The Bankers Trust Co. of St. Louis had, several years prior to 1919, failed and gone into the hands of receivers.  The petitioner sustained a loss of $22,750 upon the sale of the note.  5.  About the year 1914 the petitioner purchased stock in the A. W. C. Mining Co. for $48,000.  The company was organized for the purpose of operating a mine near Joplin, Mo.  It continued to operate up to the year 1919, producing lead and other minerals in profitable quantities.  During the year 1919 the profits of the mine decreased considerably and the petitioner sold his stock for a consideration of $10,000.  He sustained a loss upon the sale in the amount of $38,000.  *327  6.  During the year 1919 the petitioner sold certain bonds of the Greenville Gas Co. for $17,500, which was 50 per cent of their par value.  He had previously purchased bonds from one C. S. Cobb, president of the Southern Surety Co. of Des Moines, Iowa, for $28,000.  He sustained a loss upon the sale of $10,500.  7.  During*2620  the year 1920 the petitioner invested $8,128.80 in an oil project sponsored by two individuals, Markley and Wren, who had obtained a lease on a small acreage near Wichita Falls, Tex., in close proximity to the "Burke District." The petitioner took a note for the above amount signed by Markley and Wren individually.  The note bore interest at 8 per cent and there was an agreement that the petitioner would share equally with Markley and Wren in the profits of the business.  A well was drilled upon the leased land, which produced a small amount of oil but not in a paying quantity.  After a few months of unsuccessful operation the well was abandoned.  The note which the petitioner held was worthless, both parties thereto being financially irresponsible.  Later in the year 1920 the well and lease were sold.  The petitioner recovered the net amount of $3,625 from the proceeds of the sale.  He sustained a loss within the year of $4,503.80.  8.  During the year 1920 the petitioner invested $2,850 in an oil project with one W. H. Peden, of St. Louis, Mo.  The latter had secured a lease of prospective oil lands near Wichita Falls, Tex.  A well was drilled on the leased premises during the*2621  year 1920, which came in dry and the lease was thereupon abandoned.  The petitioner sustained a loss during the year of his entire investment.  9.  During the year 1918 the petitioner and other parties organized the St. Louis-Texas Petroleum Co., an association under the laws of Texas, for the purpose of developing and operating oil lands.  The petitioner paid into the company a lease on certain prospective oil lands which he had obtained during the year at a cost of $9,152 and in addition $848 cash, making his total investment in the company of $10,000.  During 1919 the company borrowed $10,000 from the National Bank of Commerce, Wichita Falls, Tex., and gave a note for the amount which the petitioner endorsed individually.  During 1920 a well was drilled upon the leased premises, which came in dry.  The company, then insolvent, dissolved and the petitioner as endorser was called upon to pay and did pay the company's note for $10,000, plus interest in the amount of $689.55.  The petitioner's certificates of interest in the company became worthless in 1920.  He sustained a total loss upon his investment, including the note and interest paid in 1920, of $20,689.55.  *328 *2622  OPINION.  SMITH: Petitioner claims deductions on account of the alleged losses enumerated under section 214(a)(4) of the Revenue Act of 1918, which provides for the deduction of "losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business." The evidence sustains the contention of the petitioner with respect to the losses claimed to have been sustained except that referred to in finding (3) above.  The evidence does not show when the Theo. Photiades Corporation became insolvent and when the petitioner's shares of stock became worthless.  The petitioner tried to force the son of his business associate, who had guaranteed him against loss in this investment, to make good his guarantee in 1919.  This the individual refused to do and the petitioner was advised by the attorney that he had no case against the individual.  So far as the record shows the loss may have been sustained many years prior to 1919.  The other losses shown by the findings of fact are deductible from gross income as indicated.  Judgment will be entered on 15 days' notice, under Rule 50.Considered by LITTLETON, TRUSSELL, and LOVE.