Court Opinion

ID: 4616594
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:34:48.815138+00
Date Added: 2024-06-11T07:55:09.023282
License: Public Domain

GARNET W. COEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Coen v. CommissionerDocket No. 23173.United States Board of Tax Appeals18 B.T.A. 1274; 1930 BTA LEXIS 2491; February 20, 1930, Promulgated *2491  Loss sustained in 1921 held not "resulting from the operation of a trade or business regularly carried on by the taxpayer," and not deductible in 1922 as a net loss under section 204, Revenue Act of 1921.  Ewell D. Moore, Esq., for the petitioner.  J. E. Mather, Esq., for the respondent.  STERNHAGEN *1274  The Commissioner determined a deficiency of $1,093.85 in income tax for the calendar year 1922.  The issue is whether a loss sustained in 1921 resulted from the operation of a trade or business regularly carried on by the petitioner.  FINDINGS OF FACT.  The petitioner is, and was in 1922, a citizen and resident of the State of California.  He is a capitalist, inventor, and business manager, and, during 1921, was interested in several businesses.  In 1921 the petitioner was president of the Coen Oil Burning Co., a corporation engaged in the manufacture and sale of oil burners.  He owned 51 per cent of its stock and was one of its directors.  He was also the inventor of practically all of the apparatus manufactured and sold by the corporation.  The corporation was organized *1275  in 1912, at the time of petitioner's first oil-burner*2492  invention, by the petitioner and three individuals in Los Angeles.  The latter provided the capital necessary to start the business and the petitioner agreed to assign to the corporation all inventions, applications for patents, and patents which might be acquired, and to furnish his services for a period of five years, or until the end of 1917.  All inventions of the petitioner after 1917 have been assigned to the corporation on a royalty basis, and his financial interest therein arose from his stock ownership, salary, and royalty rights.  The corporation operates a large factory and its business has always been operated at a profit.  The petitioner, during 1921, devoted about 60 per cent of his time to the business of this corporation.  In 1918 the petitioner entered into a contract to furnish funds to one E. Riveroll, of Los Angeles, and to the California Electric Steel Co., thereafter organized, to erect a plant for the reduction of iron ore to steel by a direct process, using natural gas instead of coke.  The California Electric Steel Co. was organized in 1919, as a corporation, under the laws of California, to carry on such operations.  In 1921 it was engaged in bringing up*2493  ore from Lower California and manufacturing it into steel castings at Los Angeles Harbor.  The petitioner made advances to said Riveroll and the corporation in 1918, 1919, 1920 and 1921 in the aggregate amount of $111,945.96, for the acquisition of an experimental plant and certain ore deposits in Mexico.  The company built a wharf on the coast of Lower California, which was destroyed by storm in 1920, and the petitioner deducted in his 1920 return the amount of $14,225.55 as a loss.  By order of the Superior Court of the County of Los Angeles, dated November 9, 1921, the Steel Co. was dissolved, and the petitioner, as sole creditor, took over its assets at a valuation of $14,500 to be applied on notes of the corporation and returned that amount as income in his return for 1921.  The loss of the taxpayer on his investment was $97,720.41.  The petitioner was president of the Steel Co. and owned 90 per cent of its stock.  He directed all of its financial affairs and business policies, and all of its other affairs except the actual mechanical work, and his only financial interest therein arose from his stock ownership and his salary as president.  He devoted about 20 per cent of his*2494  time to this business.  The petitioner was in constant contact with the business while it was being carried on, except for times when his affairs required his presence in San Francisco and Wyoming.  In 1920 the petitioner was interested in a project of developing certain oil lands in Wyoming.  Certain individuals who were desirous *1276  of obtaining a lease on lands of the Union Pacific Railroad Co. in Wyoming which they believed to be located on an oil-bearing structure, requested the petitioner to join them in an application to the Railroad Co. for a lease and to deposit $2,500 with the company as a bond, which he did some time between 1919 and 1921 but prior to 1922.  The project was originally organized as a partnership prior to 1922 and prior to the time petitioner had any interest in it, and after he became interested a Wyoming common law trust was formed and certificates of interest or units were issued to petitioner, his associates, and others who contributed to the expense of drilling, etc.  The petitioner later acquired the interests of one of the employees and others in the enterprise.  The organization was in the nature of an association issuing certificates*2495  of ownership, and was formed principally for the convenience of defining the different interests and because its affairs could be managed with greater facility than under a partnership form of organization.  The property was managed by three trustees in behalf of all of the owners of certificates.  The individuals who originally organized the project owned a large part of the certificates, the petitioner owned about one-third of them, and the remainder were owned by many individuals in lots of one, two and three units.  About fifty persons in all owned units in the organization.  The petitioner's interest was represented, prior to 1922, by certificates or units and his investment amounted to $29,500.  His relation to the organization was that of trustee, owner of certificates, and adviser.  In the event of production, he was to be paid a salary.  He spent much time and money in traveling from California to Wyoming and stayed in Wyoming a number of times.  He devoted about 20 per cent of his time to the business of the organization.  He was not engaged in the oil business in the sense that he individually went out and drilled for, produced, or refined oil.  Extensive drilling was done*2496  at considerable expense.  A hole was drilled to a depth of about 4,000 feet, which turned out to be dry, and the lease was abandoned in 1921.  The petitioner invested money in all three of the business hereinbefore referred to, and from 1921 up to the present time has been engaged in more than one business.  His venture in the California Electric Steel Co. was his first venture in the steel business.  The losses sustained by petitioner on his investments in the steel company and the oil-land project were deducted in his return for 1921, resulting in a net loss, shown on the return, of $15,994.58, which was deducted from net income on the 1922 return and disallowed by the respondent.  *1277  OPINION.  STERNHAGEN: The losses sustained by petitioner in 1921 in respect of the Steel Co. and the Wyoming Oil association were not "losses resulting from the operation of a trade or business regularly carried on by the taxpayer" and are not such as may, under section 204, Revenue Act of 1921, be carried into 1922.  ; affd., *2497 ; ; affd., ; ; ; , now on review by Circuit Court of Appeals, Eighth Circuit.  Decisions of the courts and of the Board in which it was merely held that the individual taxpayer was engaged in business or was in fact, in his own behalf, and not merely by reason of his investment in a corporation or association, regularly and actively carrying on the business in which he was engaged, are not controlling authorities for the application of the net loss provision.  Such are ; ; ; cited by petitioner.  Nor are decisions determining the right of a taxpayer to deduct losses in the year sustained which do not involve the question whether as net losses they may be carried over.  Such are *2498 ; ; ; ; ; cited by petitioner. Judgment will be entered for the respondent.