Court Opinion

ID: 4596848
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:17:56.694563+00
Date Added: 2024-06-11T07:51:41.086062
License: Public Domain

F. W. DARLING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Darling v. CommissionerDocket No. 34387.United States Board of Tax Appeals19 B.T.A. 337; 1930 BTA LEXIS 2418; March 20, 1930, Promulgated *2418  A loss sustained in 1918 may not be deducted from gross income in 1924, notwithstanding the fact that petitioner was unwisely advised by a revenue agent, as well as by others, that he was not entitled to the deduction for 1918.  W. L. Elkins, Esq., for the petitioner.  L. A. Luce, Esq., and F. L. Van Haaften, Esq., for the respondent.  LOVE *337  This proceeding is for the redetermination of a deficiency in income tax for the fiscal year ended June 30, 1924, in the amount of $10,866.13.  The only assignment of error urged is that the Commissioner failed and refused to allow a deduction from gross income of a loss of $44,300 (at the hearing reduced to $40,000) representing worthless stock in a corporation known as the Rydale Remedy Co.  FINDINGS OF FACT.  Petitioner is an individual with his principal office in Hampton, Va.  His business is oyster planting.  In 1906 the petitioner and some other persons purchased, for a cash consideration of $10,000, the assets of the Radical Remedy Co., a corporation engaged in the manufacture of certain patent medicines.  The assets consisted of a small amount of machinery, fixtures, raw material, *2419  and containers, but its principal assets were good will, formulas, trade-marks and a "going business." Soon after the purchase the manufacturing plant was moved to Newport News, Va., and another corporation organized known as the Rydale Remedy Co., which took over those assets, issuing its stock therefor.  Petitioner took 30 shares of a total issue of 100 shares, at par, $100.  The business made a profit in no year after its move to Hampton, but operated at a loss every year.  Petitioner was the only stockholder *338  who had more money to put into it, and each year he advanced money sufficient to meet the needs of the company, and did so under an agreement with the other stockholders that stock would be issued to him.  The company thus operated from 1906 until 1915, when the factory and business at Newport News was closed and the machinery and other physical assets moved to Hampton and housed in a warehouse belonging to petitioner.  Some products were there made and up to 1918 a mail order business was carried on, at a loss as usual.  In 1918 all the stockholders abandoned hope of ever making the business a success and informally, but actually, surrendered all their claims*2420  to petitioner to get out of the wreck all that he could.  Up to that time he had paid in $40,000, and was surety on a note, afterwards paid by him, for $4,300, and had issued to him 443 shares of stock.  After the removal of the plant to Hampton in 1915, he made a number of efforts to dispose of the plant, so as to realize something out of it, but his efforts were futile.  Much of the material on hand deteriorated and became worthless.  He sold an engine and printing press, together with some junk, for about $800.  In 1918 all operations ceased.  In 1918 he deemed his stock worthless and wanted to take a loss deduction for that year, for which year he had a net income in excess of $93,000.  He was advised, however, by his own counsel and by a revenue agent that he could not take a deduction until he had disposed of all assets, and dissolved the corporation.  In years subsequent to 1918 up to 1924, with the exception of 1921, he had large net incomes and wanted to take the deduction for each year, but refrained from doing so under similar advice to that mentioned hereinbefore.  In 1924, having disposed of all the assets, he did take a deduction in his return of $44,300 as a loss*2421  on said stock.  It was brought out at the hearing that $4,300 of the $44,300 taken as above indicated represented the amount petitioner had to pay on a note of the corporation in 1918, and for that year had taken that amount and had been allowed that deduction, hence the deduction in controversy is reduced to $40,000.  The Commissioner disallowed the whole amount of deduction based on the loss in said stock for the year 1924.  OPINION.  LOVE: That petitioner suffered a loss in the full amount of $40,000 may be conceded, as there is ample evidence to substantiate that fact.  *339  The pertinent statute involved here is section 214(a)(5) of the Revenue Act of 1924 (this deal not being connected with the trade or business of petitioner) which section provides as follows: SEC. 214. (a) In computing net income there shall be allowed as deductions: * * * (5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * * That the loss here claimed was incurred and completely consummated not later than 1918, seems clear and uncontrovertible*2422  from the evidence in the case.  Petitioner's investment was in the stock of the corporation.  The corporation, for a period of 12 years prior to 1918, had operated at a loss every year.  No dividends had been paid; no profits had been realized.  The business had declined to such an extent that all the stockholders had abandoned hope, and a strenuous effort was made to sell the wreckage at some salvage price.  That effort was futile.  The corporation was in debt to an extent of at least $4,300, evidently an amount in excess of the salvage value of all assets of the corporation.  The stock had absolutely no value and was so regarded by all parties concerned.  The statute prescribes that losses sustained during the taxable year shall be allowed.  The taxable year in this case is 1924.  The loss certainly did not occur in 1924.  The lack of value in that stock in 1918 was then a demonstrable, if not a demonstrated, fact.  Petitioner urges the defense that he wanted to take the deduction in 1918, but was deterred from doing so by the advice of the revenue agent, who stated that he was not then entitled to the deduction.  Being guided by unwise advice, from whatever source, can not*2423  mitigate the effect and force of the mandate of the statute.  Judgment will be entered for the respondent.