Court Opinion

ID: 4594118
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:12:14.818037+00
Date Added: 2024-06-11T07:51:11.547004
License: Public Domain

FRED GRITTMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Grittman v. CommissionerDocket No. 16025.United States Board of Tax Appeals11 B.T.A. 122; 1928 BTA LEXIS 3867; March 21, 1928, Promulgated *3867  1.  Certain deductions claimed by the petitioner in schedule A of his 1921 return held to be allocable to the operation of the business regularly carried on by him, and therefore to be used in determining his net loss for that year under section 204 of the Revenue Act of 1921.  2.  Loss on worthless stock allowed.  Nelson E. Taylor, C.P.A., for the petitioner.  W. H. Lawder, Esq., for the respondent.  MORRIS*123  This proceeding is for the redetermination of a deficiency of $1,001.54 in income tax for 1923.  The petitioner alleges that the respondent erred in the following respects: First, in disallowing as a deduction from net income for 1923 that portion of the net loss sustained from business in 1921, not absorbed by net income for 1922 alleged to be $8,691.46; and, second, in disallowing as a deduction from net income $1,500 representing a loss on fifteen shares of the capital stock of the Sunflower Mining Co.  FINDINGS OF FACT.  The petitioner resides near Drew, Miss., and is engaged in farming on his own account and as a member of the partnership of Barksdale & Grittman.  He owns approximately two thousand acres of farm lands which*3868  are farmed in part by tenants who pay cash rentals and in part by tenants who share crop their acreage.  In connection with his farming operations he conducts a commissary, making advances to his tenants for their needs and settling their accounts at the end of the crop year.  The petitioner's return for 1921 was prepared by his attorney, who was unfamiliar with the income tax laws and the regulations appertaining thereto.  The return submitted contained errors of commission and omission, some of which were later adjusted by a revenue agent upon audit of the petitioner's books of account.  The return showed the following items of income and deductions: INCOMEInterest$1,540.31Rents and royalties1,769.69Profit from business1,130.66Dividends on stock400.00Total income$4,840.66DEDUCTIONSInterest paid1,005.00Taxes paid4,390.26Losses800.00Contributions818.83Bad debts2,920.519,934.60Loss5,093.94The interest deduction was increased by the respondent from $1,005 to $1,239.31, the amount of interest shown on the petitioner's books of account.  This interest was paid on money borrowed in the operation of the*3869  petitioner's business.  Of the total tax deduction of $4,390.26 claimed in the return, $4,072.43 was paid on real and personal property of the petitioner used in his farming business.  *124  The deduction of $2,920.51 represented money advanced to tenants which could not be collected.  The respondent allowed the above deductions.  The attorney in preparing the return computed a profit on petitioner's business for 1921, but in so doing he failed to deduct anything for depreciation, or to allocate properly against business income all the items constituting business deductions.  The 1921 return showed a loss of $5,093.94, which was reduced by the respondent's adjustments to $4,517.60.  The partnership of Barksdale & Grittman sustained a loss of $629.89 for the year 1921, according to its books, one-half of which was charged against the petitioner.  On the partnership return for 1921 the loss was reported as $641.84.  Petitioner's 1921 return failed to show either income or loss from the operations of the partnership.  In determining the amount of depreciation deductible for 1919 the petitioner used the following values and rates for depreciable assets: ValueRateDepreciationPer centFarm buildings$70,000.005$3,500.00Store building7,000.004280.00Farm implements8,250.00201,650.00Furniture and fixtures900.001090.00Livestock7,500.00151,125.00Total6,645.00*3870  Depreciation in the amount of $6,645 was claimed by petitioner and allowed by the respondent for 1919.  In 1921 and 1922 the petitioner failed, through oversight, to claim any amount for depreciation on his original returns for either of those years.  Subsequently, he ascertained the error as to 1922, and filed an amended return claiming depreciation in the amount of $5,648 on the following assets: ValueRateDepreciationPer centFarm buildings$67,450.005$3,372.50Store building7,000.002140.00Farm implements5,240.00201,048.00Livestock7,250.00151,087.50Total5,648.00Petitioner's original return for 1922 showed net income in the amount of $5,401.86 upon which he paid a tax of $29.07.  The amended return showed net income in the amount of $338,58 and no tax due.  On May 22, 1926, petitioner filed a claim for refund based on his 1922 amended return.  This claim was accepted by respondent *125  and a certificate of overassessment was issued which entitled petitioner to a refund of $29.07, plus interest of $5.97.  The assets upon which depreciation was computed for 1919 and 1922 were substantially the same*3871  assets which petitioner used in his business in 1921, and none of them had been exhausted by reason of depreciation already claimed and allowed.  On September 20, 1917, the petitioner purchased ten shares of capital stock of the Sunflower Mining Co., an Arkansas corporation, organized for the purpose of mining zinc on property which it purchased.  On March 9, 1918, he purchased an additional five shares of the said stock, the fifteen shares costing him $1,500 and having a par value of $100 per share.  From 1917 to 1921 the corporation did not operate.  In 1921 its property was sold for taxes.  Thereafter in 1922 the petitioner and a few of the other stockholders redeemed the property from the tax sale and paid the taxes for 1922, but in 1923 the property was again sold for taxes and the corporation had no assets with which to redeem it.  After the sale the charter was forfeited to the State.  Petitioner deducted the $1,500 which he had invested in the stock of the Sunflower Mining Co. as a loss on his return for 1923.  In his return for the year 1923 the petitioner claimed as a deduction $5,093.94, representing a net loss sustained for 1921.  In the 1921 return the net income from*3872  business was shown as $1,130.66, which the respondent increased to $1,430.66, which increase is not in controversy.  The item of $5,093.94 was shown on the 1921 return as the total loss from all sources.  Said amount was disallowed as a net loss by the respondent.  He also disallowed the deduction for 1923 of $1,500, the cost of stock in the Sunflower Mining Co.  OPINION.  MORRIS: The principal question raised by the first issue is whether the petitioner sustained a net loss from the operation of his business in the year 1921, and the amount thereof.  The respondent did not deny the petitioner's right to the deductions now in controversey claimed in the return for that year but held that the loss shown on that return was not a net loss under section 204 of the Revenue Act of 1921 as the petitioner reported a net income from business.  The petitioner contends that certain deductions were taken in schedule A of the 1921 return which should have been taken as business deductions.  They consist of interest, $1,005, which was adjusted by the respondent to $1,239.41; taxes, $4,055.02, of the total deduction for taxes of $4,390.26; and bad debts of $2,920.51.  He contends that further*3873  deductions of $5,569.25 auw $320.92, which were not taken in the 1921 return, are allowable deductions in computing the net loss for that year, the former for depreciation and the latter his proportionate *126  share of a partnership loss, which the records show to have been $314.94 instead of the amount claimed.  The petitioner then contends that the net loss so determined should be applied against the net income for 1922 which, however, should first be reduced by depreciation sustained in that year which was not claimed in the original return but was claimed and allowed by the respondent on the basis of an amended return.  Section 204 of the Revenue Act of 1921 reads in part as follows: (a) That as used in this section the term "net loss" means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer * * *; and when so resulting means the excess of the deductions allowed by section 214 or 234, as the case may be, over the sum of the following: * * * (b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a*3874  net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year; * * *.  (c) The benefit of this section shall be allowed to the members of a partnership * * *.  Considering the deductions now claimed by the petitioner against the income from his business, the evidence is uncontroverted that the petitioner was not only engaged in the farming business on his own account but in connection with a partnership of which he was a member.  In the operation of his business he paid interest of $1,239.41, taxes on property of $4,072.43, but in his petitioner claims only $4,055.02 of that amount and had bad debts of $2,920.51.  He also sustained a loss through the operation of the partnership of $314.94.  These amounts should be applied against the gross income from the operation of business for 1921 in determining his net loss under section 204 of the Revenue Act of 1921.  *3875  With respect to the depreciation deduction which petitioner failed to claim for 1921, the evidence shows the values and rates which have been used for 1919 and 1922, and we are now asked to use them to compute an allowance for 1921 upon the same depreciable assets.  It is a well settled principle that the owner of depreciable assets is entitled to a deduction for exhaustion, wear and tear of those assets.  . We do not understand that the respondent has denied this principle; his position appears to be that no deduction therefor has ever been claimed by the petitioner.  The question then resolves itself into one of computing the amount allowable upon the petitioner's depreciable assets.  The petitioner is claiming a depreciation for 1921 upon substantially the same values and at the same rates as claimed by him for *127  1919 and 1922 and allowed by the respondent.  The testimony shows that the assets used during the three years were practically the same and none of them had been exhausted by reason of depreciation already claimed and allowed.  We are therefore of the opinion that the depreciation of $5,569.25*3876  claimed by the petitioner for 1921 is an allowable deduction and should be taken into consideration in determining the net loss for that year.  After determining the net loss for 1921 by the adjustments hereinabove provided for, the resulting figure should first be reduced by the net income for 1922 in the amount of $338.58 and the remainder allowed as a deduction in computing the net income for 1923.  The second issue relates to a loss claimed on fifteen shares of the capital stock of the Sunflower Mining Co. which cost the petitioner $1,500.  The facts show that this corporation's assets were sold for taxes in 1921 and that thereafter such assets were redeemed by the petitioner and other stockholders, but that the assets were again sold in 1923 because of the failure to meet the taxes and thereafter the charter was forfeited to the State.  In view of these facts it is our opinion that the petitioner sustained a loss of $1,500 which he is entitled to deduct on his 1923 return.  Cf. ; *3877 . Judgment will be entered on 15 days' notice, under Rule 50.