Court Opinion

ID: 4594389
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:12:51.419842+00
Date Added: 2024-06-11T07:51:14.545356
License: Public Domain

JOHN H. CARPENTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Carpenter v. CommissionerDocket No. 33419.United States Board of Tax Appeals23 B.T.A. 1119; 1931 BTA LEXIS 1762; July 14, 1931, Promulgated *1762  The Commissioner's refusal to carry forward an alleged net loss approved, where the amount was not shown and where the proof does not show the alleged loss resulted from the operation of any trade or business regulary carried on by the petitioner.  John W. Drye, Jr., Esq., for the petitioner.  James A. Lyons, Esq., for the respondent.  MURDOCK *1119  The Commissioner determined deficiencies of $65,346.50 and $4,312.34 in the petitioner's income taxes for the years 1923 and 1924, respectively.  The petitioner alleges that the Commissioner erred in his determination that a loss, sustained by him in 1922, did not result in a net loss within the meaning of section 204(a) of the Revenue Act of 1921.  FINDINGS OF FACT.  The petitioner is an individual residing in New York City.  Prior to the year 1903 he was interested in the mining of phosphate rock, which is used in the manufacture of fertilizer.  He was a stockholder in several corporations which owned a number of phosphate rock mining properties.  One of these corporations was the International Phosphate Company.  In 1903 the petitioner became associated in business with J. W. Howard.  In that*1763  year they organized a corporation under the laws of Alabama, called the Alabama Phosphate Company.  The business of the corporation was the manufacture *1120  and sale of commercial fertilizers.  It was financed through a stock subscription in the amount of $450,000.  The petitioner subscribed for one-half and Howard and his son subscribed for the other half.  The petitioner was president of this corporation and drew therefrom an annual salary of $4,000.  Soon after its organization the name of the Alabama Phosphate Company was changed to the Tennessee Fertilizer Company, hereinafter referred to as the fertilizer company.  This corporation or its subsidiaries owned plants or property in Alabama, Georgia and Florida.  It also acquired and owned certain phosphate rock mining properties in Tennessee, which were located in a general southwesterly direction from Nashville.  Some of these properties were a considerable distance west of the Louisville & Nashville Railroad line, and were remote from any transportation facilities.  On October 26, 1906, the fertilizer company and a company known as the Independent Phosphate Company entered into a contract by which the former agreed*1764  to convey to the latter by warranty deeds certain of the more remote properties, including the "Estes Bend" and "Leatherwood" tracts.  The agreed consideration was $1,000,000, the payment of which was to be secured by a trust deed on the properties; a pledge of certain contracts then existing between the fertilizer company and the International Phosphate Company; and all the stock issued or to be issued by the Independent Phosphate Company.  The petitioner was neither an officer nor a stockholder of the latter company.  The contract referred to an agreement between the International Phosphate Company and the Louisville & Nashville Railroad Company, by which the latter agreed to equip, maintain and operate a railroad connecting the remote properties with one of its existing lines.  This agreement had been negotiated by the petitioner and Howard.  The contract of October 26, 1906, provided for the construction of such a railroad by the fertilizer company.  It was to run through the Estes Bend property to a plant to be located by the Independent Phosphate Company on the Leatherwood property, and connect those tracts with the Louisville & Nashville Railroad.  the fertilizer company agreed*1765  that the road should be maintained and operated free of expense to the Independent Phosphate Company; but it was further provided that the failure of the Louisville & Nashville Railroad Company to carry out its agreement should not relieve the fertilizer company from its obligations.  The agreement further provided: Said Tennessee Fertilizer Company further undertakes and agrees that it will execute a good and solvent bond for $100,000 in some surety company duly licensed to transact business in the State of Tennessee, and a further bond *1121  signed by J. H. Carpenter, J. W. Howard and W. J. Howard for $275,000, which said bond shall be conditioned to build said railroad in the time and manner above contracted, and if said railroad or railroads are not built according to contract within the time specified, then at the expiration of said time said Independent Phosphate Company shall have the right to take charge of said construction and complete same and collect the amount so expended by it from the said Tennessee Fertilizer Company and its aforesaid sureties, and in addition thereto the sum of $1,500.00 per month as liquidated damages for the delay (time being of the essence*1766  of the contract), until the said roads are completed.  It is understood and agreed that the above bonds are conjoint and that but one penalty can be collected from the two sets of bonds.  On December 7, 1908, another contract between the fertilizer company and the Independent Phosphate Company was executed, by which the terms of the agreement of October 26, 1906, were partially modified.  It was agreed that the road, constructed in accordance with the previous agreement, might be made a common carrier instead of a private road, and a modification was made as to rates.  The latter agreement was signed "Tennessee Fertilizer Company, J. H. Carpenter" and "The Independent Phosphate Co., By T. C. Meadows, and H. C. Read, Committee." There was a further provision as follows: In consideration of the modification of the Independent Phosphate Company of the terms of its contract of October 26, 1906, as herein specified, we, Middle Tennessee Railroad Company, a corporation, W. J. AND J. W. Howard, J. H. Carpenter, hereby agree and obligate ourselves for the faithful performance by the Tennessee Fertilizer Company of all the terms and conditions of the above contract.  The Middle Tennessee*1767  Railroad Company had been organized about 1906 with the expectation and for the purpose of building the railroad mentioned in the above contract.  The petitioner was its president.  He drew no salary.  In accordance with the contracts a railroad was built from the properties in question to Franklin, Tenn.  Upon the refusal of the Louisville & Nashville Railroad Company to maintain and operate the road in accordance with its agreement, a connection was made through another line or lines from Franklin into Nashville.  At about the same time there was a proposed plan to build an interurban electric railway from Nashville to Franklin.  The Nashville Interurban Railroad Company had attempted, but failed, to finance it.  The petitioner and Howard financed the building of the road by purchasing stocks and bonds of the Interurban Company.  The road was built at a cost of about $800,000.  The petitioner became president of the company.  He drew no salary.  Subsequently traffic arrangements were entered into between the Middle Tennessee Railroad Company and the Nashville Interurban Railroad.  Meanwhile, the Independent Phosphate Company, or its successor, had developed some phosphate properties*1768  near Mount Pleasant, *1122 Tenn.  It desired to have the Middle Tennessee Railroad Company extend the line from the Estes Bend and Leatherwood properties southward to Mount Pleasant.  On July 31, 1909, an agreement was executed whereby certain persons, living along the proposed extension of the line, agreed to purchase stock of the Middle Tennessee Railroad Company from the petitioner and Howard, and also agreed to furnish rights of way necessary for such extension.  The petitioner and Howard agreed to build the line, free from any indebtedness for construction, and deliver the same to the Middle Tennessee Railroad Company in consideration of the issuance of its bonds to them at the rate of $15,000 per mile of road.  The Middle Tennessee Railroad Company agreed to accept the road, operate it for at least three years, and make traffic arrangements with the Nashville Interurban so that shipments might be made from Mount Pleasant to Nashville at rates not exceeding those charged by the Louisville & Nashville Railroad Company for the same service.  In case the latter company purchased the Middle Tennessee Railroad Company within twenty years, the petitioner and Howard agreed to*1769  repurchase at par the stock which the subscribing parties agreed to buy.  This proposed extension was completed in accordance with the agreement, and was operated from Mount Pleasant to the Leatherwood properties and Franklin, and thence to Nashville in conjunction with the Nashville Interurban.  It was financed by the petitioner and Howard, only a small percentage of the total amount involved being raised by the subscription of residents along the line.  Subsequently plans were made to electrify the line from Franklin to Mount Pleasant, build an additional line from Franklin to Columbia, and take over the lighting and power business of that section.  The petitioner discussed these plans with banking houses in London, Boston, Philadelphia, and New York.  The World War interrupted these negotiations, and the plans were not consummated.  During the above period and until 1922 the petitioner devoted a great deal of his time to the Nashville Interurban Railroad, the Middle Tennessee Railroad Company, and the Tennessee Fertilizer Company.  Up to and including the year 1922 he was interested in a number of other enterprises, all of which were carried on through corporations.  Some of*1770  these were subsidiaries of the Tennessee Fertilizer Company, engaged in the fertilizer business; one was a mining company in Alabama; another was the Hermitage Hotel Company, which built a hotel in Nashville.  At the beginning of the war the petitioner became connected with several corporations carrying on business with European governments.  One such corporation was the France and Canada Steamship *1123  Company.  The petitioner arranged for the financing of this company, and borrowed a considerable amount of money therefor on his personal account.  In addition there were five or six other corporations, real estate companies, in and around New York, in which the petitioner became interested.  He had a substantial interest in each of them, and put up several hundred thousand dollars.  The management of these companies was largely in the hands of the petitioner's brother, although the petitioner was consulted with respect thereto.  He drew no salaries from these companies.  Since 1922 he has formed several corporations and has contributed to the financing of them to the extent of approximately two million dollars.  In his income-tax return for the year 1922 the petitioner*1771  deducted $429,184.95 as a loss sustained by reason of the liquidation of the Middle Tennessee Railroad Company.  The Commissioner allowed the deduction.  With respect to the years 1923 and 1924 the Commissioner disallowed the petitioner the benefit of the "net loss" provisions of the Revenue Acts of 1921 and 1924.  OPINION.  MURDOCK: The deficiency notice which forms the basis of this proceeding had to do with the years 1922 to 1924, inclusive.  It notified the petitioner that there was no deficiency in tax for the year 1922 and that there were deficiencies for the years 1923 and 1924.  It contained the following statement: 1922.  The loss of $429,184.95 in liquidation, Middle Tennessee Railroad Company claimed on your return, has been allowed by this office and your return accepted as filed.  However, the net loss of $305,392.72 as shown by your return for 1922 and carried forward as a credit on your returns for 1923 and 1924 has been disallowed as a credit for those years.  It is held by this office that the loss sustained in 1922 was not the result of the operation of your trade or business and is, therefore, not such a loss as to constitute a net loss under the provisions*1772  of section 204 of the Revenue Act of 1921.  The petitioner's assignment of error is as follows: The respondent erroneously determined that the loss resulting to the petitioner in 1922 from the liquidation of an enterprise carried out through a corporation known as Middle Tennessee Railroad Company, was not a net loss under the provisions of section 204 of the Revenue Act of 1921.  The issue raised by the pleadings is, Did the Commissioner, having determined that the petitioner sustained a loss in 1922 of $429,184.95 in the liquidation of the Middle Tennessee Railroad Company, and having accepted the petitioner's return as filed for 1922, err in not carrying forward some certain amount for the years 1923 and 1924 *1124  as a statutory net loss under the provisions of section 204 of the Revenue Act of 1921 and section 206 of the Revenue Act of 1924?  The petitioner relied upon the statement in the deficiency notice that the Commissioner had allowed the loss of $429,184.95 for 1922 in connection with the liquidation of the Middle Tennessee Railroad Company.  We think he was justified in so doing.  He did not come to trial prepared to prove that he had sustained a loss in this*1773  amount from this cause in 1922.  The deficiency notice was dated November 3, 1927, the petition was filed December 30, 1927, the answer was filed February 29, 1928, and there were no further pleadings or requests to plead further until the date of the hearing on September 3, 1930.  At that late date counsel for the respondent moved to amend his answer by adding a paragraph as follows: Respondent admits that in the year 1922 the petitioner sustained a loss upon the liquidation of the Middle Tennessee Railroad Company in the sum of $210,600 and denies that he sustained any loss in excess of that amount.  This motion was objected to and the objection was sustained.  This was not a claim for any increased deficiency.  It was an untimely attempt to reverse the position theretofore taken by the Commissioner and relied upon by the petitioner.  Therefore, it will be assumed in the decision of this case that the petitioner sustained a loss in 1922 of $429,184.95 in the liquidation of the Middle Tennessee Railroad Company, and it will be further assumed that his return for 1922, as filed, was correct.  However, it was incumbent upon the petitioner to prove that he sustained in 1922 a statutory*1774  net loss under the provisions of sections 204 of the Revenue Act of 1921 and 206 of the Revenue Act of 1924 and the amount of such net loss.  The deficiency notice contains no determination or admission on the part of the respondent that the loss of $305,392.72, as shown on the petitioner's return for 1922, was a net loss within the meaning of section 204.  It merely states that the loss, as shown by the return, has been disallowed as a credit for 1923 and 1924.  It further states that the loss sustained in 1922 was not a statutory net loss because it did not result from the operation of the petitioner's trade or business.  If the Commissioner's stated reason for the disallowance was in fact no reason for the disallowance, there would still be the question of the computation of the amount of the statutory net loss.  Cf. . Section 204 specifies the manner in which this amount must be computed, and it is obvious that the amount may not be the same as the amount of loss shown on a correct return.  *1775 . The figures necessary to compute any possible statutory net loss are not in evidence.  The petitioner's return for 1922 has not been offered in evidence.  Thus we are unable to compute or direct a correct computation of *1125  any statutory net loss under Rule 50.  Cf. ; ; ; . But, aside from this difficulty, the evidence does not show that the alleged loss resulted from the operation of any trade or business regularly carried on by the taxpayer.  It is not contended that the petitioner was regularly engaged in the operation or construction of railroads.  A loss sustained in an isolated business transaction is not to be carried forward by an individual under section 204, nor, except under circumstances not shown in this case, is a loss from the liquidation of a corporation to be carried forward by an individual.  *1776 . Cf. ; affd., ; certiorari denied, ; ; affd., ; ; , and cases there cited; ; . Judgment will be entered for the respondent.