Court Opinion

ID: 4619866
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:41:30.35955+00
Date Added: 2024-06-11T07:59:46.138897
License: Public Domain

W. H. DAIL, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Dail v. CommissionerDocket No. 21115.United States Board of Tax Appeals19 B.T.A. 1036; 1930 BTA LEXIS 2271; May 21, 1930, Promulgated *2271  The petitioner held to have sustained a deductible loss in the taxable year of his entire investment in a business project which definitely failed and was known to have failed prior to the close of that year.  J. G. Korner, Jr., Esq., and Thos. D. Meares Jr., Esq., for the petitioner.  D. A. Taylor, Esq., and J. M. Morawski, Esq., for the respondent.  SMITH *1036  This proceeding is for the redetermination of an alleged deficiency in income tax for the calendar year 1920, which the respondent asserts amounts to $10,295.43.  The only issues are the deductibility of an alleged loss, and the amount thereof, resulting from a business venture entered into during the taxable year.  FINDINGS OF FACT.  The petitioner is a resident of Greenville, Pitt County, N. C. Early in the year 1920, he and two other persons, R. L. Smith and M. W. Price, discussed among themselves a project of conducting a county fair in Pitt County, N.C.  The petitioner at that time was engaged in conducting an automobile agency.  County fairs, such as the one under discussion, were being conducted in neighboring counties with reputed success.  However, petitioner*2272  and his associates were not able to conduct a fair on their own resources, so they decided to organize a corporation for that purpose and raise the money to carry out the project from sales of stock.  Thereupon petitioner and Price solicited farmers, merchants, and others to take stock in such a corporation to be formed and to be known as the Pitt County Fair Association.  A large number of people agreed to take stock and written promises were obtained that shares of stock of a sufficient quantity would be subscribed for when the corporation was organized.  It was contemplated that the corporation would be formed at or about September, 1920, when the people of the county would be in funds from the sale of the tobacco crop.  Smith owned a tract of land of 24 acres which was suitable for the purpose of a fair ground and petitioner and Price discussed with Smith the proposition of the latter selling the land to the corporation which they contemplated forming.  Smith agreed to give an option to such a corporation for the purchase of this land at $1,000 per acre, or a total consideration of $24,000.  By its terms the option was open until the end of the year 1920, when it expired.  *1037 *2273  This option was not in writing, but was entirely a verbal agreement between Smith, as owner of the land, and the petitioner and Price, on behalf of the proposed corporation.  During all of this time the petitioner was engaged in the conduct of his regular business, which was that of an automobile sales agency.  During the summer of 1920, soon after the foregoing agreement was had with Smith, the parties, relying on the stock subscription promises and on their ability to later organize a corporation by reason thereof, went ahead at their own expense to prepare and equip the fair grounds.  They constructed a combination grand stand and exhibition building, a race track, which required considerable grading, stables, and numerous animal and poultry exhibit pens.  They had the premises equipped with water and electric lighting facilities and built a wooden fence around the entire tract.  The total cost of these improvements was $75,294.65.  The petitioner, Smith, and Price contributed individually the amounts of $31,345.33, $18,000, and $11,300, respectively.  There remained outstanding and unpaid upon completion of the work $14,649.32 of the total cost of the improvements.  The money*2274  was all spent and the work was done in the spring and summer of 1920 prior to the holding of the fair.  All of the construction work, aside from grading work, resulted in the creation of permanent fixtures to the land of Smith and there was no agreement of any kind providing for the removal thereof by anyone, and Smith has never agreed or consented that such improvements might be removed.  Petitioner realized the significance of the various acts done but relied on the prospects relative to the successful formation of the proposed corporation which were then at hand.  As the harvesting and marketing season approached that year it became apparent that there would be a serious reversal of the prosperous conditions of prior years.  There was a general crop failure in Pitt County, particularly of the tobacco crop, which was the chief agricultural product, and market prices were low.  The depression was reflected in all lines of business.  However, announcement had been made that the fair would be held in September and many small premiums had been offered for the best live stock and other exhibits.  Accordingly, the fair was held in September, 1920, as scheduled, under the management*2275  of the petitioner and his associates.  The total gross receipts amounted to $16,939.14, against which there were operating expenses of $8,289.82, leaving the sum of $8,649.32, which was immediately applied against the unpaid balance of the cost of improvements, reducing such unpaid balance from $14,649.32 to $6,000.  Thereafter, the petitioner and his associates tried to complete the organization of the contemplated corporation so agreed upon, but *1038  were unsuccessful.  Those who had agreed to subscribe for stock in the proposed corporation declared that they were unable to do so and refused, without exception, to take any part in its organization.  The petitioner, Smith, and Price had put all of their money on the improvements.  They had no means of completing the organization of the corporation as agreed upon, or of exercising the option to purchase the land from Smith.  The petitioner frequently discussed the situation with Smith and Price, but no further action was taken nor any plans made during the year 1920.  The option for the purchase of the land was never exercised or renewed.  Smith did not, during the taxable year, enter into any agreement or otherwise consent*2276  for the removal of any of the improvements made on his land or for any reimbursement to be made to the petitioner and Price for their expenditures for the improvements.  In March, 1921, the parties further discussed the fair undertaking with the idea of trying to work out some plan to recover their supposed losses.  At the suggestion of the petitioner and Price it was agreed that the three of them would form a corporation themselves and that Smith would lease the fair grounds with the improvements thereon to the corporation for a period of 14 years at a rental of $1,250 per year.  The corporation was organized in April, 1921, with an authorized capital stock of $100,000 divided into 1,000 shares par value $100 each.  The petitioner and Price subscribed for 33 shares of stock each and Smith for 34 shares.  The corporation was authorized to do business with a minimum of 100 shares subscribed for.  No money or other assets were paid into the corporation except the aforesaid lease of the fair grounds.  The corporation assumed the balance of the unpaid cost of the improvements on the premises.  At a meeting of the board of directors held May 3, 1921, attended by Smith, Price, and*2277  the petitioner, a resolution was adopted authorizing the corporation to borrow $6,000 with which to take up some of its outstanding indebtedness.  The resolution further provided: On account of W. H. Dail, Jr., having advanced $31,345.33 and only wanting $20,000.00 of the company stock motion was made and carried that the Pitt Co. Fair, Inc. note be given to W. H. Dail, Jr. for $11,343.33 to reimburse him of amt. advanced for building fair grounds.  * * * The corporation has never had any success since its organization and has at all times been insolvent.  It has never had any assets other than its lease, which was wholly without value, and it has never had any net earnings.  Its stock has never had any value, its paper was worthless, and it has never paid any of its debts or its rental obligations.  From the time of the fair in 1920 until after the organization of a corporation in April, 1921, there was no understanding or agreement *1039  between petitioner and any of his associates concerning the operation of a fair in 1921.  The project in 1921 which resulted in the organization of a corporation to lease Smith's property was a separate, distinct, and new undertaking. *2278  It was entered upon in the hope of retrieving losses sustained and recognized as such in the prior year.  This hope has never been realized and petitioner has never retrieved or recouped and part of the loss sustained by him in 1920.  OPINION.  SMITH: The only question for our determination is whether the petitioner sustained a deductible loss of his investment in the Pitt County fair venture in the taxable year 1920.  We think that he did.  The petitioner and his associates had undertaken during that year to organize a corporation, the stock of which was to be held by the farmers and business men of Pitt County.  They secured, in writing, promises to subscribe for a large amount of stock in the corporation to be organized.  Relying on such subscription promises, as well as upon the then prosperity of the county and their apparent ability to float the corporation successfully, the petitioner and his associates expended all of their available cash, which constituted a large sum of money, for the erection of a plant and improvements upon the intended future premises of the corporation.  The money put in the venture by the petitioner was put in with the expectation that he would*2279  be reimbursed from the anticipated sales of stock.  These plans miscarried due to a local crop failure during the year 1920, and to a severe business depression, which was not merely local, but which was nation-wide.  Those who had agreed to subscribe for stock were unable to and refused to do so.  It was definitely known to the petitioner prior to the close of the year 1920 that the intended corporation could not be formed, that the entire undertaking had failed, and that the money sunk by him in the venture constituted a loss with little, if any, recoupment possible, there being none apparent at the close of the year.  The money that the petitioner and his associates had advanced had gone into the construction of a fair plant and improvements on land in which petitioner had no interest.  The construction was done at a time when construction and material costs were at the highest peak.  This period was immediately succeeded by a crop failure, coupled with local and national depression of the severest degree, all occurring during the same year.  The evidence relating to the year 1920 convinces us that prior to the close of that year the undertaking had become a complete failure. *2280  Nor does the evidence relating to the activities of petitioner and his associates, and to the events occurring during the year 1921, do *1040  more than demonstrate the fact that the investment made by the petitioner in the preceding year would not and could not be recouped.  Consequently, the evidence seems to corroborate the contentions of the petitioner that he sustained a deductible loss and that such loss occurred and was sustained during the year 1920.  Respondent has increased the income reported by the petitioner in his return for the year 1920 by the amount of $2,883.11, which represents one-third of the difference between the gross receipts of the fair held in 1920, and the operating expenses thereof.  The petitioner shows that this amount was immediately utilized to reduce the unpaid balance of cost of construction and claims that his loss during the year 1920 was increased correspondingly.  We think that the contentions of the petitioner are borne out by the facts and that he sustained a deductible loss during the taxable year 1920.  Judgment will be entered under Rule 50.