Court Opinion

ID: 4589758
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:02:10.348102+00
Date Added: 2024-06-11T07:50:20.276352
License: Public Domain

NORTHWAY SECURITIES COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Northway Sec. Co. v. CommissionerDocket No. 33996.United States Board of Tax Appeals23 B.T.A. 532; 1931 BTA LEXIS 1861; June 2, 1931, Promulgated *1861  Where a corporation engaged in manufacturing and selling speedometers sold all its assets in 1921, changed its name, and proceeded to engage in another line of business, but under the same charter, held, that there was no change in the legal entity and that a net loss sustained by it in 1921 is deductible from its 1922 net income.  Claude I. Parker, Esq., George H. Koster, Esq., and John B. Milliken, Esq., for the petitioner.  J. E. Marshall, Esq., for the respondent.  MATTHEWS *532  This is a proceeding for the redetermination of a deficiency in income tax for the year 1922 in the amount of $1,873.90.  The petitioner alleges that the Commissioner erred (1) in disallowing as a deduction an amount of $18,931.50 representing a payment made to N. H. Van Sicklen, Jr., for services rendered to the petitioner, and (2) in not applying a net loss sustained by the Van Sicklen Speedometer Company in the year 1921, amounting to $234,517.76, against the net income of the petitioner for the year 1922.  At the hearing petitioner waived the first assignment of error.  *533  FINDINGS OF FACT.  The petitioner, the Northway Securities Company, *1862  is a corporation with its principal place of business in Los Angeles, Calif.  Prior to 1921 the name of the petitioner was the Van Sicklen Speedometer Company, hereinafter referred to as the Speedometer Company.  The Speedometer Company was organized in 1919 by Norman W. Church to take over the assets of the Van Sicklen Company, a corporation engaged in the manufacture of speedometers, including all its tangible assets, good will and patents.  Church obtained an option from the Van Sicklen Company to purchase its assets for $750,000 or its equivalent.  The vendor elected to take $250,000 in cash and 5,000 shares of stock of the new corporation.  The Speedometer Company was incorporated under the laws of the State of California, with an authorized capital stock of 25,000 shares of no par value common stock.  Its articles of incorporation were very broad.  Under them it was permitted, among other things, to manufacture and sell automobile parts of every description, to engage in manufacturing, to own and control patents and patent rights, to erect buildings for the purpose of the manufacture of speedometers, and also to purchase, hold, sell and transfer the shares of its own capital*1863  stock and the capital stock of other corporations, and to engage in the purchase of bonds and evidences of indebtedness of every description.  At the time of incorporation of the Speedometer Company 2,500 shares were issued to Church as a bonus.  He subscribed for an additional 1,000 shares which he paid for in cash upon the basis of $100 a share, and one Willys subscribed for 8,500 shares, paying for 3,500 shares in cash at the rate of $100 a share, the remaining 5,000 being payable upon twenty days' call of the board of directors.  After its incorporation, the Speedometer Company engaged in the manufacture and sale of speedometers until March 3, 1921, when it sold all of its assets, both tangible and intangible, except $35,000 in cash, to the Stewart-Warner Speedometer Corporation for $725,000 cash and 15,000 shares of its capital stock.  The fair market value of the capital stock of the Stewart-Warner Speedometer Corporation was $32.75 per share at the time of the sale.  At that time Church owned about 80 per cent of the stock of the Speedometer Company.  After the sale the minority stockholders were permitted to exchange their stock in the Speedometer Company for the amount*1864  of cash to which each share was entitled and stock of the Stewart-Warner Speedometer Corporation, share for share.  All of them did this.  All that remained in the Speedometer Company was the $35,000 cash, the balance of the cash received from the sale to the *534  Stewart-Warner Speedometer Corporation, and the balance of the stock of the latter.  On or about August 29, 1921, the name of the Speedometer Company was changed, by an amendment to its articles of incorporation, to the Northway Securities Company.  Its office was moved to Los Angeles from Elgin, Ill., and it thereafter engaged in the investment business.  The Speedometer Company sustained a net loss in 1921 in the amount of $234,517.76 as a result of the sale to the Stewart-Warner Speedometer Corporation of the capital assets used in its trade or business.  The petitioner had net income for the year 1922 in the amount of $96,751.55.  The respondent refused to allow the petitioner to deduct the 1921 net loss from its 1922 net income and determined that there was a tax due from the petitioner for 1922 in the amount of $12,093.94, of which $10,220.04 had been previously assessed, leaving a deficiency of $1,873.90. *1865  OPINION.  MATTHEWS: The deficiency notice covering the years 1921 and 1922 was based on a revenue agent's report for the years 1919 to 1922.  The recommendations of the revenue agent for the years 1921 and 1922 were followed by the respondent in his 30-day letter and the subsequent notice of deficiency, which forms the basis for this proceeding.  The revenue agent determined the net loss to be $234,517.76 and as the respondent accepted the revenue agent's report and made it the basis of his notice of deficiency, we have found the net loss to be in the amount determined by the revenue agent and approved by the respondent.  Section 204 of the Revenue Act of 1921 provides: (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 (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business); * * * (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 net*1866  loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; * * * The respondent contends that the petitioner may not deduct the net loss sustained in 1921 from its 1922 net income, since the petitioner is a separate legal entity from the Speedometer Company and, hence, is not the same "taxpayer" within the meaning of the statute, and, furthermore, that the petitioner is engaged in a different line of business from that carried on under the name of Van Sicklen *535  Speedometer Company, and, therefore, the net loss sustained by the Speedometer Company in 1921 was not a net loss sustained by the petitioner in a business regularly carried on.  We do not agree with these contentions of the respondent.  We believe that the petitioner is the same "taxpayer" as the Speedometer Company within the meaning of section 204.  The only change in the articles of incorporation was the change in name, which is merely a formal matter.  The stockholders and the amount of its capital stock remained the same, and it proceeded to carry on business under the same charter.  The mere change in name did not result in the creation of a new legal*1867  entity.  See ; ; . Neither do we see any merit in the respondent's contention that the transaction was not one resulting from a trade or business regularly carried on.  Since its organization petitioner has been engaged in the manufacture and sale of speedometers.  It sold all of the assets which it was using in this business and proceeded to use the proceeds to engage in another line of business which it was authorized to engage in under its charter.  Section 204, above referred to, provides that the term "net loss" includes the loss resulting from the sale of capital assets used in the trade or business regularly carried on.  In , we held that, where liabilities were incurred by a taxpayer in the ordinary course of the operation of a partnership of which he was a member and were paid by him two years after its dissolution, any losses sustained thereby were losses resulting from the operation of a business regularly carried on within the meaning of section 204(a) of the Revenue Act*1868  of 1921.  In connection therewith, we said: We find nothing in section 204, however, which limits its application to instances where the net loss resulted from the operation of a trade or business within the year in which the loss was sustained.  It is sufficient under the statute if the loss results from the operation of a trade or business, whether the taxpayer was so engaged during the particular year or not.  The purpose of section 204 was to relieve from the harsh rule that required one's tax liability to be determined solely from the happenings of a 12-month period.  It is a relief provision and should be liberally construed.  Under the provisions of subdivision (b), section 204, a taxpayer who sustains a net loss is entitled to deduct the amount thereof from its net income for the succeeding taxable year.  Since the amount of the net loss for 1921 is in excess of the net income as determined by the respondent for 1922, it is clear that there is no tax due from the petitioner for 1922 and that there is an overassessment for that year.  Judgment will be entered under Rule 50.