The opinion
HARRY F. HARPER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Harper v. Commissioner
Docket No. 29087.
United States Board of Tax Appeals
20 B.T.A. 143 ; 1930 BTA LEXIS 2194 ;
June 25, 1930 , Promulgated
*2194 1. A net loss sustained by the petitioner in 1924 was attributable to a trade or business regularly carried on by him and is a proper deduction in computing net income for the year 1925.
2. The amount of the said net loss determined.
William P. Smith, Esq., for the petitioner.
Arthur Carnduff, Esq., for the respondent.
MCMAHON
*143 This is a proceeding for the redetermination of a deficiency in income tax for the year 1925 in the amount of $1,051.40. The petition purports to include the year 1924, for which no deficiency is asserted in the deficiency letter. The only issue presented relates to the petitioner's claim for a deduction, in computing net income for the year 1925, of a net loss alleged to have been sustained during the year 1924. The respondent determined that the net loss was not sustained in a trade or business regularly carried on by the petitioner and, accordingly, denied the deduction claimed.
FINDINGS OF FACT.
The petitioner is an individual residing at Lansing, Mich.
For several years prior to 1920 the petitioner's principal occupation was the management of the Prudden Wheel Co. of Lansing. In March, 1920, *2195 the petitioner promoted a consolidation of certain companies in which he was interested, namely the Prudden Wheel Co., the Gier Pressed Steel Co., and the Auto Wheel Co., all of Lansing, and the Weis & Lesh Manufacturing Co. of Memphis, Tenn. The consolidated company was known as the Motor Wheel Corporation and the petitioner has been president and general manager since its organization.
The various companies entering into the consolidation above described brought into the management of the Motor Wheel Corporation executives and trained personnel each of whom had specific duties to perform, and the activities of these employees relieved the *144 petitioner of practically all detail connected with the business. Each executive of the corporation became responsible for the conduct of his department and thereafter the petitioner generally considered and determined only questions of policy in conduct of the business, devoting from 50 to 60 per cent of each ordinary working day to this purpose. About once a year the petitioner visited the corporation plant at Memphis. His salary from the company for the year 1923 was $21,000, and for the year 1924, $25,200. The petitioner *2196 received no salary from any other source but he did receive small amounts as director's fees from the American State Savings Bank and the Steel Wheel Corporation.
The petitioner promoted the organization and financing of many business enterprises, among them being the following named companies: the Gier Pressed Steel Co., the Eureka Machine Co., the Detroit Electric Welding Co., the American State Savings Bank, the Ryan-Bohn Foundry Co., the Lansing Foundry Co., the Federal Drop Forge Co., the Duplex Truck Co., and the Michigan Steel Tube Products Co. The above mentioned companies were all organized prior to or during 1924, and all except the Detroit Electric Welding Co. were active during that year. Since that year the petitioner has promoted and financed the organization of the following named businesses: the Driggs Air Craft Corporation, the Central Trust Co., and the Michigan Aero Engine Co. With the exception of the Michigan Steel Tube Products Co., which was located in Detroit, all of the companies above named were located at Lansing.
The petitioner's promotions, as above detailed, were entered into to secure profits and to effect the industrial growth of Lansing, as *2197 a matter of civic pride. It was usually necessary for the petitioner to underwrite most of the stock issued upon organization of a company such as those described above, and while his object in so financing the companies was primarily to derive a profit from the sale of stock, he usually retained a small portion of such stock as an investment. The petitioner has advanced approximately $1,000,000 in organizing and financing the companies mentioned.
For several years prior to, as well as during 1924, the petitioner spent from two to three hours a day in the consideration of means of investing his funds and certain borrowed funds in the promotion and financing of various companies and the making of loans to individuals and corporations.
Interest received and paid by the petitioner during the years 1917 to 1925 was in amounts as follows: Interest received Interest paid
Year Number of Number of
sources Amount sources Amount
1917 8 $ 2,999.68 1 $ 2,360.00
1918 8 2,970.35 1 2,616.67
1919 15 2,653.23 3 1,336.90
1920 9 2,577.40 8 10,510.41
1921 11 4,367.59 8 10,091.08
1922 14 $ 5,688.01 4 $ 6,477.62
1923 8 958.01 5 7,155.33
1924 8 1,118.24 4 6,615.65
1925 11 4,632.21 5 6,029.45
*2198 *145 Details of interest received by the petitioner during the year 1922, as reported in his income-tax return for that year, are as follows: Payor Amount
R. J. Haule $ 140.00
Eureka Machine Co 1,269.12
Dyer-Jeneson-Barry Co 280.00
R. M. McConnell 420.00
C. J. Mears 168.00
J. S. Wilson 60.00
Roy Simons 45.92
H. M. Lee 34.15
H. A. Sheffer $ 468.00
E. L. Smith 120.00
T. M. Mickelson 45.00
W. H. Newbrough 2,585.35
J. K. Durling 10.33
T. J. Foster Co 42.14
5,688.01
The petitioner kept memoranda records, but no formal books of account. His income-tax returns were made upon the basis of cash receipts and disbursements. Interest received resulted from loans to various corporations and individuals, and from notes and accounts payable to the petitioner for various stocks sold by him. The usual interest rate was 6 per cent. Interest paid relates to monies borrowed by the petitioner for business purposes, including the purchase of stocks. During the nine-year period mentioned the petitioner made various loans, aggregating $150,000 to $160,000, on which he received no interest.
From 1917 to 1925 the petitioner bought and sold various *2199 stocks in transactions detailed as follows: Number of shares
1917 1918 1919
Pur. Sold Pur. Sold Pur. Sold
Auto Body, Pfd 400 400
Chelsea Steel Ball Co 200 200
City Nat. Bank
Columbia Mtrs. Co 250 250
Cont'l Mtrs. Co 250 250
Copeland Oil Royalty
Copeland Oil Units
Dodge Bros
Duplex Truck Co 100 100
Durant Motor Co
D. & R.G. Ry. Pfd
Eaton Axle Co
Fed. Drop Forge Co
Gladys Bell Oil
Gier Oil Units
Gier Pressed Steel 325 263 11 400 950
Hayes Wheel Co 2,635
Hudson Mtr. Car Co
Lawrence Baking Co
Lansing Country Club
Lansing Foundry Co
Lansing Foundry Co. Pfd
Maxwell Motor "B"
Mich. Brass & Copper Co 100 100
Mich. Employers Gas Co
Mich. Mortg. & Inv. Co
Mich. Steel Tube Prod. Co
Mich. Cont. Ref. Co
Mitchell Oil Co
Motor Products Corp
Motor Wheel Corp
Motor Wheel Corp. Pfd
National Bank of Commerce 50
Noble Oil & Gas Co
Packard Mtr. Co
Petosky-Portland Cement Co
Plywood Products
Prudden Wheel Co 450 825 675 475 5,355 1,175
Riverside Country Club 10
Ryan-Bohn Foundry
Smith Co., Robt
Timken Detroit Axle Co
Timken Roller Bearing Co
U.S. Steel Co 100 100
Walton Melting Co
*2200
1920 1921 1922
Pur. Sold Pur. Sold Pur. Sold
Auto Body, Pfd
Chelsea Steel Ball Co
City Nat. Bank
Columbia Mtrs. Co 450 450
Cont'l Mtrs. Co
Copeland Oil Royalty ( 1 )
Copeland Oil Units 100 ( 1 )
Dodge Bros
Duplex Truck Co 2,000 2,000
Durant Motor Co 50 50 1,031 1,031
D. & R.G. Ry. Pfd 500 500
Eaton Axle Co
Fed. Drop Forge Co 500 400
Gladys Bell Oil 2,000 2,000
Gier Oil Units 100
Gier Pressed Steel
Hayes Wheel Co 2,635 660 660 1,224 1,224
Hudson Mtr. Car Co 375 375
Lawrence Baking Co
Lansing Country Club
Lansing Foundry Co 1,000
Lansing Foundry Co. Pfd
Maxwell Motor "B"
Mich. Brass & Copper Co
Mich. Employers Gas Co 10 10
Mich. Mortg. & Inv. Co 40 40
Mich. Steel Tube Prod. Co
Mich. Cont. Ref. Co 10 10
Mitchell Oil Co 100
Motor Products Corp
Motor Wheel Corp 9,969 10,084 65 200 10,000 8,685
Motor Wheel Corp. Pfd
National Bank of Commerce 25 75
Noble Oil & Gas Co
Packard Mtr. Co
Petosky-Portland Cement Co 50 50
Plywood Products 20 20
Prudden Wheel Co
Riverside Country Club
Ryan-Bohn Foundry 1,500
Smith Co., Robt 1,000 1,000
Timken Detroit Axle Co
Timken Roller Bearing Co 100 100
U.S. Steel Co
Walton Melting Co 200 200
*2201
1923 1924 1925
Pur. Sold Pur. Sold Pur. Sold
Auto Body, Pfd 500
Chelsea Steel Ball Co
City Nat. Bank 25 25
Columbia Mtrs. Co 400 400
Cont'l Mtrs. Co
Copeland Oil Royalty
Copeland Oil Units
Dodge Bros 100 100
Duplex Truck Co
Durant Motor Co
D. & R.G. Ry. Pfd
Eaton Axle Co 500 500
Fed. Drop Forge Co
Gladys Bell Oil
Gier Oil Units
Gier Pressed Steel
Hayes Wheel Co
Hudson Mtr. Car Co 1,000 1,000
Lawrence Baking Co 100 100
Lansing Country Club 20
Lansing Foundry Co 50
Lansing Foundry Co. Pfd 21
Maxwell Motor "B" 200 200
Mich. Brass & Copper Co
Mich. Employers Gas Co
Mich. Mortg. & Inv. Co
Mich. Steel Tube Prod. Co 100
Mich. Cont. Ref. Co
Mitchell Oil Co
Motor Products Corp 162 40
Motor Wheel Corp 300 300 10,874 4,200
Motor Wheel Corp. Pfd 25
National Bank of Commerce
Noble Oil & Gas Co 1,800 1,800
Packard Mtr. Co 600 600
Petosky-Portland Cement Co
Plywood Products
Prudden Wheel Co
Riverside Country Club
Ryan-Bohn Foundry
Smith Co., Robt
Timken Detroit Axle Co 250 250
Timken Roller Bearing Co 100 100
U.S. Steel Co
Walton Melting Co
*2202
*147 The number of different stocks involved is 45. The petitioner classed the stock above mentioned as his "trading stocks." In addition to the transactions detailed he bought other stocks during the years 1917 to 1925 for purposes of investment.
The petitioner never bought stocks on margin nor did he ever carry an account with a broker. His purchases were made with draft attached on the petitioner's local bank and sales were made with draft attached on the broker. The petitioner watched the stock market carefully and he bought and sold as conditions warranted and his funds permitted. He devoted about one hour each day in checking market conditions on his stocks and in arranging purchases and sales when he deemed such action advisable.
The number of transactions and the amounts of purchases and sales during the nine-year period above detailed, follows: Year Number of Total purchase Number of Total
purchases price (round figures) sales sales
1917 4 $ 23,700 4 $ 24,800
1918 ( 1 ) 17,000 3 6,800
1919 10 251,000 7 60,000
1920 7 69,000 21 228,000
1921 10 69,000 10 40,000
1922 7 210,000 23 194,000
1923 7 34,500 12 38,000
1924 2 7,300 6 6,000
1925 13 176,500 13 165,400
Total 853,000 763,000
*2203
The average number of transactions for the nine-year period was approximately 17.7 per year.
In 1924 the Lansing Foundry Co. was declared bankrupt. The petitioner had promoted and backed this company financially and he had been vice president since its organization. He devoted some time to its affairs practically daily. When the company became bankrupt he held individual claims against it as an unsecured creditor which were described as follows in his proof of claim filed with the receiver:
Schedule of loans to the Lansing Foundry Co., made by H. E. Harper, as covered by the following notes of said company INTEREST CHARGES HAVE BEEN ADDED TO PRINCIPAL AND NOTES UP TO AND
INCLUDING NOVEMBER 5, 1923
Total notes plus
Interest to Nov. interest Nov.
Date of note Amount 5, 1923 5, 1923
Dec. 13, 1921 $ 64.45
Mar. 1, 1922 500.00
Apr. 21, 1922 2,500.00
May 8, 1922 10,472.10
May 10, 1922 2,500.00
June 7, 1922 5,000.00 Interest on all
June 24, 1922 1,500.00 notes herein listed
June 28, 1922 5,000.00 from Oct. 1, 1922
Sept. 25, 1922 5,000.00 to Nov. 5, 1923.
Oct. 1, 1922 1,292.03
Total 33,828.58 $ 82,227.13 $ 36,055.71
*2204 INTEREST ON THE FOLLOWING NOTES AT 6 PER CENT FROM DATE THEREOF TO
NOVEMBER 5, 1923, VIZ:
Oct. 14, 1922 $ 2,500.00 $ 159.18 $ 2,659.18
Oct. 27, 1922 2,500.00 153.75 2,653.75
Nov. 3, 1922 2,500.00 150.82 2,650.82
Nov. 21, 1922 1,500.00 86.08 1,586.06
Nov. 29, 1922 6,000.00 336.33 6,336.33
Jan. 5, 1923 2,500.00 124.93 2,624.93
Jan. 27, 1923 7,500.00 347.67 7,847.67
Mar. 8, 1923 5,000.00 198.91 5,198.91
May 18, 1923 5,000.00 140.55 5,140.55
June 27, 1923 2,500.00 53.84 2,553.84
Total 37,500.00 1,752.04 39,252.04
Grand total of all notes plus
interest to Nov. 5, 1923 75,307.75
*148 The interest rate specified in the notes dated December 13, 1921; March 1, April 21, May 8, May 10, June 7 and June 28, 1922, was 7 per cent per annum. Each of the other notes bore interest at the rate of 6 per cent per annum.
The note dated October 1, 1922, reads as follows:
$1,292.03 LANSING, MICH., Oct. 1, 1922.
Damand after date we promise to pay to the order of H. F. Harper Twelve hundred ninety-two and 3/100 Dollars payable at American State Savings Bank of Lansing Value received with six per cent *2205 interest per annum from date.
For interest in full on all your notes to October 1, 1922.
No. Due
THE LANSING FOUNDRY CO.,
H. J. SPROAT, Sec'y.,
By: RAY POTTEN, Vice-Pres.
In addition to the claim above detailed the petitioner and two officers of the Lansing Foundry Co. had jointly loaned the company certain money and as joint indorsers had paid certain of the company's *149 notes held by Lansing banks. The proof of claim filed with the company's receiver in relation to the joint claims mentioned, was as follows:
Schedule of Money Loaned To The Lansing Foundry Company by Wm. H. Newbrough, Harry F. Harper and Ray Potter; also Obligations of the Lansing Foundry Company at the American State Savings Bank, and the Capital National Bank, paid by Messrs. Newbrough, Harper and Potter. Money Loaned:
Note of Oct. 10, 1921, bearing 6 1/2% $35,766.31
Interest for one year at 6 1/2% 2,324.81
38.091.12
Interest from Oct. 10, 1922 to Nov. 5, 1923 at 6 1/2% 2,451.33
$40,542.45
Notes paid at the Capital National Bank:
Sept. 24, 1923 $5,000.00
Int. to Nov. 5, 1923 35.00
5,035.00
Oct. 15, 1923 5,000.00
Int. to Nov. 5, 1923 16.50
5,016.50
Nov. 26, 1923 10,000.00
Nov. 6, 1923, Notes paid at American State Savings Bank 71,518.17
132,112.12
*2206 July 18, 1924, the receiver of the Lansing Foundry Co. made his first and final distribution of dividends to creditors of the company, the dividends being 8.125 per cent of proven claims. On his individual claim of $75,307.75, the petitioner received a dividend in the amount of $6,118.75. On the joint claim of Newbrough, Potter, and the petitioner proven in the amount of $132,112.12, the dividend mentioned amounted to $10,734.11 and this amount was likewise paid on July 18, 1924, the petitioner receiving one-third thereof.
When the Lansing Foundry Co. became bankrupt the petitioner held 50 shares of its common stock at a cost of $10 per share, a total of $500, and 21 shares of its preferred stock at a cost of $10 per share, a total of $210.
The petitioner's return for the year 1924, reported the following: INCOME
Salaries, etc.
Motor Wheel Corp $ 25,200.00
American State Savings Bank 125.00
Steel Wheel Corp 100.00
$ 25,425.00
Interest on Bank Deposits, Corp. bonds, etc 1,118.24
Profit from sale of real estate, bonds,
stock, etc. (loss) (1,281.13)
Dividends on stock of domestic corp 51,925.00
Total income 77,187.11
DEDUCTIONS
Interest paid $ 6,615.68
Taxes paid 812.14
Bad debts 90,860.90
Contributions 1,075.00
Other deductions 1,784.66
$ 101,148.38
Net loss for year 23,961.27
*2207 *150 The deductions claimed were made up as follows: Interest paid:
Twenty-four items paid to five banks 6,615.68
Taxes paid to:
City Treasurer, Lansing $ 202.65
City Treasurer, Lansing 368.70
City Treasurer, Milwaukee 134.46
W. N. Brooks, Treas. Mullet Lake Property 14.30
Riverside Homes Co., subdivision
Lot 15, Block 2 24.37
A. W. Morford, Vanderbilt, Mich. property 40.91
Taxes paid on dues during year, viz:
Lansing Country Club 15.00
Detroit Athletic Club 5.50
Chicago Athletic Assn 6.25
812.14
Bad debts:
Loss of stocks and notes of Lansing
Foundry Co. Bankrupt as per notice
Nov. 10, 1923, and final dividend
of Receiver July 19, 1924, viz:
Loss on stock:
Cert. #66 - 50 shares com. stock at
$ 10.00 500.00
Cert. #28 - 21 shares pref. stock at
$ 10.00 210.00
710.00
Loss on notes:
Actual face of notes - no interest
added as per claim filed with Receiver
January 25, 1924, viz 33,828.58
37,500.00
71,328.58
Less dividend 7-18-24 from Receiver 6,118.75
65,209.83
Less equity:
W. N. Newbrough per letter 9-25-22 15,518.27
49,691.56
Account joint notes endorsed by Newbrough,
Harper and Potter, per claim filed of $ 132,112.12
Less dividend 7-18-24 from receiver 10,734.11
121,378.01 divided by 3 40,459.34
90,860.90
Contributions:
Fifteen items $ 1,075.00
Miscellaneous deductions:
Automobile repairs - car used for business
purposes - 4 items $ 177.90
Oil and gas 181.76
25% depreciation on Lincoln sedan 1,250.00
1,609.66
Loss on note, H. B. Selden 75.00
$ 1,784.66
*2208 *151 In his return for the year 1925 the petitioner claimed a deduction in computing net income of the amount of $23,961.38, shown as a net loss on his return for the year 1924.
Upon examination, a revenue agent, by report dated December 4, 1926, reduced the said net loss by the amounts of $200 and $178, representing, respectively, the disallowance as deductions of certain contributions, and the reduction of depreciation claimed on an automobile. The petitioner does not contest the reduction of the net loss by the amounts mentioned.
The respondent denied the deduction of the net loss for the year 1924 in computing net income for the year 1925 as not being a net loss sustained in a trade or business regularly carried on by the taxpayer.
Upon hearing the petitioner concedes that the amount of the net loss claimed as a deduction in computing net income for the year 1925 should be reduced by the amounts of $875 and $812.14, representing, respectively, the balance of the contributions claimed as deductions and the claimed deductions for taxes paid. The amount of the net loss now claimed by the petitioner as a deduction in computing net income for the year 1925 is shown *2209 as follows: Deduction shown as net loss in 1924 return $ 23,961.27
Reductions shown in R.A.R.:
Contributions disallowed $ 200.00
Disallowance of depreciation deduction 178.00
Reductions conceded by petitioner:
Balance of contributions 875.00
Taxes 812.14
2,065.14
Corrected net loss now claimed as deduction for 1925 21,896.13
OPINION.
MCMAHON: The respondent concedes that the petitioner sustained a loss for the year 1924 and he has not asserted a deficiency for that year. So far as the petition purports to include the year 1924, it is dismissed for lack of jurisdiction. ; *152 ; .
The petitioner contends that the loss which he sustained during 1924, as detailed in our findings of fact, was a loss "attributable to the operation of a trade or business regularly carried on" by him and that he is entitled to carry over and take the amount of such loss as a deduction in computing net income for the year 1925. He relies upon section 206 of the Revenue Act of 1924, which provides *2210 as follows:
SEC. 206. (a) As used in this section the term "net loss" means the excess of the deductions allowed by section 214 or 234 over the gross income with the following exceptions and limitations:
(1) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business; * * *
* * *
(b) If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year * * *.
The respondent has determined that the petitioner's net loss for the year 1924 is not attributable to a trade or business regularly carried on and accordingly he has denied the deduction claimed.
We must determine therefore what losses are deductible under section 206 and whether or not the losses claimed by the petitioner are so deductible. Section 214, referred to in section 206, is entitled "Deductions Allowed Individuals." It is the *2211 general provision re-relating to the deductions which may be taken by individuals and among those it allows are, (a)(1) all ordinary expenses of any trade or business, (b) interest paid or accrued, (3) taxes paid or accrued, (4) "losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in a trade or business; (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 [Italics supplied]," (6) losses from fire, storms, shipwreck, etc., (7) bad debts, (8) depreciation and obsolescence, (9) depletion, and (10) contributions, with exceptions relating to aliens.
Section 206, as above quoted, provides that with certain exceptions the excess of the above enumerated deductions over gross income shall be considered as the "net loss" for its purposes, i.e., for the purposes of section 206. The only exception material in this proceeding is that of paragraph (a)(1) of section 206, reading:
(a) (1) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly *2212 carried on by the taxpayer shall be *153 allowed only to the extent of the amount of the gross income not derived from such trade or business.
It is apparent from this description of the losses that may be deducted under section 206 that the statute differentiates between certain types of losses sustained. Losses from isolated transactions, i.e., from transactions entered into for profit though not attributable (connected) to the operation of a trade or business regularly carried on by the taxpayer, are expressly excepted from the losses which may be deducted as net losses under section 206.
It remains to determine therefore whether the activities of the petitioner in which he sustained losses by reason of failure of the Lansing Foundry Co. constituted a trade or business regularly carried on by him.
In , we held that a person might be engaged in more than one trade or business. See also ; , affd., *2213 ; ; , and .
In the instant proceeding the petitioner has established, we believe, that his activities in stock transactions and in loaning money constituted a "trade or business regularly carried on." His stock operations numbered about 160 transactions and involved approximately $1,621,000 of purchases and sales over a nine-year period. These were his "trading operations," and in addition he bought stocks for investment in amounts not shown. In the promotion and financing of various business enterprises he has advanced approximately $1,000,000. It was his practice to devote about one hour a day to consideration of stock transactions and from three to four hours a day to the consideration and care of financing individuals and corporations by loans, and the borrowing of money to use in his operations. His only other activity appears to have been as president of the Motor Wheel Co., and it is shown that subordinate officials of that company carried the brunt of its burden, relieving the petitioner from all detail and *2214 turning to him only for final decision upon matters of policy. See .
In a number of cases the Board has held that losses upon stocks were not incurred in the course of a "trade or business regularly carried on" and consequently did not constitute "net losses" deductible under the revenue laws in computing the income of a year other than that in which they were sustained. Examination of such cases reveals, however, that they turn upon the fact that the stocks involved were held for investment, or were acquired and sold in purely casual transactions rather than in the course of a business regularly carried on. ; R. J. *154 ; ; .
Upon appropriate facts we have held in other cases that purchase and sale of stocks constituted a business and that losses so incurred could be considered in computing a net loss. *2215 ; ; ; .
We have also recognized that the promotion of business enterprises and their financing by loans and stock purchases may constitute a business regularly carried on. In , we said:
* * * It appears that during the year 1921 petitioner's business was not only that of a corporate executive officer, as conceded by respondent, but he regularly carried on the business of financing mining and related corporations, which financing sometimes stock the form of loans and at other times the acquisition of stock in the company, the method followed being determined by the circumstances.
See ; .
Among the notes making up the "net loss" involved is one to the petitioner individually, bearing date of October 1, 1922, and having endorsed thereon the following: "For interest on all your notes to October 1, 1922." The said note is set out in full in our findings. The *2216 petitioner's income-tax returns were filed upon the basis of cash receipts and disbursements. Items of interest reported as income for the year 1922, as detailed in the findings, indicate that this note was not so reported. If the note had no fair market value when received, such an omission was proper. However, it appears that this item should not be included in the petitioner's net loss for 1924 and, therefore, that the amount of that net loss deductible in computing net income for 1925 should be reduced accordingly. We have held, in , that a taxpayer who keeps his accounts and makes his returns on a cash receipts and disbursements basis may not deduct from gross income, as for a bad debtAn item of accrued interest which he has not at any time previously treated as income or reported as taxable income. To the same effect, that is, that a taxpayer may not take as a deduction the loss of a gain that has never been reflected in income, see also ; *2217 .
In accordance with the foregoing we think that the amount of $21,896.13 designated in our findings as the "Corrected net loss now claimed as a deduction for 1925" should be reduced by the amount of $1,292.03, representing the note of October 1, 1922, and that the balance, namely, $20,604.10, is a proper deduction in computing net income for the year 1925.
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. Indicates numbers not shown. ↩
1. Several. ↩