Scharps v. Commissioner

ALBERT T. SCHARPS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Scharps v. Commissioner

Docket No. 21457.

United States Board of Tax Appeals

20 B.T.A. 246 ; 1930 BTA LEXIS 2165 ;

July 18, 1930 , Promulgated

*2165 1. NET LOSS. - A loss sustained by petitioner resulting from loans to a corporation is not a deductible net loss within the meaning of section 204(a) of the Revenue Act of 1921, or of section 206(f) of the Revenue Act of 1924.

2. Id. - Losses resulting from dealings in stocks as an investment are not deductible as net losses under said sections.

Albert T. Scharps, Esq., pro se.

P. A. Bayer, Esq., for the respondent.

BLACK

*246 The respondent determined a deficiency of $638.65 in income tax against petitioner for the year 1924. Petitioner seeks redetermination *247 and alleges that respondent erred in refusing to allow a deduction of $26,615.48 on account of a net loss sustained by him for the year 1923. It is claimed that the net loss resulted from loans and advancements made to the Flagg Ink Co. in the sum of $23,089.67 and charged off as a bad debt in 1923, and the loss of $12,000 through failure of Zimmerman & Forshay, a brokerage concern.

FINDINGS OF FACT.

The petitioner is an individual and has his office at 154 Nassau Street, New York City, N.Y. He is an attorney and has been engaged in the practice of law in *2166 New York since 1901, but in conjunction therewith he has at various times made investments and been connected with business enterprises. In 1920 and 1921 one Albert B. Flagg, the originator and owner of a formula for a record ink, interested petitioner in its manufacture. A corporation was organized to manufacture the ink. This corporation, the Flagg Ink Co., was incorporated under the laws of the State of New York in 1921. The record does not show the authorized capital stock, but whatever it was, only $200 capital stock was paid in. Flagg was president of the company and petitioner Albert T. Scharps was treasurer. The money which Scharps furnished to the Flagg Ink Co. was used for the pay roll, factory rent, office rent, telephone, stationery, postage, etc. Sometimes Scharps would pay the bills himself. Sometimes he would advance money to the company to pay them. The loans or advancements of money which he made to the company varied in amounts from $100 to $1,000, and extended over a period from June 7, 1921, to December 1, 1923, on which date petitioner charged off $23,089.67 as a bad debt.

The amounts which petitioner advanced in the form of loans to the Flagg Ink Co. *2167 to pay its bills were credited to him on a ledger account kept by the Flagg Ink Co., and from time to time he was debited with certain amounts paid him on this account. From June 78 1921, to December 1, 1923, when he charged off $23,089.67 as a bad debt, petitioner was credited on this account with 397 different items. The first debit for money paid Scharps on this account is dated December 22, 1922, and from that time to December 1, 1923, 24 debits are shown, which consisted of checks and exchange that the Flagg Ink Co. had received in payment of accounts from customers and turned over to Scharps to apply as part payment of the loans and advances which he had made.

From the time that it started operations, petitioner Scharps spent a part of every day at the office of the Flagg Ink Co., except those days in which he was actually engaged in the trial of causes in the courts. He directed the policies of the company and its selling campaign and managed its finances.

*248 Petitioner had no contract with the Flagg Ink Co. for the employment of his services, neither did he have any agreement, either in the by-laws or resolutions or otherwise, which required him to perform *2168 services. Testifying on this point, he said: "I did this work, gave my personal time and attention and advanced these monies, in the expectation that the business would be brought to such a successful point, that I could make a stock investment." He further testified: "Finally in the year 1923, when I saw it was in a hopeless condition and over $28,000 had been lost on the advances which I made, I decided to close it up, surrendered up the Factory Lease, surrendered up the Lease at 154 Nassau Street (office of the company) and I took back the furniture and filing devices which I owned and placed them elsewhere." Thus the Flagg Ink Co. ceased operations in 1923, practically without assets.

For about two years prior to 1923 petitioner had been buying from his surplus funds for investment purposes certain high grade securities through the brokerage firm of Zimmerman & Forshay. These securities were bought in small lots for actual delivery and were paid for by petitioner in monthly payments. The brokerage firm went into bankruptcy in 1923 and at the time owed petitioner $12,000. This was allowed as a deductible loss for 1923, but respondent ruled that it could not be carried over *2169 or included in net loss for 1924. Petitioner's income-tax returns for 1921, 1922, 1923, and 1924 were introduced in evidence and in each of these in answer to the question as to what was his "Occupation, Profession, or Kind of Business," he answered "Attorney at Law." No other occupation, profession or kind of business was listed on any of these returns.

OPINION.

BLACK: In the instant case petitioner's 1923 loss in connection with Flagg Ink Co. was not due to the fact that stock which he held in the corporation became worthless during the taxable year. The evidence shows that he held no stock in the corporation. His loss was occasioned by having to charge off as a bad debt certain sums which he had loaned and advanced to the corporation, covering a period from June 7, 1921, to December 1, 1923. Under the applicable revenue act it was perfectly proper for petitioner to use this bad debt charge-off as a deduction from his 1923 income. This he was permitted to do, but he may not carry forward the remaining net loss as a statutory net loss to use as a deduction in computing net income for the succeeding year, unless it was incurred in some trade or business in which petitioner *2170 was regularly engaged. The facts do not establish that the loss was so incurred.

*249 This case is similar in its facts, we think, to , where the taxpayer made an investment in a corporation and rendered it in addition his personal and financial assistance, and the Board held that his loss therein was not a net loss. After quoting section 204(a) of the Revenue Act of 1921, the Board said:

In the opinion of the Board the facts stipulated do not bring the petitioner within the provisions of this section. They fail to show that he was regularly engaged in carrying on a trade or business of his own. He rendered personal and financial assistance to the corporation in which he had made an investment, but the business was that of the corporation. All that he did was to make an investment in and an occasional loan to a corporation which was regularly engaged in carrying on a millinery business. In the opinion of the Board, the evidence does not warrant the conclusion that petitioner's loss in 1921 was from the operation of a trade or business regularly carried on by him within the meaning of section 204, and the Commissioner correctly *2171 denied the deduction of $4,797.57 from 1922 income.

In the recent case of , the taxpayer was the president and largest stockholder of a corporation and sustained a loss of $68,000 by endorsing its notes. He claimed the benefit of the net loss provision of the Act of 1921, but it was denied by the Board on the ground that the business was that of the corporation and that taxpayer had not shown that he was in the business of endorsing notes. See also , and .

Relative to that part of the alleged statutory net loss relating to a loss of $12,000 sustained by petitioner in the failure of the brokerage firm of Zimmerman & Forshay, the evidence fails to establish that this loss resulted from any business carried on by petitioner.

In the case of , where the taxpayer made occasional investments in securities, sustained a loss and claimed a net loss, the Board denied it and said:

We are unable to agree with the petitioner that he is entitled to the deduction claimed, for the reason that his dealing *2172 in stocks on his own account, which gave rise to the loss in question, did not, in our opinion, constitute a trade or business regularly carried on by him. On the contrary, they appear to be isolated and occasional transactions outside the scope of his regular trade or business. As he testified, he had for many years traded in the market "off and on." We have held that the term "trade or business regularly carried on" used in section 204 of the Revenue Act of 1921 means a vocation and not occasional or isolated transactions. , and .

Judgment will be entered for the respondent.