The opinion
M. A. BURNS MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
M. A. Burns Mfg. Co. v. Commissioner
Docket No. 41365.
United States Board of Tax Appeals
21 B.T.A. 749 ; 1930 BTA LEXIS 1791 ;
December 17, 1930 , Promulgated
*1791 Commissioner's disallowance of an amount claimed as a net loss carried over from a prior year sustained.
J. S. Lamson, Esq., Fred D. Bullock, Esq., and H. A. Kellogg, C.P.A., for the petitioner.
Eugene Meacham, Esq., for the respondent.
LANSDON
*749 This proceeding involves an asserted deficiency in income taxes for the calendar year 1925, in the amount of $1,696.50. As a basis for its appeal the petitioner alleges that the respondent committed error in holding that it did not sustain a net loss in 1924, which it could carry forward in 1925.
FINDINGS OF FACT.
The petitioner is a California corporation with principal offices at San Francisco. Ever since its organization in 1904 it has been engaged in manufacturing lumber, red wood shingles, and boxes. In 1910 the petitioner's president organized the Burns Lumber Co., which was operated at a loss until 1918, when it was voluntarily liquidated through the San Francisco Board of Trade. At the time of its going into liquidation, the Burns Lumber Co. was indebted to the First National Bank of Eureka, Calif., upon a note for $20,000. The petitioner's president, Burns, who was likewise *1792 president of the failing corporation, was surety upon this note; and the petitioner, in aid of its own credit took up that company's note and replaced it with a new demand note for the sum of $20,000. At the suggestion of the bank this note was executed by M. A. Burns, in favor of the petitioner, and endorsed over by the latter to the bank; but with an understanding, however, between petitioner and Burns that, as between themselves, it, and not he, would be the principal debtor thereon. In distributing the assets of the Lumber Co. the Board of Trade, on November 26, 1919, paid to the bank $3,137.58, which was credited upon the face of petitioner's note. On December 18 thereafter, a new note for the reduced amount, similar in form to the other, was given by the petitioner to the bank. Five successive renewals through new notes were made of this indebtedness, the last being on March 7, 1923. In January, 1924, the petitioner closed a sale of some timber lands in which it owned equities. In the deal it received, as part of the purchase, some second mortgage installment notes which it discounted with the First National Bank of Eureka. In settling with the petitioner is this transaction *1793 the bank retained $16,621.44, out of the proceeds due petitioner from the discount of *750 the sale notes, as payment of the note then held by it against petitioner, which it thereupon canceled and returned to it. In computing its taxable gain from the sale of these timber lands the petitioner included as part of its cost the sum of $16,862.42, representing the amount withheld by the bank, and determined its net profit in the transaction to be $12,166.02. In making out its income-tax return for 1925, the petitioner took credit for $13,384.08, which it claimed represented a net loss carried forward from 1924. This claim the respondent denied in auditing that return, and determined the deficiency in controversy.
OPINION.
LANSDON: The petitioner claims that through its payment of the note in 1924 it sustained a loss in that year for which it was not compensated by insurance or otherwise. The record shows that in 1918, when the Lumber Co. went into liquidation, the petitioner voluntarily substituted itself in lieu of that company as debtor to the bank. It was known by the petitioner, at the time it gave the first note to the bank, that the Burns Lumber Co. was hopelessly *1794 insolvent and that by such act it had assumed a loss for which it had no prospect of recoupment. Later, in 1919, after final liquidation of the assets of the Lumber Co., when the payment of $3,137.58 was made on this account to the bank, the full amount of the petitioner's loss was determined. ; . The fact that through the giving of other notes the petitioner was enabled to defer payment in cash of its obligation to the bank in no way changed its status as the loser, or mitigated its loss. .
Even if we should hold that the payment of this note by the petitioner in 1924 was a loss to it deductible from its income for that year, we would be unable to find that it sustained a net loss in such income, since there is nothing in the record to show what its gross income for that year was, and we can not assume that it operated at a loss. Neither does it appear that the alleged loss was incurred in, or in any way connected with, the operation of petitioner's trade or business, within section 206(a) *1795 of the Act of 1924. The determination of the respondent is, therefore, approved. ; .
Decision will be entered for the respondent.