The opinion
FRED F. DE VORE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
De Vore v. Commissioner
Docket No. 19462.
United States Board of Tax Appeals
13 B.T.A. 1376 ; 1928 BTA LEXIS 3053 ;
November 2, 1928 , Promulgated
*3053 Loss held to have been sustained by petitioner where corporation was formed but no corporate action was ever taken and the business in which the loss was sustained was never transferred to the corporation.
Emil C. Wetten, Esq., and James P. Haffner, Esq., for the petitioner.
Paul E. Peyton, Esq., for the respondent.
SIEFKIN
*1376 This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1920 in the amount of $3,563.40. The deficiency arises because of the disallowance by the respondent of a deduction of $22,261.14 alleged by the petitioner to be a loss sustained by him in 1920.
FINDINGS OF FACT.
The petitioner is an individual with his residence and office at Omaha, Nebr. In his income-tax return for the year 1920 he deducted *1377 an amount of $22,261.14 as a loss in a publishing business. This net deficit was arrived at by deducting from $37,748 total sales, items totaling $60,009.14, consisting of the following: Labor $711.30
Printing 25,323.50
Net cost of goods sold $26,034.85
Salaries and wages $25,622.26
Rent 412.50
Repairs, wear and tear, etc 1,428.75
Other expenses 6,510.78
Total other business deductions 33,974.29
60,009.14
*3054 The deficiency notice sent to the petitioner, from which this appeal is taken, states:
With reference to the disallowance of the loss of $22,261.14 on your individual return which loss was sustained by the F. F. De Vore Publishing Company, you are advised that it is held that "where a body of men are acting as a corporation and are in ostensible possession of corporate powers, it will be conclusively presumed in all cases except in direct action against them by a State to vacate the franchise that it is a corporation."
It appears that the business was a de facto corporation in the year 1920 and the loss sustained through the corporation is not deductible on your individual return.
Petitioner was a promoter of Duroc hogs. For about 15 years prior to 1920 he was an advertising solicitor for the "Duroc Bulletin," a farm journal, and also represented the breeders of Duroc hogs at various sales all over the hog belt. During the many years of his wide experience in this business he collected data, information and statistics. In order to capitalize such information he made preparations to publish a "Duroc Directory" which would contain a history of the breed, general facts *3055 regarding the hog business and give a list of all the active breeders in the country. He began to write the directory in November, 1919, and assemble the data and then began to figure with printing companies as to the cost of publication. At first he did this alone but later he employed one Brown, a printer, to help him and to figure the cost of publishing. Then he took in Samuel E. Hussey, a printer, to handle the printing end of the directory. Hussey was used because because of the objection to the petitioner's employers, the Duroc Bulletin, to the publication of the directory by the petitioner. The purpose was to make Hussey the ostensible publisher of the directory. In March, 1920, the petitioner, through his attorney, filed articles of incorporation of the "F. F. De Vore Publishing Co." with the Secretary of State of Nebraska. He then completed some sales for his employer, the Duroc Bulletin, and resigned about the middle of March, 1920. Thereafter, he devoted *1378 his time to the directory and to a business arrangement with one Kraschel relating to advertising and hog sales. After the articles of incorporation were filed no directors meetings were held, there *3056 were no stock books, stock certificates, corporate seal, minute book, account book or by-laws. The corporation never owned any real estate, was not sued nor did it sue as a corporation. No capital was paid in and nothing was turned over to the corporation, by bill of sale or otherwise. The petitioner did not know there was a corporation in existence, having been informed by his attorney that the incorporation had not gone through. The petitioner, in the summer of 1920, became suspicious of Hussey and broke with him and abandoned all expectation of carrying the publishing of the directory in corporate form. Thereafter, he published the directory and paid all bills with reference to the publishing business himself. In June, 1921, the petitioner discovered that there was an existing corporation of F. F. De Vore & Co. and he caused the corporation to be dissolved by filing a certificate of dissolution with the Secretary of State. He also caused to be filed an income-tax return for the corporation for the priod April 1, 1920, to March 31, 1921, marked "No Business Transacted See Affidavit Attached." The affidavit was as follows:
STATE OF NEBRASKA,
County of Douglas, ss:
*3057 On this 8th day of June, 1921, personally appeared before me, a Notary Public in and for the County of Douglas, Fred F. DeVore and Samuel E. Hussey who, being duly sworn, did depose and say.
That they did plan on a Corporation under the name of "F. F. DeVore Publishing Company" and that Articles of Incorporation were drawn up, Filed in the County Clerk's Office at Douglas County and also filed in the Secretary of State Office at Lincoln, Nebraska.
That no further action was taken and the Organization was never perfected, no meetings were ever held, no officers ever elected, no stock was ever issued and no corporate Actions of any kind was ever taken.
(Signed) F. F. DEVORE
SAMUEL E. HUSSEY
Sworn to before me this 8th day of June, 1921.
(Signed) FRED J. COLE
Notary Public for Douglas County.
The return was signed by the petitioner and Hussey as individuals the words "president and treasurer" being lined out on the oath. A similar return was filed for the period April 1, 1921, to June 10, 1921.
The petitioner carried a bank account in the name of Fred F. DeVore Publishing Co. until about August, 1920, when the directory was published. Checks on the account *3058 were signed by the Fred F. DeVore Publishing Co. by Hussey or the petitioner. Advertising matter for the directory stated that it was published by Fred DeVore *1379 and also contained order blanks addressed to "F. F. DeVore Publishing Co." The prospectus for the directory contained numerous references to the petitioner as an individual. It stated:
I'm game enough to start this encyclopedia of Duroc knowledge on my own responsibility and on my own money.
The petitioner, during the year 1920, used some stationery printed with the name "Fred F. DeVore Publishing Co." and made sales of directories in that name.
OPINION.
SIEFKIN: The record convinces us that the so-called corporation, even if it existed as a de facto corporation, had nothing with which to conduct a publishing business and did not, in fact, conduct such business so as to make the undoubted loss its loss rather than that of the petitioner. The publishing business was never turned over to it, formally or informally, and throughout the year 1920, except as the petitioner at times used its name in conducting an individual business it was useless and its very existence was in doubt.
The respondent *3059 now argues that the loss was not proved, either to the petitioner or the corporation. All of the prior proceedings in the Bureau of Internal Revenue, so far as we can tell, and the deficiency letter giving rise to this proceeding, were based upon the position of the respondent that there was an admitted loss but that it was that of a corporation, not that of the petitioner. This position continued through the hearing at which counsel for the respondent stated:
The Commissioner's position is that there was a corporation which sustained. a loss.
The pleadings and the proof are, in our opinion, sufficient to prove the loss and that it was sustained by the petitioner.
Judgment will be entered for the petitioner.