Arata v. CIR
| Decision Date | 27 April 1960 |
| Docket Number | No. 204,Docket 25661.,204 |
| Citation | 277 F.2d 576 |
| Parties | George F. ARATA and Carolyn M. Arata, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Second Circuit |
John W. Burke, Jr., New York City (Alfred C. B. McNevin, White Plains, N. Y., John A. Clark, New York City, on the brief), for petitioners.
Meyer Rothwacks, Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Carter Bledsoe, Dept. of Justice, Washington, D. C., on the brief), for respondent.
Before LUMBARD, Chief Judge, and HINCKS and FRIENDLY, Circuit Judges.
The primary issues presented to us by this petition for review of a decision of the Tax Court are whether "losses" suffered by one of the taxpayers were losses "incurred in a trade or business" or "losses incurred in any transaction entered into for profit" and therefore deductible under § 23(e) (1) or (2) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23(e) (1, 2). Also presented is the question whether the taxpayers are excused from the requirement of filing a declaration of estimated tax because their final return for the year showed that a refund was due them, thus avoiding the imposition of penalties under § 294(d) (1) (A) and (2) of the 1939 Code, 26 U.S.C.A. § 294(d) (1) (A), (2). The Tax Court disallowed the deduction and upheld the Commissioner's imposition of penalties. We affirm, except as to the penalty imposed under § 294(d) (2), with respect to which the Commissioner now concedes error.
The taxpayers, George F. Arata and Carolyn M. Arata, are husband and wife. The latter is a party to this action only because she filed a joint return with her husband for 1953, the tax year in dispute. George Arata will be referred to hereafter as petitioner.
Petitioner, at all times here relevant, was president and a director of Snyder & Black, a corporation engaged in the business of creating and manufacturing lithographic advertising. Prior to November 1953, petitioner held 8,191 of the 17,137 shares of Snyder & Black common stock, which at the time was worth $50 per share. Salers, Inc. was a corporation engaged in developing original designs and ideas for display advertising. Its employees consisted mainly of commercial artists, designers and engineers experienced in advertising display work. Snyder & Black was the selling agent for Salers. In November of 1953, 1,000 shares of Salers stock was outstanding. Petitioner owned 235 shares, Snyder & Black (which at the time of Salers' formation had subscribed to and paid for all of the 200 shares then issued) owned 125 shares, and various production personnel of Salers owned approximately 500 shares. Other shareholders in Salers included the vice-president, treasurer, general counsel, and a director of both corporations, the brother and one of the sons of petitioner, the wife of Snyder & Black's art director, and the widow of a former director of Snyder & Black.
During 1953 Salers encountered financial difficulties and was assisted by Snyder & Black in meeting a bank loan and its operating expenses. It suffered a considerable loss for the year and in November 1953 Salers' assets were purchased by Snyder & Black for a nominal price. As of November 10, 1953, Salers stock was worthless. Petitioner thereupon transferred 765 of his shares in Snyder & Black to the shareholders of Salers in exchange for the worthless stock of Salers. Every shareholder of Salers received one share of Snyder & Black stock for each share of Salers that he transferred to petitioner.
On his 1953 tax return petitioner reported a long-term capital loss of $27,025 with respect to the 235 shares of Salers stock owned by him prior to the transaction in question. This item is not challenged. Petitioner also took as a deduction $38,250 described as a "loss on 765 shares Salers, Incorporated, Common Stock at $50.00 per share declared worthless by Corporation March 1953." The Commissioner disallowed the deduction.
Section 23(e) (1) of the Internal Revenue Code of 1939 permits the deduction, in the case of an individual taxpayer, of losses incurred in a trade or business. The petitioner is not entitled to a deduction under this provision since on the record made below the Tax Court could properly find that the loss which the petitioner sustained in disposing of 765 shares of Snyder & Black stock was not one incurred in any business of his own, such as the financing of corporate ventures, but was merely a loss flowing from an isolated transaction unconnected with any "business" of the taxpayer, which may have enured to the benefit of Snyder & Black. It is, of course, well settled that for tax purposes a corporation will not ordinarily be regarded as the alter ego or agent of its principal or even its sole stockholder. Burnet v. Clark, 1932, 287 U.S. 410, 53 S.Ct. 207, 77 L.Ed. 397; Deputy v. DuPont, 1940, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416. The corporation is a separate and distinct entity. Therefore, "a taxpayer, in order to deduct his outlay as a business expense, must show that the loss occurred in a separate business of his own rather than that the loss occurred in the business of a corporation." Folker v. Johnson, 2 Cir., 1956, 230 F.2d 906, 909. Even assuming that the loss was incurred in order to retain the services of the Salers personnel, it was the business of Snyder & Black that was thereby furthered, not that of the petitioner.
Petitioner alternatively contends that the $38,250 was deductible as a loss "incurred in a transaction entered into for profit, though not connected with the trade or business." Section 23(e) (2). He argues that his purpose in exchanging stock in Snyder & Black for the worthless Salers...
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