Clark v. Burnet, 5386.

• Decision Date: 11 April 1932
• Docket Number: No. 5386.,5386.
• Citation: 59 F.2d 1031
• Parties: CLARK v. BURNET, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — District of Columbia Circuit

59 F.2d 1031 (1932)

CLARK v. BURNET, Commissioner of Internal Revenue.

No. 5386.

Court of Appeals of the District of Columbia.

Argued March 10, 1932.

Decided April 11, 1932.

Wm. S. Hammers, of Washington, D. C., for appellant.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, C. M. Charest, Frank M. Thompson, and S. Dee Hanson, all of Washington, D. C., for appellee.

Before MARTIN, Chief Justice, and ROBB, VAN ORSDEL, and GRONER, Associate Justices.

MARTIN, Chief Justice.

An appeal from a decision of the Board of Tax Appeals denying certain deductions claimed by taxpayer under section 204 (a) of the Revenue Act of 1921 (42 Stat. 231) as net losses resulting from the operation during the taxable year of a trade or business regularly carried on by taxpayer.

The record discloses that since 1888 appellant was engaged in the business of dredging and supervising dredging operations off the coast of Florida and elsewhere. From 1899 he was associated with the Bowers Southern Dredging Company, hereinafter called the Bowers Company. He was its majority stockholder, its active directing head, and devoted all of his time to its operation.

In addition to his association with the Bowers Company, appellant in 1921 and 1922 was a member of the partnerships of D. M. Picton & Co., Port Arthur, Tex. the Florida Dredging Company, Miami, Fla., and Megathlin & Clark, Miami, Fla. Megathlin & Clark and the Florida Dredging Company were engaged in the dredging business and D. M. Picton & Co. was engaged in river and harbor work and jetty building. Appellant took an active advisory interest in these partnerships whose work was mostly in connection with the work of the Bowers Company. In 1921 and 1922 appellant also owned stock in a number of corporations which he held as investments.

At the beginning of the war in 1917 the Bowers Company had many contracts to complete, and began to experience financial difficulties. This finally resulted in its business being placed in the hands of a creditors' committee under which it was operated in 1921. During this time appellant served as managing operator of the company for the creditors. The company was unable to borrow money from banks without the individual indorsement of appellant; therefore, in order to protect his investment in the company, appellant at various times became indorser upon notes of the company. In 1921, as a result of such indorsements, appellant was forced to pay the sum of $68,000 for the company. This amount he took as a deduction for losses in his 1921 income tax return, and it was allowed by the Commissioner.

In his return for 1921 appellant also reported a loss of $9,500 incurred by him in a sale of the Bowers Company stock. The loss was allowed by the Commissioner in the final audit of the return.

In 1922, appellant, being desirous of having some one with financial strength associated with the business of the Bowers Company, sold 1,000 shares of the stock owned by him in the company, which he had purchased at a cost of $100,000, to George H. Nolan for $7,500. In his return for 1922 appellant accordingly took a deduction for the loss thus sustained in the amount of $92,500, which represented the difference between the cost and selling price of the stock. In the final audit of the return this loss was allowed by the Commissioner.

However, appellant's income for the years 1921 and 1922, respectively, was not sufficient to absorb the net losses thus suffered by appellant in those years, but left a net loss of $17,768.51 in 1921 and $4,985.18 in 1922, and appellant claimed the right to deduct these sums from his income tax returns in the succeeding years, as net "business losses" coming within the provisions of section 204, supra. This claim was disallowed by the Commissioner, and his decision was affirmed by the Board of Tax Appeals. 19 B. T. A. 859.

Section 204, supra, reads in part as follows:

"(a) That as used in this section the term `net loss' means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer. * * *

"(b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year. * * *"

It may be observed that no question is made in this case as to the amounts, dates, or actual circumstances of appellant's losses, and that the sole issue is whether they are within the purview of the foregoing statute.

The Board of Tax Appeals placed its decision upon the ground that the losses resulting from appellant's indorsement of the company's notes, as well as those resulting from the sale of company stock, did not result from the operation of...