Dresser v. United States

• Decision Date: 18 January 1932
• Docket Number: No. H-362.,H-362.
• Parties: DRESSER et al. v. UNITED STATES.
• Court: U.S. Claims Court

55 F.2d 499 (1932)

DRESSER et al. v. UNITED STATES.

No. H-362.

Court of Claims.

January 18, 1932.

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Robert B. Dresser, of Providence, R. I. (Robert E. Jacobson, of Providence, R. I., and Joseph Fairbanks, of Washington, D. C., on the brief), for plaintiff.

Fred K. Dyar, of Washington, D. C., and Charles B. Rugg, Asst. Atty. Gen (George A. Mathers and Charles B. Lingamfelter, both of Washington, D. C., on the brief), for the United States.

Before BOOTH, Chief Justice, and GREEN, LITTLETON, and WILLIAMS, Judges.

LITTLETON, Judge.

There are five issues in this case. The first four are all substantially the same, and are whether the decedent sustained deductible losses in 1918 and 1919 upon the acquisition by him in these years of certain shares of stock of the East Providence Water Company, the Nitrogen Products Company, the Nitrogen Corporation, and the Erie Specialty Company. The fifth question is whether the decedent was entitled to a deduction of $243,579.33, or any other amount, for the calendar year 1919 as a loss on 7,500 shares of common stock of Clarence Whitman & Co., Inc., resulting from the liquidation of that corporation.

The first four issues are rested by plaintiffs upon the proof which establishes that the outstanding and issued capital stock of these corporations prior to January 1, 1918, and January 1, 1919, was worthless and that stock acquired by the decedent during 1918 and 1919 was worthless at the time of its acquisition, and that the amounts paid by him for the stock in 1918 and 1919 were losses sustained by him at the time the stock was acquired and were deductible under section 214 (a) (5) of the Revenue Act of 1918, 40 Stat. 1057, 1067, which provides: "That in computing net income there shall be allowed as deductions: * * * Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business. * * *" No deduction is claimed on account of the stock of these corporations acquired by the decedent prior to the years 1918 and 1919 for the reason that such stock was worthless prior to those years. These transactions do not fall under subdivision (4) of section 214 (a) as losses "incurred in trade or business," and they are not claimed under that subdivision. Neither did the transactions in question give rise to a deductible loss for tax purposes under subdivision (5) of section 214 (a) of the Revenue Act of 1918, inasmuch as the facts establish that the acquisitions of stock of these corporations were not "transaction entered into for profit." Before a deduction can be taken under this subdivision, it must be established that the loss claimed resulted from a transaction entered into for profit. If a taxpayer chooses to pay or contribute money in any transaction, which, under all the circumstances known to him at the time, is a hopeless venture, and from which he has no reasonable expectation of profit, he is not entitled to take the amounts paid or contributed as a deduction from income for tax purposes. A loss, in order to be deductible under the statute, must be an unintentional parting with something of value. The evidence establishes and we have found as a fact that the decedent was familiar with the affairs and conditions of the business of the corporations, the stocks of which are involved in these issues, and that the acquisitions in 1918 and 1919 of the stocks thereof were not transactions entered into for profit. The losses claimed for 1918 of $177,800 on account of 3,232 shares of stock of the East Providence Water Company, $48,500 on account of 485 shares of stock of the Nitrogen Products Company, and $17,500 on account of 175 shares of the Nitrogen Corporation, and the losses claimed for 1919 of $40,950 on account of 615 shares of stock of the Erie Specialty Company, and $22,500 on account of 225 shares of the Nitrogen Corporation, are not legal deductions from gross income.

The loss of $177,800 on account of 3,232 shares of the capital stock of the East Providence Water Company is claimed on the basis that the indebtedness of the corporation to Sayles of $323,200, for the cancellation of which the stock was issued to him, had a value of $176,900 and that in addition to the cancellation of such indebtedness the decedent paid the corporation $900 in cash. The facts establish that the value of the indebtedness of the corporation to Sayles, for the cancellation of which this stock was issued, was $80,800. We find no proof that the decedent paid $900 in cash in this transaction.

The burden is on the plaintiffs who claim a loss under section 214 (a) (5) to show, in order to be entitled to the loss, that the transaction upon which it is based was one entered into for profit. In this case the estate has not shown this, but the evidence establishes the contrary. In Worcester Bank & Trust Co. et al., Adm'rs v. Com'r, 13 B. T. A. 630, the United States Board of Tax Appeals allowed a deduction as a loss on the cost of stock, which it was stipulated was worthless at the time of acquisition and at the close of the taxable years, upon the sole ground that the parties had stipulated that the stock was acquired as an "investment," stating that in view of this stipulation and the absence of any evidence in the record further to explain the circumstances under which the stock was acquired there was nothing to indicate that the acquisition was not a transaction for profit or to justify a finding to that effect. In W. H. Dail, Jr. v. Com'r, 19 B. T. A. 1036, the board allowed a loss on a transaction in the year in which it was entered into, but the proof there showed the taxpayer's dealings constituted a transaction entered into for profit. It cannot be assumed that every transaction is one that is entered into for profit under section 214 (a) (5), but this must be determined under the facts in each case and the record must establish that there was a transaction entered into for profit. In Edgar M. Carnrick v. Com'r, 21 B. T. A. 12, the United States Board of Tax Appeals pointed out this requirement, and one of the grounds for denying the loss there claimed was that there was nothing in the record to indicate that, even if there were a loss, there was a transaction entered into for profit, and in this connection the board said: "The statute has always confined deductible losses to certain carefully described classes, and the qualifications of these classes may not be ignored. The reasonable intendment of restricting non-business transactions resulting in losses to such as were entered into for profit is that, since the intended profit would be taxable, the loss suffered instead should be deductible. When there is no intended profit and naturally could be none, there is no just demand for a...