Polachek v. Comm'r of Internal Revenue, Docket No. 35727.

• Decision Date: 09 July 1954
• Docket Number: Docket No. 35727.
• Citation: 22 T.C. 858
• Parties: FRANK B. POLACHEK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

22 T.C. 858

FRANK B. POLACHEK, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 35727.

Tax Court of the United States.

Filed July 9, 1954.

1. Losses realized by petitioner in trading in commodity futures contracts were capital losses subject to the limitations of section 117(d), Internal Revenue Code.

2. Expenses incurred in planning and preliminary organization of an investment advisory service are not deductible as ordinary and necessary expenses of carrying on a trade or business.

3. Where taxpayer receives a refund of taxes for an earlier year by reason of a carry-back under section 3780, Internal Revenue Code, to which he is not entitled, the period in which the Commissioner may assess a deficiency for the amount of the erroneous refund is, under sections 276(d) and 3780(c) of the Code, the period in which a deficiency for the later year could be assessed. Frank B. Polachek, pro se.

James J. Quinn, Esq., for the respondent.

This proceeding involves deficiencies in income taxes for the calendar years 1945 and 1947 in the aggregate amount of $999.65. The deficiency for 1947, $185.85, occurs because of the partial disallowance of losses taken as ordinary business losses which the respondent contends are capital losses, and because of the disallowance of certain miscellaneous deductions taken as business expenses or business losses which the respondent contends are personal expenses. The deficiency for 1945 occurs because the petitioner has received a refund of part of the taxes paid for that year as a result of a net operating loss appearing on the face of his return for 1947 which was carried back and applied to his income for 1945. However, after the respondent made his adjustments in petitioner's income for 1947 resulting from the foregoing disallowances, petitioner had a net income for the year instead of the net loss he originally reported. The respondent, therefore, asks for the return of the refund, $813.80, by claiming a deficiency for 1945 in that amount.

In the amended petition, petitioner claimed the right to a deduction in the amount of $1,085 as a business expense for brokerage commissions paid during the period of June through July 1947. He had not deducted these commissions on his return. On brief, petitioner abandons his claim to this deduction.

The case was submitted on a stipulation of facts, oral testimony, and exhibits.

FINDINGS OF FACT.

The petitioner, Frank B. Polachek, resided in New York City during the years 1945 and 1947. His individual income tax returns for each of these years were filed with the collector of internal revenue for the third district of New York.

In 1947, until April 1, the petitioner was employed as a security analyst by The First Boston Corporation, an investment banking firm. He had held this particular position since the beginning of 1945 and his entire business career had been in the securities investment field.

During the months of April, May, June, and July 1947, the petitioner engaged in speculating in commodity futures contracts in wheat and corn. These transactions were made for his own account and for the accounts of two other persons. His transactions were not hedges.

Petitioner was not a member of any commodity exchange and did not hold a broker's license, nor was he employed by a brokerage firm during this period. He had, however, oral agreements with the two persons for whom he traded to the effect that he was to share in any profits that resulted from his trading for their accounts.

Petitioner devoted all his time to his trading during these 4 months. He committed all his capital, approximately $8,000, to the venture. His trading was accomplished, on margin accounts, through a brokerage firm whose offices he visited almost daily during these 4 months and whom he paid a total of $1,085 in brokerage fees on the futures transactions for his own account.

During this period, petitioner executed a total of 238 transactions. Of these, 84 were for the two others for whom he traded, and 154 were for his own account. The following schedule summarizes the transactions executed by petitioner for his own account, and their results, during the 4-month period:

+----------------------------------------------+
                ¦Date      ¦Purchases¦Sales¦Gains    ¦Losses   ¦
                +----------+---------+-----+---------+---------¦
                ¦April 1947¦30       ¦36   ¦$1,681.00¦$2,054.50¦
                +----------+---------+-----+---------+---------¦
                ¦May 1947  ¦10       ¦14   ¦255.50   ¦748.00   ¦
                +----------+---------+-----+---------+---------¦
                ¦June 1947 ¦22       ¦16   ¦633.75   ¦2,838.00 ¦
                +----------+---------+-----+---------+---------¦
                ¦July 1947 ¦12       ¦14   ¦341.50   ¦1,550.00 ¦
                +----------+---------+-----+---------+---------¦
                ¦Totals    ¦74       ¦80   ¦$2,911.75¦$7,190.50¦
                +----------+---------+-----+---------+---------¦
                ¦Net loss  ¦         ¦     ¦         ¦$4,278.75¦
                +----------------------------------------------+
                

In his 1947 income tax return, petitioner treated the $4,278.75 loss as an ordinary loss incurred in his business and profession. He did not deduct the $1,085 paid in commissions on these transactions as a business expense.

During March, August, and September 1947, the petitioner also executed commodity futures transactions for his own account through the same brokerage firm. These transactions resulted in a loss of $1,321.75. He treated this loss as a capital loss in his 1947 return.

From sometime in the late summer of 1947 until the spring of 1948, petitioner devoted his time to planning a new business to be called the Bankers Investment Service. Petitioner's plan was to establish an investment advisory service for small investors. His idea was to sell his service to banks for the convenience of their depositors. In operation, a subscriber bank would present a depositor with a form which, when completed, would present a summary view of the depositor's investment objectives. With the information thus supplied, the petitioner's service would be able to advise on an investment plan for the depositor.

Petitioner's proposed advisory service was never formally organized. However, petitioner discussed his proposal extensively with potential associates and subscribers. He advertised in leading newspapers for associates and for financial backing. He made a trip to Philadelphia seeking financial support. He rented a car and visited the banks in the area in and around New York, canvassing the need for his proposed service and seeking clients. He incurred stenographic expenses in preparing specimens of his proposed service and also substantial mailing and printing expenses in connection with the plan. The total amount of expenses incurred in 1947 was $554. In April 1948 he abandoned the project because of lack of financial backing and he accepted a job.

On his 1947 return, petitioner showed a net deficit of $2,572.49 to which he added his personal exemption of $500, bringing a total of $3,072.49. The latter amount petitioner claimed as his net operating loss for the year 1947 in his application for tentative carry-back adjustment (Form 1045). As a consequence of this carry-back, petitioner claimed he was entitled to a decrease of $813.80 in his income tax for the year 1945. This claim was filed February 6, 1948.

On the basis of the foregoing application, the petitioner received a refund of $813.80 in 1948 on taxes paid for the year 1945.

The petitioner consented to an extension of the period of limitation upon assessment of his income tax for 1947 (Form 872) until June 30, 1952. The statutory notice of deficiency herein was mailed on April 16, 1951.

The deficiency determined for 1945 in the amount of $813.80 was based on respondent's finding that the refund of 1945 taxes to petitioner arising from a net loss carry-back from 1947 was erroneously made. None of the deficiency for 1945 results from adjustments in petitioner's income or deductions for that year. The deficiency is identified in the statement attached to the notice as ‘Credit under Section 3780(b).’

Petitioner's return for 1947 showed a net loss of $2,572.49. The respondent's adjustments restored $4,050.64 in deductions to income and determined petitioner's net income to be $1,478.15 on account of which a deficiency of $185.85 was determined. The contested deductions are: (1) $4,278.75 in losses on commodity futures contracts which the respondent claims are capital losses and (2) $554 in miscellaneous expenses which petitioner claims were incurred in the organizational planning of his proposed investment advisory service.

Petitioner's losses from trading in commodity futures contracts during the months of April, May, June, and July are capital losses and not losses incurred in a trade or business.

The expenses incurred in the planning and organization of petitioner's proposed investment advisory service were not incurred in carrying on a trade or business.

OPINION.

ARUNDELL, Judge:

We have already decided that commodity future contracts, which are bought and sold for one's own account and which are not hedging transactions, are capital assets, and subject to the capital loss limitations of section 117(d) of the Internal Revenue Code. Modesto Dry Yard, Inc., 14 T. C. 374; Tennessee Egg Co., 47 B.T.A. 558; Commissioner v. Covington, (C. A. 5) 120 F. 2d 768.

The petitioner attempts to avoid the above rule by arguing that he was engaged in the trade or business of buying and selling futures contracts during the 4 critical months of 1947 in which the losses in issue occurred. He contends that during this period he devoted himself exclusively to trying to make his living from the profits on these transactions. He claims that his intensive application to this endeavor, to which he committed all his capital, qualifies his activity as his trade or business during this period and, consequently, such losses as he suffered are fully deductible as ordinary losses under section 23(e) of the Code.

However,...