Washburn v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 27590.
| Decision Date | 20 June 1929 |
| Docket Number | Docket No. 27590. |
| Citation | 16 BTA 1091 |
| Parties | J. L. WASHBURN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
A. McC. Washburn, Esq., for the petitioner.
L. A. Luce, Esq., for the respondent.
The respondent has asserted a deficiency in income tax for the year 1923 in the amount of $8,771.96. The deficiency arises from the respondent's determination that a loss incurred by petitioner in 1922 was not a "net loss" within the meaning of section 204 of the Revenue Act of 1921 and may not be carried forward and deducted from income for the year 1923. The petitioner further contends that the amount of $6,581.44 which was reported on his income-tax return as a dividend from the Alworth-Washburn Co. was, in fact, a distribution of capital.
FINDINGS OF FACT.
The petitioner is an individual residing at Duluth, Minn., where he has for many years maintained an office at 1600 Alworth Building.
From 1880 until 1911 petitioner was engaged in the active practice of law as a member of the firm of Washburn, Bailey & Mitchell. He retired from such practice in 1911, severed his connection with the law firm, and established a separate office, where he devoted his attention to a number of corporations and enterprises in which he had become financially interested while practicing law and many of which he had organized. During the years 1922 and 1923 petitioner held stock in the following corporations and received dividends which he reported on his income-tax returns as follows:
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Name | 1922 | 1923
------------------------------------------------------------------------|------------|-----------
Royal Mineral Association _____________________________________________ | $16,423.67 | $19,942.81
Northern National Bank ________________________________________________ | 3,130.00 | 4,230.00
Great Lakes Transit Corporation _______________________________________ | 625.00 | 625.00
Spalding Hotel Co _____________________________________________________ | 2,500.00 | 5,000.00
Union Match Co ________________________________________________________ | 4,590.00 |___________
Consolidated Abstract Co ______________________________________________ | 350.00 | 450.00
Bank of Trion _________________________________________________________ | 228.00 | 255.00
Western Land & Loan Co ________________________________________________ | 20.00 | 40.00
Northwestern Mutual Life Insurance Co _________________________________ | 31.60 | 32.10
Equitable Life Insurance Co ___________________________________________ | 185.20 | 217.00
Duluth Mor is Plan Co _________________________________________________ | 469.00 | 700.00
Marquette Fire Insurance Co ___________________________________________ | 25.00 |___________
Philip L. Ray & Co ____________________________________________________ | 200.44 | 1,050.00
Federal Land & Loan Co ________________________________________________ | __________ | 4,892.00
Alworth Washburn Co ___________________________________________________ | __________ | 6,683.50
Gales Creek & Wilson River R. R. Co. (sold in 1922) ___________________ | __________ | __________
|____________|___________
Total ___________________________________________________________ | 28,777.91 | 44,117.41
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The dividends received from the Equitable Life Insurance Co. and the Northwestern Mutual Life Insurance Co. were paid on life insurance policies held by petitioner and did not result from stockholdings in those companies, except in so far as a policyholder in a mutual company is a stockholder. The Duluth Morris Plan Co. is a local organization of the Morris Plan chain of banks.
The stock in most of the corporations listed above was closely held and was seldom traded in. Such stock was acquired by petitioner upon organization of the corporations several years prior to the taxable year and was held by him as an investment. During the years 1922 and 1923 petitioner was president of the Northern National Bank, Spalding Hotel Co., and Union Match Co. The latter was reorganized in 1923 and continued under the name of the Federal Match Co. Four of the corporations were timber-holding companies which petitioner managed practically alone. In order to open up the timber of one of these, the American Land & Timber Co, the petitioner organized in 1913 the Gales Creek & Wilson River Railroad Co., which built a 14-mile railroad to the timber property. He was the principal stockholder in the corporation and though neither a director nor an officer, he in fact managed its affairs, selecting as directors and officers persons residing in Oregon where the railroad was to be built. In 1922 he sold his stock, which had cost him $365,300, for $252,600.89, thereby sustaining a loss in the amount of $112,699.11.
Petitioner's income-tax returns for the years 1922 and 1923 disclose, inter alia, the following:
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| 1922 | 1923
--------------------------------------------------------------------|------------|----------
Income, salaries and bonuses: | |
Spalding Hotel Co _____________________________________________ | $2,400.00 | $2,400.00
Union Match Co ________________________________________________ | 5,350.00 | 523.27
Federal Match Co ______________________________________________ |____________| 30,000.00
Miscellaneous salaries and director's fees ____________________ | 1,180.00 | 963.00
|____________|__________
Total _______________________________________________________ | 8,930.00 | 33,886.27
Income from partnerships __________________________________________ | 12,374.88 | 2,716.65
Dividends see above _____________________________________________ | 28,777.91 | 44,117.41
Interest __________________________________________________________ | 1,241.93 | 459.63
Profit from sale of stock _________________________________________ |____________| 3,624.52
Other income ______________________________________________________ | 52.62 | 72.50
|____________|__________
| 51,377.34 | 84,876.98
|============|==========
Deductions: | |
Interest paid _________________________________________________ | 2,515.12 | 1,634.21
Taxes _________________________________________________________ | 4,445.45 | 4,693.18
Contributions _________________________________________________ | 1,248.33 | 1,913.34
Salaries and office expenses __________________________________ | 7,511.11 | 6,763.07
|____________|__________
| 15,720.01 | 15,003,80
Loss on sale of stock _________________________________________ | 112,699.11 |__________
|____________|__________
| 128,419.12 |__________
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The amounts received in the nature of salaries were in fact payments to reimburse petitioner for actual expenses in connection with the services rendered to each corporation. The bonuses received were voluntary and were paid in appreciation of the services rendered. Petitioner had no salary contracts with any of the corporations and the amounts received by him as salaries or bonuses were not paid pursuant to any legal obligation.
The respondent concedes that a loss was sustained for the taxable year 1922. He denies that such loss was sustained in the operation of a regular trade or business.
In 1923 petitioner received $15,970.50 from the Alworth-Washburn Co., which was his share of the proceeds from the sale of certain tracts of timber in Oregon held by that company since 1906 or 1907. During the time between 1906 or 1907 and 1923 the Alworth-Washburn Co. had followed the practice of accounting which capitalized the carrying charges. On this basis petitioner determined that, of the amount received, $6,683.50 represented a distribution of surplus, and such an amount was reported on his income-tax return for the year 1923 as a dividend. The respondent readjusted the amount to $6,581.44.
On audit of the Alworth-Washburn Co.'s income-tax return for the year 1923, the respondent disallowed the method of accounting which capitalized carrying charges and held that such amounts should be treated as expenses. Changed to this basis, the books of the Alworth-Washburn Co. would show a deficit in the surplus account at January 1, 1923, of $95,698.13. Profit from the sale of the timber property in 1923 was $67,392.71, which leaves a deficit in the surplus account of $28,305.42.
The petitioner's first contention is that in 1922 he sustained a net loss which he is entitled to carry forward and deduct from his income for 1923. The Commissioner admits that the loss was sustained, but denies that it was sustained in the operation of a trade or business regularly...
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