Heaslet v. Commissioner , 23 B.T.A. 50 ( 1931 )

JAMES G. HEASLET, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Heaslet v. Commissioner

Docket Nos. 26828, 29505.

United States Board of Tax Appeals

23 B.T.A. 50; 1931 BTA LEXIS 1933;

May 5, 1931, Promulgated

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">*1933 Loss sustained in 1921 on certain securities held to have been incurred in a trade or business regularly carried on.

J. Marvin Haynes, Esq., and W. C. Magathan, Esq., for the petitioner.

Arthur Carnduff, Esq., for the respondent.

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ARUNDELL

">*50 Proceeding for the redetermination of deficiencies of $4,631.86 and $3,939.47 in income taxes for 1922 and 1923. The issue is whether a loss sustained in 1921 was a net loss resulting from a trade or business regularly carried on by petitioner.

FINDINGS OF FACT.

From 1898 until December, 1918, petitioner was connected with a number of corporations engaged in the production of automobiles and trucks either as an executive or engineer, or both. Commencing in 1910 and continuously thereafter until 1918 he was associated with the Studebaker Corporation, being vice president in charge of all of its activities after 1912. For his services as vice president he received a salary and a percentage of the corporation's profits. During that period he purchased a large amount of the corporation's stock.

From December, 1918, until February, 1919, petitioner was an officer in the U.S. Army in charge">*1934 of the production of Liberty motors.

By 1919 petitioner had accumulated considerable wealth. In July of that year he opened an office for the purpose of designing ">*51 commercial cars and then organizing a company for their manufacture. While so engaged petitioner was solicited to become interested in the Signal Motor Truck Company, which was then in financial difficulties. Negotiations conducted thereafter resulted in an agreement entered into on November 21, 1919, with Kay and Company, which, with the King Hoagland Company, had previously financed the Signal Motor Truck Company, under the terms of which petitioner received, for a cash payment of $116,000, the following securities of the Signal Motor Truck Company: (a) Eighty $1,000 notes, (b) forty $1,000 gold bonds, and (c) 35,200 shares of common stock voting trust certificates. The gold bonds were disposed of to King Hoagland Company for a sum which reduced petitioner's investment in securities of the Signal Motor Truck Company to $80,000. Of the stock certificates issued to petitioner, 20,200 shares were placed in trust for delivery to petitioner when operating revenue of the corporation deposited with the trustee">*1935 reached certain amounts. In case any of the stock certificates were on hand when the corporation ceased making deposits to the fund, the undelivered delivered shares held in escrow were to be delivered to Kay and Company unless within thirty days petitioner should pay to Kay and Company as liquidated damages, the sum of $3 per share not released. The agreement contained provisions enabling petitioner to obtain control of the corporation by the purchase of additional stock. For his services as president and general manager of the Signal Motor Truck Company, petitioner was to receive a salary of $10,000 per annum until the close of 1920, and thereafter a minimum of $10,000 per year and a maximum of 10 per cent of the corporation's profits for the preceding year.

The Signal Motor Truck Company went into bankruptcy in 1921, and petitioner did not recover any of his investment. It has been stipulated that should our decision be that the loss sustained was incurred in a trade or business within the meaning of the taxing act, the amount thereof to be carried forward into 1922 and 1923 as a net loss is $69,881.02.

During the period petitioner was connected with the Signal Motor Truck">*1936 Company he was free to engage in other businesses. In 1919 he investigated the condition of the Dansard-Hall Company with the view of acquiring some of its stock and becoming one of its directors. He was president of the corporation long enough to adjust difficulties which had arisen among the officers.

After 1921, petitioner investigated several corporations engaged in the manufacture of automobiles with the idea of making an investment in their securities. In 1923 he invested $6,000 or $8,000 ">*52 in the Rollins Motor Car Company. During that period he also appraised the properties and investigated the condition of other like corporations for courts and financial institutions.

OPINION.

ARUNDELL: The respondent's conclusion from the facts is that the petitioner's business during the taxable year was nothing more than that of a corporate executive. This, we think, is too narrow a construction to be reached from the evidence.

Petitioner entered the automobile industry in its early stages, and until 1919 his activities were, with a few exceptions, limited to engineering and executive positions. Petitioner's connection with the Studebaker Corporation as an officer">*1937 and stockholder was very profitable, and by 1919 he had accumulated considerable wealth. He then started to design commercial cars with the intention of organizing a corporation to produce cars of his design. Before he had an opportunity to fully carry out such plans, however, financial backers of the Signal Motor Truck Company approached him with a proposition to employ his time and capital in managing and financing the affairs of that corporation. This he did after assuring himself that the company could be placed on a paying basis with additional capital and able management. Concurrently with his investment of $116,000 in securities of the corporation, he was elected its president and general manager. Had the venture been successful, instead of a failure, he would have received a large return on his outlay of money and from his executive position. The failure of the corporation resulted in the loss of his investment and made him liable for liquidated damages.

This is not the case of a man making an investment in securities of a corporation conditioned upon his appointment to a salaried executive position. In 1919 petitioner's knowledge of the automotive industry and financial">*1938 standing was such that he was in a position where he could invest his capital and employ his time in an enterprise of his own selection. This he did by investing his money and taking the controlling executive position with the Signal Motor Truck Company. The investment and position were directly related, neither being independent of the other. Managing the affairs of the corporation, with the view of obtaining the largest possible return on his investment in its securities, was the principal business of petitioner in and for two years prior to 1921.

In 1921 he became financial interested in another corporation engaged in the production of automobiles, and for a short period acted as its president. After the taxable year petitioner investigated the condition of other like corporations with the intention of becoming ">*53 financially interested in them if the prospects of success warranted it.

We think the loss sustained in 1921 was suffered in a business regularly carried on by petitioner. ; ">*1939 ; ; . The net loss provisions of the revenue acts are relief provisions and should be liberally construed. . The stipulated amount thereof should be carried forward into 1922 and 1923 as a net loss to determine petitioner's income-tax liability for those years.

Decision will be entered under Rule 50.