Donner v. Commissioner ( 1929 )

PHILLIP C. DONNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Donner v. Commissioner

Docket No. 22524.

United States Board of Tax Appeals

16 B.T.A. 758; 1929 BTA LEXIS 2525;

May 28, 1929, Promulgated

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Where a corporation, whose stock was owned equally by two individuals, sustained an operating loss during the calendar year 1921, and was liquidated on December 31, 1921, its assets and business being transferred to a partnership composed of the same two individuals who were stockholders in the corporation, held that the operating loss is not a proper deduction from the net income of the partnership in the succeeding year.

Frederick L. Pearce, Esq., and Edward R. Burt, C.P.A., for the petitioner.

Bruce A. Low, Esq., for the respondent.

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GREEN

In this proceeding, the petitioner seeks a redetermination of his income tax for the calendar year 1922, for which year the respondent has determined a deficiency in the amount of $6,266.04.

The sole question involved in this proceeding is whether a loss sustained by a corporation in 1921 may be claimed by a partnership which succeeded it in business, as a deduction for 1922 under the provisions of section 204 of the Revenue Act of 1921.

FINDINGS OF FACT.

In 1904 the petitioner and his cousin, Ernest J. Donner, formed a partnership to carry on the business of the manufacture and sale of hatters' fur. Ernest Donner, who resided in London, England, handled the buying of raw material for the firm and supervised its partial manufacture in Belgium, forwarding the product to this country. The petitioner supervised the final manufacture and attended to the selling of the hatters' fur. The partnership agreement provided for the payment of 6 per cent interest on capital accounts and an equal division of the profits. The business was conducted by the partnership without change of its membership, to March 15, 1920, at which time the net worth exceeded $1,000,000.

On March 15, 1920, the business carried on by the partnership under the name of Donner & Co. was incorporated under the same name, with a capital stock of $1,000,000, 10,000 shares of the par value of $100 each, one-half of which was issued to each of the two partners. The business was conducted by Donner & Co., Inc., without change in the stockholdings, until December 31, 1921, at which time the corporation was liquidated and the assets returned to the former partners.

The net income of the corporation, for the period March 15, 1920, to December 31, 1920, was approximately $79,000, after deducting Federal taxes for the period. The corporation, for the calendar year 1921, after making allowance for dividends, nontaxable interest and unallowable deductions, sustained a net loss in the amount of $26,948.86. Upon the liquidation of the corporation, on December 31, 1921, each of the former partners reported a liquidating dividend of $26,314.74 in his income-tax return, for the calendar year 1921.

The partnership of Donner & Co. was formed January 1, 1922, by Phillip Donner and Ernest Donner, each contributing the assets received in liquidation from the corporation. Each partner was to receive interest at 6 per cent upon his net investment, and the balance of the profit and loss was to be distributed 60 per cent to Phillip Donner and 40 per cent to Ernest Donner.

The partnership of Donner & Co. conducted the same business during the year 1922, and reported in its original Federal income-tax return for that year, as follows:

Net income for 1922	$139,375.88
Less: Net loss, Donner & Co., Inc., 1921	26,948.86
Net income distributable, 1922	112,427.02
Distributive shares
Phillip C. Donner	58,396.08
Ernest J. Donner	54,030.94
Total	112,427.02

The net income of each partner was reported upon his Federal income-tax return for the year 1922, including the distributive share of each referred to in the foregoing paragraph:

Phillip Donner	$62,265.04
Ernest Donner	54,330.94

The net income of the partnership of Donner & Co., and the distributive shares thereof, for the year 1922, as determined by the respondent, without any deduction for net loss of Donner & Co., Inc., for the year 1921, and after disallowing depreciation in the sum of $3,328.50, for the year 1922, was as follows:

Net Income of Donner & Co., 1922	$142,704.38
Distributive shares
Phillip Donner	73,867.61
Ernest Donner	68,836.77
Total, 1922	142,704.38

In determining the deficiencies, the respondent determined the net income of each partner, including the distributive share of each mentioned in the foregoing paragraph, to be as follows:

Phillip Donner	$77,736.57
Ernest Donner	69,136.77

OPINION.

GREEN: In 1894 the petitioner and his cousin, Ernest Donner, formed a partnership for the manufacture and sale of hatters' fur. This partnership existed until March 15, 1920, when the two individuals conveyed all the assets to a corporation with the same name, and became the sole stockholders in the corporation. The corporation continued in business until December 31, 1921, when it was liquidated and the stockholders re-formed a partnership. The business of the corporation and the partnership was, at all times, the same. During the year 1921, the corporation sustained a net loss in the amount of $26,948.86, which the petitioner is seeking to have deducted from the partnership income for the subsequent year.

The pertinent net loss provisions of the Revenue Act of 1921 are as follows:

SEC. 204. (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 from 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; * * *

(c) The benefit of this section shall be allowed to the members of a partnership * * *.

The loss which the petitioner is here seeking to have deducted in computing the net income of the partnership for the year 1922, is a net loss sustained by a corporation, the assets of which were transferred in liquidation to its stockholders, who thereupon contributed such assets to a partnership composed of the individuals who had previously held the stock of the corporation. Section 2(9) reads as follows:

The term "taxpayer" includes any person, trust or estate subject to a tax imposed by this Act.

In subparagraph (1) of the same section appears the following definition:

The term "person" includes partnerships and corporations, as well as individuals.

It thus appears that by statute the corporation is a separate taxable entity, and it is a matter of common knowledge that the scheme adopted by Congress in levying income and excess-profits taxes contemplates its taxation as such. The corporation, although its stock was owned by the individuals who formed the partnership which took over the business, was a separate and distinct taxable entity. It, and not its stockholders, was the taxpayer. Here, as in , "We are asked in this proceeding to disregard the corporate entity and hold that the petitioner was in fact a part owner of the business and that the business carried on by the corporation was his business to the extent of his stockholdings." In that case, we declined to allow a stockholder to reduce his income by his share of the net loss of the corporation, and our ruling here must be the same.

Judgment will be entered for the respondent.