Cunningham v. Commissioner ( 1930 )

ROBERT T. CUNNINGHAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Cunningham v. Commissioner

Docket No. 41885.

United States Board of Tax Appeals

20 B.T.A. 428; 1930 BTA LEXIS 2119;

July 31, 1930, Promulgated

---

">*2119 1. Where a taxpayer is adjudicated a bankrupt after filing a petition with the Board, such adjudication does not oust the Board of jurisdiction.

2. Petitioner sustained a loss in 1925 by reason of payments made on debts of two corporations for which he became liable by indorsement. Held that such loss was not a net loss which can be deducted from 1926 income.

J. V. Blair, Jr., Esq., for the petitioner.

W. Frank Gibbs, Esq., for the respondent.

---

ARUNDELL

">*428 The respondent determined a deficiency in income tax for the year 1926 in the amount of $1,594.12. In this proceeding petitioner alleged ">*429 that the respondent erred in disallowing a net loss sustained in 1925, which loss arose out of petitioner's payments on the indebtedness of corporations upon whose notes he was personally liable.

At the hearing a question of jurisdiction was raised by counsel for petitioner because of the bankruptcy of the petitioner.

FINDINGS OF FACT.

Petitioner has resided at Fairmont, W. Va., since 1894. Prior to 1914 he was auditor for a coal company, and from 1914 to February, 1926, he was secretary-trasurer of the Monongah Glass Co. ">*2120 , located at Fairmont. In 1926 he was also treasurer of the Greater Fairmont Investment Co.

In 1909 a corporation known as the Twin Mountain Orchards (hereinafter called the orchard company), was organized, and it acquired in excess of 1,500 acres of land in Grant County, W. Va., some 115 or 120 miles from Fairmont. Petitioner was one of the original subscribers to stock in the orchard company and became vice president of it. The orchard company was authorized to issue common stock in the amount of $500,000. About $155,000 worth was sold, of which petitioner acquired about $15,000 worth. Upon acquisition of the land, the orchard company proceeded to clear about 1,000 acres and planted some 50,000 peach trees and 26,000 apple trees. The planting was started in 1910, and the peach trees began bearing fruit in 1914. The planting and care of the trees was financed by money borrowed from banks. The actual care and operation of the orchards was under the direction of one Russell, who was one of the five principal stockholders.

About 1912 or 1913 the orchard company organized a subsidiary corporation, the Twin Mountain and Potomac Railroad Co. (hereinafter called the railroad">*2121 company), through which it constructed a narrow gauge railroad, 26 miles in length, from the orchards to Keyser, W. Va. The Twin Mountain Orchards owned all the stock of the railroad company except small amounts issued for rights of way. Stockholders of the orchard company subscribed for bonds of the railroad to the amount of $150,000, which subscriptions, with the bonds attached as collateral, were pledged with banks from whom funds were borrowed to finance the building of the railroad.

The details of financing both the orchard company and railroad company were taken care of by the petitioner. Both companies were financial failures. The railroad company went into receivership in 1921 and the road was not operated after 1922. Thereafter the trees were neglected and no fruit was shipped from the orchards. The orchard company kept a man on the premises who received no salary, ">*430 but was allowed to keep the proceeds from such fruit as he could sell to people who drove to the orchards. Within a year or two after 1922, due to the trees not being cared for, the fruit became so faulty that it was not salable. The property of the orchard company was sold under foreclosure">*2122 in December, 1926, for $5,000.

About 1919, when it began to be doubtful that the orchard company and railroad company would ever be successful, the bank that had advanced the bulk of the funds to the companies called upon petitioner and his associates for security to protect the loans. Some collateral was deposited by stockholders and the remainder of the liability of the corporations was secured by the personal endorsements of the five principal stockholders, of whom petitioner was one.

From 1922 to 1926 petitioner devoted a great deal of time to the financial affairs of the orchard company, attempting to have its notes renewed and shifting them from one bank to another. These activities required some traveling and forced him to be absent from his employment with the Monongah Glass Co. In 1926 fully 50 per cent of his time was spent on the orchard company affairs. During that year the glass company was merged with another company, whereupon petitioner sold his holdings and applied most of the proceeds to the indebtedness of the orchard and railroad companies, upon which he and his associates had become liable by endorsement as above described.

Petitioner's gross income">*2123 in 1926 consisted of $9,000 salary from the Monongah Glass Co., $600 salary from the Greater Fairmont Investment Co., $222.50 sundry fees, and $70.20 interest. His payments in 1925 on the indebtedness of the orchard and railroad companies resulted in a loss of $6,355.94, which he claimed as a deductible net loss in his return for 1926. The respondent disallowed the claimed deduction.

The petition in this proceeding was filed on December 14, 1928. Petitioner was adjudicated a bankrupt on May 9, 1929, and was discharged in bankruptcy on October 28, 1929.

OPINION.

ARUNDELL: The question of jurisdiction raised at the hearing because of petitioner's being adjudicated a bankrupt is settled by our decision in , in which we held that where the adjudication occurs after the filing of a petition with the Board, the jurisdiction of the courts and the Board is concurrent.

Petitioner's claim is that the loss he sustained in 1925 by reason of payments made on the liabilities of the orchard and railroad companies ">*431 constitutes a net loss which should be allowed as a deduction from 1926 income. ">*2124 The argument is that the devotion by petitioner of a large part of his time and efforts to the financial affairs of the companies constituted engaging in a business within the meaning of the statute. We have held in a number of cases that losses sustained in the promoting of corporations have constituted net losses, but in such cases the evidence was that the taxpayer regularly carried on such business. See ; . The words "trade or business" as used in the statute refer to a regular occupation or calling of the taxpayer for the purpose of livelihood or profit and not to occasional or isolated transactions. ; . While those cases deal with losses on corporate stock, the same rules are applicable to the present case. While the petitioner undoubtedly invested in the companies originally with the hope of making a profit, it was exceedingly doubtful when he endorsed the notes of the companies that they would ever be financially successful, and so his subsequent activities in attempting">*2125 to finance their debts can not be said to constitute a trade or business. Furthermore, while the winding up of the corporate business and the payment of debts extended over several years, these activities when viewed as a whole were but one transaction and this transaction was not of a sort regularly engaged in by petitioner.

Decision will be entered for the respondent.