Reisch v. Commissioner

GEORGE REISCH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

FLORENZ N. GADERT AND MARIE GADERT, HIS WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ALBERT REISCH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Reisch v. Commissioner

Docket Nos. 35346, 35409, 35600.

United States Board of Tax Appeals

22 B.T.A. 94; 1931 BTA LEXIS 2177;

February 5, 1931, Promulgated

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">*2177 DEDUCTION - NET LOSSES. - Held, that the net loss of each of the petitioners for 1922 as a result of a loss sustained upon the sale of stock in that year did not constitute a statutory net loss resulting from the operation of a trade or business regularly carried on, within the meaning of section 204(a) of the Revenue Act of 1921, but instead constituted an isolated transaction.

A. M. Fitzgerald, Esq., and Robert Bacchus, C.P.A., for the petitioners.

Harold Allen, Esq., for the respondent.

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TRUSSELL

">*94 The respondent has determined the following deficiencies in petitioners' income taxes:

	Deficiencies
Name	1923	1924	1925
George Reisch	$4,434.79	$1,762.59	None.
Florenz N. Gadert, and Marie Gadert, his wife	1,263.52	1,634.39	$2.33
Albert Reisch	934.60	460.05	None.

The three proceedings have been consolidated for hearing and decision and each of the petitioners alleges that a statutory net loss was sustained in the year 1922 and each contends that the respondent has erred in not allowing their respective net losses as deductions from net income for the succeeding taxable years 1923 and 1924.

">*2178 ">*95 FINDINGS OF FACT.

The petitioners are residents of Springfield, Ill.

At or about the year 1853, the father of George Reisch engaged in the brewery business and subsequently the petitioner and his elder brother, Frank Reisch, became associated with him. After the death of their father in or about 1875, George, Frank, and another brother, Joseph Reisch, conducted the brewery business as a partnership under the name of F. Reisch & Bros. About 1897 Frank Reisch died and his widow, Annie Reisch, became one of the corpartners. The partnership conducted the brewery business until 1904, when the business was incorporated under the laws of Illinois. The authorized capital stock of the corporation, Reisch Brewing Company, was $300,000, divided into 3,000 shares of the par value of $100 each. The stock was equally divided among George Reisch, Joseph Reisch, and Annie Reisch. The land and buildings occupied by the brewery and other partnership property were paid in to the corporation for stock but the 350 parcels of realty owned by the partnership and leased for saloon purposes were not so transferred. The members of the copartnership, which continued in existence, purchased">*2179 stock in the Spring Creek Coal Company, which supplied coal to the brewery and the saloons operated on partnership property. The partners also became interested by the purchase of stock or otherwise, in the ice business, the milling business, and the manufacture of grits and other products used at the brewery. George Reisch was the managing director of the brewery business.

Upon the death of Joseph Reisch in 1918, his two children, Albert Reisch and Marie Gadert, each inherited a one-half interest in his estate, which included shares of stock of the Reisch Brewing Company.

After the advent of national prohibition the Reisch Brewing Company ceased doing business and its property, suited solely for the brewing business, suffered a material loss in value. The Spring Creek Coal Company's profits were affected by the loss of its principal customer, the Reisch Brewing Company, and the numerous saloon properties owned by the partnership, F. Reisch & Bros., suffered a heavy loss of income from rentals.

Due to family differences an agreement was entered into in February, 1922, which provided for the adjustment and elimination of various accounts between the coal company and brewing">*2180 company and the members of the copartnership and also for the purchase and sale of the stock in the two companies. On February 28, 1922, George Reisch purchased the stockholdings of Annie Reisch, Albert ">*96 Reisch, and Marie Gadert, in the Spring Creek Coal Company, and the Reisch Brewing Company.

When the Reisch Brewing Company was incorporated, George Reisch acquired 1,000 shares of its stock at a cost of $123,246.78 and subsequent assessments made against such stock and paid by George Reisch made the total cost of such stock amount to $216,519. Subsequent to May, 1922, George Reisch made a bona fide sale of 850 shares of that original stock to his six sons for $10 per share. The transfer of those 850 shares was made as of February 28, 1922, as evidenced by the stock certificate and book entries as to the payments made by the sons. In his return for the year 1922, George Reisch described himself as a capitalist and reported a loss of $171,099.97 from the sale of stock, that figure being a $175,602.35 loss on the said 850 shares of Reisch Brewing Company stock, reduced by a profit of $4,502.38 realized from the sale of other stock. He had income from other sources and">*2181 reported a net loss of $112,888.20. He carried that net loss forward and deducted it from the net income for 1923, and, it being in excess of his 1923 net income, he reported a net loss of $78,826.14, which latter amount was deducted from net income of the next succeeding year, 1924. The respondent determined that the net loss sustained in 1922 was not a statutory net loss and he disallowed the claimed deductions from the net incomes of the succeedings years, 1923 and 1924.

Due to the sale of stock in February, 1922, by Albert Reisch and Marie Gadert to George Reisch, they computed a loss of $144,013.90, or approximately $72,006.95 each. On his return for 1922 Albert Reisch reported a net loss of $36,149.29, which was carried forward and deducted from net income for 1923, and, it being in excess of the 1923 net income, the amount of $16,354.68 was deducted from net income of the next succeeding year, 1924. In the 1922 return of F. N. Gadert and his wife, Marie Gadert, they reported a net loss of $36,871.04, which was carried forward and deducted from their net income for 1923, and, it being in excess of 1923 net income, the amount of $15,333.70 was deducted from their net income">*2182 for the next succeeding year, 1924. The respondent determined that losses sustained in 1922 from the sale of stock by Albert Reisch and Marie Gadert were not statutory net losses and disallowed the claimed deductions from their net incomes for the succeeding taxable years 1923 and 1924.

OPINION.

TRUSSELL: The petitioners in these three proceedings contend that the net losses sustained by them in 1922 constituted statutory net losses within the meaning of section 204(a) of the Revenue Act of 1921 and that the respondent erred in not allowing such net losses ">*97 to be applied against the net incomes of the succeeding taxable years, 1923 and 1924, as provided for by section 204(b) of the said act.

George Reisch was engaged as the manager and director of the brewing business and certain allied interests. The sale of a portion of his stock, representing his investment in the brewery business, was not an incident of that business and the net loss sustained did not result from the operation of a trade or business regularly carried on. The loss resulted from an isolated transaction and the determination of the respondent must be sustained. Cf. ">*2183 ; ; , and the authorities cited therein.

With respect to the other petitioners, the only testimony submitted was that of the accountant who prepared their tax returns, and he testified merely as to what was shown by the figures and records submitted to him. Even if sufficient evidence had been submitted to establish, or to enable the Board to compute, the amount of the net loss sustained in 1922, our decision would be the same as that with respect to George Reisch.

Judgment will be entered for the respondent.