Anthony v. Commissioner

E. D. ANTHONY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Anthony v. Commissioner

Docket No. 38607.

United States Board of Tax Appeals

20 B.T.A. 5; 1930 BTA LEXIS 2219;

June 2, 1930, Promulgated

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Loss sustained by the petitioner in 1923 is a "net loss" deductible in computing net income for 1924.

Clair Groover, Esq., for the petitioner.

Arthur H. Murray, Esq., for the respondent.

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ARUNDELL

This proceeding is for the redetermination of a deficiency in income tax for the year 1924 in the amount of $52.07. The issue is whether a loss sustained in 1923 is deductible as a net business loss in computing net income for 1924.

FINDINGS OF FACT.

Petitioner entered the service of Anthony Brothers, a partnership, engaged in the operation of a store at West Palm Beach, Fla., for the retail of men's, women's and children's ready-to-wear furnishings, in 1902 as a clerk, and for several years before the sale of the partnership's business in 1910 was manager of the firm's store.

In 1910 the petitioner and his two brothers organized Anthony Brothers, Inc., under the laws of Florida with an authorized capital stock of $50,000 to take over the business of the partnership. Each of the corporation's organizers acquired one-third of its authorized capital stock. The petitioner was secretary and general manager of the corporation from 1910 until 1914, when he became its president. The petitioner in 1923 owned $61,700, par value, of its stock.

Prior to or in 1919 petitioner organized the Anthony Brothers Co., an Ohio corporation, for the retail at Dayton, Ohio, of ready-to-wear furnishings for men, women and children. During the same period he and S. M. Gilbert organized corporations for the purpose of retailing the same line of goods at stores located in White Sulphur Springs, W. Va., Hot Springs, Va., and Asheville, N.C. In 1919 petitioner organized Anthony's Ladies Department, a Florida corporation, to take over the business of a partnership bearing the same name in which Anthony Brothers, Inc., had a financial interest. The petitioner, and Anthony Brothers, Inc., invested money in all of the corporations so organized and petitioner subsequently used his endorsement to help finance their activities. He induced Gilbert to invest money in the corporations the latter helped organize. He also induced others to invest money in Anthony's Ladies Department, and was president of most of the corporations he promoted.

After organizing Anthony Brothers Co., petitioner leased a building in which to conduct its business, employed the manager and other personnel for the store, selected the initial stock of merchandise, conducted the first sales, and thereafter made periodical visits to the store and otherwise kept in touch with the corporation's activities by having daily reports rendered to him of the volume of business transacted. This form of procedure is typical of the method followed by petitioner in commencing and supervising the activities of the corporations in which he had a financial interest.

In 1921 the corporations in which petitioner had money invested were in financial difficulties, due, primarily, to a sudden decrease of 50 per cent in the value of their inventories. Petitioner rendered financial aid to Anthony Brothers, Inc., by selling $40,000 of the corporation's preferred stock to some of his friends and loaning it stock to use as collateral for loans, and by paying $20,000 of its indebtedness. Petitioner and his brother sold two buildings owned by them as partners in order to raise funds to pay debts of Anthony Brothers, Inc. Petitioner in 1921 was an endorser on obligations of the corporations amounting to "a great many thousands of dollars." Towards the close of the period during which the affairs of some of the corporations were being liquidated, when their losses were heavy, the banks with which they were doing business required petitioner's endorsement on all loans made to the corporations.

Subsequent to 1921 the assets of some of the corporations were sold to pay their debts. The business being conducted by Anthony Brothers, Inc., was sold to Anthony's, Inc., a corporation organized by petitioner in September, 1923. Petitioner owns all of the common stock of Anthony's, Inc., and 25 per cent of the corporation's preferred stock.

Commencing in 1910 and continuously thereafter until 1924, petitioner devoted all of his time to actively managing, directing, and financing the affairs of Anthony Brothers, Inc., and the several other corporations in which he owned stock. As compensation for his services he received a salary or drawing account of $4,800 per year, and a commission equal to 10 per cent of the net profits of the corporations. The commission was paid to him in stock of the corporations.

As the result of the liquidation in 1923 of Anthony Brothers, Inc., petitioner sustained a loss of $34,142.26 on the stock he owned in the corporation.

OPINION.

ARUNDELL: There is no dispute as to the amount of the loss sustained, the point in issue being simply whether it was a "net loss" within the meaning of the statute.

A loss to be deductible in computing net income must be one resulting from the operation of a trade or business regularly carried on by a taxpayer. Section 204(a) of the Revenue Act of 1921; section 206(f) of the Revenue Act of 1924. A definition of the term "business" adopted by the court in Flint v. Stone Tracy Co.,220 U.S. 107">220 U.S. 107, and frequently cited by us, T. I. Crane,17 B.T.A. 720">17 B.T.A. 720, elmore L. Potter,18 B.T.A. 549">18 B.T.A. 549, is as follows:

"Business" is a very comprehensive term and embraces everything about which a person can be employed. Black's Law Dictionary, 158, citing People ex rel. Hoyt v. Tax Comrs.,23 N.Y. 242">23 N.Y. 242, 244. That which occupies the time, attention and labor of men for the purpose of a livelihood or profit. 1 Bouvier's Law Dict., 273.

The business in which the loss was sustained must have been engaged in to the extent of amounting to a vocation. J. J. Harrington,1 B.T.A. 11">1 B.T.A. 11.

Since 1902 petitioner has been devoting his time and attention to a branch of the mercantile business. He entered the service of Anthony Brothers as a clerk and afterwards was employed by the partnership as manager of its store. He was secretary and general manager of Anthony Brothers, Inc., from 1910, the year in which he and others organized the corporation, until 1914, when he became the corporation's president. Either individually, or in connection with other persons, he organized a number of other corporations to engage in the mercantile business in other cities. He not only acquired stock in all of these corporations, of most of which he was president, but financed and actively managed and directed their affairs. Petitioner rendered financial aid to all of the corporations by endorsing their paper. In addition, he loaned Anthony Brothers, Inc., stock to use as collateral for loans, sold some of his real estate to raise funds to pay its debts, and used other funds to pay its financial obligations.

The activities of petitioner in connection with the organization and operation of these corporations were closely related, each dependent upon the other. In addition to a return on his investment in the stock of the corporations, he received as income a yearly salary or drawing account in the amount of $4,800 from Anthony Brothers, Inc., and a commission of 10 per cent on the net profits of the several corporations.

The facts, in our opinion, show that in 1923 and for many years prior thereto, petitioner, in addition to being a corporate executive, was engaged in organizing, financing and managing corporations carrying on a branch of the mercantile business. In this business he invested his money and devoted all his time. See T. I. Crane, supra, and Elmore L. Potter, supra. The loss of $34,142.26 sustained by petitioner in 1923 on his investment in stock of Anthony Brothers, Inc., is a "net loss" deductible in computing his net income for 1924.

Decision will be entered under Rule 50.