Reporter's Statement of the Case The Reporter's statement of the case: Mr. Frank J. Albus for the plaintiff. Mr. Hugh E. Wall, Jr., was on the brief. Mr. D. F. Hickey, with whom was Mr. Assistant Attorney General Samuel O. Clark, Jr., for the defendant. Messrs. Robert N. Anderson and Fred K. Dyar were on the brief. The court made special findings of fact as follows, upon the stipulation of facts: 1. The plaintiff is a citizen of the United States and a resident of Norfolk, Virginia. At all times material herein he was principally engaged in the newspaper publishing business, being chairman of the board of the Norfolk LedgerDispatch, the evening newspaper of Norfolk. His salary from that source was $36,000 in 1931. 2. On March 15, 1932, plaintiff, reporting on a cash receipts and disbursement basis, filed his individual income tax return for the calendar year 1931 in the office of the Collector of Internal Revenue at Richmond, Virginia. The return reported taxable net income of $40,145.32 and tax liability of $1,753.13. Such $1,753.13 was paid to said collector on dates and in installments as follows: 3. In reporting net income in the aforesaid return for 1931 plaintiff deducted, among other losses, a loss of $8,750 sustained on the purchase on June 29, 1931, of 50 shares of the capital stock of the Norfolk National Bank of Commerce and Trusts for $15,000 and the sale on June 30, 1931, of such 50 shares for $6,250. Also, among other contributions, plaintiff deducted a payment of $500 to the Norfolk-Portsmouth Advertising Board. These two deductions were disallowed by an internal revenue agent, which disallowance was sustained in full by the Commissioner of Internal Revenue, as Reporter's Statement of the Case was the addition to income of overlooked dividends amounting to $3,265. After consideration and denial of plaintiff's protest regarding the said disallowance, deficiency tax of $1,620.53 was duly assessed and, together with $193.55 interest thereon, was paid on March 24, 1934. 4. On August 29, 1935, plaintiff filed a claim for refund of the entire deficiency tax of $1,620.53, basing such claim, however, only upon the disallowance of the deduction of the $8,750 loss on the stock of the Norfolk National Bank of Commerce and Trusts. Formal notice of the disallowance of such claim was mailed to plaintiff under date of January 14, 1936. This suit was filed on April 18, 1936, and seeks refund of $1,207.15 of the said deficiency tax, plus $144.17 of the interest paid thereon, with interest according to law on the total of $1,351.32. 5. At all times material herein the plaintiff was a prominent man of affairs in Norfolk, Virginia, being financially interested in several corporations in and near that city, including banks. His main interests, however, were centered in publishing the aforesaid Ledger-Dispatch newspaper. Associated with him in this enterprise in an executive capacity was P. S. Huber, a young man in whom the plaintiff took an interest. 6. In December 1928 it was suggested to Huber by the plaintiff that he purchase some stock of the Norfolk National Bank of Commerce and Trusts as it appeared to be an investment that ultimately would be profitable to Huber. Realizing that Huber was a man of limited means who could not afford to go into an enterprise in which he would lose money, the plaintiff made a proposition to him in a letter, as follows: Mr. P. S. HUBER, Norfolk, Virginia. NORFOLK, VIRGINIA, Dear Sir: Referring to our recent conversation regarding the acquisition by you of stock of the Norfolk National Bank of Commerce and Trusts, as you know, I am greatly interested in the development of the bank and in your welfare also, and as I consider the pur Opinion of the Court chase of the stock of this bank a good investment for you and one that may result in bringing you into closer contact with one of the leading business institutions of this city, I will agree to purchase from you at any time upon reasonable notice up to 50 shares of this stock at a price of $300.00 per share. Yours very truly, (Signed) S. L. SLOVER. 7. The market price of this stock in December 1928 was about $300.00 per share. Because of the plaintiff's agreement to purchase, Huber borrowed the necessary money to purchase 50 shares of the stock, using it as collateral for the loan. By July 1931 the market value of the stock had declined to about $125.00 per share and Huber was experiencing difficulty in maintaining the stock as collateral for the loan upon which he was still making payments. On June 29, 1931, he called upon the plaintiff to make good his agreement to purchase, which the plaintiff did by purchasing the 50 shares from him at $300.00 per share. On the following day, June 30, 1931, the plaintiff sold the same stock for $125.00 per share. The resulting loss of $8,750.00 was claimed as a deduction by the plaintiff. 8. The plaintiff did not purchase within thirty days prior or subsequent to the date of the aforesaid sale any stock in the Norfolk National Bank of Commerce and Trusts other than the stock purchased from the said Huber. The court decided that the plaintiff was not entitled to recover. WHITAKER, Judge, delivered the opinion of the court. The plaintiff seeks a deduction for 1931 of a loss incurred in connection with the purchase of fifty (50) shares of stock of the Norfolk National Bank of Commerce and Trusts. Section 23 (e) of the Revenue Act of 1928 (45 Stat. 791) permits a deduction of losses (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business. The plaintiff was the chairman of the board of the Norfolk Ledger-Dispatch, an evening newspaper. He was also Opinion of the Court a stockholder in the Norfolk National Bank of Commerce and Trusts. Associated with him in the newspaper business was P. S. Huber, a younger man, in whose welfare the plaintiff was interested. Plaintiff suggested to Huber in 1928 that he purchase some of the stock of the Norfolk National Bank of Commerce and Trusts and, in order to induce him to do so and to save him from loss if he did, plaintiff entered into an agreement with him, as set out in his letter of December 1, 1928, which reads as follows: Referring to our recent conversation regarding the acquisition by you of stock of the Norfolk National Bank of Commerce and Trusts, as you know, I am greatly interested in the development of the bank and in your welfare also, and as I consider the purchase of the stock of this bank a good investment for you and one that may result in bringing you into closer contact with one of the leading business institutions of this city, I will agree to purchase from you at any time upon reasonable notice up to 50 shares of this stock at a price of $300.00 per share. Following this Huber bought fifty shares of the stock of this bank at $300.00 a share, borrowing the money in order to do so, and using the stock as collateral for the loan. By July 1931 the market value of the stock had declined to about $125.00 a share, and Huber was being pressed by his creditor for payment of the loan or for additional collateral. He, therefore, found it necessary to call on the plaintiff to fulfill his agreement as set out in his letter of December 1, 1928. In response the plaintiff purchased from him his 50 shares at $300.00 a share, and the next day sold the same stock for $125.00 a share, sustaining thereby a loss of $8,750.00. It is clear that this is not a loss incurred in the plaintiff's trade or business; in fact, plaintiff in his brief makes no such claim. It also seems clear that the loss sustained was not one in a "transaction entered into for profit." Plaintiff had no opportunity of realizing a profit from the transaction. It could result in a loss but not in a profit. The plaintiff entered into the engagement not for profit, but in order to Syllabus promote the welfare of a young man in whom he was interested. Goldsborough v. Burnet, 46 F. (2d) 432. The plaintiff is not entitled to recover and his petition will therefore be dismissed. It is so ordered. LITTLETON, Judge; GREEN, Judge; and WHALEY, Chief Justice, concur. BOWLES LUNCH, INC., v. THE UNITED STATES [No. 43486. Decided June 3, 1940] On the Proofs Income tax; loss on property reacquired under mortgage.-Where plaintiff sold a piece of real estate in 1928 for a certain consideration a part of which was secured by a mortgage on the property, and where in 1931 plaintiff repossessed the property, acquiring an equity therein less than the amount due on the mortgage plus accrued interest, it is held that plaintiff, under Section 23 (f) of the Revenue Act of 1928, and the treasury regulations, is entitled to a deduction in its income tax return for 1931 of a loss measured by the difference between the face value of the notes taken in payment for the property and the agreed market value of the equity in the property when reacquired. Same; bad debt.—Where in the reconveyance to taxpayer in 1931 of property sold in 1928, part of the consideration of which sale was a mortgage, and where as a consideration for said reconveyance parties personally liable on such mortgage were released from such liability, it is held that in its income tax return for 1931 plaintiff cannot claim deduction for a bad debt under Section 23 (j) of the Revenue Act of 1928, since when the property was reconveyed to the mortgagee the liability was extinguished and the debt was wiped out. Same; computation of loss.-Where in computing its profit when it sold property taxpayer treated notes secured by mortgage as worth their face value, it is held that in computing its loss on reacquisition of the property taxpayer was entitled to use the same value. Same; legislative sanction to regulations.—Where provisions of the Revenue Acts succeeding the Revenue Act of 1928 with relation to the deduction of losses are substantially the same as the provision of the Revenue Act of 1928, under which the regulation relied upon by the taxpayer was promulgated, it is held that legislative sanction has been presumptively given to the regulation. |