The taxpayer was interested in a corporation engaged in river
and harbor improvement work, as majority stockholder and president,
and devoted himself largely to its affairs. He was also interested
in other concerns engaged in similar work, and had investments in
other corporate shares. He treated the corporation as a separate
entity for taxation, and made separate personal income tax returns.
Through endorsement of obligations of the corporation, and sale of
its stock, he suffered net losses in 1921 and 1922, for which he
claimed deductions in his return for 1923. He was not in the
business of endorsing or buying and selling securities.
Held:
The losses did not result "from the operation of any trade or
business regularly carried on by the taxpayer," and, under the
Revenue Act of 1921, § 204, were not deductible from gains of
succeeding years. P.
287 U. S.
414.
61 App.D.C. 217, 59 F.2d 1031, reversed.
Page 287 U. S. 411
Certiorari to review a judgment reversing a decision of the
Board of Tax Appeals, 19 B.T.A. 859, which sustained an order of
the Commissioner determining a deficiency in income tax.
Cf. the cases next preceding and following.
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
Respondent Clark's income tax return for 1921 showed net loss
exceeding $17,000; for 1922, net loss of about $5,000. He claimed
these should be deducted from gains reported for 1923, under §
204(a) and (b),
* Revenue
Page 287 U. S. 412
Act of 1921, c. 136, 42 Stat. 227, 231. The Commissioner of
Internal Revenue ruled otherwise, and the Board of Tax Appeals
approved. The Court of Appeals, District of Columbia, 61 App.D.C.
217, 59 F.2d 1031, reversed the Board's action. The matter is here
upon certiorari.
From 1899 until 1922, respondent was closely connected with the
Bowers Southern Dredging Company, which did river and harbor
improvement work, dredging, and jetty building. He was majority
stockholder, active head, after 1905 president, and devoted himself
largely to its affairs. During 1921 and 1922, he was a member of
three partnerships similarly engaged, and often associated with the
Bowers Company. Also he owned and held as investments shares of a
number of corporations. He was not in the investment business.
After 1917, the Bowers Company encountered continuous financial
difficulties. To protect his interest therein, at sundry
undisclosed times respondent indorsed the company's obligations to
the banks. In 1921, a creditors' committee took charge, and
thereafter respondent conducted the corporate affairs as managing
director. A new concern took over the entire assets and business in
1922.
Because of his indorsements, respondent paid $68,000 for the
company during 1921. He claimed and was allowed
Page 287 U. S. 413
to deduct the sum thus lost upon his return for that year.
During the same year, he also lost $9,500 through sale of the
corporation's stock, and in 1922 he sustained a similar loss
amounting to $92,500. For both these sums, appropriate deductions
were permitted.
After considering all the circumstances, the Commissioner held
respondent's losses did not result "from the operation of any trade
or business regularly carried on by the taxpayer," and could not be
deducted from gains of succeeding years. The Board of Tax Appeals
approved. Among other things, it said:
"In order for the losses here involved to be deductible in
determining taxable income for 1923, they must be net losses
resulting from the operation of a trade or business regularly
carried on by the petitioner, and not from isolated and occasional
transactions."
"With respect to the loss of $68,000 resulting from the
petitioner's endorsement of the Bowers Company notes, he testified
that, in endorsing the notes, he was seeking to protect his
investment in its stock. Aside from endorsing an undisclosed number
of notes of this company, there is nothing in the record to
indicate that acting as endorser or guarantor constituted a
business or trade with the petitioner. So far as the record shows,
these were the only notes ever endorsed by the petitioner for the
Bowers Company or for any other company or person. From the facts
in the case, we are of the opinion that the loss did not result
from the operation of a trade or business regularly carried on by
the petitioner, but resulted from isolated or occasional
transactions. . . ."
"With respect to the remaining losses resulting from the sale of
the Bowers Company stock in 1921 and 1922, we do not think the
petitioner's ownership of stock in a number of corporations which
he held as an investment during 1921 and 1922 or the sale of some
of such stock in those years constituted a business or trade
regularly
Page 287 U. S. 414
carried on by him. As to his being in the investment business,
the petitioner testified as follows: 'Q. Would you say you were in
the investment business, Mr. Clark?' 'A. No sir.'"
"Since the petitioner was not in the investment business or
engaged in the business of a dealer in securities, we think the
losses resulting from the sale of the Bowers Company stock in 1921
and 1922 constituted losses arising from occasional or isolated
transactions, and not from the operation of a business regularly
carried on. . . ."
In support of the contrary view, the District Court of Appeals
said:
"It appears that, during the times in question appellant was
engaged in regularly carrying on the business of dredging, operated
by a corporation of which appellant was principal owner and active
directing head, and to which he devoted all of his time and
energies. Appellant accordingly was necessarily concerned with the
financial conditions and difficulties which beset the business, and
he was compelled by circumstances to indorse the company's notes in
order to supply it with necessary operating funds. This action was
not isolated or occasional, but became part of the operation of the
business, and helped to carry it on. It is true that appellant did
not regularly carry on a business of indorsing notes for profit,
but his indorsement of the company's notes was part of the business
regularly carried on for the company. It is also true that
appellant was not regularly engaged in the business of selling
corporate stocks, but the transactions of that character appearing
in the record cannot be separated from the regular course of
business of which they were part, and must not be considered as if
wholly independent transactions."
59 F.2d 1031, 1032.
We agree with the Commissioner and the Board of Tax Appeals. The
judgment below must be reversed.
Page 287 U. S. 415
The respondent was employed as an officer of the corporation;
the business which he conducted for it was not his own. There were
other stockholders. And in no sense can the corporation be regarded
as his
alter ego, or agent. He treated it as a separate
entity for taxation, made his own personal return, and claimed
losses through dealings with it. He was not regularly engaged in
indorsing notes, or buying and selling corporate securities. The
unfortunate indorsements were no part of his ordinary business, but
occasional transactions intended to preserve the value of his
investment in capital shares.
A corporation and its stockholders are generally to be treated
as separate entitles. Only under exceptional circumstances -- not
present here -- can the difference be disregarded.
Reversed.
* Revenue Act, 1921:
"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 (including
losses sustained from the sale or other disposition of real estate,
machinery, and other capital assets, used in the conduct of such
trade or business), and when so resulting means the excess of the
deductions allowed by § 214 or 234, as the case may be, over the
sum of the following: (1) the gross income of the taxpayer for the
taxable year, (2) the amount by which the interest received free
from taxation under this title exceeds so much of the interest paid
or accrued within the taxable year on indebtedness as is not
permitted to be deducted by paragraph (2) of subdivision (a) of §
214 or by paragraph (2) of subdivision (a) of § 234, (3) the amount
by which the deductible losses not sustained in such trade or
business exceed the taxable gains or profits not derived from such
trade or business, (4) amounts received as dividends and allowed as
a deduction under paragraph (6) of subdivision (a) of § 234, and
(5) so much of the depletion deduction allowed with respect to any
mine, oil or gas well as is based upon discovery value in lieu of
cost."
"(b) If for any taxable year beginning after December 31, 1920,
it appears upon 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, and if such net loss is in excess of
the net income for such succeeding taxable year, the amount of such
excess shall be allowed as a deduction in computing the net income
for the next succeeding taxable year; the deduction in all cases to
be made under regulations prescribed by the Commissioner with the
approval of the Secretary."