Conrades v. Commissioner , 21 B.T.A. 213 ( 1930 )

EDWIN H. CONRADES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Conrades v. Commissioner

Docket No. 25622.

United States Board of Tax Appeals

21 B.T.A. 213; 1930 BTA LEXIS 1892;

November 6, 1930, Promulgated

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">*1892 NET LOSS. - Petitioner, in addition to large investments in various corporations which he directed, possessed large means from which he derived income during the course of many years by loaning them at interest. This practice was carried on regularly and consistently, loans being made to those corporations in which he was interested and to individuals with whom he was associated. Held that a loss sustained in 1921 on certain of these loans to an individual was one in the course of business regularly carried on and consequently a "net loss" under section 204 of the Revenue Act of 1921, subject to being carried forward as a deduction from income for 1922.

L. D. Slattery, Esq., for the petitioner.

Harold Allen, Esq., for the respondent.

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TRUSSELL

">*214 This appeal is from a deficiency of $2,340.51 in income taxes for the calendar year 1922 and arises from the disallowance by respondent of a deduction of $1,000, representing a donation, and $24,179.52, representing an alleged net loss carried forward by petitioner from the prior year. Error is assigned only upon respondent's action in respect to the item of $24,179.52.

FINDINGS OF FACT.

">*1893 The petitioner is an individual residing in St. Louis, Mo. During the years 1921 and 1922, and for many years prior to that time, petitioner was a man of large means with very substantial investments in the stock of various corporations whose activities he directed. In addition to these investments petitioner had large means which were regularly and consistently used by him in making loans at interest to these corporations and to certain individuals. The interest received on these loans represented a portion of his income. The individuals to whom petitioner made loans were mainly the officers of the various corporations in which he was interested. In the year 1921 these loans aggregated $350,000, this amount being somewhat less than the average yearly amount. In addition to making these loans to the corporations he directed, petitioner also personally guaranteed the indebtedness of these corporations to the banks for money borrowed, these guarantees being for very large amounts. Petitioner received no compensation for these guarantees, but drew very substantial salaries from several of the corporations for his services as president.

Prior to 1921 the petitioner made several">*1894 loans to one Otto Stifel, his brother-in-law, who was at the time rated as a very wealthy man with an estate of almost a million dollars. These loans to Otto Stifel aggregated $89,990.25 in 1921, in which year this debtor died after sustaining some disastrous business losses which wiped out his fortune. In making his income-tax return for the calendar year 1921, petitioner deducted this amount of $89,990.25 as a bad debt, which deduction was allowed by respondent and exceeded petitioner's income by the sum of $24,179.52.

">*215 In making his income-tax return for the year 1922, petitioner deducted the aforesaid item of $24,179.52 as a net loss incurred in carrying on business in the calendar year 1921 and this deduction was disallowed by the respondent.

OPINION.

TRUSSELL: The sole question presented is whether the loss detailed in the findings of fact was a "net loss" under section 204 of the Revenue Act of 1921 which defines such losses as those "* * * resulting from a trade or business regularly carried on by the taxpayer * * *."

The record of this proceeding shows that petitioner was a man of wealth, owning large interests in various corporations directed by him. ">*1895 It further shows that in addition to these investments he had large means which for many years he has used regularly and consistently in making loans at interest, this interest being one of the sources of his yearly income. These loans he made to the corporations in which he was interested, to a corporation owned wholly by his wife, and to various individuals with whom he was closely associated.

The fact that petitioner limited the field of his loans to corporations directed by him and individual associates with whose affairs and financial standing he was familiar, does not alter the fact that in making these loans he was carrying on a personal business distinct from the business carried on by the corporations in question. There is nothing in our opinion peculiar or significant in such limitation. If this field was sufficient for the employment of his capital used for loan purposes it was, as a matter of good business, the best field for such operations. The fact that in making many of these loans he was, in addition to obtaining interest, safeguarding his investments by providing the funds needed by his various corporations, does not, in our opinion, stamp the loan activities">*1896 as merely an incident of his service as an officer of these various corporations or as merely incident to his ownership of corporate stock. Neither does the fact that the loans on which the loss in question was suffered in 1921 were to his brother-in-law indicate that they were transactions outside of his regular loan activities. It is testified that this debtor, at the time the loans were made, was rated as "almost a millionaire" and subsequently lost his fortune in some business reverses. There is nothing to indicate that these loans were not business transactions made with expectation of their producing income.

The fact that this petitioner in making these loans was carrying on an individual business for profit can not, it is thought, be questioned. In fact, respondent's counsel appears to have expressly conceded ">*216 this fact at the hearing. The only other question is whether such business was one regularly carried on, and as to this it is testified without contradiction that petitioner's loan activities had been carried on regularly in the manner described for many years before and subsequent to 1921 and that in such year his loans aggregated approximately">*1897 $350,000, which was something less than the average yearly amount. The case of , relied on by respondent as a case upon facts similar to those here presented, is not in point. That was a case of a series of isolated transactions, the taxpayer not being engaged in a regular business of making loans, the loss being sustained in the failure of a corporation in which he had made an investment and to which he had loaned money in an effort to put it on its feet. The other cases cited by respondent involve situations substantially similar.

We hold that the loss in question was one sustained in the course of business regularly carried on by petitioner and was accordingly a net loss under section 204 of the Revenue Act of 1921. Cf. ; ; ; .

Reviewed by the Board.

Judgment will be entered under Rule 50.