Graff v. Commissioner

*1116 The respondent has asserted deficiencies in income tax for the year 1920 as to the estate of W. P. Graff, and as to F. M. Graff, in the respective amounts of $1,641.77 and $10,434.61. The errors alleged are the disallowance of a loss alleged to have been sustained in the *1117 taxable year resulting from the sale of real estate which was the property of a partnership of which the petitioners were members, and the inclusion in the income of F. M. Graff of an amount as salary which it is claimed was not received in the year involved. The two proceedings were consolidated for hearing and decision.

FINDINGS OF FACT.

The Graff Coal Co., hereinafter called the Coal Company, was a partnership composed of two brothers, W. P. and Frank*4297 M. Graff. Their residence and its principal place of business was Blairsville, Pa. W. P. Graff died in 1920.

The Bay City Brick Co., hereinafter called the Brick Company, was a corporation organized in 1900 under the laws of the State of California, having its manufacturing plant and land in San Francisco, Calif. Its land consisted of 11 city lots in the suburbs in direct line with Market Street and lying on the city end of the tunnel later put through on that street. In 1907 the Coal Company and J. E. McCreary of Berkeley, Calif., purchased all the stock of the Brick Company, each receiving one-half thereof. The Coal Company paid $40,000 for one-half interest in such company - $20,000 in cash and $20,000 by its promissory note, which was paid. Later it also paid one-half of $4,000 operating expenses or loss, and at various times taxes and upkeep expenses, the amounts of which were not within the knowledge of the witnesses testifying in the case.

Due largely to the increasing use of steel in the larger buildings, the demand for brick was not sufficient to justify the operation of the plant, which was closed down about September 1, 1907. Thereafter the stockholders sought*4298 to dispose of their interests. On March 22, 1909, the Coal Company sent its certificate of stock to McCreary, who acknowledged the receipt thereof by letter to F. M. Graff, bearing date March 27, 1909.

May 31, 1917, title to all the land was conveyed by the company to J. E. McCreary. The officers of the company whose signatures appear on the deed were J. E. McCreary, president; Zella J. McCreary, secretary. All the stockholders signed their consent to the conveyance. Their holdings were stated to be as follows: J. E. McCreary, 997 shares; Zella J. McCreary, R. H. McCreary, and J. C. Hickman, one share each. June 1, 1918, McCreary and his wife conveyed an undivided one-half interest in the land to W. P. and F. M. Graff. The Brick Company was dissolved in 1917 or early in 1918.

In 1920 the petitioners sold their undivided one-half interest in the land for $10,000 cash, each receiving one-half thereof.

*1118 J. E. McCreary and W. P. Graff both died in 1920. After the death of the former, his widow destroyed all the records and papers left by him in relation to the matters here involved.

In 1920 F. M. Graff was president and general manager of the Westmoreland*4299 Mining Co., a corporation. The books of the company show that he was to receive a salary of $6,666.67 for that year. In his return he failed to report the receipt of any salary from this company. It was afterwards ascertained that the company had credited Graff with a payment of $1,111.10 on a promissory note it held against him and charged him with a like amount paid on account of salary for that year. Graff kept his accounts and made his income-tax returns on the cash basis.

OPINION.

LANSDON: The parties having agreed that the $1,111.10 payment received by F. M. Graff from the Mining Co. was taxable, and that the $5,555.57 credited on the books of such company but not paid in the taxable year was nontaxable, and their agreement being in conformity with the law, it is approved.

This leaves for our consideration only the amount of the loss or gain realized through the transactions relating to the Brick Company and its property. That in 1907 the Graff Coal Co. bought a one-half interest in the Brick Company, paying therefor an equivalent of $40,000 cash, is not disputed, nor is the allegation of petitioners that the Coal Company thereafter paid its one-half of an alleged*4300 operating loss of $4,000 in dispute. These two payments, making a total of $42,000, are now claimed by the petitioners to have been the cost of the land which they sold in 1920 for $10,000. In other words, they now claim a loss on account of this purchase, operating loss, and sale, of $16,000 each.

There is no evidence whatever adduced in support of the claim as to the operating loss. It was not a loss of such a nature as could bring it within the purview of section 202 of the Revenue Act of 1918. If it was not simply a necessary and ordinary expense of the business, it was at least sustained and known by petitioners to have been sustained several years prior to 1920. This claim is denied.

The law applicable to the remainder of the claim is found in section 202 of the Revenue Act of 1918, and is as follows:

SEC. 202. (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale * * * of property, real, personal, or mixed, the basis shall be -

(1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date * * *.

The *1119 nature of the alleged loss is not clear. The record*4301 indicates that the petitioners acquired a one-half interest in the land in question in exchange for their certificates of one-half the stock of the Brick Company, which was dissolved in 1917, but we are unable to determine whether this transaction was an exchange of stock for real estate or a distribution in liquidation. In either event, however, the true gain or loss from the sale of such land must be determined by ascertaining the value of the stock at March 1, 1913, since it was acquired prior to that date. As to such value there is no evidence in the record except the fact that before that time the Brick Company had suspended operations. At March 1, 1913, the value of the stock was measurable by the value of the assets of the Brick Company.

Neither party has adduced any evidence upon which we can base findings of fact either as to the value of the stock or of the assets of the Brick Company at March 1, 1913. There is, therefore, no basis upon which we can determine whether gain or loss resulted from the sale of the lots in question in the taxable year. The petitioners allege a loss which they seek to deduct in proper proportion from their respective gross income for the*4302 year 1920. The respondent holds that such loss has not been established by proof and has disallowed the deductions. The taxpayers have not sustained the burden of proof necessary to establish their allegation that the respondent erred in such determination.

Judgment will be entered on 10 days' notice, under Rule 50.

Considered by STERNHAGEN, GREEN, and ARUNDELL.