Opinion
Docket No. 16053.
1949-03-11
DAVID HANOVER, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
T. J. Griffin, Esq., for the petitioner. Edward L. Potter, Esq., for the respondent.
DEDUCTIONS— LOSSES— TAXPAYER ON CASH BASIS, BUSINESS ON ACCRUAL BASIS.— A taxpayer, filing his returns upon a cash basis, is not entitled to deduct from his gross income in 1942 and 1943 his share of the payments made in those years on notes give in 1940 for the purchase of oil property which was sold at a loss in 1940, where the books for operations of that and other oil properties were kept upon an accrual basis and the taxpayer properly claimed the loss in 1940 as accrued. T. J. Griffin, Esq., for the petitioner. Edward L. Potter, Esq., for the respondent.
The Commissioner determined a deficiency of $216.67 in the income tax of the petitioner for the calendar year 1943. The year 1942 is involved because of the forgiveness provisions of the Internal Revenue Code. The only issue for decision is whether the petitioner is entitled to deductions of $594.38 for 1942 and $505.90 for 1943 representing payments made in those years upon the purchase price of property sold at a loss in 1940.
FINDINGS OF FACT.
The petitioner and his wife filed a joint return for 1940 upon a cash basis and the petitioner filed separate returns for 1941, 1942, and 1943 with the collector of internal revenue for the district of Tennessee.
The return for 1940 reported a loss as follows:
+-----------------------------------------------------------------------+ ¦Income from law practice ¦$2,796.81¦ +-------------------------------------------------------------+---------¦ ¦12-1/2/110 Gain from Golden Eagle Oil Co ¦37.71 ¦ +-------------------------------------------------------------+---------¦ ¦2/12 Loss from Silver Eagle Oil Co ¦$1,195.30¦ ¦ +---------------------------------------------------+---------+---------¦ ¦8/16 “Loss from Joint Venture 'John Johnson Lease”'¦4,945.21 ¦ ¦ +---------------------------------------------------+---------+---------¦ ¦ ¦6,140.51 ¦2,834.52 ¦ +---------------------------------------------------+---------+---------¦ ¦ ¦2,834.52 ¦ ¦ +---------------------------------------------------+---------+---------¦ ¦Net loss ¦3,305.99 ¦ ¦ +-----------------------------------------------------------------------+
The loss on the John Johnson lease was shown on the return as follows:
+---------------------------------------------------------+ ¦ ¦Dr. ¦Cr. ¦ +-----------------------------------------------+---------¦ ¦INCOME ¦$1,734.15¦ +-----------------------------------------------+---------¦ ¦EXPENSES: ¦ ¦ ¦ +------------------------------------+----------+---------¦ ¦Depreciation ¦$846.92 ¦ ¦ +------------------------------------+----------+---------¦ ¦Interest ¦30.04 ¦ ¦ +------------------------------------+----------+---------¦ ¦Repairs ¦691.39 ¦ ¦ +------------------------------------+----------+---------¦ ¦Supplies ¦356.96 ¦ ¦ +------------------------------------+----------+---------¦ ¦Travelling ¦106.14 ¦ ¦ +------------------------------------+----------+---------¦ ¦Legal, Aud. & Off. Exp ¦121.16 ¦ ¦ +------------------------------------+----------+---------¦ ¦Taxes ¦59.36 ¦ ¦ +------------------------------------+----------+---------¦ ¦Loss from Sale of Equipment or Lease¦9,178.02 ¦ ¦ +------------------------------------+----------+---------¦ ¦Salaries ¦234.65 ¦ ¦ +------------------------------------+----------+---------¦ ¦ ¦$11,624.64¦$1,734.15¦ +------------------------------------+----------+---------¦ ¦ ¦9,890.49 ¦ ¦ +---------------------------------------------------------+
The petitioner and his brother Joseph have been law partners since 1920. They owned interests in an oil project in Rusk County, Texas, known as the John Johnson lease, beginning at a time not disclosed in this record. The cost of those interests is now shown in this record. A third party also owned an interest in that property. The petitioner and his brother bought the interest of the third party in November 1940. They agreed to assume all obligations and to pay the seller $2,700 represented by 27 notes of Joseph Hanover to the seller, each for $100, the first note payable on or before December 1, 1941, and one additional payable on or before the first of each succeeding month until all were paid. $1,188.75 was paid on the notes in 1942 and $1,011.81 in 1943. One-half of those payments was made by the petitioner.
The petitioner and Joseph sold their interest in the John Johnson lease in December 1940 for $1,000.
The petitioner operated the John Johnson lease property and five other adjacent properties as ‘attorney in fact‘ during 1940. Books upon an accrual basis were kept for those operations under his supervision. The losses claimed upon the petitioner's return for 1940 were taken in accordance with the way the books of John Johnson lease operation were kept during that year.
The petitioner reported income subject to tax on his 1941 return in excess of $3,305.99.
He reported income of $9,492.56 on his return for 1942 and claimed deductions thereon of $4,489.49, including $3,387.68 described as ‘Carry over net operating loss for calendar year of 1940, arising from operations and containing no gains or losses that would be excluded in the computation of Carry Over Loss.‘
The Commissioner, in determining the deficiency for 1943, disallowed the deduction of $3,387.68 for 1942.
OPINION.
MURDOCK, Judge:
The petitioner concedes that the disallowance of the claimed deduction of a net loss carry-over for 1942 was proper, since the 1941 income would have absorbed any such loss from 1940. He now claims that he is entitled to deduct, in the years paid, the amounts which he paid on the notes given in 1940 when they purchased the only outstanding interest in the John Johnson lease. He argues that such deductions are proper for 1942 and 1943 because he filed his returns upon the cash basis and was not entitled to deduct a loss upon the sale of his interest in the John Johnson lease until he paid the purchase price. Citing Helvering v. Price, 309 U.S. 409. If this was simply a loss from the sale of a capital asset by a taxpayer upon a cash basis, then the evidence fails to show the basis for gain or loss of the property upon which the loss is claimed, and the total claimed exceeds the only apparent loss in the amount of $1,700. However, it does not appear that this was merely a loss from the sale of a capital asset by a taxpayer upon a cash basis. It appears, instead, that books upon an accrual basis were kept for the operation involving the John Johnson lease, and the 1940 deduction, including a stated loss from the disposition of the ‘equipment or lease,‘ was claimed in accordance with those books. A taxpayer reporting some personal income upon a cash basis may, nevertheless, for the same year report income or claim deductions or losses from a separate business which uses an accrual system of accounting, Joseph Stern, 14 B.T.A. 838; Berryman D. Fincannon, 2 T.C. 216, and where he claims a loss properly accrued upon the books of the business he may not thereafter claim another deduction when he makes some cash payment representing all or a part of his share of the loss. Cf. Cornelia v. Cecil, 37 B.T.A. 904; affirmed on this point, 100 Fed.(2d) 896; J. E. Mergott Co., 11 T.C. 47. It does not appear that the loss in question was improperly accrued on the books kept for the lease operations for 1940 or that the Commissioner erred in holding that no part of the loss was deductible for 1942 and 1943.
Decision will be entered for the respondent.