[287 U.S. 410, 411] The Attorney General and Mr. G. A.Youngquist, Asst. Atty. Gen., for petitioner.
Mr. William S. Hammers, of Washington, D.C., for respondent.
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 section 204(a) and ( b),1 Revenue [287 U.S. 410, 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, 287 U.S. 584 , 53 S.Ct. 19, 77 L.Ed. --.
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 al- [287 U.S. 410, 413] lowed 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 collector 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 support of the contrary view, the District Court of Appeals said:
We agree with the Commissioner and the Board of Tax Appeals. The judgment below must be reversed. [287 U.S. 410, 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.
[ Footnote 1 ] 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 section 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 section 214 or by paragraph (2) of subdivision (a) of section 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 section 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.