The opinion of the court was delivered by: DAWSON
This is an action by a taxpayer for refunds aggregating $ 23,597.51 asserted to have been wrongfully assessed and cllected for the calendar years 1958 and 1959. The defendant moves for summary judgment, under Rule 56 of the Rules of Civil Procedure, dismissing the complaint.
There are no controverted issues of fact which would prevent a disposition of the motion. The parties agree to the following facts:
The taxpayer acquired fifty percent of the stock of New Rochelle Lincoln-Mercury, Inc. (the corporation) at a cost of $ 40,000.00. During the years 1958, 1959 and 1960 the taxpayer advanced a total of $ 105,000.00 to the corporation and was reimbursed in the amount of $ 39,075.00. As of December 31, 1960 plaintiff was unreimbursed in the sum of $ 65,925.00. Adding this amount to the original investment of $ 40,000.00, plaintiff's total investment was $ 105,925.00.
In 1960 the corporation was liquidated and the stock interest and unreimbursed advances became worthless. On his 1960 federal income tax return the plaintiff was allowed an ordinary loss deduction of $ 36,347.95 as his distributive share of the corporation's operating loss. A determination was made that the corporation qualified as a subchapter S corporation. The remainder of the plaintiff's $ 40,000.00 investment was treated as a capital loss and $ 1,000.00 applied against ordinary income. Section 1211.
The District Director ruled that the taxpayer was not entitled to treat the $ 65,925.00 as a business bad debt. Section 166.
On June 15, 1962, plaintiff filed suit for refunds for the years 1957 and 1958. Thereafter, on August 29, 1962, plaintiff filed an amended complaint which sought refunds limited to the years 1958 and 1959. The amended complaint asserts that the entire $ 105,925.00 is deductible as a business bad debt and is deductible in those years. This is a question of fact that must await the trial. It cannot be decided on this motion. The defendant, nevertheless, contends that, however classified, the losses cannot be deducted from either 1958 or 1959 income and that the amended complaint which is limited to those two years should be dismissed.
The taxable income of plaintiff for 1960 was $ 48,514.49. This is without regard to personal exemptions or the amount deducted in that year for loss on his investment in the corporation. His taxable income for 1957 was $ 57,651.59, again disregarding personal exemptions. The total for the two years is $ 106,166.18, which is more than the total loss claimed by the taxpayer.
The procedure for deducting losses in a year other than the year of loss is controlled by Section 172.
It is evident from a reading of the section that any loss which exceeds gross income in any taxable year must first be carried back three years. If any loss remains to be applied it is then carried back two years and finally for one year preceding the year of loss. The Income Tax Regulations made this clear. Section 1.172-4(b)(5), Example (1).
Under the facts here agreed upon, the entire $ 105,925.00 would be exhausted if applied to income of 1960 and 1957.
A disposition of this motion, adverse to plaintiff, should not be construed to bar a suit for refund for either 1957 or 1960. The issue before this Court is a narrow one; it involves only a determination of which years a loss may be applied to. If plaintiff can establish that the losses he suffered are business bad debts, then he may be entitled to deduct those losses from 1957 and 1960 income. But those years years are not before the Court.
The defendant's motion for summary judgment dismissing the complaint is ...