Comm'r of Internal Revenue

Tax Court of the United States.Sep 20, 1951
17 T.C. 308 (U.S.T.C. 1951)
17 T.C. 308T.C.

Docket No. 21763.



Clarence D. Phillips, Esq., for the petitioner. Wilford H. Payne, Esq., for the respondent.

Held: A parcel of water front property was not ‘ * * * real property used in the trade or business of the taxpayer‘ within the meaning of section 117(a)(1) of the Code as amended by the Revenue Act of 1942, and a loss incurred on its foreclosure was a capital loss, not an ordinary loss. Clarence D. Phillips, Esq., for the petitioner. Wilford H. Payne, Esq., for the respondent.

Respondent determined a deficiency of $29.71 in petitioner's income tax liability for the year 1944 and denied petitioner's claim for refund for that year in the amount of $11,962.68, for which petitioner now claims an overpayment.

The sole issue is whether a loss sustained by a trust in which petitioner had an interest was an ordinary loss or a capital loss to petitioner.

Most of the facts were stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.


The petitioner is an individual who resides in Milwaukee, Oregon. The return for the period here involved was filed with the collector of internal revenue for the district of Oregon at Portland, Oregon.

Henry L. Pittock died on January 28, 1919, and by the terms of his will there was created a trust which was to continue for a period of 20 years after his death. Upon the termination of the trust the property was to be distributed to the wife of Henry L. Pittock, if living, and upon her death to his children. The wife died prior to the termination of the trust and the remaining property became distributable to the children of Henry L. Pittock.

On or about January 27, 1939, the heirs and beneficiaries under the trust and will of Henry L. Pittock, entered into a trust agreement known as the ‘Pittock Heirs Liquidating Trust.‘

Susan P. Emery, the petitioner herein, is one of the beneficiaries under the will of Henry L. Pittock, and one of the parties to the Liquidating Trust. By the terms of this trust the various beneficiaries under the will of Henry L. Pittock, including petitioner, placed their property in trust for the following stated purpose:

The primary purpose of the creation of this trust is that the Trustee shall liquidate the said properties by sale thereof as speedily as may be compatible with good business management and the protection of the interests of the Beneficiaries, discharge from the proceeds all indebtedness and expenses of such liquidation, and distribute the proceeds to the Beneficiaries, and pending such liquidation, and for the purposes thereof, shall manage and control the said properties and collect and receive the rentals and other income and profits therefrom, as hereinafter more particularly provided.

The property thus transferred to the Liquidating Trust consisted of extensive and, in the large part, valuable tracts of real property in the vicinity of Portland, Oregon, and some personal property. There was included a certain property referred to as the ‘Mock Bottom Property,‘ consisting of approximately 403.37 acres bordering on the Willamette River near Portland Oregon. At the time of his death, in 1919, Henry L. Pittock owned a 20 per cent interest in this property appraised at $82,654. Subsequent to Pittock's death the estate acquired an additional 4.6 per cent interest in the property at an agreed value of $19,000, so that thereafter the total value of the Mock Bottom Property in the Henry L. Pittock trust estate was the amount of $101,654.

The Mock Bottom Property is low lying land, in the most part, subject to overflow by the Willamette River, and is covered a good part of the time by water. The upper portion of the property rises sharply to a high bluff which forms the perimeter of the tract. The still water on which the property bordered made it useful for the storage of rafts of logs. It was rented for that purpose during the years 1928 to 1942, inclusive, for the following amounts:

+----------------+ ¦Year ¦Amount ¦ +------+---------¦ ¦1928 ¦$210.33 ¦ +------+---------¦ ¦1929 ¦366.00 ¦ +------+---------¦ ¦1930 ¦1,480.12 ¦ +------+---------¦ ¦1931 ¦467.40 ¦ +------+---------¦ ¦1932 ¦1,033.20 ¦ +------+---------¦ ¦1933 ¦590.40 ¦ +------+---------¦ ¦1934 ¦420.66 ¦ +------+---------¦ ¦1935 ¦350.55 ¦ +------+---------¦ ¦1936 ¦350.55 ¦ +------+---------¦ ¦1937 ¦350.55 ¦ +------+---------¦ ¦1938 ¦ ¦ +------+---------¦ ¦1939 ¦671.87 ¦ +------+---------¦ ¦1940 ¦305.38 ¦ +------+---------¦ ¦1941 ¦258.86 ¦ +------+---------¦ ¦1942 ¦321.32 ¦ +----------------+

The property transferred by the beneficiaries to the Liquidating Trust was itemized in a schedule attached to the trust agreement. This schedule showed the appraised value of all of the property as of January 28, 1919, the date of Pittock's death, and the value as of June 20, 1938, as such values were then appraised by the Portland Realty Board and, further, the minimum value set by the beneficiaries for the purpose of sale. Certain of the properties, including the Mock Bottom Property, were further identified in this schedule as properties on which the trustee of the Liquidating Trust was not to pay the taxes except on written instructions from the beneficiaries. The Mock Bottom Property was not appraised by the Portland Realty Board in its appraisal of June 20, 1938. The beneficiaries of the Liquidating Trust never gave instructions to the trustee to pay taxes on the Mock Bottom Property and no taxes were paid thereon except as set forth below.

In 1942 the opportunity arose to lease to the United States Maritime Commission a part of the Mock Bottom Property. The owners of the Mock Bottom Property were delinquent in the payment of the taxes thereon, and in 1942, in order to determine the portion of the delinquent taxes which applied to the area to be leased, a division of the property was made.

As of June 1, 1942, the United States Maritime Commission entered into a 3-year lease agreement with the trustee of the Liquidating Trust covering the 24.6 per cent interest of the trust in approximately 56.41 acres of land comprising a part of the Mock Bottom Property. Under the lease agreement an annual rental of $716.30 was to be paid, but first applied to taxes due on that portion of the tract beginning with the year 1939 and amounting to $1,969.20. Taxes for the year prior to 1939 had been paid by the testamentary trustee. The area leased to the United States Maritime Commission was adjacent to other tracts acquired by it in its shipyard program. The portion of the property thus leased to the United States Maritime Commission occupied approximately 1,980 feet of the water front which was less than half of the water front adjacent to the whole Mock Bottom tract.

During the year 1943, foreclosure proceedings were commenced in the Circuit Court of the State of Oregon for Multnomah County, for the foreclosure of Mock Bottom for delinquent taxes. All of the tract was included within the complaint in the foreclosure proceedings. In the complaint the property was described as consisting of Tax Lot 1, Tax Lot 3, and Tax Lot 11. The delinquent taxes which were due and unpaid, as shown by the notice of sale published in the tax foreclosure proceedings, were as follows:

+------------------------------------+ ¦Taxes¦ ¦ ¦ ¦ +-----+---------+---------+----------¦ ¦Year ¦Tax Lot 1¦Tax Lot 3¦Tax Lot 11¦ +-----+---------+---------+----------¦ ¦1939 ¦$1,726.99¦$444.96 ¦$695.56 ¦ +-----+---------+---------+----------¦ ¦1940 ¦1,442.07 ¦373.34 ¦580.95 ¦ +-----+---------+---------+----------¦ ¦1941 ¦1,224.50 ¦333.25 ¦492.90 ¦ +-----+---------+---------+----------¦ ¦1942 ¦496.13 ¦122.95 ¦199.79 ¦ +------------------------------------+

Tax Lot 11 is the description of the land leased to the United States Maritime Commission and which was redeemed from the foreclosure proceedings after commencement thereof by the payment of the taxes thereon. The tax foreclosure proceedings were continued to completion as to the other parts of the Mock Bottom Property. The decree of foreclosure was entered on December 15, 1943, and the property covered thereby was conveyed to the sheriff by foreclosure deed on December 29, 1944.

The issue in this proceeding concerns only the loss sustained by petitioner, through her interest in the Liquidating Trust, in that part of the Mock Bottom Property conveyed by foreclosure deed, that is, Tax Lot 1 and 3. It was stipulated that the basis for income tax purposes of the 24.6 per cent interest of the Liquidating Trust in the property referred to above, which was included in the deed of foreclosure, was $87,528.39, and that the petitioner owned an undivided one-fifth interest in said property having a tax basis of $17,505.68. The petitioner filed an amended income tax return for the calendar year 1944 and claimed as a deduction from income the loss sustained by reason of the foreclosure in the amount of $17,505.68, and filed a timely claim for refund in the amount of $11,962.68 based thereon.

In determining the deficiency involved in this proceeding and in disallowing the claim for refund the respondent refused to allow as an ordinary loss the loss on account of such foreclosure.

The property in question was not used in the trade or business of the taxpayer.



The parties are in agreement that petitioner sustained a loss and as to the amount thereof. The only question now presented is whether the loss is an ordinary loss deductible in full or a capital loss, the deductibility of which is limited by section 117. The answer depends upon whether the property is excluded from the category of capital assets by section 117(a)(1) of the Code as ‘ * * * real property used in the trade or business of the taxpayer.‘

Our ultimate finding of fact is dispositive of the case. The petitioner had the burden of proving that the property was used in taxpayer's trade or business. In this, she has failed and the affirmation of the respondent's holding automatically follows. No useful purpose will be served by a recital or discussion of the facts. Suffice it to state that the facts do not establish the contention on which the petitioner's case rests. The property in question is, therefore, included in the category of capital assets under section 117(a)(1), I.R.C., and the loss is not deductible as an ordinary loss.

It is unnecessary to consider other questions which might be discussed, such as the respective rights of the trust and the beneficiaries thereunder.

Decision will be entered for the respondent.