Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Apr 26, 1951
16 T.C. 906 (U.S.T.C. 1951)

Docket No. 24552.



Oliver M. Jamison, Esq., for the petitioner. Robert G. Harless, Esq., for the respondent.

Oliver M. Jamison, Esq., for the petitioner. Robert G. Harless, Esq., for the respondent.

Held, since petitioner was using the property in question in a trade or business, the loss from its sale in 1944 is deductible in full under section 23(e) of the Internal Revenue Code.

The respondent determined a deficiency in petitioner's income tax liability for the year ended December 31, 1944, in the amount of $1,178.49. The question is whether the Commissioner erred in determining that the loss sustained by the petitioner in 1944 was a loss from the sale of a capital asset.


Part of the facts have been stipulated and they are so found.

Petitioner resides in Fresno, California. his tax return for the year involved was filed with the collector of internal revenue for the first district of California.

In February 1923 petitioner and another person contracted to purchase a parcel of land located on or near the city limits of Clovis, California, for the amount of $10,000. The other person being unable to pay his portion of the cost withdrew from the transaction soon after its inception. Thereafter petitioner carried on alone receiving a deed to the property some two years subsequent to the original contract.

The property comprised 20 acres. The land was improved at the time of purchase with an old barn. Petitioner did not further improve the property.

Petitioner originally acquired the property for the purpose of subdividing and selling lots. Shortly after he purchased the property it was subdivided for sale, but because economic conditions changed for the worse about this same time petitioner abandoned that plan. Shortly after the subdivision of the property a few lots were sold but when the property was reclassified into acreage petitioner refunded the sale price of these lots. Three years from the date of purchase petitioner had the land reclassified from subdivided property to acreage for the purpose of effecting a saving in taxes.

Thereafter, through the year in question, with the exception of three or four years, petitioner rented the property for whatever he could obtain. For several years petitioner rented to tenants who raised hay and grain, the rent being in the form of a quarter share of the profits. For the remainder of the time petitioner rented the property as pasture for $50 per year and during two or three years a 2-acre portion of it was rented for the storage of lumber also for $50 a year. When petitioner rented it for both pasture and as a number yard the total annual rental of $100 exceeded the property taxes.

Petitioner managed his own property. He never engaged the services of a real estate broker in any of his dealings in realty. The property in question was never advertised for sale nor were any signs posted on it. Persons in Clovis knew, however, that it was for sale. Petitioner never made any active effort to sell the property and he was never actively engaged in buying and selling property.

Between 1923 and 1944, in addition to the above property, petitioner owned and rented four parcels of farm property. These other parcels included a 10-acre vineyard, another 60-tract, half of which was used as a vineyard, an 80-acre vineyard, and a 160-acre parcel of grain land. During the period between 1923 and 1944 petitioner bought, with the intention of reselling, and resold three or four houses. During that same period he also derived income from mortgages and securities.

The property in question was sold in February 1944. At the time of the sale the basis of the property for income tax purposes was $9,472. The sale price was $4,000. The expenses of sale were $42.30. In determining the cost basis the allowable depreciation of the barn on the property was $525.

During the years 1923 to 1945 and prior thereto petitioner was a member of a partnership engaged in conducting a general merchandising business in the city of Clovis. He gave more than one-half of his time to this business.

In his tax return for the year 1944 petitioner deducted as a loss from the sale of this property the sum of $5,517.30 as a loss incurred in a transaction entered into for profit under section 23(e) of the Internal Revenue Code. The respondent determined that the loss resulted from the sale of a capital asset and therefore was deductible under the limiting provisions of section 117 of the Code.


HILL, Judge:

The respondent contends that the loss from petitioner's sale of the land in question constituted a loss from the sale of a capital asset. The petitioner, on the other hand, contends first that he held the 20-acre tract in question primarily for sale in the ordinary course of his trade or business and, second, that the ‘the 20-acre parcel * * * was 'real property used in the trade or business of the taxpayer’ within the meaning of Internal Revenue Code Section 117(a)(1).‘

We agree with the petitioner that the property in question was ‘real property used in the trade or business of the taxpayer‘ since petitioner rented the property during substantially all of the period he owned it and, therefore, that the loss in question is deductible in full under the provisions of section 23(e). See section 117(a)(1) of the Code.

That conclusion is supported by Leland Hazard, 7 T.C. 372. In that case the taxpayer was an attorney at law who prior to July 1, 1939, owned and occupied, as a residence, property in Kansas City, Missouri. On July 1, 1939, the taxpayer and his family moved to Pittsburgh, Pennsylvania. in January 1940 taxpayer listed the Kansas City property with real estate agents for rent or sale. Early in 1940 that property was rented for $75 per month. The property was continuously rented until sold on November 1, 1943. The Commissioner there, as here, determined the loss sustained was allowable only as a long term capital loss under the limiting provisions of section 117. We stated as follows:

Acquiesced 1946-2 C.B. 3.

* * * Prior to the Revenue Act of 1942 the established rule followed by this and other courts over a long period was that residential improvements on real estate converted into income-producing property are property ‘used in the trade or business of the taxpayer,‘ regardless of whether or not he engaged in any other trade or business, and are therefore excluded from the definition of ‘capital assets‘ as defined by section 117(a)(1). John D. Fackler, 45 B.T.A. 708 (and cases therein cited); affd. 133 Fed.(2d) 509; N. Stuart Campbell, 5 T.C. 272; George S. Jephson, 37 B.T.A. 1117. The undisputed facts bring the instant case within the rule. Thus, unless the amendments contained in the Revenue Act of 1942 require a change in the rule, the petitioner's position must be upheld.

The Court then went on to determine that section 151(b) of the Revenue Act of 1942, which added section 117(j) to the Code, did not change the rule established in John D. Fackler, 45 B.T.A. 708. We then concluded that the taxpayer's Kansas City property, as above explained, was not a capital asset at the time of its sale and that the taxpayer was entitled to a deduction for the total net loss as an ordinary loss under section 23(e) of the Code.

The facts of the case at bar are not distinguishable from the Hazard case, supra. Petitioner rented the property throughout almost all of the time that he held it. We therefore feel in view of what was said in the Hazard case, supra, that the property in question was not a capital asset as defined by section 117(a)(1) of the Code. William H. Jamison, 8 T.C. 173; Solomon Wright, Jr., 9 T.C. 173; Mary E. Crawford, 16 T.C. 678.

We therefore conclude that petitioner may deduct the total net loss of $5,517.30 under section 23(e) of the Code.

It follows that respondent erred in his determination.

Decision will be entered for petitioner.

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