Wilkes v. Commissioner

Gilbert Wilkes, Petitioner, v. Commissioner of Internal Revenue, Respondent Wilkes v. Commissioner Docket No. 22331 United States Tax Court 17 T.C. 865; 1951 U.S. Tax Ct. LEXIS 27; November 28, 1951, Promulgated *27 Decision will be entered for the respondent. Held: 1. Petitioner, in the taxable year 1945, did not sustain a loss deductible under section 23 (e) of the Internal Revenue Code, on the sale of real estate devoted solely to his use as a personal residence for 16 years, although he originally purchased the property with the predominant purpose of realizing a profit on its sale. 2. Assuming a conversion from residential to rental property took place in April 1944, petitioner has not established the fair market value of the property at the time of the alleged conversion, which is a prerequisite to a determination of the amount of loss, if any, sustained on the sale of the property in the taxable year 1945. Stanley Worth, Esq., and Edward*28 S. Smith, Esq., for the petitioner. Paul E. Waring, Esq., for the respondent. Leech, Judge. LEECH *865 This proceeding involves a deficiency in income tax for the calendar year 1945 in the amount of $ 2,317.25. The issue is whether the petitioner is entitled to a deduction of the *866 sum of $ 6,795.76, as a loss sustained on the sale of certain real estate in the taxable year, under section 23 (e) of the Internal Revenue Code. FINDINGS OF FACT. Petitioner is a resident of Chevy Chase, Maryland. His tax return for the period involved was filed with the collector of internal revenue for the district of Michigan, at Detroit, Michigan. Petitioner is a scientist, having been educated in this country and in France. Because of his French education and experience, petitioner was employed in 1927 as an engineer by W. S. Barstow & Co., an operator of utilities, which was considering entering the utility field in France. He was sent to the Metropolitan Edison Co. in Reading, Pennsylvania, with the understanding that he would be sent to France. This French plan of the Barstow Co. did not materialize, and petitioner was retained in Reading to design power plants. In 1930*29 the Barstow interests were absorbed by the Associated Gas & Electric Co., and petitioner continued in the latter's employ until 1932. Petitioner then became a consulting engineer and did consulting work for various steel mills in the vicinity of Reading. For that purpose he established an office in his home. In 1933 these firms were not very active, and petitioner established a brewery in Salisbury, Maryland, and employed a manager to operate it. In 1935 petitioner discharged the manager and went to Salisbury to manage the brewery, where he remained about 18 months. The brewery business consistently lost money and was later sold to a silk mill. In 1937 petitioner resumed his consulting work for steel mills, which were becoming active. In 1939 petitioner accepted full time employment with the Taylor-Wharton Iron & Steel Co., and was required to spend all his time in Easton, Pennsylvania, and Highbridge, New Jersey. He remained with that company until February 1944 since when he has been employed by the Applied Physics Laboratory of Johns Hopkins University, in Silver Spring, Maryland. Petitioner was married in September 1925. Five children were born to the union, in the respective*30 years 1926, 1928, 1929, 1932, and 1934. On September 7, 1928, petitioner purchased real property known as "Jacksonwald," consisting of an eight-room stone and frame dwelling, and six and three-quarters acres of land. The property is located near Jacksonwald, Pennsylvania, which is about six miles from Reading, Pennsylvania. At the time petitioner signed the contract of purchase he was shown a residential development plan with lots, boulevards and parkways surrounding his plot. The agreed consideration for the acquisition of "Jacksonwald" was $ 13,000, of which amount $ 1,500 was reserved as a guarantee to insure the carrying out of the proposed development *867 plan. The plan, however, was not put into effect, and petitioner was not required to pay $ 1,500 of the purchase price. Petitioner made many permanent improvements to the property. After the purchase of "Jacksonwald," petitioner's family increased, and as a result he partitioned the entire third floor into separate rooms, increasing the number of rooms from eight to twelve; installed a bathroom on the third floor; installed a second bathroom on the second floor; constructed a playhouse in the yard for the children, *31 and started and partially completed tennis courts. The cost of "Jacksonwald," together with the subsequent permanent improvements, was $ 21,500, $ 17,000 of which cost petitioner allocated to buildings and improvements, and the balance of $ 4,500 was allocated to land. Since October 1928, petitioner and his family continuously occupied the premises, "Jacksonwald," as their home and personal residence until April 1944, except for a period of 18 months in the years 1936 and 1937 when they lived in Salisbury, Maryland. While petitioner and his family resided in Salisbury, Maryland, "Jacksonwald" was unoccupied. From the time petitioner acquired "Jacksonwald" in September 1928 until he accepted his position with Johns Hopkins University in February 1944, no effort was made either to sell or to rent the premises. About April 1, 1944, petitioner purchased a new home in Washington, D. C., and decided to move his family to that city. On April 15, 1944, petitioner's wife rented "Jacksonwald" to a Dr. Hershland for $ 60 per month. On April 17, 1944, petitioner's family moved to their new Washington home. Dr. Hershland occupied the premises until October 1944, when he entered the Navy and*32 moved therefrom. Thereafter "Jacksonwald" was listed with a real estate agent for rent or sale. The agent was unable to rent the premises and on April 19, 1945, the property was sold for $ 15,000. Petitioner, on his individual return for the year 1944, under a schedule entitled "Explanation of Deduction for Depreciation," reported, inter alia: Cost or Allowable Property Type of construction Date acquired other basis depreciation Jacksonwald, Pa Stone Apr. 1, 1944 $ 17,000 $ 281.25 On his individual return for the taxable year 1945, here involved, petitioner, under a similar schedule, reported the following: Property Type of construction Date acquired Jacksonwald, Pa Stone Apr. 1, 1944 Allowable Property Cost or other basis depreciation Jacksonwald, Pa $ 17,000 (sold Apr. 1, 1945) $ 127.50 *868 Also on his return for the taxable year 1945, petitioner claimed a loss sustained upon the sale of "Jacksonwald" during that year of the sum of $ 6,795.76, computed as follows: Cost or other basis (Date acquired -- 1928) $ 13,500.00 Expense of sale and cost of improvements subsequent to acquisition 8,805.76 Total $ 22,305.76 Less depreciation allowed 510.00 Net cost $ 21,795.76 Less gross sales price 15,000.00 Loss $ 6,795.76 *33 The respondent disallowed the claimed deduction in its entirety. OPINION. Petitioner contends that on the sale of real property known as "Jacksonwald," in the taxable year 1945, he sustained a loss which is deductible under section 23 (e) (1) or ( 2) of the Internal Revenue Code. 1 Petitioner's position is that this real property was purchased by him in 1928 with the predominant purpose of later selling it at a profit, and that the loss sustained on its subsequent sale was incurred in a transaction entered into for profit within the purview of subdivision (2) of section 23 (e) of the Code. Sidney W. Sinsheimer, 7 B. T. A. 1099; Henry J. Gordon, 12 B. T. A. 1191; W. W. Holloway, 19 B. T. A. 378; Minnie L. Campe, 17 B. T. A. 575; Marjorie G. Randall, 27 B. T. A. 475. The respondent contends that the property was acquired for residential purposes and was used as petitioner's personal residence until its sale. Morgan v. Commissioner, 76 F. 2d 390, certiorari denied 296 U.S. 601;*34 Rumsey v. Commissioner, 82 F. 2d 158, certiorari denied 299 U.S. 552; W. H. Moses, 21 B. T. A. 226. We think no benefit will ensue from an analysis of the cases relied upon by the respective parties. The issue involves the motive or intent petitioner had in acquiring the property, and whether such purpose continued throughout his ownership. The issue is one of fact and is to be resolved on the basis of the particular facts and circumstances disclosed by this record. Although petitioner makes the argument*35 here, in his petition he makes no allegation that "Jacksonwald" was acquired solely for realizing *869 a profit. The allegations there are that it was purchased in 1928; that he and his family occupied it as a residence from that time to the early part of 1944, when they vacated it and took up permanent residence in Washington, D. C.; and that on or about April 1, 1944, the property was converted into rental property and was rented to a tenant in April 1944 for a rental of $ 60 per month. Assuming the evidence does establish the fact that the property in question was purchased as a residence and was abandoned as petitioner's personal residence and devoted to rental purposes, such conversion from residential to rental property would constitute a transaction entered into for profit. Heiner v. Tindle, 276 U.S. 582. Petitioner, however, does not rely upon the conversion theory, presumably for the reason that in order to establish that he sustained a loss on that theory it would have been incumbent upon him to prove what the fair market value of the property was on the conversion date. Heiner v. Tindle, supra.*36 No evidence of such value was offered. The facts and surrounding circumstances disclosed by this record indicate that in all probability petitioner could not establish that the fair market value at the time of conversion in April 1944 was in excess of its sale price in 1945. Petitioner testified that the property was purchased at the peak of the real estate market and that the contemplated surrounding development which would have enhanced its value, did not materialize. Hence we think it is not unlikely that the loss occurred prior to such conversion date. Thus, for the purpose of using his original cost basis to establish his loss, petitioner, at the hearing and on brief, relies upon the theory that his predominant motive and intention in acquiring the property was one of profit, and that its use for residential purposes was merely incidental. Both petitioner and his wife so testified, and he argues that we should accept their testimony as establishing such fact. The mere assertion of one's intention in entering into a given transaction is of little or no evidentiary value unless the subsequent conduct in dealing with respect thereto is consistent with such asserted intention. *37 The purchase of residential property, its immediate occupancy and continued use as a personal residence, raise a strong presumption that the property was acquired for such purpose. To successfully rebut that presumption, the evidence must be clear and convincing. The record here is not persuasive. It shows that almost immediately after petitioner acquired "Jacksonwald" in September 1928, he moved his family into the property and they occupied the premises for a period of nearly 16 years. They had no other residence except a place which petitioner rented during the 18 months in the years 1936 and 1937 while he was operating a brewery in Salisbury, Maryland. During this absence "Jacksonwald" remained unoccupied. At no time during the period September 1928 to April 1944 was any effort made either to rent or to sell "Jacksonwald." Furthermore, it appears that as *870 petitioner's family increased, the premises were enlarged and facilities added to accommodate such increase. A transaction which was not originally entered into for profit may by later change become one for profit. Heiner v. Tindle, supra. Likewise, a transaction entered into*38 for profit may by later change become one for nonprofit. Gevirtz v. Commissioner, 123 F. 2d 707. So assuming, arguendo, that petitioner's original predominant motive in purchasing "Jacksonwald" was to realize a profit, his subsequent conduct with respect to such property, as set forth herein, changed the transaction into one for nonprofit. Prior to April 1944, "Jacksonwald" was definitely devoted solely to residential use by petitioner. No deductible loss is recognized on the sale of real property used as a personal residence at the time of sale. And again assuming, as heretofore mentioned, that a transaction entered into for profit resulted from the conversion in April 1944 to rental property, since the fair market value of the property at the time of such alleged conversion has not been established, we are unable to determine what loss, if any, petitioner sustained on the sale in 1945. Petitioner makes no claim that he was engaged in the real estate business. We, therefore, hold that in the taxable year 1945 petitioner is not entitled to any deductible loss as a result of the sale of "Jacksonwald" in that year, under either subdivision*39 (1) or (2) of section 23 (e) of the Internal Revenue Code. The determination of the respondent is sustained. Decision will be entered for the respondent. Footnotes 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -- (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or * * * *↩