Horrmann v. Commissioner

William C. Horrmann, Marian D. Horrmann, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent Horrmann v. Commissioner Docket No. 28362 United States Tax Court 17 T.C. 903; 1951 U.S. Tax Ct. LEXIS 23; November 30, 1951, Promulgated *23 Decision will be entered under Rule 50. The family residence of petitioner's mother was acquired by petitioner by devise upon the death of his mother in February 1940. Petitioner redecorated and moved into the family residence and sold his own home. The newly acquired home was found to be unsuitable and petitioner abandoned it as a residence in October 1942. After making several unsuccessful attempts to rent or to sell the property it was finally sold in June 1945, at a loss. Held, after October 1942, the property was held for the production of income and petitioner is entitled to deductions for depreciation, section 23 (l) (2), and maintenance and conservation expenses, section 23 (a) (2) during the years 1943, 1944, and 1945; held, further, the loss incurred upon the sale of the property in 1945 is not deductible as the loss was not incurred in any transaction entered into for profit, section 23 (e) (2) of the Code. Robert A. Littleton, Esq., and Ward M. French, Esq., for the petitioners. Robert Margolis, Esq., for the respondent. Black, Judge. BLACK *904 The Commissioner has determined deficiencies in petitioners' income tax as follows: Year Amount of deficiency [1943] $ 1,459.19 [1944] 1,678.33 [1945] 387.86 [1946] 7,090.46 *25 Petitioners contest the determinations by the following assignments of error: (a) Respondent errs in his failure and refusal to allow petitioners a deduction for each of the years 1943, 1944, and 1945, the amount of depreciation sustained to improvements on real property held primarily as rental property or for sale as a capital asset during said years. (b) Respondent errs in his failure and refusal to allow petitioners a deduction for each of the years 1943, 1944 and 1945, the expense incurred and paid out during each of said years to protect and preserve property held primarily as rental property or for sale as a capital asset. (c) In computing tax on long-term and short-term capital gains realized by petitioners in the year 1946, with respect to amount thereof taken into account, respondent errs in his failure and refusal to allow petitioners the carry-over of a net long-term capital loss sustained for the year 1945 from the sale of a capital asset. Some adjustments made by the Commissioner, more or less minor in their nature, are not contested by petitioners. FINDINGS OF FACT. Petitioners are husband and wife who reside in St. Petersburg, Florida. Their returns for the years*26 1943, 1944, 1945, and 1946, were filed with the collector of internal revenue for the district of Florida. William C. Horrmann will sometimes hereafter be referred to as petitioner. The property which is the basis of this case is located at 189 Howard Avenue, Grymes Hill, Staten Island, New York. The land consists of a 5-acre landscaped plot situated on the side of a hill, and on the land is a stone house and brick garage. The house was built by petitioner's father and mother in 1910 at a cost of more than $ 100,000. It was a replica of a castle located in Germany, and it had 17 rooms, or *905 more. Petitioner's father lived in the house until his death sometime in the 1920's and petitioner's mother continued to live in the house as a family residence until her death in February 1940. Petitioner lived in the house until he was married in 1938. Petitioner's mother devised the property to petitioner, and for estate tax purposes the property was valued at $ 60,000. The Horrmann family consisted of mother and father, four daughters, and two sons, of whom petitioner was the youngest. In addition to the devise of the property, the will also contained a wish, although not a *27 condition, that petitioner maintain the property as a home, if possible, for the members of his mother's family. The petitioner's mother had communicated this wish to her family during her lifetime. During 1940, petitioner expended $ 9,000 in redecorating the house, and in November 1940, moved into the house with his wife and son. Petitioner hoped that some of his sisters or his brother would move in for the size of the house was out of proportion to the size of petitioner's immediate family, and they could share in the expenses. Sixty tons of coal were required each year to heat the house, and in order to maintain the property there was required the full-time services of three or four servants for the house and a gardener for the grounds. It was an expensive residence to maintain; petitioner found that out from experience. In October 1942, petitioner moved out of the house and rented a much smaller house at 338 Douglas Road, Emerson Hill, Staten Island, one to one and one-half miles from 189 Howard Avenue. The house leased by petitioner was smaller and was more in keeping with his income. When petitioner moved out, he did so with the intent of never returning to the property. *28 In the year 1943, petitioner and his family moved to St. Petersburg, Florida. He purchased a house there, and has maintained his personal residence there ever since. Prior to moving into 189 Howard Avenue, petitioner owned and resided in a residence located at Ocean Terrace, Staten Island, but the latter residence was sold shortly after it was vacated. When petitioner moved from 189 Howard Avenue the property had a reasonable market value of $ 45,000 allocated as follows: land, $ 35,000, buildings, $ 10,000. In addition to stipulating these values, the parties also agreed that the buildings had a remaining useful life of 20 years. Immediately before and after petitioner moved from the Howard Avenue property, a proposal to convert the house into separate apartments was considered. A construction company was consulted and estimated the cost of conversion would be $ 60,000. The plan was abandoned because of the prohibitive cost. On or about December 19, 1942, petitioner listed the Howard *906 Avenue property for sale with Kolff and Kaufmann, Inc., real estate brokers, with offices on Staten Island. The property was offered for sale at $ 75,000, which was reduced to $ 40,000*29 in November 1944, and to $ 30,000 in March 1945. The realtors advertised the property for sale, attempted to sell the property, and also attempted to lease the property. Offers were received from prospective tenants, but the monthly rental offered by them, $ 200 to $ 250, was inadequate. An offer of $ 500 per month would have been an acceptable rental from the property. The property was offered for use as an officers' club for Halloran General Hospital which was nearby in return for payment by the Army of the taxes and maintenance costs of the property. However, nothing came of this offer. Early in 1943, the property was offered to the Coast Guard for use as accommodations for the SPARS. Because of lack of transportation facilities the Coast Guard rejected petitioner's offers to sell or to lease the property. In late 1943, after petitioner entered the U. S. Maritime Service, the U. S. Army Engineers inspected the property and displayed an interest in renting the property. Petitioner's agent, however, received no offer from them. The property was also offered to the Maritime Commission and to several service organizations, but these attempts to rent or to sell the property*30 ended in failure. At no time during the period from October 1942 to June 5, 1945, was the Howard Avenue property or any part thereof rented, nor did it produce any income whatsoever. On May 28, 1943, petitioner entered into a contract with a national real estate clearing house for their services in promoting the sale of the Howard Avenue property, and in accordance with that contract the clearing house prepared a listing or brochure describing the property. This brochure which was prepared under the direction and with the approval of petitioner contained the following statement: "Not for rent." In January of 1945, the property at 189 Howard Avenue was broken into by vandals who inflicted heavy damage on the property by smashing furniture, decorations, fixtures, and glass, and by building fires on the floors. On June 5, 1945, the property was sold for the consideration of $ 23,000. Petitioner paid expenses of $ 2,200 incurred in connection with the sale of the property, of which $ 1,150 was paid to Kolff and Kaufmann, Inc., under his oral contract made with the broker in December 1942. The expenses incurred by petitioner in the maintenance and conservation of the Howard Avenue *31 property during the taxable years are as follows: *907 [1944] Caretaker expenses and detective agency $ 520 $ 700 Gas and electricity [50] Coal [600] Total 1,170 [750] OPINION. Three issues are presented in this proceeding. All issues relate to the real property, residence and garage, at 189 Howard Avenue, Staten Island, New York, which was acquired by petitioner by a devise from his mother upon her death in February 1940. Petitioner redecorated the house and moved into it about October 1940. Shortly thereafter petitioner sold the residence in which he was living prior to October 1940. The property at 189 Howard Avenue was used by petitioner as his personal residence until October 1942, at which time petitioner abandoned the house. Petitioner, after living in the residence for awhile, considered the property too large and too expensive and when he left he planned never to use it again as his personal residence. Petitioner considered converting the building into apartments, but this was found to be impractical. Numerous efforts were made to rent and to sell the property. The property was sold in June 1945, and the net proceeds from the sale were*32 $ 20,800. At the time petitioner acquired the property its value was $ 60,000, and at the time it was abandoned by petitioner as a personal residence the value was $ 45,000, with $ 35,000 allocated to land and $ 10,000 to the buildings. The issue which we shall first consider is whether petitioner is entitled to a deduction for depreciation on the property during the taxable years 1943, 1944, and 1945. The applicable provision of the Internal Revenue Code is set forth in the margin. 1 Petitioner is entitled to a deduction for depreciation at the rate of $ 500 per year provided the property was held for the production of income. In determining whether the test prescribed by statute is satisfied the use made*33 of the property and the owner's intent in respect to the future use or disposition of the property are generally controlling. Until November 1942, the property was used by petitioner solely as a personal residence, but thereafter that use was abandoned. The mere abandonment of such use does not mean that thereafter the property was held for the production of income. But when efforts are made to rent the property as were made by petitioner herein, the *908 property is then being held for the production of income and this may be so even though no income is in fact received from the property, Mary Laughlin Robinson, 2 T. C. 305, and even though the property is at the same time offered for sale. While an intention not to rent the house was indicated in May 1943, on the brochure of the real estate clearing house, efforts to rent the property were made subsequent to that time. The evidence, when considered in its entirety, supports the conclusion that petitioner continuously offered to rent the property until it was sold. In the recomputation of tax for the years 1943, 1944, and 1945, petitioner is to be allowed depreciation at the rate of $ 500*34 per year until June 1945, when the property was sold. The second issue is whether petitioner is entitled to a deduction for expenses incurred during the taxable years for the maintenance and conservation of the property. The applicable provision of the Internal Revenue Code is set forth in the margin. 2 The same phrase appearing in section 23 (l) (2) of the Code, see footnote 1 of this Opinion, appears also in section 23 (a) (2) of the Code, the requirement being that the property be held for the production of income. The taxpayer in Mary Laughlin Robinson, supra, claimed a deduction for depreciation on the property and expenses for services of a caretaker. Although the taxable year there was 1937, the sections of the Code applicable there (see footnote 1 of that Opinion) contain the same standard, property held for the production of income, as is applicable here. We there held that the taxpayer was entitled to both the deductions at issue. In accordance with that Opinion, we hold that petitioner in the recomputation of tax for the years 1943 and 1944, is entitled to deductions for maintenance and conservation expenses of the property *35 as itemized in our Findings of Fact. The third issue is whether petitioner is entitled to a deduction for a long term capital loss arising from the sale in 1945 of the property at 189 Howard Avenue. Petitioner claims a deduction under the provisions of section 23 (e) (2) of the Code which are set forth in the margin, 3 and he has computed the deduction in accordance with the limitations provisions of section 117 of the Code. *36 *909 The language of the Code sections applicable in issues one and two was property held for the production of income, and the language of section 23 (e) (2) of the Code is different. In order for a loss to be deductible under that section it must be incurred in any transaction entered into for profit. In a situation where the use of the property as a personal residence has been abandoned, and where the owner has offered the property for sale or for rent and finally sells the property at a loss, that distinction in language may result in allowing a deduction in one case and not allowing a deduction of another type. At least the cases have distinguished between the two statutory provisions, Warner v. Commissioner, 167 F. 2d 633, affirming per curiam a Memorandum Opinion of this Court. We think that the facts in respect to this issue are not materially different from those in Allen L. Grammer, 12 T. C. 34, and those in Morgan v. Commissioner, 76 F. 2d 390. When property has been used as a personal residence, in order to convert the transaction into one entered into *37 for profit the owner must do more than abandon the property and list it for sale or rent, Allen L. Grammer, supra.See also Rumsey v. Commissioner, 82 F. 2d 158. In that case, in denying the taxpayer any deduction for the loss so incurred, the Court said: The taxpayer argues with considerable persuasive force that the fact that a man first rents his house before selling it is only significant as evidentiary of his purpose to abandon it as a residence and to devote the property to business uses; that renting is not the sole criterion of such purpose, as the regulations themselves imply by the words "rented or otherwise appropriated" to income producing purposes. But we think the argument cannot prevail over counter considerations. If an owner rents, his decision is irrevocable, at least for the term of the lease; and if he remodels to fit the building for business purposes, he has likewise made it impossible to resume residential uses by a mere change of mind. When, however, he only instructs an agent to sell or rent the property, its change of character remains subject to his unfettered will; he may revoke the agency*38 at any moment. Certainly it strains the language of Article 171, Regulations 74, to find that the property is "appropriated to" and "used for" income producing purposes by merely listing it with a broker for sale or rental. * * * We have held that an actual rental of the property is not always essential to a conversion, Estate of Maria Assmann, 16 T. C. 632, but that case is not controlling here for the taxpayer there abandoned the residence only a few days after it was inherited, and then later demolished the residence. In Mary E. Crawford, 16 T. C. 678, which involved only the question of whether the loss was a section 23 (e)(1) loss or a section 23(e)(2) loss, the owner-taxpayer had also demolished the residence. While we held in both cases that such action constituted an appropriation or conversion, in both cases the facts indicate that from the moment the properties were inherited the taxpayers did not intend to continue to occupy the property as their personal residence. Here the situation is different. The petitioners in the instant case *910 soon after the death of petitioner's mother took immediate and*39 decisive action, fixing the character of the property in their hands as residential. The surrounding circumstances point to this conclusion; their expenditure of approximately $ 9,000 in redecorating the house in preparation for their use of it as a home; their moving into the property within nine months after they acquired it; the sale of their former residence at Ocean Terrace shortly after they had moved into the Howard Avenue property; and finally, their occupancy of the Howard Avenue property for a period of about two years as a home and residence. They could hardly have gone further more decisively to fix the character of this property, originally neutral in their hands, as personal residential property. As to the third issue, we think there was no conversion of the property into a transaction entered into for profit. Respondent did not err in determining that petitioner was not entitled to the benefits of a capital loss carry-over to 1946 for the loss sustained upon the sale in 1945 of the property at 189 Howard Avenue. Allen L. Grammer, supra. Decision will be entered under Rule 50. Footnotes 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (l) Depreciation. -- A reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) -- * * * * (2) of property held for the production of income.↩ 2. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: (a) Expenses. -- * * * * (2) Non-trade or non-business expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.↩ 3. 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 -- * * * * (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *↩