Simister v. Commissioner

Walter Simister, Jr., and Bertha E. Simister, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent Simister v. Commissioner Docket No. 3970 United States Tax Court 4 T.C. 470; 1944 U.S. Tax Ct. LEXIS 9; December 12, 1944, Promulgated *9 Decision will be entered under Rule 50. The petitioners sustained a loss upon the sale of a farm to their daughter and son-in-law. In payment for the farm the daughter and son-in-law gave their joint promissory note. Held, that the vendees acquired the property in equal shares as tenants in common and that the prohibition contained in section 24 (b) of the Internal Revenue Code against the deduction of losses sustained upon the sale of property between members of a family is applicable to one-half the loss sustained which resulted from the sale of property to the daughter, but does not apply to the remainder of the loss, which resulted from the sale to the son-in-law. J. Alex Neely, Jr., Esq., for the petitioners. Bernard D. Hathcock, Esq., for the respondent. Turner, Judge. TURNER *470 The respondent has determined a deficiency in income tax against the petitioners for the year 1941 in the amount of $ 3,325.68. The respondent's determination resulted from his disallowance of certain deductions and the making of certain additions to income. The petitioners contest only the disallowance of a deduction of $ 2,429.52, claimed as a loss sustained upon the *10 sale of a farm. FINDINGS OF FACT. The petitioners are husband and wife, and residents of Greenville County, South Carolina. They filed a joint income tax return for the calendar year 1941. In 1939 petitioner Walter Simister, Jr., purchased a 36.2-acre farm in Greenville County, paying $ 5,500 therefor. Title to the property was taken in the name of petitioner Bertha E. Simister. The improvements on the property at the time of purchase consisted of a small dwelling, a two-room tenant house, and an old cow barn. In October of 1938 the petitioners' daughter Elsie married Clay Jones, Jr., who was then working in the city of Greenville. Shortly thereafter Jones and his wife moved to the above farm, Jones agreeing with Simister to devote some of his after-work time to seeing that the tenant farmer "did what was right." In the spring of 1939 Jones expressed the desire to go into the dairy business. Since he had no money, it was agreed that Simister should finance the operation and that Jones should run the dairy. Jones was to have $ 25 per week from the venture to cover his living expenses, and if there were any profits he was to have the said $ 25 per week or half of the profits, whichever*11 was greater. If the venture resulted in a loss, Simister was to stand the loss. *471 At some time, the date not being shown, Simister, or Simister and Jones, entered into the chicken business on the said farm. The location proved to be bad for such an enterprise, and the chicken business was abandoned or moved by Simister to a more suitable location on another farm which he had purchased. During 1939 and 1940 a new cow barn was built and the old dairy barn was repaired. Three chicken houses and one brooder house were also built. The total cost of these improvements, all of which was paid by Simister, was $ 3,175. After abandonment or removal of the chicken business, the houses built for that operation were used only for storage purposes. In 1941 Simister decided to sell the above farm, and discussed the matter with Jones. Jones, desiring to continue in the dairy business, agreed to purchase the farm and to pay $ 6,000 therefor. In payment for the farm, Jones delivered his and his wife's joint promissory note for $ 6,000, the said note being payable at the rate of $ 300 per year, on the first of December, beginning December 1, 1942, until paid in full. It was to bear interest*12 at the rate of 3 percent per annum. Title to the farm was conveyed in fee by Bertha E. Simister to "Clay Jones, Jr., and Elsie S. Jones." The deed recited that the conveyance was made in consideration of the payment of the sum of $ 6,000 by the grantees. The date of both the note and the deed was December 30, 1941. Simister and Jones continued the operation of the dairy business as before, except that it was agreed between them that the business should pay Jones $ 400 per year for the use of the farm. The $ 400 was paid for 1942, but was not paid for 1943 because the business did not have the money with which to make the payments. The $ 400 due for 1943 is still owing and is carried as a liability on the accounts of the dairy. The dairy business has not been profitable and, as a result, Jones' withdrawals have been limited to the $ 25 per week, as provided in the agreement between him and Simister. Payments of $ 28 per month have been made regularly on the note, principal and interest, given by Jones and his wife in payment for the farm. In their return for 1941 the petitioners deducted $ 2,429.52 as a loss sustained on the sale of the above farm in December of 1941. In determining*13 the deficiency, the respondent has disallowed the deduction so claimed. OPINION. It is the claim of the respondent, first, that the petitioners have failed to prove that a loss was sustained on the disposition of the above farm, and, second, that if it be held that a loss was sustained, the deduction thereof is prohibited by section 24 (b) of *472 the Internal Revenue Code. 1 That the first claim is without merit, is shown by the facts. In December of the taxable year, the petitioners, or petitioner Walter Simister, Jr., sold, for $ 6,000, a farm which with the improvements thereon had a total cost of $ 8,675, and for the purpose of computing the amount of the loss there appears to be no dispute, or basis for dispute, between the parties as to the amount by which the cost basis of the property should be adjusted by depreciation sustained on the improvements prior to the sale. *14 The respondent's alternative claim is that Clay Jones, Jr., and Elsie Jones, his wife, acquired the farm as joint tenants; that under joint tenancy each of the tenants is vested with the property in its entirety, and, since Elsie Jones is a lineal descendant of the petitioners, the sale of the property to her brings the transaction within the provisions of section 24 (b), supra, and bars the deduction of the loss sustained. He makes no claim that Jones was a member of petitioners' family within the meaning of the said section. The petitioners, on the other hand, contend that Jones, alone, was the purchaser, and Jones not being a member of petitioners' family under section 24 (b), the deduction claimed is not barred. In the alternative, they claim that under South Carolina law Jones and his wife acquired the farm as tenants in common and, such being the case, one-half of the loss should be considered as having resulted from the sale to Jones and not within the prohibition of the above section. It is the law of South Carolina that, where a grant is made to husband and wife and there is no expressed intention of conveying the whole to the survivor, they become tenants in common. *15 Green v. Cannady, 77 S.C. 193; 57 S.E. 832. In the instant case, the grant was to "Clay Jones, Jr., and Elsie S. Jones" and there was no expressed intention of conveying the property to the survivor. We accordingly conclude that they acquired the property as tenants in common. We also conclude that Jones and his wife acquired the property in equal shares. The presumption is that tenants in common hold an equal share or interest in the common property, where the instrument creating the estate does not make their shares or interests unequal. Thompson on Real Property, vol. 2, sec. 1768. The instrument in question here does not make their interests unequal and the facts show that the parties were equally obligated on the purchase note. On the law and the facts, *473 it is our opinion and we hold that one-half of the loss sustained upon the sale of the farm was attributable to the sale to petitioners' daughter, and to that extent the deduction claimed is barred by the provisions of section 24 (b), supra. The remainder of the loss, however, was attributable to the sale to Jones, and the section in question*16 does not contain any prohibition against its deduction. To that extent the petitioners are sustained. Decision will be entered under Rule 50. Footnotes 1. SEC. 24. ITEMS NOT DEDUCTIBLE. * * * * (b) Losses From Sales or Exchanges of Property. -- (1) Losses Disallowed. -- In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly -- (A) Between members of a family, as defined in paragraph (a)(D); (2) * * * * * * * (D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; * * *↩