Gordon v. Commissioner

HENRY J. GORDON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Gordon v. Commissioner Docket No. 13838. United States Board of Tax Appeals 12 B.T.A. 1191; 1928 BTA LEXIS 3388; July 6, 1928, Promulgated *3388 Petitioner is entitled to deduct any loss sustained in 1923 in the sale of residential property constructed by him in 1906-1907 to sell at a profit. J. Philip Dippel, Esq., for the petitioner. J. L. Backstrom, Esq., for the respondent. MORRIS *1191 This proceeding is for the redetermination of a deficiency in income tax of $1,030.42 asserted by the respondent for the year 1923. The sole question for determination is whether the respondent erred in disallowing a loss sustained by the petitioner in the sale of residential property in 1923. FINDINGS OF FACT. The petitioner is an individual residing at 40 King Street, Weehawken, N. J. Prior to engaging in his present occupation as a banker he was a druggist by profession. He has at all times since 1890 engaged in the purchase and sale of real estate either on his own account or with others. From 1891 until about 1910 he and Frederick Walker maintained real estate offices in various parts of the county and during the period when he was engaged in the drug business he also devoted about 90 per cent of his time to the real estate business. In addition to the erection and sale of the Bellevue*3389 Avenue house, hereafter discussed, the petitioner and one Carpenter also constructed and sold nine two-family houses on Eighth Street in West New York. In 1893 the petitioner formed a syndicate of four men and they purchased 41 acres of land in the Palisades on the Hudson River, which were subdivided into lots, some of which were sold, and the profits therefrom divided among the syndicate members, the petitioner receiving some cash and four and one-half lots, in lieu of cash, the fair market value of which at that time was $4,500. The lots received by him front on the south side of Bellevue Avenue, and on their east face the Hudson River and overlook New York City. The petitioner endeavored to sell the lots himself and he also enlisted the aid of other individuals and real estate brokers. A man by the name of McDonald, to whom the petitioner had spoken about the sale of the lots, interested someone in the purchase of two of them in or about 1903, but because of their peculiar location and the adverse effect the sale of only a portion of the plot would have upon the value of the lots remaining unsold, the petitioner refused to sell only two. *1192 In 1906 he started*3390 construction of a two-story residence on these lots, which, compared with other homes in the immediate vicinity, was very elaborate; it was 50 by 72 feet, contained 20 rooms, was of brick construction with a tile roof, and was of Spanish patio architecture. It had a probable life after it was built in 1907 of 50 years. The house was completed in February or March of 1907, and in August, 1907, the petitioner and his family moved into it, where they made their home continuously until the property was sold in 1923. Prior to 1907, when he moved upon the premises aforesaid, the petitioner and his family made their home in a modest flat of five rooms on the second floor of a two-story frame house in Guttenberg, the first floor of which was a drug store. At the time of the construction of this residence in 1906-1907 petitioner employed an architect and he sought his wife's advice as to the plans and the details of arrangement of the house. While the construction was in progress he was residing about three miles from the Bellevue Avenue property and at that time had no intention of moving into the house, but was building it in order to dispose of it at a profit. The petitioner had*3391 the property listed for sale in his own real estate office while it was under construction. He spoke to a number of other real estate brokers about it, advertised it for sale for about ten years, and it was officially listed with the firm of Koch Brothers, real estate brokers, in 1910 to be sold at $60,000. A fair value of the four and one-half lots received by the petitioner as a portion of his profits from the sydicate hereinbefore mentioned, at the time he concluded to build thereon, was $12,000, and the construction cost of the residence was $35,000. An additional lot was acquired and added to this property in 1909 at a cost of $1,750. A retaining wall and a garage were erected on the premises in 1915 at a cost of $5,200. The petitioner also expended $1,215 in advertising the property. The fair market value of the property at March 1, 1913, was $53,500. This property was sold by the petitioner in 1923 for $50,000, out of which he paid a commission of $2,600, and he claimed a loss in the computation of his net income for that year of $8,565.87, which the respondent disallowed on the ground that the loss was not one sustained in a transaction entered into for profit*3392 within the meaning of the taxing statute. OPINION. MORRIS: Section 214 of the Revenue Act of 1921 provides, among other things, that an individual shall be allowed deductions in the *1193 computation of net income for "losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business"; and also "losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business." As to the deductibility of the amount of the loss sustained in the computation of his net income for 1923, the petitioner urges , and . While the question raised in that case is with respect to the deductibility of a loss sustained in the sale of alleged residential property, the facts there are so utterly different from those in the instant case that we do not regard it as dispositive of the issue here in determining whether this petitioner is entitled to the deduction claimed. There the dwelling house was erected at some*3393 time prior to 1892 and it was occupied as a residence until 1901, in which year it was leased by the taxpayer at a stipulated rental until 1920, when it was sold at a loss and a deduction claimed in the computation of net taxable income. The Commissioner disallowed the deduction, and assessed an additional tax against the taxpayer, which was paid under protest, and suit was brought in the district court for recovery of the amount so paid. That court rendered a judgment for the collector of internal revenue which was reversed by the Circuit Court of Appeals for the Third Circuit. On certiorari the Supreme Court of the United States sustained that court in the allowance of the deduction but reversed the decision and remanded the case so that the value of the property as of 1901 could be found. The basis for the decision rendered there was that when the property was abandoned for residential purposes in 1901 and leased at a stipulated rental "all sentimental connection in the use of the house as a home ended, and thereafter the use of the property was by others under lease * * *." The instant case is distinguishable from *3394 , in one very vital particular in the petitioner's favor, namely, that the residence and the land upon which it was situated were at the outset intended to be sold at a profit, and by another vitally distinguishing factor which in our opinion mitigates against the petitioner's cause, namely, that he moved into the house shortly after its completion and continued to reside there for over 16 years. While the use of a residential property as a home for such a lengthy period of time raises a strong presumption that it was constructed, not with a view to selling it at a profit, but for a permanent place of abode, and without more, would completely defeat the petitioner's cause, it is not, by any means, a conclusive presumption, and therefore may be rebutted by showing that the motivating influence which *1194 impelled the construction was the hope and expectation of an immediate sale at a profit. The statute permits an individual to deduct such losses as are sustained during a taxable year which are not compensated for by insurance, even though they are not connected with his trade or business, "if incurred in any transaction entered*3395 into for profit." Therefore, the test of deductibility is whether a taxpayer entered into the transaction for profit and the question of occupying the premises as a residence is only one of the evidential factors to be considered in satisfying that test. A review of the cases bearing upon this question reveals to us that where a taxpayer acquires property with the intention of selling it at a profit, even though he may have resided thereon, if the predominating factor in its selection was the prospect of future profits, he is entitled to any loss sustained upon the sale thereof. See ; ; ; ; and . The factors which convince us that the petitioner's occupancy of this residence for over 16 years was merely by force of circumstances rather than choice are that he was himself a real estate agent and engaged in the purchase, sale and development of residential property in that vicinity; that his personal wealth was not sufficient*3396 to justify the maintenance of such an expensive home; that prior to erection of this residence on Bellevue Avenue he lived in a modest five room flat above his drug store; that the lots themselves upon which the house was built were originally acquired for resale and were at all times offered to the public for sale; that at the time of the construction of the building, the petitioner had no intention of moving thereto upon its completion; that all during the period of construction and for the many years thereafter during his occupancy every effort was made to sell at a profit; that due possibly to the fact that the building was elaborately erected in a settlement of much less desirable homes it was made more difficult to sell than had it been erected among more costly homes. From these factors, together with the undisputed testimony of the petitioner that the building was constructed for the purpose of resale at a profit and that he never intended it as a home, and the testimony of men who were aiding in the attempt to dispose of the property for the petitioner, we are forced to the conclusion that this was a transaction entered into for profit within the meaning of section 214, *3397 supra, and that the respondent erred in holding that any loss sustained from the sale in 1923 was not deductible. Judgment will be entered for the petitioner under Rule 50.