Greenleaf Textile Corp. v. Commissioner

GREENLEAF TEXTILE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Greenleaf Textile Corp. v. Commissioner Docket No. 46747. United States Board of Tax Appeals 26 B.T.A. 737; 1932 BTA LEXIS 1257; July 28, 1932, Promulgated *1257 1. DEDUCTION - LOSS. Held, no deductible loss was sustained on asserted abandonment of real estate, where taxpayer held title throughout tax period and no identifiable event occurred therein by which the asserted loss became a closed transaction. A. J. Schwarzler Co.,3 B.T.A. 535, followed. Brumback v. Denman, 58 Fed.(2d) 128, distinguished. 2. Id. - INTEREST - TAXES. Interest on mortgage notes secured by the real estate and taxes paid thereon during the two preceding years allowed in computing net loss carried forward to taxable year in controversy. Benjamin Mahler, Esq., for the petitioner. William E. Davis, Esq., and Paul E. Waring, Esq., for the respondent. LEECH *738 The petitioner in this proceeding alleges that the income taxes in controversy are for the fiscal years ended February 28, 1927, and February 29, 1928. The deficiency letter upon which the appeal is taken asserted a deficiency for the fiscal year ended February 29, 1928, in the amount of $6,725.97, but no deficiency for the fiscal year ended February 28, 1927. The petitioner assigns as error the Commissioner's*1258 disallowance of a deduction of $49,893.24 for the fiscal year ended in 1928 as a loss sustained in that year on Florida real estate and, in the alternative, if the Board disallows any portion of such amount because it represents taxes and interest paid in prior years, that such deduction be considered as of the prior years for the purpose of determining the net losses to be brought forward in the computation of the correct tax liability for the fiscal year ended February 29, 1928. FINDINGS OF FACT. The petitioner is a New York corporation, engaged in the textile and cotton-converting business. Concluding that there were favorable opportunities for engaging in the purchase and sale of Florida real estate for profit, the petitioner's board of directors duly adopted a resolution on June 29, 1925, authorizing Samuel Greenblatt, its president, to make such purchases, sales and investments in real estate and in mortgages in Florida as he deemed advisable, but not to exceed $50,000 at any one time; to negotiate purchases and sales and to hold title in his own name or in the name of any company he might organize for that purpose; to withdraw funds of the corporation to carry out the*1259 purpose of the resolution, such funds to be charged against his personal account until he shall account to the corporation therefor; and, further, that he pay over to the corporation all profits realized from such transactions and that he transfer to the corporation upon its demand all contracts and real estate titles acquired pursuant to the resolution. In July, 1925, Greenblatt went to Miami, Florida, where, pursuant to the resolution and on behalf of the petitioner, he negotiated the purchase of seven lots. Four of the lots located in Dade County were purchased at a cost of $47,000, of which amount Greenblatt paid $21,962.26 in cash, and three lots located within ten blocks of the *739 Miami city hall were purchased at a cost of $60,000, of which amount he paid $17,408.41 in cash. For the purpose of avoiding liability by petitioner or himself, Greenblatt organized the S. and G. Realty Company, which took title to the lots and gave its notes due in one, two and three years, secured by mortgages for the balances due thereon. Each lot was acquired subject to five or six prior mortgages. The S. and G. Realty Company was merely a dummy corporation which never held directors' *1260 meetings and never had a bank account. All of its affairs were handled by Greenblatt, who at various times during the period from September, 1925, to May, 1926, made payments totaling $7,431.33 on the principal of the mortgage notes. During petitioner's fiscal years ended February 28, 1926, and February 28, 1927, he also made payments of $444.33 and $1,796.33, respectively, as interest on mortgage notes and taxes on such property. In addition to the foregoing amounts Greenblatt expended $850.58 in traveling expenses for several trips between New York and Miami, making a total of $49,893.24 expended by him on behalf of the petitioner. Early in 1926 it appeared that there had been an overexpansion in the development of Florida real estate and many persons offered their property for sale, with the result that the boom collapsed. Greenblatt made no further payment of any kind on the property after May, 1926, but retained hope for a recovery of market values and obtained agreements with the mortgagees for extensions of time on payments due. In September, 1926, a hurricane ravished Miami and the surrounding country, with the result that property owners were willing to sell at any*1261 price. Greenblatt hoped for a revival of land values during the winter season of 1927, and secured further extensions of time for payments due on the mortgage notes. The S. and G. Realty Company retained title to the lots during 1927. In the fall of 1927 Greenblatt went to Miami to determine if any disposition could be made of the lots. He found that there was absolutely no hope of getting anything then for petitioner's equity in the property. He then determined to abandon the property to prevent further loss on the venture and on December 1, 1927, submitted to petitioner a report on his real estate activities, and an accounting of the funds expended by him on behalf of petitioner. On December 5, 1927, the petitioner's board of directors adopted a resolution ratifying and confirming Greenblatt's acts and transactions in connection with Florida real estate, specifically as to the purported abandonment of the property, and directed that there be credited to Greenblatt's personal account the amount of $49,893.24. The petitioner charged such amount to profit and loss on its books as a loss sustained on Miami property. The lots in question have never been sold by the S. and*1262 G. Realty Company. *740 The petitioner duly filed a return on the accrual basis for its fiscal year ended February 29, 1928, which reported a net income of $868.81 after deducting, inter alia, $49,893.24 as a loss on Miami property, $5,321.80 as a statutory net loss for the year ended February 28, 1926, and $401.96 as a statutory net loss for the year ended February 28, 1927. In auditing such return the Commissioner has made only one change, namely, the disallowance of the deduction of $49,893.24 as a loss sustained in that taxable year. OPINION. LEECH: The Commissioner having determined no deficiency for the fiscal year ended February 28, 1927, this proceeding is dismissed as to that year, for lack of jurisdiction. Cf. . The asserted deficiency in controversy for the fiscal year ended February 29, 1928, resulted from the Commissioner's disallowance of a deduction of $49,893.24 taken by petitioner as a loss realized in that year on real estate purchased in 1925. Section 23(f) of the Revenue Act of 1928 and section 234(a)(4) of the Revenue Act of 1926 provide that in computing net income there shall be allowed*1263 as deductions "losses sustained during the taxable year and not compensated for by insurance or otherwise." The title to the real estate in question was taken in the name of the S. and G. Realty Company. This company never functioned as such, and, admittedly, was a mere name, in which the title was held for the sole benefit of petitioner. Therefore, if the loss asserted was sustained in the taxable period here involved, the petitioner must prevail. ; ; . This Board early adopted the rule that a taxpayer could not sustain a deductible loss as to the value of real estate while retaining title thereto, upon the theory that losses "growing out of the ownership thereof, are deductible only when ascertained and determined upon an actual, completed, and closed transaction during the taxable year, and are not sustained through the mental processes by which a taxpayer determines that the property is worthless and charges it off on its books, while it still retains the title to the property itself." *1264 . The Circuit Court of Appeals for the 6th Circuit, in the case of , affirming , apparently recognized an exception to this theory by applying the "practical test" of the Supreme Court in , and , which had to do with losses in the value of personal property, to losses involving real estate. The exception which the court there recognized is the occurrence of an identifiable event during the taxable period in which the controverted *741 loss is claimed of such consequence as to definitely fix the taxpayer's loss, regardless of title. It was held there that a court order authorizing a bond issue and assessing a tax against lands for the payment of the principal and interest on the bonds when due, was such an event. Although petitioner in the instant case has our sympathy, we are unable to find in the evidence before us any event of comparable effective consequence, upon the happening of which the worthlessness of the*1265 land in question was definitely and decisively determined. The absence of such occurrence brings this case within the operation of the rule in , the facts in which were somewhat similar to those here. In effect the situation in the case at bar can not be described as resulting in more than a mere diminution of value which does not constitute a realized or sustained loss. Cf. . We hold, therefore, that, since the petitioner retained title to the real property in question throughout the tax period at issue, there was no actual, completed and closed transaction resulting in a deductible loss. Cf. The petitioner's alternative issue is that taxes and interest paid on the Miami property in its two prior tax years be considered for the purpose of determining the correct statutory net losses incurred in those years and deductible in the taxable year. The Board, in redetermining a deficiency for a taxable year, has jurisdiction to consider such facts with relation to the taxes for other taxable years as*1266 may be necessary to redetermine correctly the amount of the deficiency in controversy. Section 274(g), Revenue Act of 1926, and section 272(g), Revenue Acts of 1928 and 1932. The petitioner had net losses for the two prior taxable years ended February 28, 1926 and 1927, in the amounts of $5,321.80 and $401.96, respectively, and the Commissioner has allowed the deduction thereof in determining the deficiency in question. Section 234(a)(2) and (3) of the Revenue Act of 1926 provides specifically for the deduction of interest and taxes paid or accrued within the taxable year. The excess of the deductions allowed by section 234 over gross income, with certain exceptions not applicable here, constituted petitioner's net losses for those two preceding years. Section 206, Revenue Act of 1926, section 117, Revenue Act of 1928. The said amounts of interest and taxes were charged to Greenblatt's personal account during those prior years and no deduction has been taken on that account. Accordingly, the net losses for the two prior years should now be increased by the interest and taxes paid in those years and such increased net losses brought forward in recomputing the correct deficiency*1267 for the taxable period here involved. Judgment will be entered under Rule 50.