Krauss v. Commissioner

FREDERICK KRAUSS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Krauss v. Commissioner Docket No. 67922. United States Board of Tax Appeals 30 B.T.A. 62; 1934 BTA LEXIS 1376; March 13, 1934, Promulgated *1376 The sale of real estate for taxes in Florida does not divest the owner of the title as long as the right of redemption exists and does not constitute abandonment, nor is it such an event as to give rise to a deductible loss. Virgil Y. Moore, Esq., for the petitioner. Roy N. McMillan, Esq., and P. S. Crewe, Esq., for the respondent. TRAMMELL *62 This is a proceeding for the redetermination of a deficiency in income tax for 1930 in the amount of $3,738.96. The error assigned is the failure of the respondent to allow as deductions losses claimed on account of real estate becoming worthless during the taxable year. FINDINGS OF FACT. Petitioner, a physician, citizen and resident of Philadelphia, Pennsylvania, in 1925 became a member of a syndicate dealing in and developing real estate in Florida. The syndicate organized the New Homes Development Co., which during 1925 and 1926 engaged in extensive real estate development in that state. Petitioner was one of its stockholders. He acted in a consultatory capacity with reference to its affairs, and made trips to Florida to inspect its property in 1925, 1926, 1928, and possibly in 1927. *1377 In the course of his dealings in Florida real estate he bought in 1925 lot Nos. 14, 15, 16, 18, and 19 of block 27, Edison Park Subdivision, Ft. Myers, Florida, paying therefor in separate payments *63 from 1925 to 1928, inclusive. In May 1925 he bought and paid $10,890 for lot Nos. 15, 16, 17, and 36 of block B of Granada Terrace Subdivision, Ft. Myers, Florida, and lot Nos. 17 and 18 in block H of Coronado Subdivision, Ft. Myers, Florida. Petitioner paid all taxes when they became due on all of the lots until and including the year 1928. In the summer of 1929 petitioner received from the tax collector at Ft. Myers, Florida, tax notices covering 1929 taxes on all the properties referred to above. The notices bore the notation "Taxes are due and payable November 1, 1929. Discounts allowed: Four per cent. in November; three per cent. in December; two per cent in January and one per cent. in February. Taxes are delinquent April 1, 1930, when property is advertised and tax certificate sold. Tax certificates bear high rate of interest, and may be foreclosed in two years from date and title conveyed." On July 7, 1930, lot 14, 15, and 16, block 27, Edison Park Subdivision, *1378 Ft. Myers, Lee County, Florida, at the time the property of petitioner, were offered for sale by the tax collector of Lee County, Florida, for 1929 taxes due Lee County and the State of Florida in the amount of $108.30. On the same date lot 18 and 19, block 27, Edison Park Subdivision, Ft. Myers, Lee County, Florida, at the time the property of petitioner, were offered for sale by the tax collector of Lee County, Florida, for 1929 taxes due Lee County and the State of Florida in the amount of $72.30. On the same date lot 15, 16, and 17, block B, Granada Terrace, Ft. Myers, Lee County, Florida, at the time the property of petitioner, were offered for sale by the tax collector of Lee County, Florida, for 1929 taxes due Lee County and the State of Florida in the amount of $27.30. On the same date lot 36, block B, Granada Terrace, Ft. Myers, Lee County, Florida, at the time the property of petitioner, was offered for sale by the tax collector of Lee County, Florida, for 1929 taxes due Lee County and the State of Florida in the amount of $9.30. On the same date lot 17 and 18, block H, Coronado Subdivision, Ft. Myers, Lee County, Florida, at the time the property of petitioner, were*1379 offered for sale by the tax collector of Lee County, Florida, for 1929 taxes due Lee County and the State of Florida in the amount of $12.90. At said sale there was no bidder who would bid for any one of the lots above mentioned the price of the outstanding taxes against it, and no sale of any one of the lots was made. Thereafter, and on August 3, 1931, the lots were again offered for sale by the tax collector of Lee County, Florida, and at the sale there was no bidder who would bid for any one of the lots the price of the outstanding taxes against it, and no sale of any one of the lots was made. *64 The Edison Park Subdivision, Ft. Myers, Florida, was located about one mile from the center of Ft. Myers. It was vacant property. It was developed by the New Homes Development Co. with roads, sidewalks, gutters, sewers, gas, and electricity, and lots were sold. The promoters also put on the property five or six houses which they offered for sale. These houses were placed on the property in 1925 or 1926. No houses were placed on any of the lots after 1926. The Edison Park Subdivision contained several hundred lots. The lots owned by petitioner had no houses on them. *1380 The Edison Park Subdivision was about one mile from the center of Ft. Myers and was on the outskirts of the city proper. It was not occupied by anything except scrub oak and scrub palm. The houses were built prior to the collapse of the real estate boom in 1926, no houses have been built since that time, and no lots have been sold from the subdivision since 1926, except between the stockholders of New Homes Development Co. The Granada Terrace Subdivision and the Coronado Subdivision, adjoining each other, were located between three to five miles from the city proper, but were within the city limits of Ft. Myers. These limits covered not only the business and residential sections, but vast acreages of unoccupied land. The limits were extended in 1925 to help the real estate promoters. The Granada Terrace and Coronado Subdivisions were on the edge of the city limits. No houses were ever built in these subdivisions except two or three houses put up by the promoters for speculative purposes. The promoters themselves lived in the houses so erected. These houses were not occupied in 1930. Much of the land in these two subdivisions, including the lots owned by the petitioner, *1381 was below the level of the road. The two subdivisions were not improved. Gravel streets had been built through them, but by 1928 the sand had drifted over the gravel and there was nothing to indicate any development of the properties except two or three standing houses and the remnants of the streets. There were no trees upon the property and no vegetation except "salt grass." Petitioner had paid taxes on all the lots above mentioned during the years of his ownership until and including the year 1928, notwithstanding the collapse of the real estate boom in Florida, for the reason that he felt that if the United States continued prosperous there should be a chance for these lots to "come back", but in 1930, on account of the depression throughout the country and the collapse of land values, he felt that the chance of Florida real estate having any value was long in the future, and that the lots would never be worth the taxes, plus interest, in his lifetime. *65 Late in 1929 he received the notices above mentioned concerning payment of 1929 taxes and noted that such taxes became delinquent in April 1930. In early 1930 he then undertook to sell the lots for something more*1382 than the taxes. He found that he could not sell the lots at any price. He then offered to give the lots away in order to get rid of what he considered was a moral obligation to pay taxes. He was unable to get anyone to take title to the property as a gift. He then decided, in the early part of 1930, after consulting friends in Florida, that he would pay no further taxes, that the property was valueless, and that he would forget it. He has since received tax notices but has paid no attention to them. Since 1930 he has taken no care of the property and exercised no dominion over it. He has not redeemed the property from tax sales and does not expect to do so. In his original income tax return for 1930 petitioner did not claim any loss on account of the lots above mentioned. His original return showed no tax due. Thereafter respondent by his computation increased petitioner's income from other sources, whereupon petitioner presented his claim of loss in connection with the lots. Respondent refused to allow the deduction of $34,390 claimed, or any sum on account of the loss claimed by petitioner. OPINION. TRAMMELL: It is the contention of the petitioner that the real*1383 estate in controversy became wholly worthless in 1930 and that he is entitled to a deduction of the cost thereof in that year. The respondent contends that no deduction is allowable with respect to real estate so long as the taxpayer holds title thereto, at least in the absence of some identifiable event which would create a closed transaction giving rise to gain or loss. The petitioner asks the Board to reverse itself in a long line of decisions, beginning with , and relies upon the decision of the Circuit Court of Appeals for the Sixth Circuit in the case of , and contends that our decision in the case of , affd., , is distinguishable. In the Greenleaf Textile case, supra, we distinguished the Brumback case as follows: * * * The Circuit Court of Appeals for the 6th Circuit, in the case of , affirming *1384 , 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 *66 there recognized is the occurrence of an identifiable event during the taxable period in which the controverted 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 land in question was definitely and decisively determined. The absence of such occurrence brings this case within the operation of the rule in *1385 , the facts in which were somewhat similar to those here. * * * We think that in this case no particular significance may be attached to the fact that the property was sold for taxes and that tax certificates were issued. In section 972 of the Compiled General Laws of Florida, 1927, Cumulative Supplement of 1932, it is provided as follows: In case there are no bidders the whole tract shall be bid off by the tax collector for the State, and the tax collector must offer all such lands as assessed. Section 983 of the statute further provides that: All tax sale certificates * * * issued to the State shall be held by the clerks of the circuit courts of the several counties wherein are situated the lands covered by such certificates * * *. Section 1003(1) of the statutes (Acts 1929, Extra. Sess.) provides as follows: Any holder of a certificate of tax sale or a tax deed therefor, whether heretofore or hereafter issued, including the State of Florida, is hereby authorized on and after January 1st, 1930, to file a bill in chancery to foreclose the lien of such certificate or deed, and the practice, pleading and procedure for foreclosure*1386 shall be in accordance with the practice, pleading and procedure for foreclosure of mortgages on real estate, except as herein otherwise provided and except that no personal judgment shall be given. No suit shall be brought on any tax sale certificate until after expiration of two years from the date of the certificate nor shall the State commence any such suit before the time hereinafter provided for such suit by the State; Provided, however, that no suit shall be brought on any tax sale certificate upon any homestead until after the expiration of four years from the date of such certificate. In construing these sections of the Florida statutes as they existed in 1930, the Supreme Court of Florida, in the case of , stated: The statute gives the state a lien upon lands for taxes duly assessed thereon. Sections 896, 1020, Comp. Gen. Laws 1927. Such lien is evidenced by tax sale certificates issued at the sale for nonpayment of taxes. When the certificates are purchased by private parties at the sale, or from the state when the certificates are sold to the state, the statute provides that the owner of the land or others*1387 interested therein may redeem the cerificates within two years. At the end of the two-year redemption period, the private holder may get a deed or *67 foreclose the lien evidenced by the tax certificate. If the state holds the tax certificate when the redemption period expires, the title to the land vests in the state under the statutes. The state may sell the certificate and issue a deed thereon after due notice to the owner, or may authorize the lien of the tax certificate to be foreclosed and the rights of the owners cut off. The state exercises this authority by virtue of its sovereignty to enforce tax payments. The sovereign power is exerted through statutes that afford due process and equal protection of the laws to property owners. Since there were no bidders for the property when it was offered for sale by the tax collector, it was bid in by the tax collector for the state. This, however, did not deprive the taxpayer of the ownership of that property. He had two years in which to redeem and longer if someone did not purchase the certificates from the state and undertake proceedings in accordance with the statute to obtain title. The tax sale involved in this*1388 case did not have any more effect than to establish a lien in behalf of the state for these taxes. The taxpayer, therefore, still owns the property and this brings us to the question as to whether the record in this case presents such facts as to entitle the taxpayer to a deduction for a loss with respect to this property. The taxpayer testified that he felt that the chance of Florida real estate having any value was long in the future and that the lots would never be worth the taxes, plus interest, in his lifetime. He also expressed the opinion that the property was worthless in 1930. We do not believe, however, that any identifiable event occurred in 1930 of sufficient character as to entitle the taxpayer to a deductible loss with respect to the property. We see no reason to depart in this case from our long line of decisions on that subject. See ;; ; ; affd., *1389 ; certiorari denied, . With respect to the testimony as to the property being worthless, this consists of the opinion of the taxpayer based largely upon what was told him. He was not an expert in property values in Florida and we cannot attach sufficient weight to this testimony to find that the property was in fact worthless in 1930. The petitioner did testify that he undertook to give the property away. However, he did not state under what conditions, with respect to obligations for certain improvements or to what extent he made a search for someone who could have put such property to use. It may well be that the particular individual or individuals to whom he made such an offer might not have been able to either undertake to sell same or to use it. Because of the general reduction in value in the so-called collapse of land values in the United States, and particularly the reduction in values in Florida since the collapse of the boom in that *68 state, property may be very slow in selling. A purchaser might not be found within any particular time, but we are not convinced that the property had no value whatever. *1390 Following our previously decided cases, we hold that the petitioner is not entitled to the deduction claimed. Reviewed by the Board. Judgment will be entered for the respondent. SMITH SMITH, dissenting: In my opinion the petitioner's investment in the real estate in question is deductible as a loss of the taxable year 1930. The facts as set forth in the majority report show conclusively that the real estate was acquired by the petitioner in transactions entered into for profit and that it was totally worthless in 1930. Section 23(e) of the Revenue Act of 1928 permits the deduction of losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit. The statute makes no distinction between transactions involving the purchase of real estate and other transactions. I therefore disagree with the reasoning of the majority opinion, or at least with the inference to be gained from the reasoning of the cases cited and relied upon, that no deduction can be taken for a loss of an investment in real estate until such real estate has been sold or otherwise disposed of irretrievably. The*1391 unreasonableness and impracticability of such a requirement is clearly illustrated by the facts in the instant proceeding, where the petitioner during the taxable year tried to sell the property for the amount of the taxes due but was unable either to sell it or to give it away with the tax overburden. It seems to me that the identifiable event fixing the loss in 1930, which, in the majority opinion, is said to be lacking, is to be found in the foreclosure proceedings brought on its tax liens against the property by the State of Florida in that year, resulting in the issue of the tax sale certificates to the state and in the fruitless attempts of the petitioner to dispose of the property. In my opinion the statutory equity of redemption did not effect a postponement of the realization of the petitioner's loss, nor did the expiration of the redemption period supply as sound or practical a test for identifying the loss as is afforded by the events which occurred in the taxable year before us. I think that our decision in this proceeding should follow *1392 , cited in the majority opinion. BLACK agrees with this dissent.