Oots v. Commissioner

HOWARD OOTS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Oots v. Commissioner Docket No. 84123. United States Board of Tax Appeals 37 B.T.A. 571; 1938 BTA LEXIS 1021; March 29, 1938, Promulgated *1021 Petitioner purchased certain residential property on October 16, 1928, and occupied the same as his plersonal residence from November 20 to December 28 of that year. Thereafter, until the property was finally sold in 1933, petitioner and his wife occupied the residence approximately four months in each year. The property was never converted to business purposes, nor used to produce taxable income. Held, petitioner is not entitled, under section 23(e)(1), (2), Revenue Act of 1932, to deduct from gross income the loss sustained on the sale of the property in 1933. Samual M. Wilson, Esq., for the petitioner. Conway N. Kitchen, Esq., for the respondent. HILL *571 This is a proceeding for the redetermination of a deficiency in income tax for the year 1933 in the amount of $1,654.84. The sole error assigned by petitioner is the action of respondent in disallowing a deduction of $12,000, alleged to represent a capital net loss sustained by petitioner in the taxable year. *572 FINDINGS OF FACT Petitioner is an individual with residence on the Georgetown Road, near the city of Lexington, in Fayette County, Kentucky. Petitioner*1022 is engaged in the business of raising and training horses, and has been engaged in such business about 35 or 38 years. On or about October 16, 1928, petitioner acquired by purchase a certain parcel of real estate, having a dwelling house or residence thereon, located in the city of Lexington, Kentucky, known as No. 218 North Broadway, at a cost of $20,000. On December 26, 1933, petitioner sold the property for a consideration of $8,000, and thereby sustained a loss of $12,000. In his income tax return for the year 1933 petitioner claimed such amount as a deduction from gross income, which deduction respondent disallowed in determining the deficiency. Prior to 1927 James Cox Brady, who died in that year, conducted a horse breeding establishment known as Dixiana Farm, located in Fayette County, near Lexington, Kentucky. Petitioner was connected with that establishment from 1925 to 1928. The Dixiana Farm was sold in 1928, and petitioner purchased a part of it, amounting to 93 or 94 acres, which he sold in the same year to one Fisher. Petitioner and his wife were then occupying a house on the tract sold to Fisher. Petitioner also owned a small house on the Briar Hill Pike, *1023 on which he started improvements when the Dixiana Farm was announced for sale. These improvements had not been completed when Fisher requested possession of the house on the tract of land purchased by him. Petitioner and his wife occupied the house at No. 218 North Broadway in the city of Lexington from November 20 to December 28, 1928, when they went to Florida. During the years subsequent to 1928, to and including 1933, petitioner and his wife occupied the house at No. 218 North Broadway approximately four months annually, generally about two months in the spring and two months in the autumn. They spent Christmas Day, December 25, 1933, in this house. Each winter they went to Florida and other places. Petitioner attended race tracks in Florida, Texas, and Hot Springs, Arkansas. Petitioner occupied the North Broadway house as stated for the reason that his wife was in poor health and frequently needed the services of a physician. One Dr. Barclay, who had been petitioner's physician for a long time, lived just four or five houses away. Immediately after purchasing the property in question, petitioner listed it for sale or rent with the real estate agent through whom*1024 he had purchased it. After the death of this agent, petitioner placed his property with another agency. In the spring of 1929 petitioner had an opportunity to lease his property for use as a fraternity house at a rental which would have returned good interest on the investment. *573 However, he declined to rent for such purpose at the request of a neighbor, who stated that it had been a fraternity house and was a nuisance in the neighborhood. About June 1933, a lady who conducted an antique shop sought to obtain a lease on petitioner's property, but he declined to rent it to her because she wanted the interior of the house changed, which a short term lease would not justify, and petitioner was unwilling to lease for a long term, which might interfere with the sale of the property. About December 1, 1928, petitioner purchased 26 acres of land on Eastern Road, near Lexington, known as the Rose Crest Subdivision, parcels of which property he sold at different times, the last of it in 1936. There was a house on this property, but petitioner never lived in it. Beginning in October 1928, petitioner's Briar Hill property was undergoing remodeling, including the installing*1025 of a furnace, and, while it was partially suitable for occupancy, it was not comfortable. In addition to the reason before stated, petitioner and his wife occupied the North Broadway house in Lexington because the residence on Briar Hill Road, until its sale in February 1930, was not in a livable condition, particularly for petitioner's wife. Petitioner never claimed in his Federal income tax returns any deduction for depreciation on the North Broadway house from the date of its purchase in 1928 to the date of its sale in 1933. The loss of $12,000 sustained by petitioner in the taxable year, involved herein, was not incurred in a transaction entered into for profit. OPINION. HILL: The only issue in this case is whether the loss sustained by petitioner in 1933 from the sale of the property known as No. 218 North Broadway, Lexington, Kentucky, constitutes an allowable deduction from gross income. Such loss is not allowable unless (1) it was incurred in trade or business, or (2) incurred in a transaction entered into for profit, thought not connected with the trade or business. Sec. 23(e)(1), (2), Revenue Act of 1932. Concededly the loss in question was not incurred in*1026 connection with petitioner's trade or business, but he contends that it was incurred in a transaction entered into for profit. Petitioner purchased the Lexington property on October 16, 1928. At that time he and his wife were occupying a house on a tract of land, originally part of the Dixiana Farm, which he purchased and sold in the same year to one Fisher, who shortly thereafter demanded possession. Petitioner and his wife thereupon occupied the house in *574 Lexington on November 20, and remained there until December 28, when they went to Florida. From 1928 to 1933, when the property was finally sold, petitioner and his wife occupied the Lexington house approximately four months in each year, usually about two months in the spring and two months in the fall. A considerable portion at least of the balance of each year they spent in Florida, or elsewhere outside of the State of Kentucky. Article 171 of respondent's Regulations 77, issued under the Revenue Act of 1932, provides that a loss on the sale of residential property purchased or constructed by a taxpayer for use as a personal residence, and so used up to the time of sale, is not deductible; but where property*1027 so purchased or constructed is, prior to sale, rented or otherwise appropriated to income-producing purposes and is so used up to the time of sale, a loss from the sale is properly allowable. It will be noted that under this regulation property acquired by a taxpayer for use as a personal residence must not only be abandoned for such purpose but must be thereafter rented or otherwise appropriated to income-producing purposes and actually be so used up to the time of sale in order to render a loss thereon deductible. Similar provisions were contained for the first time in Regulations 74 under the 1928 Revenue Act. Prior regulations provided that a loss on residential property could not be deducted unless the property was originally purchased or constructed "with a view to its subsequent sale for pecuniary profit." In , decided April 9, 1928, the Court declined specifically to pass upon the correctness of the early regulations above referred to for the reason that the question was not before it, but the Court did refuse to apply the principle embodied therein. In effect, the Court held that the provision of the regulations*1028 that a loss was not allowable unless the property was originally purchased or constructed with a view to its subsequent sale for a pecuniary profit was not in conformity with the statute, and further held that, where property so purchased or constructed was subsequently abandoned for that purpose and was thereafter devoted to business uses in the production of taxable income until sold, a loss from the sale was properly allowable. Accordingly, the regulations under the 1928 Act were conformed to the doctrine enunciated in the Tindle case, and similar provisions have been continued in the regulations issued under the subsequent revenue acts. The principle appears now to be well settled that a loss from the sale of a residence is not an allowable deduction unless (1) the use of the property as a residence was abandoned, and (2) it was devoted exclusively to the production of taxable income from the time of abandonment *575 until sold. Abandonment of a personal residence, followed by a listing of the property with the real estate agent for sale or rent, is not sufficient. In *1029 ; certiorari denied, , the taxpayer built a home in 1913 in which he resided until 1927, when he removed to Florida. He placed the property in the hands of a real estate agent, "with instruction to diligently endeavor to rent the same in whole or in part or to sell it." The property was not rented, with the exception of a garage, but it was sold in 1929 at a loss. In denying the right to deduct such loss, the court, after a discussion of , said: The question here is whether the residence abandoned as such and put into the hands of an agent "to rent in whole or in part or to sell" is devoted exclusively to the production of taxable rentals, or whether indeed there is a transaction at all within the meaning of the statute. We think not. The owner did not remodel or recondition the house, or do anything that specially devoted it to rental purposes. He spoke only to his agent, which in legal effect is speaking to himself; and his instructions were as much to sell as to rent it and a sale was the actual outcome. * * * Here the taxpayer*1030 could have returned any day to his home or have sold it without hindrance. What he did does not amount to a transaction. To the same effect see also ; certiorari denied, , and . Petitioner contends most strenuously that the cited cases are not in point for the reason that the property in controversy was not acquired in the first instance as a personal residence; that his original purpose in purchasing the property was to sell it for a profit, and therefore it was a transaction entered into for profit; that he never used the property as a personal residence, but merely stayed in the house and occupied it temporarily from time to time. We are not impressed by this argument. Petitioner's intentions in the matter, we think, are best demonstrated by his actions. The undisputed evidence clearly shows that the property was never in fact converted to business property, or used for income-producing purposes; that the petitioner resided there with his wife for a substantial portion of each year from the time of purchase in 1928*1031 until the property was finally sold in 1933. The fact that he intended to occupy the residence only temporarily, if such was the case, and did so from time to time as suited his convenience, is immaterial. In , we denied the right of the taxpayer to deduct a loss on the sale of residential property, although it appeared that the purchase was originally made with the intention *576 of using or disposing of it as in a transaction entered into for profit, and it further appeared that the property was occupied by the taxpayer only temporarily, or until a new residence was completed for his occupancy. In that connection we held that the taxpayer abandoned his original intention by using the property as a residence, and since it was not used at any time to produce income, the purchase and sale lost the characteristics of a transaction entered into for profit. We hold that petitioner here is not entitled to the deduction claimed. Judgment will be entered for the respondent.