Seerley v. Commissioner

JOHN J. SEERLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Seerley v. Commissioner Docket No. 97673. United States Board of Tax Appeals 43 B.T.A. 50; 1940 BTA LEXIS 857; December 10, 1940, Promulgated *857 Petitioner owned lands in a drainage district which had issued bonds which were in default in 1932. Petitioner conveyed the lands in 1932 to trustees of a trust created to liquidate the property to pay the debt on the bonds. He was entitled to receive certificates of interest and to receive payment thereon from any surplus from the liquidation. In 1935 petitioner assigned his certificates of interest to another. Upon the facts, held, that the conveyance in 1932 was not a closed transaction determining loss in that year; that it was not a sale or exchange of a capital asset; that the trust was a liquidating trust; that petitioner abandoned his equity interest in 1935 sustaining loss in that year entitling him to deduction for the entire loss without the limitation prescribed in section 117(d) of the Revenue Act of 1934. James J. Magner, Esq., and L. S. Davis, C.P.A., for the petitioner. E. G. Sievers, Esq., for the respondent. HARRON *51 Respondent determined a deficiency of $9,051.88 in petitioner's income tax for 1935. The questions are whether in 1935 petitioner sustained a deductible loss of his investment in certain real estate, *858 and, if so, whether the loss was an ordinary loss deductible in full or a capital loss subject to the limitations of section 117(d) of the Revenue Act of 1934. FINDINGS OF FACT. Petitioner is a resident of Chicago, Illinois. In 1935, and prior thereto, he was engaged in the investment and utility business. In 1921 he purchased and took title to approximately 2,451 acres of land adjoining the Mississippi River in Carroll County, Illinois. Much of the land was not under cultivation and was flooded during high water. Petitioner purchased the land with the intention of developing and draining it and then selling it at a profit. Petitioner caused the organization of a drainage district known as the Carroll County Drainage and Levee District Number 1. Including petitioner's land, there were 3,300 acres of land in the district. For the construction of a combined system of drainage, the district levied an assessment of $190,000 against the lands in the district. Of that amount $14,234.22 was paid on or about February 20, 1923, and the balance of $175,765.78 was payable in 15 annual installments, commencing on February 20, 1928. Each installment bore interest at the rate of*859 6 percent from February 20, 1923, until paid. The district issued bonds in the total amount of $158,000, which bore interest at the rate of 5 1/2 percent and were liens on the unpaid portion of the assessment. Commencing on October 1, 1928, the bonds matured serially in each of the years 1928 to 1942, inclusive. The bonds were sold to the public through the firm of H. C. Speer & Sons. The district constructed a drainage system consisting of levees, ditches, and a pumping plant and proceeded to operate the drainage system. The district levied an annual maintenance tax on the lands in the district in order to raise the funds necessary to operate the drainage system. In the development of his land petitioner made substantial expenditures for the erection of fences, for the construction of various farm buildings and residences, for the clearing of timber from parts of his land, and for the tiling of his land for drainage. In connection with the development and operation of his lands petitioner borrowed substantial amounts from banks. On March 21, 1924, petitioner borrowed $9,000 from the Burlington Joint Stock Land Bank of Burlington, Iowa, and on April 6, 1926, he borrowed*860 $70,000 from H. F. Kuhlemeier. These two loans were evidenced by promissory notes and were secured by mortgages on approximately one-half of petitioner's land. The note and mortgage to H. F. Kuhlemeier *52 was assigned by him to the First Iowa State Trust & Savings Bank of Burlington, Iowa, on April 19, 1926. Petitioner also was liable as comaker or endorser on two promissory notes payable to the Burlington Savings Bank in the total amount of $3,550. The operation of petitioner's lands resulted in a loss in the total amount of $101,828.80 during the period from 1921 to 1927, inclusive, and a loss in each of the years from 1928 to 1931, inclusive, as follows: [1928] $51,574.04 [1929] 24,630.73 [1930] 33,450.70 [1931] 30,352.24 Subsequent to 1929 petitioner did not pay any of the general real estate taxes assessed on his lands. In the spring of 1931 petitioner defaulted on his obligations to the three banks. In October 1931 the drainage district defaulted on its bonds. By the end of 1931 petitioner had paid in to the drainage district approximately $20,000 more than he was required to pay for assessment installments which had become payable, for interest*861 on assessment installments which had not yet become payable, and for annual maintenance taxes. Shortly after October of 1931 the bondholders of the drainage district organized a committee of three. This committee and representatives of the three banks entered into negotiations with petitioner in order to straighten out the situation which had been created by the defaults on the drainage district's bonds and petitioner's notes to the banks. Both the bondholders' committee and the two banks which held mortgages on petitioner's lands considered foreclosure proceedings, but did not want to institute foreclosure proceedings unless absolutely necessary because such proceedings would be expensive and would take a long time. Between April 1 and April 15, 1932, petitioner submitted the following written proposal to each of the three banks to which he was indebted: That he convey certain of his lands to each bank free and clear of all drainage assessments and taxes except current maintenance taxes and current general real estate taxes, and that in consideration for such conveyance each bank release him of his obligations to the bank. Petitioner proposed to convey 400 acres to the First*862 Iowa State Trust & Savings Bank, 140 acres to the Burlington Joint Stock Land Bank, and 40 acres to the Burlington Savings Bank, or a total of 580 acres to the three banks. As of April 1, 1932, petitioner's indebtedness to the First Iowa State Trust & Savings Bank and to the Burlington Joint Stock Land Bank had been reduced to $55,000 and $8,231.13, respectively. The three banks accepted petitioner's proposals on or about April 16, 1932. On April 19, 1932, petitioner submitted the following written proposal to the bondholders' committee: That he convey to an "agency *53 (corporate, trustee or otherwise,)" to be formed by the committee all his land with the exception of the 580 acres to be conveyed to the three banks; that all "assessed benefits representing the bond liens heretofore assessed and now remaining unpaid" against the lands owned by petitioner were to be released and satisfied; that the agency to be formed by the committee issue not more than $150,000 of 4 1/2 percent, 15-year income bonds and deliver the bonds to the bondholders of the drainage district in exchange for an equal amount of drainage district bonds; that the "equity interest in said lands shall*863 be represented by certificates of interest, stock, or otherwise, * * * and shall be transferred and delivered to the undersigned or to my order upon consummation hereof"; and that the agency be formed so that the bondholders would be able to elect a majority of the board of directors or trustees and so that, in case of default in the terms of the new bonds, the certificates of interest, stock, or otherwise, would vest in the bondholders without foreclosure proceedings. The proposal was accepted by the bondholders' committee on April 19, 1932. On April 30, 1932, by an agreement between Roy S. Lundin, as trustee, and the bondholders' committee, a trust was created to take title to the land which petitioner proposed to convey for the benefit of the bondholders of the drainage district. The name of the trust was "Carroll Farms." Its object was the sale and liquidation of the land and the distribution of the net proceeds thereof among the beneficiaries of the trust as soon as might be practicable in the opinion of the trust managers, and, in the interval, the conservation thereof and the division of the net income among the beneficiaries of the trust. The affairs of the trust and*864 the actions of the trustee were to be directed by five trust managers, who were the three members of the bondholders' committee (referred to as the bondholders' group), and the trustee himself and petitioner (referred to as the shareholders' group). The trustee was authorized to issue 15-year income registered debenture bonds of the trust in an aggregate principal amount not to exceed $150,000 and to deliver the bonds in exchange for a like principal amount of drainage district bonds. The trustee was authorized also, for the purpose of acquiring title to the land assessed for the payment of the bonds of the drainage district, "from time to time to issue not to exceed one hundred and fifty (150) units of beneficial interest, to such person or persons as the trust managers may direct." The holder of a certificate representing units of beneficial interest was not to have "any claim, title or interest, legal or equitable, in or to any of the trust property at any time held by the trustee under this trust, but only an interest in the net income, avails and proceeds thereof." The net earnings of the trust were to be applied first to the payment of interest on the outstanding bonds of the*865 trust and, after the interest requirements were met, one-half of the balance was to be used for the redemption *54 of bonds and, under certain conditions, the other one-half of the balance was to be paid to the owners of the certificates of interest. Similarly, the net proceeds from the sale of the land held in trust was to be used first for the redemption of bonds of the trust and, under certain conditions, the balance of the proceeds was to be paid to the owners of certificates of interest. The owners of 75 percent of the bonds and 75 percent of the certificates of interest were empowered to make "any alterations in or additions or supplements to the trusts, powers and provisions" contained in the agreement, or to terminate the trust at an earlier date than the date prescribed in the agreement. Unless sooner terminated, the trust was to terminate on April 30, 1952. Upon termination of the trust, the proceeds from the sale of the land held in trust were to be used first for the redemption of bonds of the trust and the balance was to be divided among the owners of certificates of interest. In accordance with the proposals made to the three banks, petitioner conveyed 140*866 acres to the Burlington Joint Stock Land Bank and 40 acres to the Burlington Savings Bank on May 2, 1932, and 400 acres to the First Iowa State Trust & Savings Bank on June 16, 1932, or a total of 580 acres. Each of the three banks went into possession of the land conveyed to it by petitioner. The land and the improvements thereon which petitioner conveyed to the three banks represented a cost to petitioner of $70,000. In July of 1932 petitioner and others conveyed the title to lands in the drainage district to the trustee of the Carroll Farms trust. Petitioner conveyed the balance of his land in the drainage district, or 1,871 acres, to the trustee. The trustee went into possession of the lands thus conveyed. The trustee issued debenture bonds of the trust in the principal amount of $146,000 and exchanged debenture bonds in the amount of $140,000 for a like amount of drainage district bonds. None of the debenture bonds of the trust were ever redeemed. No certificates of interest of the trust were ever issued to petitioner. From the time of the creation of the Carroll Farms trust until January 29, 1935, petitioner acted as one of the trust managers and assisted the trustee*867 in the operation of the lands held in trust. On January 10, 1933, petitioner assigned to the trustee of the Carroll Farms trust the amounts which he had paid to the drainage district in excess of the amounts which he was required to pay for assessment installments which had become payable, for interest on assessment installments which had not yet become payable, and for annual maintenance taxes. The amounts thus assigned by petitioner were applied by the trustee to the release of the assessments levied against the lands conveyed by petitioner to the three banks. On April 11, 1933, the lands conveyed to the three banks were released from all drainage district assessments levied against the lands. *55 Thereafter, releases of the mortgages held by the First Iowa State Trust & Savings Bank and the Burlington Joint Stock Land Bank were filed. W. W. Speer, the president of H. C. Speer & Sons, the firm through which the bonds of the drainage district had been sold to the public, advanced $20,000 to finance the organization of the bondholders' committee and the organization and operation of the Carroll Farms trust. In January 1935 he requested that petitioner assign to him*868 all petitioner's rights to receive certificates of interest in the trust. On January 29, 1935, petitioner executed and delivered to W. W. Speer an order directing the trust managers in accordance with the agreement of April 19, 1932, to "issue and deliver to William W. Speer a certificate or certificates covering the equity interest in the lands owned by Carroll Farms." Thereafter, petitioner ceased to act as a trust manager of the Carroll Farms trust and terminated all connections with the trust. On June 14, 1937, certificates representing 150 units of beneficial interest in the trust were issued to W. W. Speer. OPINION. HARRON: The basic questions are whether petitioner sustained the loss of his investment in his Carroll County lands in the taxable year, and, if so, whether the loss was an ordinary loss deductible in full or a capital loss subject to the limitations of section 117(d) of the Revenue Act of 1934. On his income tax return for the taxable year petitioner took a deduction of $168,162.56 as the loss of his investment in his Carroll County lands. Respondent reduced the amount of the deduction to $2,000 on the ground that the loss was a capital loss subject to*869 the limitations of section 117(d) of the Revenue Act of 1934. In an amended answer respondent alleged that petitioner did not sustain the loss of his investment in his Carroll County lands in the taxable year and asserted a claim for an increased deficiency. In order to be deductible, losses, in general, must be fixed by identifiable events, United States v. White Dental Manufacturing Co.,274 U.S. 398; and, as a rule, must be evidenced by closed and completed transactions, Ewing-Thomas Converting Co. v. McCaughn, 43 Fed.(2d) 503; certiorari denied, 282 U.S. 897; Louisville Trust Co.v. Glenn,33 Fed.Supp. 403; John C. Shaffer,28 B.T.A. 1294; and must be sustained during the taxable period for which allowed. Regulations 86, art. 23(e)-1. Identifiable events have been defined as incidents or occurrences which point to or indicate a loss. Industrial Rayon Corporation v. Commissioner, 94 Fed.(2d) 383. In order to be deductible, losses must be complete either through worthlessness or through a final disposition. *870 United States v. Sentinel Oil Co., 109 Fed.(2d) 854. *56 See Paul & Mertens, Law of Federal Income Taxation, vol. 2, sec. 17.15. In determining whether losses are deductible, substance, and not mere form, governs. North Jersey Title Insurance Co. v. Commissioner, 84 Fed.(2d) 898. The question of whether petitioner sustained a loss in 1935 or in another year of his investment in his Carroll County lands will be considered first with respect to his investment in the 580 acres of land which he conveyed to the three banks and then with respect to his investment in the 1,871 acres of land which he transferred to the trustee of the Carroll Farms trust. Since respondent first raised the question relating to the year in which the loss was sustained in his amended answer, he has the burden of proving that petitioner did not sustain the loss of his invesment in his Carroll County lands in the taxable year. Cf. Berkshire Cotton Manufacturing Co.,5 B.T.A. 1231. First, with respect to the loss of petitioner's investment in the 580 acres of land which he conveyed in 1932 to the three banks in satisfaction of his personal indebtedness*871 to the banks, there can be no doubt but that the loss was sustained in 1932, or prior to the taxable year. In his briefs petitioner does not seriously contend otherwise. Since petitioner sustained the loss of his investment in the 580 acres of land, which he conveyed to the three banks, in 1932, he is not entitled to deduct such loss in the taxable year. With respect to the loss of petitioner's investment in the 1,871 acres of land which he transferred in 1932 to the trustee of the Carroll Farms trust, respondent argues that such transfer to the trustee constituted a closed and completed transaction, i.e., a final disposition, which fixed petitioner's loss in 1932, or prior to the taxable year. With respect to the effect to be given to petitioner's execution and delivery in the taxable year of the order directing the trust managers to issue the certificates of interest to W. W. Speer, respondent contends that that did not constitute a closed and completed transaction which fixed the loss in the taxable year because petitioner executed and delivered the order as a gift to W. W. Speer, and, further, because the certificates of interest actually were not issued to W. W. Speer until*872 1937, or subsequent to the taxable year. On the other hand, petitioner argues that the transfer of the 1,871 acres of land to the trustee did not constitute a closed and completed transaction which fixed the loss in 1932, or prior to the taxable year, and that petitioner's execution and delivery in the taxable year of the order directing the trust managers to issue the certificates of interest to W. W. Speer did constitute a final disposition which fixed the loss in the taxable year. The burden of proof is upon respondent with respect to all of the contentions set forth above. *57 The transfer by petitioner of the title to the 1,871 acres of land to the trustee of the Carroll Farms trust in 1932 did not constitute a closed and completed transaction which fixed the loss of petitioner's investment in that land in 1932, or prior to the taxable year. The transfer of the title to the 1,871 acres of land to the trustee was not a final disposition. The trustee was to sell the land and to distribute the net proceeds to the beneficiaries of the trust. After the transfer of the title to the land to the trustee, the interests of both petitioner and the bondholders were substantially*873 the same as prior to the transfer, even though under the trust agreement the interests of both petitioner and the bondholders were stated to be in personam and not in rem. Only the form in which the interests were evidenced was different; the bondholders received bonds of the trust in the place of bonds of the drainage district, and petitioner was entitled to receive certificates of interest of the trust in the place of his equity interest in the land. Moreover, petitioner received no consideration whatsoever for the transfer of the title to the land to the trustee. It is true that in connection with the transfer of the title to the land to the trustee, the drainage assessments levied against all of petitioner's lands were released. However, the release of the drainage assessments was of no benefit to petitioner because he was not personally liable for the drainage assessments. Spring Creek Drainage District v. Elgin, J. & E. Ry. Co,249 Ill. 260; 94 N.E. 529. In as much as there was in fact no consideration to the petitioner, the transfer of the title to the land to the trustee was not a sale or exchange. *874 In the final analysis, the trustee of the Carroll Farms trust was a mere liquidating agent for the bondholders of the drainage district and petitioner. That both the bondholders of the drainage district and petitioner intended that the trustee was to be a mere liquidating agent is shown clearly by the terms of the proposal which petitioner submitted to the bondholders and which the bondholders accepted. In that proposal petitioner repeatedly referred to the creation of an agency, "corporate, trustee, or otherwise", to which he would transfer the title to the land. Obviously the transfer of the title to the 1,871 acres of land to a mere liquidating agent did not constitute a closed and completed transaction which fixed petitioner's loss of his investment in that land in 1932, or prior to the taxable year. Cf. Whitney Realty Co., Ltd.,29 B.T.A. 453; affd., 80 Fed.(2d) 429; certiorari denied, 298 U.S. 668; and see North Jersey Title Insurance Co. v. Commissioner, supra.Even if the Carroll Farms trust were regarded as a separate entity, the trust unquestionably would be a liquidating trust. *875 Helvering v. Washburn, 99 Fed.(2d) 478; Broadway-Brompton Buildings Liquidation Trust,34 B.T.A. 1089; Dolese & Shepherd *58 Co.,30 B.T.A. 1171; and the transfer of the title to the land to the trustee would not constitute a final disposition which would fix the loss of petitioner's investment in the land in 1932. Cf. Selma Wertheimer et al., Coexecutors,31 B.T.A. 407; William J. Snyder,11 B.T.A. 807; and see G.C.M. 8098, C.B. IX-1, p. 195; Sol. Op. 149, C.B. II-1, p. 20. And even if the Carroll Farms trust were regarded as an association, as distinguished from a liquidating trust, there would be some foundation for holding that any loss sustained by petitioner on the transfer of title to the land to the trustee should not be recognized under section 112(b)(5) of the Revenue Act of 1934, the pertinent provisions of which are set forth in the margin, 1 because, after the transfer, petitioner and the bondholders were substantially in control of the association and the interests of petitioner and the bondholders in the association were substantially in proportion to their*876 respective interests in the land prior to the transfer. Cf. Edwin L. Dana,36 B.T.A. 231. The conclusion that the transfer of the title to the land to the trustee did not constitute a closed and completed transaction is entirely consistent with the conclusion, in a somewhat analogous situation, that a taxpayer whose land has been sold either for taxes or on foreclosure does not sustain a loss of his investment in his land until the redemption period has expired. T. J. Bosquett,39 B.T.A. 763; Derby Realty Corporation,35 B.T.A. 335; Frederick Krauss,30 B.T.A. 62; J. C. Hawkins,34 B.T.A. 918; and see Nickoll v. Commissioner, 103 Fed.(2d) 619. *877 It should be emphasized that the record clearly shows that the purpose of creating the Carroll Farms trust and conveying to it in 1932 the 1,871 acres of land was the sale and liquidation of the land. That the trustee managed and operated the land while attempting to make a sale thereof does not detract from the essential character of the trust as a liquidating trust. Broadway-Brompton Buildings Liquidation Trust, supra. The activities of the trustee were all reasonably necessary to and consistent with the accomplishment of the purpose to sell and liquidate the land. As the Board stated at page 1093 in Broadway-Brompton Buildings Liquidation Trust, "The law does not require that in liquidating a property the owner must abandon all ordinary business judgment and sacrifice the property immediately without *59 regard for conditions of the market or amount of loss." Without doubt the period from 1932 to 1935 was not a period generally when a sale of the land in question could readily be made except at a great sacrifice. The execution and delivery by petitioner in the taxable year of the order directing the trust managers to issue the certificates of*878 interest to W. W. Speer constituted a closed and completed transaction which fixed petitioner's loss of his investment in the 1,871 acres of land in the taxable year. By an order executed and delivered by petitioner on January 29, 1935, petitioner directed the trust managers to issue to Speer a certificate or certificates "covering the equity interest in the lands owned by Carroll Farms." The record is not clear as to whether the certificate or certificates to be issued to Speer represented the equity interest of petitioner alone or the equity interest of petitioner and others. However that may be, the only reasonable inference to be drawn from all the evidence is that the execution and delivery of the order constituted, in substance, an abandonment by petitioner of his equity interest in the 1,871 acres of land. Park Chamberlain,41 B.T.A. 10; Commonwealth, Inc.,36 B.T.A. 850. Petitioner testified that by the execution and delivery of the order he intended to relinquish his equity interest in the 1,871 acres of land. It is true that petitioner did not receive any consideration from W. W. Speer for the execution and delivery of the order. *879 However, the record does not show that petitioner had any intention of making a gift of the certificates of interest to W. W. Speer. The record shows that petitioner executed and delivered the order to Speer only because Speer urged him to do so and only because petitioner thought that it was the "fair thing" to do in view of Speer's large advances to finance the organization of the bondholders' committee and the Carroll Farms trust. Thus respondent's argument that the execution and delivery of the order was a gift to Speer is entirely without foundation. Park Chamberlain, supra.The mere fact that the trust managers did not issue the certificates of interest to Speer until more than two years after petitioner's execution and delivery of the order does not make the execution and delivery of the order any less an abandonment by petitioner of his equity interest in the 1,871 acres of land. The abandonment by petitioner of his equity interest in the 1,871 acres of land constituted a final disposition which fixed the loss of his investment in that land in the taxable year. *880 Park Chamberlain, supra;Commonwealth, Inc., supra. Petitioner originally purchased his Carroll County lands with the hope of realizing a profit on their resale. Thus the loss of his investment in the 1,871 acres of land which he transferred to the trustee of the Carroll Farms trust was a loss incurred in a transaction entered into for profit, deductible under section 23(e)(2), the pertinent provisions *60 of which are set forth in the margin. 2Park Chamberlain, supra. While petitioner's equity interest in the 1,871 acres of land which he transferred to the trustee of the Carroll Farms trust constituted a capital asset within the meaning of section 117(b) of the Revenue Act of 1934, petitioner did not sustain the loss of his investment*881 in that land from a sale or exchange of his equity interest but from the abandonment thereof. Thus the loss of petitioner's investment in the 1,871 acres of land which he transferred to the trustee of the Carroll Farms trust was an ordinary loss, deductible in full, and not a capital loss subject to the limitations of section 117(d) of the Revenue Act of 1934, the pertinent provisions of which are set forth in the margin. 3Park Chamberlain, supra;Commonwealth, Inc., supra. Section 23(h) of the Revenue Act of 1934 provides that the "basis for determining the amount of deduction for losses sustained, to be allowed under subsection (e) * * *, shall be the adjusted basis provided in section 113(b) for determining the loss from the sale or other disposition of property." The parties have stipulated in effect that the adjusted basis of petitioner's entire 2,451 acres of Carroll County land was $168,162.56. The*882 record shows that the cost, i.e., the unadjusted basis, of the 580 acres of land which petitioner conveyed to the three banks was $70,000. However, there is nothing in the record to show either the adjusted basis of the 580 acres of land which petitioner conveyed to the three banks or the adjusted basis of the 1,871 acres of land which petitioner transferred to the trustee of the Carroll Farms trust. While the adjusted basis of the 580 acres of land undoubtedly was less than $70,000, petitioner apparently concedes in his reply brief that for present purposes the adjusted basis of the 580 acres of land was $70,000. On the basis of this concession, the adjusted basis of the 1,871 acres of land which petitioner transferred to the trustee of the Carroll Farms trust was no less than $98,162.56, or $168,162.56 (the adjusted basis of the entire 2,451 acres) less $70,000 (the adjusted basis of the 580 acres). Therefore, petitioner is entitled to deduct in the taxable year $98,162.56 as the loss of his investment in the 1,871 acres of land which he transferred to the trustee of the Carroll Farms trust. *61 On his income tax return for the taxable year petitioner took a deduction*883 of $168,162.56 as the loss of his investment in the entire 2,451 acres of land. The return showed a net loss of $116,272.62. Thus, after the reduction of the amount of the deduction from $168,162.56 to $98,162.56, the return will still show a net loss. In this situation recomputation under Rule 50 is unnecessary. There is no deficiency in income tax liability. Decision will be entered for the petitioner. Footnotes 1. SEC. 112. RECOGNITION OF GAIN OR LOSS. * * * (b) EXCHANGES SOLELY IN KIND. - * * * (5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. ↩ 2. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * (e) LOSSES BY INDIVIDUALS. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise - * * * (2) if incurred in any transaction entered into for profit, though not connected with the trade or business. ↩ 3. SEC. 117. CAPITAL GAINS AND LOSSES. * * * (d) LIMITATION ON CAPITAL LOSSES. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * * * ↩