Calvelli v. Commissioner

A. R. CALVELLI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. IRMA M. CALVELLI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Calvelli v. Commissioner Docket Nos. 101618, 101619. United States Board of Tax Appeals 43 B.T.A. 6; 1940 BTA LEXIS 864; December 4, 1940, Promulgated *864 1. Lots in a tract purchased by a building contractor for the purpose of subdivision and sale and to promote the building business, held, property held primarily for sale to customers in the ordinary course of the taxpayer's trade or business, and the tax upon the profits from the sale is not limited by the percentage applicable to capital assets. 2. A dwelling house used by the builder for display as a sample of his building and as an office, and occupied by him as a residence, held, in the absence of evidence of the proportionate extent of the business use, not a proper subject of a depreciation deduction. 3. The basis of depreciation of a house previously built by a taxpayer and sold on installments, which is reacquired upon default of payment of the installments, is not the original cost of construction. Philip G. Sheehy, Esq., for the petitioners. Arthur L. Murray, Esq., for the respondent. STERNHAGEN *7 The Commissioner determined deficiencies of $181.89 for 1936 and $103.40 for 1937 in the individual income tax of A. R. Calvelli and deficiencies in the same amounts in the individual income tax of Irma M. Calvelli. 1*865 (1) He treated a real estate profit as an ordinary gain and not as a capital gain, (2) he denied depreciation on a house which petitioner occupied as a residence, and (3) he reduced a deduction for depreciation by reducing the basis. FINDINGS OF FACT. 1. Petitioner is a building contractor in San Jose, California. In 1932 he and his wife as joint tenants bought a tract of land in San Jose adjoining a city park. The tract was not yet subdivided, but streets were already dedicated. In 1935 petitioner started subdividing; he made improvements - streets, curbs, and gutters - and began selling lots. His primary interest was building houses; selling the lots was secondary. He was not a licensed real estate dealer or broker and was engaged in selling only lots in this tract. The tract was subdivided into twenty-two lots. All but two have been sold, and on all but one of these petitioner built the house for the purchaser. In 1936 eleven lots were sold at a gain of $9,664.57 and in 1937 four lots were sold at a gain of $5,020.01. The lots which petitioner*866 sold in 1936 and 1937 were property held by petitioner primarily for sale to customers in the ordinary course of his trade or business. 2. On this tract, petitioner in 1935 built a seven-room house in which he and his wife have been living ever since. The house cost $11,417.83 and is more expensive than he would ordinarily occupy. He built it in order to have a sample of his building work to display, and he has frequently shown it to prospective customers. His office is in the house. This house was not principally property used in the taxpayer's trade or business. *8 3. In 1932 petitioner sold to Minardi a house and lot not on the above tract. The lot had been bought by petitioner in 1930 at a cost of $1,300. He built the house in 1932 at a cost of not less than $5,800. The sale price of the property was $7,900, composed of $400 down payment and $320.83 a month. One installment payment was made. In 1933, when $7,179.17 remained to be paid, Minardi defaulted and petitioner reacquired the property. OPINION. STERNHAGEN: 1. The first contention made by the petitioner is that the Commissioner erred in his determination that the gains derived from the sale*867 of the lots in the subdivided tract were ordinary gains and not capital gains, Revenue Act of 1936, section 117(b), the amount of which is taxable to the extent of 60 percent, section 117(a). The evidence establishes that the petitioner bought this property for the purpose of subdividing it into lots and selling the lots and the finding has been made in the language of the statute. There is, in our opinion, no escape from the finding. It must be said here, as it was in , "the petitioners have established that they bought this property * * * for subdivision and sale in lots to customers as they could be found." It does not detract from the finding that the petitioner's greater interest was in building the houses. Both were parts of his business. Indeed he sold one of the lots and did not build a house on it. The Commissioner's determination is sustained. 2. On one of the lots petitioner built a house primarily as an exhibition house as a sample of his building. He and his wife have occupied it since as a residence. Petitioner contends that he has the right to a deduction of $342.53 (3 percent of the cost of $11,417.83) for*868 depreciation of the house. The depreciation deduction of the statute is "a reasonable allowance for exhaustion, wear and tear of property used in the trade or business." The use of the house was twofold - as a residence and as a business sample and office. If it were solely the latter, depreciation would be allowable. ; affd., ; certiorari denied, . If it were solely the former it would not. "No such allowance may be made in respect of * * * a building used by the taxpayer solely as his residence." Regulations 94, art. 23(1)-2; Paul and Mertens, Law of Federal Income Taxation, §§ 20.12, 20.54. If the extent of business use were substantial and appeared in the evidence there might be a question of a proper apportionment and a resulting proportionate deduction. Cf. . *9 The evidence, however, does not provide any basis for such apportionment but rather indicates a comparatively slight use of the house for business - too slight to provide a mathematical factor to measure depreciation. There is nothing from which one could*869 infer whether any particular part of the house was an office, and if that were the fact it would have been easy for the petitioner to prove it. It appears only that he regarded the house as more than he and his wife could afford, and he showed it to prospective lot buyers. , is inapposite, for there it was held that a house built by a corporation for business purposes is no less subject to a depreciation deduction because it is sometimes occupied by one or more of the corporation's officers. The Commissioner's determination is sustained. 3. The petitioner demands a depreciation deduction upon the house sold to Minardi in 1932 and taken back in 1933 after the purchaser's default in payments. The issue is the proper basis for the depreciation; the petitioner claims a basis of the original cost of construction of the house before its sale in 1932, which is shown to be not less than $5,800. The gross sales price in 1932 was $7,900, of which $400 was paid down and $320.83 was an installment payment. Its value when reacquired is not shown. How this transaction has been treated for income tax purposes in its several stages does not appear. *870 The petitioner suggests that the $320.83 may have been rent, but the evidence shows that the house was sold. Thus the gain upon the sale was taxable on the installment basis. The original sale and the reacquisition were two separate transactions. . If there was gain to petitioner in the disposition in 1933 of the installment rights which he presumably held, as of purchase money notes, the basis of depreciation of the reacquired house would have been the same figure of value as measured the gain. Without this data it can not be said from the evidence of only original cost, sale price, default, and reacquisition that the Commissioner's basis of depreciation was incorrect. The determination is sustained. Decision will be entered for the respondent. Footnotes 1. Irma M. Calvelli is the wife of A. R. Calvelli and a separate petitioner only because she filed a separate return. ↩