298 F.2d 583 (2nd Cir. 1962), 34, Austin v. C.I.R

Docket Nº:34, 26908.
Citation:298 F.2d 583
Party Name:James E. AUSTIN and Elizabeth G. Austin, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Case Date:January 19, 1962
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 583

298 F.2d 583 (2nd Cir. 1962)

James E. AUSTIN and Elizabeth G. Austin, Petitioners,



No. 34, 26908.

United States Court of Appeals, Second Circuit.

January 19, 1962

Argued Dec. 14, 1961.

Ben A. Matthews of Harper & Matthews, New York City (Vincent P. Uihlein, New York City, on the brief), for petitioners.

Donald P. horwitz, Atty., Dept. of Justice, Washington, D.C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and Meyer Rothwacks, Attys., Dept. of Justice, Washington, D.C., on the brief), for respondent.

Before LUMBARD, Chief Judge, and MOORE and HAYS, Circuit Judges.

HAYS, Circuit Judge.

This is a petition for review of a decision of the Tax Court determining a deficiency in income tax for the year 1955. The Tax Court, sustaining a ruling of the Commissioner, held that a loss incurred by petitioners on the sale of real property was not deductible as a loss incurred in a trade or business or in a transaction entered into for profit, within the meaning of § 165 of the Internal Revenue Code of 1954 (26 U.S.C.A. § 165). 1

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The Tax Court found that the property involved 'was purchased by petitioners primarily for a residence and secondarily to make a profit.' Petitioners contend that, since the word 'primarily' does not appear in the statute, and since the Tax Court found that the transaction was entered into for profit, the deduction must be allowed. The Tax Court, they say, has no power to classify petitioners' motives as primary or secondary; once it is established that realizing a profit was a motive for purchase of the property the requirements of the statute have been met.

But the position for which petitioners contend would not provide a workable interpretation of § 165. It is true generally of people who buy property for residential purposes that they are interested in making potentially profitable purchases. The statute makes no provision for the apportionment of the loss when a transaction is entered into both to satisfy a personal or family need and to make a profit. A primary motive of acquiring a family residence brings the purchase within the ambit of § 262 of the Internal Revenue Code, 26 U.S.C.A. § 262, which provides that 'no deduction shall be allowed for personal, living, or family expenses.' The logical interrelation of § 165 and § 262 requires a decision as to which of the two motives was dominant, so that one or the other section can be applied. And the decisions of the Supreme Court and of this court have been consistent with this result. In Helvering v. National Grocery Co., 304 U.S. 282, 289 note 5, 58 S.Ct. 932, 936, 82 L.Ed. 1346 (1938), the Supreme Court said: 'The deductibility of losses under ( § 165(c)) 2 may depend upon whether the taxpayers' motive in entering the transaction was primarily profit.' 3 This court has repeatedly held that, in determining the deductibility of a loss, the primary motive must be ascertained and given effect. Arata v. Commissioner, 277 F.2d 576, 578-579 (2d Cir. 1960); Ewing v. Commissioner, 213 F.2d 438, 439-440 (2d Cir. 1954); Meurer v. Commissioner, 221 F.2d 223 (2d Cir. 1955). Cf. Gevirtz v. Commissioner, 123 F.2d 707 (2d Cir. 1941).

However petitioners also assert that the Tax Court's finding as to motive is a 'legal conclusion,' and that as such it is not subject to Rule 52(a) of the Federal Rules of Civil Procedure, 28 U.S.C.A., which requires that findings of fact be upheld...

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