WL Schautz Co. v. United States, 227-75.
| Decision Date | 14 December 1977 |
| Docket Number | No. 227-75.,227-75. |
| Citation | 567 F.2d 373 |
| Parties | W. L. SCHAUTZ COMPANY v. The UNITED STATES. |
| Court | U.S. Claims Court |
Donald LaBarre, Jr., Bethlehem, Pa., for plaintiff, Robert Margolis, Bethlehem, Pa., attorney of record; Margolis, LaBarre & Kucy, Bethlehem, Pa., of counsel.
Patricia B. Tucker, Washington, D.C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D.C., for defendant; Theodore D. Peyser, Jr., Washington, D.C., of counsel.
Before DAVIS and KASHIWA, Judges.*
This case is before us on an agreed stipulation of facts. The sole issue before the court for decision is whether a corporation is entitled to deduct a loss incurred from the sale in 1965 of a winter vacation home used solely by its shareholders. After careful consideration of the briefs and oral arguments presented, we hold it cannot for reasons hereafter stated.
The plaintiff, W. L. Schautz Company, is a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania, with its office located at 150 East Grove Street, Dunmore, Pennsylvania. Its business is yarn brokerage and yarn processing. During the period in issue, taxpayer was wholly owned by Walter L. Schautz, Sr., and members of his family.
In 1958, plaintiff purchased from an unrelated party a two-story, four-bedroom house located in a residential neighborhood of Palm Beach, Florida, about one block from the water. Plaintiff did not hold the property for use in its trade or business in any way. The property was held for the personal use of Walter L. Schautz, Sr., and his family, who used it as a winter vacation home.
From the time of the purchase in March 1958 until Mr. Schautz, Sr.'s death on January 1, 1961, the Schautz family used the property each year from the middle of October to the middle of April as a personal residence. After the death of Mr. Schautz, Sr., the property was vacant except for occasional use by his family. In some years the family paid rent for the use of the property. In fiscal 1959, no rent was paid. In fiscal 1960 and 1961, $3,600 in rent per year was paid. In fiscal 1962 and 1963, $7,200 per year in rent was paid. In fiscal 1964, no rent was paid and in fiscal 1965, $553.60 was paid.
In August 1965, the property was sold to an unrelated party at a loss. Plaintiff claimed a deduction for the loss on its federal income tax return for the taxable year ending January 31, 1966. The loss deduction was disallowed on audit and taxpayer paid the additional tax which resulted. Appropriate claims for refund were filed by taxpayer and disallowed by the Internal Revenue Service. Plaintiff subsequently filed suit here seeking the refund.
The question for decision is whether Internal Revenue Code1 § 274 bars a corporation from deducting a loss incurred in the sale of property used solely as a winter vacation residence by the corporation's shareholders.
Plaintiff contends that it is entitled to deduct the loss under I.R.C. § 165(a) which states, "There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise." This is so regardless of whether the property was used in the taxpayer's trade or business. International Trading Co. v. Commissioner of Internal Revenue, 484 F.2d 707 (7th Cir. 1973).
Plaintiff is correct that I.R.C. § 165(a) allows the taking of a deduction for a loss such as it incurred on the sale of the Florida property. It is also correct that the Seventh Circuit held that this was so regardless of whether the property was held for use in the corporation's trade or business.
However, there is a distinguishable difference between the facts involved in International Trading Co., supra, and this case. That difference is the taxable year in dispute. In International Trading Co., the taxable year in dispute was 1957. The taxable year in dispute here is fiscal year 1966.2 This distinction's importance is due to the passage of I.R.C. § 274 by Congress in 1962, with an effective date of January 1, 1963. §§ 4(a)(1) and (c), Revenue Act of 1962, P.L. 87-834, 76 Stat. 960. The Seventh Circuit acknowledged the potential impact of the enactment of section 274 on its conclusion that the loss was deductible and expressly qualified its decision in the following manner:
* * * We reach no decision as to whether a loss of the type here involved would be deductible by a corporation after the effective date of Section 274. * * 484 F.2d at 712.
Thus, the issue before this court was not reached by the Seventh Circuit.
Section 274 provides, in pertinent part, as follows:
A winter vacation home is clearly a facility used in connection with an activity generally considered to constitute recreation, entertainment, or similar activity described under the terms of section 274(a)(1). Treas.Reg. §§ 1.274-2(b)(1) and 1.274-2(e)(2) (1963). Indeed, the taxpayer does not challenge the characterization of the Palm Beach residence as an entertainment facility under section 274(a)(1). Since it is such a facility and the plaintiff has stipulated that the property was not used in its trade or business, section 274(a)(1) clearly disallows the loss deduction plaintiff claimed on its fiscal 1966 tax return.
Plaintiff has advanced several reasons why the disallowance provisions of section 274(a) should not be applied in this case. First, plaintiff claims it fits within an exception to section 274(a). I.R.C. § 274(f) states:
(f) Interest, Taxes, Casualty Losses, etc. — This section shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity). In the case of a taxpayer which is not an individual, the preceding sentence shall be applied as if it were an individual.
Plaintiff contends that the first sentence of subsection (f) read in conjunction with International Trading Company, supra, saves it from the disallowance mandated by section 274(a). The limiting provision of subsection (f) instructs us, however, that in applying the exception a corporate taxpayer, like plaintiff, shall be treated as an individual. When this is done the limitation of I.R.C. § 165(c),3 which applies only to individuals, again requires the loss to be incurred in the conduct of a trade or business if it is to be deductible. Since plaintiff's loss was not incurred in the conduct of its trade or business, if fails to qualify under the exception stated in I.R.C. § 274(f).4
Next plaintiff contends that section 274 was intended to disallow deductions for expenses but not losses. We do not agree. Section 274(a)(1) states that "no deduction otherwise allowable * * * shall be allowed * * *." It does not state no deduction for expenses otherwise allowable shall be allowed. The absence of the word "expenses" from section 274(a) is significant. Congress has demonstrated that it can limit disallowance provisions to expenses when it so intends. See, e.g., I.R.C. §§ 262, 267(a)(2).5 It is also clear from the legislative history of the Revenue Act of 1962 that Congress intended section 274 apply to losses. Both the House Ways and Means Committee...
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Blake Const. Co., Inc. v. US, 274-73.
...profit-related. Cf. International Trading Co. v. Commissioner of Internal Revenue, 484 F.2d 707 (7th Cir. 1973); W.L. Schautz Co. v. United States, 567 F.2d 373, 215 Ct.Cl. ___ (decided Dec. 14, 1977). However, this taxpayer never raised this point throughout these proceedings but has consi......