Austin v. Comm'r of Internal Revenue, Docket No. 77594.

• Decision Date: 31 October 1960
• Docket Number: Docket No. 77594.
• Citation: 35 T.C. 221
• Parties: JAMES E. AUSTIN AND ELIZABETH G. AUSTIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

35 T.C. 221

JAMES E. AUSTIN AND ELIZABETH G. AUSTIN, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 77594.

Tax Court of the United States.

Filed October 31, 1960.

Upon the ultimate finding that petitioners' predominant purpose in acquiring in 1950 improved real estate located in Millbrook, New York, was to acquire a residence, it is held that a loss sustained upon the subsequent sale of the property in 1955 is not deductible under section 165(a) and (c), I.R.C. 1954. Ben A. Matthews, Esq., and Vincent P. Uihlein, Esq., for the petitioners.

Douglas D. Robertson, Esq., for the respondent.

ARUNDELL, Judge:

Respondent determined a deficiency in income tax for the calendar year 1955 in the amount of $7,043.

Petitioners allege that respondent's determination is based upon the following error: ‘Disallowance of loss on sale of house, supporting buildings and forty acres of land— $32,229.00.’

FINDINGS OF FACT.

The stipulated facts are so found and are incorporated herein by this reference.

Petitioners are husband and wife whose joint income tax return for the taxable year 1955 was filed with the director of internal revenue for the district of Connecticut. Since August 1954 petitioners have resided in Wilton, Connecticut, within commuting distance of New York City.

Attached to their return, petitioners claimed, under the heading of ‘Other Business Deductions,‘ a ‘Loss upon sale of improved real property with 40 acres located in Millbrook, New York’ of $30,470. They also claimed three other items totaling $1,759, thus making the total amount of ‘Other Business Deductions' claimed in their return $32,229. This total amount¹ was disallowed by the respondent and, in a statement attached to the deficiency notice, the respondent said:

It is determined that the deduction of $32,229.00 claimed in your return for the taxable year ended December 31, 1955, as resulting from the sale of improved property located in Millbrook, New York, is not deductible for the reasons that (1) if in fact you did sustain a loss in this transaction, such loss is personal in nature and deduction of same is prohibited by Section 262 of the Internal Revenue Code of 1954; and (2) you have failed to establish that you sustained any loss in the sale of the property involved.

At all times pertinent hereto, petitioner James E. Austin (hereinafter sometimes referred to as petitioner) was a director, an elected officer, and general counsel of the DeLaval Separator Company (hereinafter sometimes referred to as Separator) and DeLaval Steam Turbine Company (hereinafter sometimes referred to as Turbine).

Separator is a corporation with its plant at Poughkeepsie, New York. Turbine is a corporation with its plant at Trenton, New Jersey. In and prior to 1949, the DeLaval corporations occupied joint offices on three floors of the Chemical Bank Building in New York City. One of these offices was the office of petitioner.

In and prior to 1949, petitioners resided with their children in Riverside, Connecticut, within commuting distance of New York City.

Sometime during 1947 petitioner was advised by the then president of Separator and chairman of Turbine's board that petitioner would probably have to move his residence to the vicinity of Poughkeepsie, New York. At that time the board of directors of Separator was studying a plan to build an office building in Poughkeepsie to house its own employees and also the joint executive officers of the two companies. This plan was studied for a period of 2 years. In January 1949, the board appointed a committee to complete plans and let contracts for the construction of the building. Construction of the building was commenced during 1950 and completed in August 1951.

The decision to remove the executive offices of the DeLaval corporations to Poughkeepsie, although acquiesced in, was against the better judgment of some of the officers of those corporations. Because of this division of opinion among the management, petitioner realized that the move to Poughkeepsie might later be reversed if and when the minority should gain control of the management. In the meantime, petitioner felt that in order to hold his position with the companies he would have to move his residence temporarily to the vicinity of Poughkeepsie.

Petitioner determined that, in seeking a place near Poughkeepsie, he should select a property which would be a venture from which he could ultimately make a profit and which, in the meanwhile, could be used as a temporary residence for his family. He sought such a property for 18 months until he finally found what he thought was a very good bargain from a profit standpoint, consisting of approximately 220 acres, with a house, cottage, and some small buildings, about 17 miles from Poughkeepsie in the small town of Millbrook, New York.

In August 1950 petitioners contracted to purchase the Millbrook property for $28,000, plus some additional costs for closing and adjustments of $550, thus making the total original cost $28,550.

Upon purchasing the Millbrook property, petitioners made immediate arrangements for substantial capital improvements, renovations, and land additions of approximately 10 acres, costing altogether $44,250, which brought the total cost of the Millbrook property to $72,800. Those improvements and additions were not completed until sometime in 1952 or 1953.

In November 1950, shortly after contracting to purchase the Millbrook property, petitioners sold the home in which they were then living in Riverside, Connecticut, and moved into a rented house in Riverside.

At the annual meetings of the DeLaval corporations held in April 1951, newly elected officers decided that the principal officers of the companies (including petitioner) must have their offices in New York City. Petitioner was thereupon advised to attend the New York office daily and to establish his residence convenient to New York City, close enough for him to commute. Petitioners moved to the Millbrook property on May 30, 1951. Petitioner's family continued to reside in the Millbrook property until August 1954 when the entire family moved to Wilton, Connecticut. During the period his family was in Millbrook, petitioner, except on such occasions as his duties took him to Poughkeepsie, rented accommodations at the University Club in New York City for 4 nights a week, Monday, through Thursday. He was with his family in Millbrook the other 3 nights. Within a week after moving to Millbrook petitioners put the Millbrook property up for immediate sale with the leading real estate agent in Millbrook. In April 1952, petitioners purchased the previously mentioned 10 adjoining acres to round out the Millbrook property. The entire Millbrook property was on the market for sale at all times after June 2, 1951, and for rent at all times after July 1952, when the alterations and repairs were substantially completed. Advertisements were placed in newspapers, including the Wall Street Journal, New York Times, the Herald-Tribune, Washington Post, Business Letter in Los Angeles, and in newspapers in Chicago and San Francisco, and in national farm agency brochures such as the Strout Agency and Batson Farm Agency. While at the Millbrook property, petitioner Elizabeth G. Austin showed the house to approximately 50 prospective purchasers and tenants.

On March 18, 1955, petitioners sold a part of the Millbrook property consisting of the main house, adjacent buildings, and 40 acres for $31,500. The actual cost of the part sold was $60,000.

Petitioners' expenses of the 1955 sale aggregated $3,157.

Depreciation allowed petitioners in prior years on the property sold in 1955 aggregated $1,187.

Petitioners sustained a loss of $30,470 on the sale of a part of the Millbrook property on March 18, 1955. No part of this loss was compensated for by insurance or otherwise.

The balance of the Millbrook property (cottage, small buildings, and approximately 190 acres), with a cost basis of $12,800, has been at all times and still is on the market for sale.

The Millbrook property was purchased by petitioners primarily for a residence and secondarily to make a profit.

The loss of $30,470 from the sale of a part of the Millbrook property was not incurred in a trade or business or in a transaction entered into for profit.

OPINION.

We are satisfied that petitioners have proven that they sustained a loss of $30,470 on the sale in 1955 of a part of the Millbrook property. Thus, respondent's second reason given in the statement attached to the deficiency notice for disallowing the loss deduction claimed in petitioners' return in disapproved. We hold that the loss was sustained.

We are not satisfied, however, that the evidence, taken in its entirety, establishes that the loss was not ‘personal in nature’ and therefore prohibited by section 262 of the Internal Revenue Code of 1954.² Thus, we approve respondent's first reason for disallowing the loss.

In order for petitioners to have prevailed, it would have been necessary for them to have established that the loss was either ‘incurred in a trade or business' or ‘in any transaction entered into for profit’ as those phrases are used in section 165(c), I.R.C. 1954. The applicable provisions of section 165 and of the regulations thereunder are in the margin.³

It is clear that petitioners' activity in buying and selling real estate did not amount to ‘a trade or business' as that term is used in section 165(c)(1). Prior to the purchase of the Millbrook property in 1950 , petitioners had purchased in 1945 a residence in Riverside (the Cochran property) which they sold in December 1946 at a profit of approximately $5,000. In November 1946 they purchased another residence in Riverside, consisting of a house, cottage, and 6 1/2 acres, for approximately $21,500. They sold the house and one-half acre in November 1950 for approximately $19,215. In December 1950 they purchased for $1,750 one-half an acre in...