Brumback v. Denman

• Decision Date: 14 November 1930
• Docket Number: No. 3316.,3316.
• Citation: 48 F.2d 255
• Parties: BRUMBACK v. DENMAN.
• Court: U.S. District Court — Northern District of Ohio

48 F.2d 255 (1930)

BRUMBACK v. DENMAN.

No. 3316.

District Court, N. D. Ohio, W. D.

November 14, 1930.

John S. Brumback and Orville S. Brumback, both of Toledo, Ohio, for plaintiff.

Eugene Angevine, Sol. for Department of Internal Revenue, of Washington, D. C., and Lee N. Murlin, U. S. Atty., of Toledo, Ohio, for the United States.

HAHN, District Judge.

This is an action to recover a deficiency assessment of United States income tax in the amount of $3,069.15, assessed and collected by the defendant from the plaintiff for the calendar year 1922. In that year the plaintiff in his return deducted a loss incurred in land in the Bitter Root Valley in Ravalli county, Mont., purchased in 1912. The plaintiff purchased and owned in fee simple a one-half interest in 130 acres of undeveloped, arid land that was exploited for fruit-raising possibilities, and which to that end was dependent upon artificial irrigation. His venture was for purposes of resale and speculation. The irrigation was furnished by the Bitter Root Valley Irrigation Company, a private corporation which, in about 1908, constructed an irrigation canal some 70 miles in length. By 1920 a large part of the wooden flumes and water lines constructed by the irrigation company was badly deteriorated and in need of repair and rebuilding, but the irrigation company was then insolvent and in the hands of a receiver. The landowners in the valley then formed a political organization under the laws of the state of Montana, known as the Bitter Root irrigation district, which purchased the irrigation canal and the old water system from the receiver of the irrigation company. The only way the irrigation district could function was by the issuance of bonds which were to be paid by taxes and assessments upon the lands in the Valley. Under the Montana law, and as a result of a court proceeding authorized by that law, an order was entered on the 24th day of June, 1922, in the district court of the Fourth judicial district of the state of Montana in and for the county of Ravalli, authorizing a bond issue in the aggregate amount of $1,140,000, and the "levying of a special tax or assessment upon all of the lands of the said Bitter Root Irrigation District to pay the principal and interest of said bonds when the same shall fall due."

In view of the history of the lands in the Bitter Root Valley, and the certainty of the placing of taxes and assessments upon the lands therein because of the proceedings just related, the salability and marketability of the land of the plaintiff was destroyed upon the entering of the court's order of June 24, 1922, and the same became worthless for the purposes of the plaintiff. The testimony does not leave any doubt upon this point. More than 40 per cent. of the lands were forfeited for taxes, and for at least six years no lands were sold at prices above the delinquent tax thereon. The plaintiff, upon whom rested the first duty of determining the matter, in the year 1922 concluded that the land was worthless, that he would take his loss as a result of the situation; thereupon, in 1922 he refused to pay further taxes upon the property, charging it off on his books, and had no further transactions with relation to it, nor did he exercise further dominion over it. The taxes not being paid, the property was sold for taxes October 3, 1923, the legal title being transferred pursuant to the tax sale February 13, 1926. The plaintiff deducted the amount of his loss upon the property in his income tax report for the year 1922.

Both sides have argued the case as involving a construction of section 214 of the Revenue Act of 1921 (42 Stat. 239, 240), particularly that portion thereof which is as follows:

"Sec. 214. (a) That in computing net income there shall be allowed as deductions: * * *

"(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business."

It is not argued that the regulations are helpful in determining the point upon which counsel agree that the case turns. The taxpayer argues that the property became absolutely worthless in the year 1922, and that he was entitled to claim the loss for that year. The government, relying upon the case of the Appeal of A. J. Schwarzler, 3 B. T. A., 535 (1926), argues that even if the property became worthless in the year 1922, the plaintiff could not have the benefit of the loss so long as he held the legal title to the property; that he was not divested of the legal title until February 13, 1926¹; and that the plaintiff was entitled to claim the loss, not for 1922, but for the year 1926.

The reasoning of the Schwarzler Case, in so far as it is claimed to apply to this case, is represented by the following, at page 538:

"The testimony produced tends to show that the property in question had decreased in value, due to changes in the neighborhood, that it was not desirable as a building site, and that taxes had been permitted to accumulate against it until they equaled or exceeded its then value. Assuming all this to be true, the taxpayer did not sustain a loss in the taxable year. * * *

"Here there is no question but that the legal title to the property attempted to be abandoned was in the taxpayer, and remained in it until after the taxable year in question. It could exercise dominion over it to the exclusion of everyone else, and it is difficult to conceive how it could sustain a loss with respect to the property and still have the property to deal with as its own. True, the value of the property may have declined by reason of changed conditions and the taxpayer's neglect to pay taxes thereon. In fact, every piece of property upon which taxes are permitted to accumulate and which is located in a neighborhood which has become undesirable, necessarily suffers a diminution in its market value, but it has never been held that a taxpayer could deduct as a loss the diminution in value of land the title to which is still retained, and the difference is one of degree only. Losses from dealing in real or personal property, growing out of the ownership thereof, are deductible only when ascertained and determined upon an actual, completed, and closed transaction during the taxable year, and are not sustained through the mental processes by which a taxpayer determines that the property is worthless and charges it off on its books, while it still retains the title to the property itself." (Italics supplied.)

Plaintiff denies that the Schwarzler Case should be applied to this case, and argues that his loss was established for income tax purposes by the court's order hereinabove referred to, and which was entered on the 24th day of June, 1922. Plaintiff relies upon the cases of United States v. White Dental Company, 274 U. S. 398, 47 S. Ct. 598, 600, 71...