Commissioner of Internal Revenue v. McCarthy, 7898.

• Decision Date: 08 July 1942
• Docket Number: No. 7898.,7898.
• Citation: 129 F.2d 84
• Parties: COMMISSIONER OF INTERNAL REVENUE v. McCARTHY.
• Court: U.S. Court of Appeals — Seventh Circuit

129 F.2d 84 (1942)

COMMISSIONER OF INTERNAL REVENUE v. McCARTHY.

No. 7898.

Circuit Court of Appeals, Seventh Circuit.

July 8, 1942.

Samuel O. Clark, Jr., Asst. Atty. Gen., J. Louis Monarch and Louise Foster, Sp. Assts. to Atty. Gen., and J. P. Wenchel and Roy N. McMillan, both of Washington, D. C., for petitioner.

Robert F. Carey and John D. Clancy, Jr., both of Chicago, Ill. (Howard R. Brintlinger, and Patrick S. Filter, both of Chicago, Ill., of counsel), for respondent.

Before EVANS and SPARKS, Circuit Judges, and LINDLEY, District Judge.

SPARKS, Circuit Judge.

The Commissioner challenges a decision of the Board of Tax Appeals permitting the taxpayer to deduct as a loss under § 23(e) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Code § 23(e), his investment in a parcel of real estate claimed to have been abandoned by him during that tax year.

The facts, as stated by the Board in its findings, were that the taxpayer, respondent, together with one John McCabe, purchased an unimproved corner lot in the year 1930. Respondent took title to the property. Of the purchase price of $41,850, the taxpayer paid $17,850, and McCabe $5,000, in cash. The balance was defrayed by delivery of respondent's notes for $19,000, payable in five years, secured by mortgage executed by him on the property. It was understood between respondent and McCabe that they should hold equal interests in the property, and that McCabe would make contributions to respondent to make up his half of the investment. The transaction was entered into for profit, the plan being to erect a gasoline filling station on the property, to be operated by others under lease. This was done in 1932, at a cost of $3,838, of which respondent furnished $1,550, and McCabe the balance.

Respondent left the entire management of the property to McCabe, and permitted him to collect the rent which was used to pay interest on the mortgage and some expenses, but it was never sufficient to pay taxes, and none were ever paid. McCabe reported the entire income on his tax return and respondent never received any income from the property.

The Board found that, "The petitioner soon realized that the purchase had been unwise and would probably result in a loss. He made no efforts to sell the property because he thought they would be unavailing." It also found that, "Although legal title to the property was transferred several times, whoever held the legal title did so for the benefit of the petitioner and McCabe."

In February, 1936, respondent and McCabe "signed a writing which was as follows:

"Be It Known that Emmett J. McCarthy and John McCabe have heretofore had a half interest in the following described property: * * * which property cost about $42,000.00 originally, and which is now encumbered with a $19,000.00 mortgage. Such property is now subject to unpaid taxes for past years, and, in addition, it is contemplated that the mortgage should be refinanced and certain improvements placed on the land to permit earnings to pay carrying expenses. Since acquisition the property has depreciated in value over 50% and is now worth only about the amount of the existing mortgage. Emmett J. McCarthy is unwilling to pay out additional moneys for back taxes, new improvements, etc., and in view of the fact he considers his present investment (including his personal indebtedness of approximately $10,000.00 to the Receiver of the Bain Banks) as a total loss, and not wishing to have any further connection with the property, it has been agreed between the parties hereto that hereafter the said Emmett J. McCarthy shall have no interest whatsoever in said property and that John McCabe shall be the exclusive owner thereof insofar as Emmett J. McCarthy or any claim by or through him is concerned."

The Board found that at the time, respondent believed that he had a loss on the property and that, by signing the instrument, he would be enabled to deduct the loss for income tax purposes.

Subsequently, in 1940, the mortgagee learned that taxes had never been paid on the property and notified respondent that the mortgage would have to be paid. According to the terms of the compromise agreement, respondent paid $12,500 and received back the mortgage and notes amounting to $19,000 in 1940.

Pursuant to the original agreement between respondent and McCabe, that the latter would reimburse respondent for his half of the purchase price, McCabe paid amounts totalling $6,100 prior to the February 1936 instrument, and $2,917 thereafter, up to October, 1939.

The taxpayer claimed a deduction of $17,850, his original cash outlay on the property, from his gross income for the year 1936. The Board allowed a deduction of $10,383, reducing his total cash outlay of $19,400 (exclusive of the amount paid in settlement of the mortgage) by the total payments of McCabe amounting to $9,017.

Section 23 of the Revenue Act of 1936 under which the taxpayer claims the deduction, provides that in computing net income there shall be allowed as deductions: "(e) In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise * * * (2) if incurred in any transaction entered into for profit, though not connected with the trade or business * * *." Treasury Regulations 94 promulgated thereunder provide that, "In general losses for which an amount may be deducted must be evidenced by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed."

Respondent's theory, sustained by the Board, was that the signing of the instrument of February 6, 1936, constituted the identifiable event...