Hazard v. Comm'r of Internal Revenue, Docket No. 8690.
| Decision Date | 16 July 1946 |
| Docket Number | Docket No. 8690. |
| Citation | 7 T.C. 372 |
| Parties | LELAND HAZARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, an attorney at law, owned and occupied, as a residence property in Kansas City, Missouri, which he abandoned as such and took up his residence in Pittsburgh, Pennsylvania. The Kansas City property was rented and depreciation allowed thereon from January 1, 1940, until its sale in the taxable year 1943. Held, such property was not a ‘capital asset‘ within the purview of section 117, I.R.C., as amended by the Revenue Act of 1942, and petitioner is entitled to deduct the total loss sustained on the sale, as an ordinary loss under section 23(e), I.R.C. William Wallace Booth, Esq., and Sidney B. Gambill, Esq., for the petitioner.
Homer F. Benson, Esq., for the respondent.
This proceeding involves a deficiency in income tax for the calendar year 1943 in the amount of $4,467.24. The only issue submitted is whether a loss sustained upon the sale of improved real estate, formerly occupied by petitioner as a residence, is deductible in full as an ordinary loss or as a long term capital loss. The case was submitted upon a stipulation of facts, oral testimony, and exhibits. The stipulated facts are so found. Other facts are found from the record.
Petitioner is an individual, residing at 5023 Frew Street, Pittsburgh, Pennsylvania. The return for the period involved was prepared on the cash basis and filed with the collector of internal revenue for the twenty-third district of Pennsylvania. Prior to 1938 petitioner engaged in the general practice of law at Kansas City, Missouri. Effective in October 1938, petitioner was employed as general counsel for the Pittsburgh Plate Glass Co., which employment required him to maintain his office and post of duty at Pittsburgh. Prior to 1940 petitioner severed his law partnerships in Kansas City, and he has since devoted his entire time to the Pittsburgh Plate Glass Co., for which he received a salary of $50,000 in 1943.
In 1930 petitioner purchased a residence at No. 1005 Brentwood Circle, Kansas City, Missouri, at a cost of $27,000, allocated on a basis of $6,000 for the land and $21,000 for the improvements. Subsequently he made additional improvements, aggregating $5,600, so that his total original cost was $32,600. Petitioner and his family occupied such residence until July 1, 1939, when they moved to Pittsburgh. In February 1940, petitioner purchased stock in a cooperative apartment building in Pittsburgh, entitling him to an apartment therein, which he and his family have occupied since the purchase. Prior to 1943 petitioner registered and voted in Allegheny County, Pennsylvania. On March 18, 1940, he was duly admitted to practice before the Supreme Court of Pennsylvania. On or about January 1, 1940, petitioner listed his Kansas City home with real estate agents for rent or for sale. Early in 1940 said property was rented at $75 per month. The property was continuously rented until sold on November 1, 1943. The depreciation on the building and the additions, from the date of acquisition to January 1, 1940, based on an estimated life of 33 1/3 years from the acquisition date, is as follows:
+-----------------------------+
¦$21,000 at 28 1/2% ¦$5,985.00¦
+-------------------+---------¦
¦1,000 at 19 1/2% ¦195.00 ¦
+-------------------+---------¦
¦600 at 10 1/2% ¦63.00 ¦
+-------------------+---------¦
¦3,000 at 4 1/2% ¦135.00 ¦
+-------------------+---------¦
¦Total ¦6,378.00 ¦
+-----------------------------+
The depreciated value at January 1, 1940, was $25,222, allocated on a basis of $6,000 to the land and $19,222 to the improvements. The fair market value of the properties on January 1, 1940, was equal to the depreciated value.
During the time the property was rented it continued to be listed for sale. In his Federal income tax returns for the years 1941, 1942, and 1943 petitioner claimed and was allowed depreciation on the buildings. The rate of 2 per cent per annum was claimed in petitioner's return for 1943. For the period January 1, 1940, to the date of sale on November 1, 1943, $1,819.38 in depreciation was claimed and allowed.
The sale price of the properties in question was $18,500, on which petitioner claimed a net loss of $6,844.92, computed as follows:
+-----------------------------------------------------------------------------+
¦Fair market value on January 1, 1940 ¦ ¦$25,222.00¦
+-------------------------------------------------------+----------+----------¦
¦Less: Depreciation on $19,222, value of dwelling for ¦ ¦ ¦
¦period Jan. 1, ¦ ¦ ¦
+-------------------------------------------------------+----------+----------¦
¦1940, to Nov. 1, 1943, on estimated life of 40 1/2 ¦ ¦1,819.38 ¦
¦years ¦ ¦ ¦
+-------------------------------------------------------+----------+----------¦
¦Adjusted value of property Nov. 1, 1943 ¦ ¦23,402.62 ¦
+-------------------------------------------------------+----------+----------¦
¦Sale price of property ¦$18,500.00¦ ¦
+-------------------------------------------------------+----------+----------¦
¦Less furniture, carpets, tools and equipment ¦1,000.00 ¦ ¦
+-------------------------------------------------------+----------+----------¦
¦ ¦17,500.00 ¦ ¦
+-------------------------------------------------------+----------+----------¦
¦Less cost of sale ¦942.36 ¦ ¦
+-------------------------------------------------------+----------+----------¦
¦ ¦ ¦$16,557.70¦
+-------------------------------------------------------+----------+----------¦
¦Net loss from sale ¦ ¦6,844.92 ¦
+-----------------------------------------------------------------------------+
The respondent determined the loss sustained is allowable as a long term capital loss to the extent of $1,000, computed as follows:
+-------------------------------------------------------------------+
¦Net loss from sale ¦$6,844.92¦
+---------------------------------------------------------+---------¦
¦Loss taken into account ¦3,422.46 ¦
+---------------------------------------------------------+---------¦
¦Limitation of capital loss under sec. 117 (d) (2), I.R.C.¦1,000.00 ¦
+---------------------------------------------------------+---------¦
¦Capital loss carry-over ¦2,422.46 ¦
+-------------------------------------------------------------------+
The sole question presented is the extent the loss of $6,844.92 sustained by the petitioner, an attorney at law, on the sale of his former residence in Kansas City, is deductible for income tax purposes. Petitioner contends that the total net loss is deductible under section 23(e)(1) of the Internal Revenue Code as a ‘ * * * (loss) sustained during the taxable year and not compensated for by insurance or otherwise * * * .‘ The respondent determined the property in question was a capital asset, on the ground that it was not used in petitioner's trade or business, and therefore restricted the deductible loss on its sale in accordance with the limitations provided in section 117 of the code, as amended by the Revenue Act of 1942. Prior to the Revenue Act of 1942 the established rule followed by this and other courts over a long period was that residential improvements on real estate converted into income-producing property are property ‘used in the trade or business of the taxpayer,‘ regardless of whether or not he engaged in any other trade or business, and are therefore excluded from the definition of ‘capital assets‘ as defined by section 117(a)(1). John D. Fackler, 45 B.T.A. 708 (); affd., 133 Fed.(2d) 509; N. Stuart Campbell, 5 T.C. 272; George S. Jephson, 37 B.T.A. 1117. The undisputed facts bring the instant case within that rule. Thus, unless the amendments contained in the ...
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