Helvering v. Jones

• Decision Date: 23 July 1941
• Docket Number: No. 11731.,11731.
• Citation: 120 F.2d 828
• Parties: HELVERING, Com'r of Internal Revenue, v. JONES.
• Court: U.S. Court of Appeals — Eighth Circuit

120 F.2d 828 (1941)

HELVERING, Com'r of Internal Revenue, v. JONES.

No. 11731.

Circuit Court of Appeals, Eighth Circuit.

June 24, 1941.

Rehearing Denied July 23, 1941.

Harry Marselli, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and John J. Pringle, Jr., Sp. Assts. to Atty. Gen., on the brief), for petitioner.

Chase Morsey, of St. Louis, Mo. (Edward W. Lake, of St. Louis, Mo., on the brief), for respondent.

Before GARDNER and JOHNSEN, Circuit Judges, and COLLET, District Judge.

GARDNER, Circuit Judge.

This matter is before us on petition of the Commissioner of Internal Revenue for a review of the decision of the United States Board of Tax Appeals which determined a deficiency in respondent's income tax for the year 1931 in the amount of $2.05, whereas the Commissioner had determined a deficiency in the tax for that year in the amount of $1,589.83. The facts were stipulated and are as follows:

On February 11, 1931, respondent purchased certain real estate known as No. 3760 Lindell Avenue, St. Louis, Missouri. The purchase price was $35,400. At the time of the purchase there was a deed of trust on the property in the amount of $15,000, and the balance of the purchase price, to-wit, $20,400, was paid by respondent. The deed of trust was neither executed nor assumed by the taxpayer. The property was purchased subject to the deed of trust. During the taxable years 1931, 1932, 1933 and 1934, respondent took depreciation on said property at the rate of $500 per year. When respondent purchased said property it was rented and the income therefrom was $160 per month. Shortly thereafter property values in the neighborhood deteriorated and the tenant refused to continue the payment of $160 per month rent. Thereafter, on August 26, 1931, respondent leased said property for a period of two years to Thomas J. Kemp and Robert L. Foster. The lease ran from September 15, 1931, to September 14, 1933, and the rental was $135 per month. This rent was collected until February, 1933, and was thereafter reduced to $115 per month. This amount was collected until the end of the term of the lease in September, 1933. Upon the termination of the lease the property became vacant and respondent was never able to secure another tenant.

The note for $15,000, which was secured by a deed of trust on said property, came due on January 27, 1935. At that time business conditions had so completely changed in that particular locality that taxpayer's equity in said property was of no value. The taxes for the year 1934, amounting to $380.04, were past due and unpaid, and when the note became due on January 27, 1935, respondent determined to abandon the property and permit the holder of the deed of trust to foreclose. The foreclosure sale under the deed of trust took place on March 16, 1935, and the property was purchased for the sum and price of $10,000. Respondent did not, directly or indirectly, purchase said property. The property was not purchased by the holder of the mortgage and no redemption proceedings were instituted by respondent. By reason of the foreclosure sale, the equity of respondent was completely wiped out.

The taxpayer contended before the Board of Tax Appeals, and renews the contention here, that he was entitled to deduct the sum of $20,400, less $2,000 depreciation, as an ordinary loss, allowable in full under Section 23(e) of the Revenue Act, 1934, 26 U.S.C.A. Int.Rev.Acts, page 672, while the Commissioner contends that the loss was a capital loss, allowable only to the extent of $2,000 as limited by paragraph (d) of Section 117 of the Act, 26 U.S.C.A. Int.Rev.Acts, page 708. The Board of Tax Appeals sustained the contention of the taxpayer and determined a deficiency of $2.05.

It is the theory of the taxpayer that he abandoned the property prior to the foreclosure of the deed of trust, and hence did not lose it through foreclosure proceedings. The decision of the Board of Tax Appeals holding that the loss was an ordinary one and not a capital loss was rendered before the decisions of the Supreme Court in Helvering v. Hammel, 311 U.S. 504, 61 S.Ct. 368, 85 L.Ed. ___, 131 A.L.R. 1481, and Electro-Chemical Engraving Co. v. Commissioner, 311 U.S. 513, 61 S.Ct. 372, 85 L.Ed. ___, had been handed down. In these decisions the Supreme Court held that Section 117(d) of the Revenue Act, here involved, was applicable to a sale in foreclosure, as well as to a voluntary sale. It is, however, argued by the taxpayer that the doctrine of these two cases is not here applicable because he had abandoned the property before foreclosure, and hence, was...