Horrmann v. Comm'r of Internal Revenue

Decision Date30 November 1951
Docket NumberDocket No. 28362.
Citation17 T.C. 903
PartiesWILLIAM C. HORRMANN, MARIAN D. HORRMANN, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

The family residence of petitioner's mother was acquired by petitioner by devise upon the death of his mother in February 1940. Petitioner redecorated and moved into the family residence and sold his own home. The newly acquired home was found to be unsuitable and petitioner abandoned it as a residence in October 1942. After make several unsuccessful attempts to rent or sell the property it was finally sold in June 1945, at a loss. Held, after October 1942, the property was held for the production of income and petitioner is entitled to deductions for depreciation, section 23(1)(2), and maintenance and conservation expenses, section 23(a)(2) during the years 1943, 1944, and 1945; held, further, the loss incurred upon the sale of the property in 1945 is not deductible as the loss was not incurred in any transaction entered into for profit, section 23(e)(2) of the Code. Robert A. Littleton, Esq., and Ward M. French, Esq., for the petitioners.

Robert Margolis, Esq., for the respondent.

The Commissioner has determined deficiencies in petitioner's income tax as follows:

+------------------------------+
                ¦Year  ¦Amount of deficiency   ¦
                +------+-----------------------¦
                ¦1943  ¦$1,459.19              ¦
                +------+-----------------------¦
                ¦1944  ¦1,678.33               ¦
                +------+-----------------------¦
                ¦1945  ¦387.86                 ¦
                +------+-----------------------¦
                ¦1946  ¦7,090.46               ¦
                +------------------------------+
                

Petitioners contest the determinations by the following assignments of error:

(a) Respondent errs in his failure and refusal to allow petitioners a deduction for each of the years 1943, 1944, and 1945, the amount of depreciation sustained to improvements on real property held primarily as rental property or for sale as a capital asset during said years.

(b) Respondent errs in his failure and refusal to allow petitioners a deduction for each of the years 1943, 1944 and 1945, the expense incurred and paid out during each of said years to protect and preserve property held primarily as rental property or for sale as a capital asset.

(c) In computing tax on long-term and short-term capital gains realized by petitioners in the year 1946, with respect to amount thereof taken into account, respondent errs in his failure and refusal to allow petitioners the carry-over of a net long-term capital loss sustained for the year 1945 from the sale of a capital asset.

Some adjustments made by the Commissioner, more or less minor in their nature, are not contested by petitioners.

FINDINGS OF FACT.

Petitioners are husband and wife who reside in St. Petersburg, Florida. Their returns for the years 1943, 1944, 1945, and 1946, were filed with the collector of internal revenue for the district of Florida. William C. Horrmann will sometimes hereafter be referred to as petitioner.

The property which is the basis of this case is located at 189 Howard Avenue, Grymes Hill, Staten Island, New York. The land consists of a 5-acre landscaped plot situated on the side of a hill, and on the land is a stone house and brick garage. The house was built by petitioner's father and mother in 1910 at a cost of more than $100,000. It was a replica of a castle located in Germany, and it had 17 rooms, or more. Petitioner's father lived in the house until his death sometime in the 1920's and petitioner's mother continued to live in the house as a family residence until her death in February 1940. Petitioner lived in the house until he was married in 1938. Petitioner's mother devised the property to petitioner, and for estate tax purposes the property was valued at $60,000.

The Horrmann family consisted of mother and father, four daughters, and two sons, of whom petitioner was the youngest. In addition to the devise of the property, the will also contained a wish, although not a condition, that petitioner maintain the property as a home, if possible, for the members of his mother's family. The petitioner's mother had communicated this wish to her family during her lifetime. During 1940, petitioner expended $9,000 in redecorating the house, and in November 1940, moved into the house with his wife and son. Petitioner hoped that some of his sisters or his brother would move in for the size of the house was out of proportion to the size of petitioner's immediate family, and they could share in the expense. Sixty tons of coal were required each year to heat the house, and in order to maintain the property there was required the full-time services of three or four servants for the house and a gardener for the grounds. It was an expensive residence to maintain; petitioner found that out from experience.

In October 1942, petitioner moved out of the house and rented a much smaller house at 338 Douglas Road, Emerson Hill, Staten Island, one to one and one-half miles from 189 Howard Avenue. The house leased by petitioner was smaller and was more in keeping with his income. When petitioner moved out, he did so with the intent of never returning to the property.

In the year 1943, petitioner and his family moved to St. Petersburg, Florida. He purchased a house there, and has maintained his personal residence there ever since. Prior to moving into 189 Howard Avenue, petitioner owned and resided in a residence located at Ocean Terrace, Staten Island, but the latter residence was sold shortly after it was vacated.

When petitioner moved from 189 Howard Avenue the property had a reasonable market value of $45,000 allocated as follows: land, $35,000, building $10,000. In addition to stipulating these values, the parties also agreed that the buildings had a remaining useful life of 20 years.

Immediately before and after petitioner moved from the Howard Avenue property, a proposal to convert the house into separate apartments was considered. A construction company was consulted and estimated the cost of conversion would be $60,000. The plan was abandoned because of the prohibitive cost.

On or about December 19, 1942, petitioner listed the Howard Avenue property for sale with Kolff and Kaufmann, Inc., real estate brokers, with offices on Staten Island. The property was offered for sale at $75,000, which was reduced to $40,000 in November 1944, and to $30,000 in March 1945. The realtors advertised the property for sale, attempted to sell the property, and also attempted to lease the property. Offers were received from prospective tenants, but the monthly rental offered by them, $200 to $250, was inadequate. An offer of $500 per month would have been an acceptable rental from the property.

The property was offered for use as an officers' club for Halloran General Hospital which was nearby in return for payment by the Army of the taxes and maintenance costs of the property. However, nothing came of this offer. Early in 1943, the property was offered to the Coast Guard for use as accommodations for the SPARS. Because of lack of transportation facilities the Coast Guard rejected petitioner's offers to sell or lease the property. In late 1943, after petitioner entered the U.S. Maritime Service, the U.S. Army Engineers inspected the property and displayed an interest in renting the property. Petitioner's agent, however, received no offer from them. The property was also offered to the Maritime Commission and to several service organizations, but these attempts to rent or to sell the property ended in failure. At no time during the period from October 1942 to June 5, 1945, was the Howard Avenue property or any part thereof rented, nor did it produce any income whatsoever.

On May 28, 1943, petitioner entered into a contract with a national real estate clearing house for their services in promoting the sale of the Howard Avenue property, and in accordance with that contract the clearing house prepared a listing or brochure describing the property. This brochure which was prepared under the direction and with the approval of petitioner contained the following statement: ‘Not for rent.‘

In January of 1945, the property at 189 Howard Avenue was broken into by vandals who inflicted heavy damage on the property by smashing furniture, decorations, fixtures, and glass, and by building fires on the floors. On June 5, 1945, the property was sold for the consideration of $23,000. Petitioner paid expenses of $2,200 incurred in connection with the sale of the property, of which $1,150 was paid to Kolff and Kaufmann, Inc., under his oral contract made with the broker in December 1942.

The expenses incurred by petitioner in the maintenance and conservation of the Howard Avenue property during the taxable years are as follows:

+-----------------------------------------------------+
                ¦                                       ¦1943  ¦1944  ¦
                +---------------------------------------+------+------¦
                ¦Caretaker expenses and detective agency¦$520  ¦$700  ¦
                +---------------------------------------+------+------¦
                ¦Gas and electricity                    ¦50    ¦50    ¦
                +---------------------------------------+------+------¦
                ¦Coal                                   ¦600   ¦----  ¦
                +---------------------------------------+------+------¦
                ¦Total                                  ¦1,170 ¦750   ¦
                +-----------------------------------------------------+
                
OPINION.

BLACK, Judge:

Three issues are presented in this proceeding. All issues relate to the real property, residence and garage, at 189 Howard Avenue, Staten Island, New York, which was acquired by petitioner by a devise from his mother upon her death in February 1940.

Petitioner redecorated the house and moved into it about October 1940. Shortly thereafter petitioner sold the residence in which he was living prior to October 1940. The property at 189 Howard Avenue was used by petitioner at his personal residence...

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