Kittredge v. Commissioner of Internal Revenue, 236.

• Decision Date: 08 March 1937
• Docket Number: No. 236.,236.
• Citation: 88 F.2d 632
• Parties: KITTREDGE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

88 F.2d 632 (1937)

KITTREDGE v. COMMISSIONER OF INTERNAL REVENUE.

No. 236.

Circuit Court of Appeals, Second Circuit.

March 8, 1937.

Satterlee & Canfield, of New York City (F. Morse Hubbard and Barham R. Gary, both of New York City, of counsel), for petitioner.

James W. Morris, Asst. Atty. Gen. (Sewall Key, Norman D. Keller, and Alexander Tucker, Sp. Assts. to the Atty. Gen., of counsel), for respondent.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

In 1931 the petitioner sold a property known as the Weston Winery for substantially less than it had cost him. Whether the sale resulted in profit or loss for income tax purposes is the matter in dispute, and this turns on whether the cost of the property should be diminished by deductions for depreciation for the years 1922 to 1931, during which the petitioner had no tenant for it and did not operate it himself. Specifically, the question is whether the property was "used in the trade or business" of the taxpayer within the meaning of section 23(k) of the Revenue Act of 1928 (45 Stat. 799, 800) and the similar provision of prior revenue acts.

The petitioner purchased the winery in 1919 for the price of $25,000, and during 1920 expended sums for buildings and machinery which brought the cost of the property to $37,422.53. In 1920 he leased it to a tenant who agreed to operate it as a grape juice plant on a profit-sharing basis. Early in 1922, however, the tenant abandoned the grape juice project as a failure, and the lease was terminated by agreement. Thereafter the petitioner neither leased the property nor used it for any purpose whatever. In 1931 he sold it for $12,000, and reported a loss from the sale in his tax return. The Commissioner corrected the return to show a profit by diminishing the cost of the property by the amount of depreciation allowable during the years of the petitioner's ownership. In none of these years had he claimed or been allowed for income tax purposes any deduction for depreciation, though in fact the property had depreciated to the extent and in the manner determined by the Commissioner. During the period from 1919 to 1931 the petitioner owned other wineries, which were operated by lessees, and as to these he had taken deductions for depreciation in his income tax returns.

Section 111(b) (2) of the Revenue Act of 1928 (45 Stat. 815 26 U.S.C.A. § 111 note) provides that in determining the amount of gain or loss from a sale of property "(2) The basis shall be diminished by the amount of the deductions for exhaustion, wear and tear, obsolescence, amortization, and depletion which have since the acquisition of the property been allowable in respect of such property."

The amounts deductible in the ascertainment of the gain or loss from a sale are independent of whether or not deductions were claimed in the taxpayer's annual returns. United States v. Ludey, 274 U.S. 295, 304, 47 S.Ct. 608, 611, 71 L.Ed. 1054; article 561, Treas.Reg. 74. Whether deductions for depreciation during the years in question were "allowable" depends upon the meaning of section 23(k) of the 1928 Act (45 Stat. 799, 800) and the similar provision in the prior applicable acts. Section 23(k) allows deduction from gross income of "A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence." See articles 201, 202, Treas.Reg. 74. Hence the dispute is reduced to the single question whether the Weston Winery was "used in the trade or business" of the petitioner during his...