McNeill v. Commissioner of Internal Revenue, 7527.

• Decision Date: 11 January 1958
• Docket Number: No. 7527.,7527.
• Citation: 251 F.2d 863
• Parties: Robert H. McNEILL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

251 F.2d 863 (1958)

Robert H. McNEILL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 7527.

United States Court of Appeals Fourth Circuit.

Argued November 22, 1957.

Decided January 11, 1958.

Wilton H. Wallace, Washington, D. C. (Henry F. Lerch and Wallace & Lerch, Washington, D. C., on brief), for petitioner.

Charles B. E. Freeman, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and A. F. Prescott, Attys., Dept. of Justice, Washington, D. C., on brief), for respondent.

Before SOPER and HAYNSWORTH, Circuit Judges, and R. DORSEY WATKINS, District Judge.

SOPER Circuit Judge.

Robert H. McNeill, the taxpayer in this case, is a lawyer who for many years has practiced his profession in Washington, D. C. He has also been interested in real estate, and in the pursuit of this line of activity he acquired a large tract of land near Altoona, Pennsylvania, which he intended to subdivide and to sell in lots. The venture proved unsuccessful despite repeated efforts on his part and the land was finally seized and sold at a loss for taxes. The present controversy raises the question whether the taxpayer is entitled under the federal statutes to deduct the loss from his taxable income for the year 1946.

A minor question is whether the taxpayer is entitled to a deduction from income in 1947 for losses in that year from bad debts due him for certain loans to individuals and certain accommodation endorsements for their benefit.

The Pennsylvania project involved 834 acres of land, a portion of which had already been divided into lots and sold. The taxpayer acquired the property at a mortgage foreclosure sale in 1924. He gave in payment his promissory notes for $12,500 and $7,500 secured by mortgage on the land. He had lost money through advances to the prior owner and hoped to recoup his loss by further subdividing and selling the land. For this purpose the land was surveyed, plats showing the division into lots were prepared, and a road was built leading to the plateau on which the land was located to make the property more accessible. The taxpayer also employed a prominent realtor in the community to solicit sales of the lots, and extensive efforts were made by advertisement and otherwise to sell the lots over a period of several years. In 1925, elaborate plans for an auction sale were made and it was well attended, but nothing was accomplished since the crowd was suddenly dispersed by a violent storm. Subsequent attempts were made to establish a public park and also to develop an airport project in the area, and efforts to interest the governmental authorities were made, but these projects also fell through. No lots were ever sold by the taxpayer, and the project lay dormant for a number of years.

Eventually, in 1940, the commissioners of Blair County, Pennsylvania, seized the property because of nonpayment of taxes and held title to it for a period of two and one-half years, during which they attempted, without success, to sell it for an amount equal to the unpaid taxes. Under Pennsylvania law the taxpayer had the right to redeem the land by payment of the taxes within certain periods (72 Purdon's Pennsylvania Statutes, §§ 5971p, 5971q and 6105.1) and he made certain efforts to sell all or part of the land but was unsuccessful. The tax authorities had no better success in their efforts to sell after the expiration of the redemption period and finally, in 1946, more than six years after the seizure, they offered to sell the property to the taxpayer for $750.00, and for this sum the property was transferred, through the intervention of the taxpayer, directly to the Royal Village Corporation, in which all of the stock was held by the taxpayer and members of his family. The transfer was made by deed on December 5, 1946, and the taxpayer accepted this as the date of the realization of his loss and deducted it in his 1946 income tax return. Six years later, in 1952, the taxpayer paid $5,250 to the estate of the mortgagee of the property in full satisfaction of the outstanding mortgage thereon at that time. The Royal Village Corporation then held title to the property.

The Commissioner disallowed the loss on the ground that the final transaction constituted an indirect sale by the taxpayer to a corporation in which more than 50 per cent in value of the outstanding stock was owned by members of his family, and hence the loss was not deductible under § 24(b) (1) (B) of the Internal Revenue...