Newcombe v. Comm'r of Internal Revenue
| Citation | 54 T.C. 1298 |
| Decision Date | 17 June 1970 |
| Docket Number | Docket No. 2272-68. |
| Parties | FRANK A. AND HELEN A. NEWCOMBE, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Richard A. Williams, for the petitioners.
W. B. Riley and Robert S. Leigh, for the respondent.
Shortly after Dec. 1, 1965, petitioners moved out of their personal residence and immediately offered it for sale at a price in excess of the then market value but not in excess of their investment. Efforts to sell were continuous until Feb. 1, 1967, when the property was sold. At no time was the property offered for rent. Held, during 1966, petitioners did not hold the property for the production of income within the meaning of sec. 167(a)(2) or 212(2), I.R.C. 1954.
Respondent determined a deficiency of $2,059.95 in petitioners' income taxes for their taxable year 1966. The only issue is the deductibility of expenses incurred during the period in which a house, previously used by petitioners as their residence, was held for sale.
All the facts have been established by admissions in the pleadings and are found accordingly.
Petitioners are husband and wife and had their legal residence in Naples, Fla., at the time of the filing of their petition herein. They filed a joint income tax return for 1966 with the district director of internal revenue at Jacksonville, Fla.
Until December 1, 1965, petitioner Frank A. Newcombe (hereinafter referred to as Frank) was employed and he and his wife resided in a house at Pine Bluff, Ark.
Petitioners' total adjusted cost basis in the house on December 1, 1965, was $70,887.39, allocated $3,500 to the land and $67,387.39 to the house. The total fair market value on that date was $60,000, allocated $52,000 to the house and improvements and $8,000 to the land.
On December 1, 1965, Frank retired and shortly thereafter he and his wife moved to Naples, Fla. In Naples, they purchased a residence in which they have since continuously resided. After this move, petitioners never again occupied the Pine Bluff house. It remained unoccupied from December 1, 1965, until it was sold. Frank did return to Pine Bluff three times during 1966 to attend certain board meetings, but each of these times he stayed at a motel or with his adult daughter, who resided in her own home in Pine Bluff.
Petitioners listed their Pine Bluff house for sale on or about December 1, 1965, with a local realtor. They never attempted to rent the house. The price at which it was initially listed for sale was $70,000. Continuing efforts to sell during all of 1966 were unsuccessful. It was finally sold for $50,000 on or about February 1, 1967.
During 1966, petitioners incurred and paid the following maintenance expenses, totaling $1,146, in connection with their Pine Bluff house:
+-------------------------------------+
¦Expense ¦Amount ¦
+----------------------------+--------¦
¦ ¦ ¦
+----------------------------+--------¦
¦Maid and yard service ¦$451 ¦
+----------------------------+--------¦
¦Telephone ¦71 ¦
+----------------------------+--------¦
¦Gas ¦234 ¦
+----------------------------+--------¦
¦Electricity ¦132 ¦
+----------------------------+--------¦
¦Sanitation ¦25 ¦
+----------------------------+--------¦
¦Water ¦46 ¦
+----------------------------+--------¦
¦Painting white trim on house¦178 ¦
+----------------------------+--------¦
¦Plumbing repair ¦9 ¦
+-------------------------------------+
On their 1966 income tax return, petitioners claimed these expenses as deductions and also claimed $2,600 in depreciation as a deduction, utilizing a $52,000 basis, a 20-year life, and a straight-line method.
The threshold question involved herein is whether, during 1966, petitioners' former residence at Pine Bluff, Ark., constituted ‘property held for the production of income’ so as to entitle them to deductions for maintenance expenses and depreciation under sections 212(2)1 and 167(a)(2), 2 respectively. The quoted phrase in both sections stems from the Revenue Act of 1942, 56 Stat. 798, 819. Since the two sections have the same purpose, the phrase should be given the same construction in one as in the other and neither party has argued otherwise. Commissioner v. Ridgeway's Estate, 291 F.2d 257, 259 (C.A. 3, 1961), affirming 33 T.C. 1000 (1960); William C. Horrmann, 17 T.C. 903, 908 (1951).
Each of the parties seeks the adoption of a single standard for determination. Petitioners argue that the mere abandonment of personal use of property plus offering it for sale is sufficient to satisfy the statutory requirements. Respondent disagrees and urges that we hold that there can be a conversion of a personal residence to an income-producing use only where the property is rented or offered for rent. We do not share the penchant for polarization which the arguments of the parties reflect. Rather, we believe that a variety of factors must be weighed and, on this basis, we have concluded that petitioners' deductions should not be sustained.
In reaching this conclusion, we have taken into account the following considerations:
(1) Petitioners actually occupied the Pine Bluff house as their personal residence for a substantial period of time. This factor has been emphasized in the decided cases as indicative of the personal nature of the expenses subsequently incurred while holding the property for postoccupancy sale. Charles F. Neave, 17 T.C. 1237 (1952); Warren Leslie, Sr. 6 T.C. 488 (1946). Similarly, the total absence or limited presence of this factor has made it easier to find that the statutory requirements have been met, e.g., with respect to inherited property or property acquired by purchase, which is then offered for sale. George W. Mitchell, 47 T.C. 120 (1966).3 Compare Mary E. Crawford, 16 T.C. 678 (1951).
(2) The house was not occupied during the period between its abandonment as the petitioners' residence and its ultimate disposition. Under such circumstances, the house was potentially available to petitioners for their personal use. See Rumsey v. Commissioner, 82 F.2d 158, 159, 160 (C.A. 2, 1936), affirming a Memorandum Opinion of this Court; Morgan v. Commissioner, 76 F.2d 390 (C.A. 5, 1935), Grammer, 12 T.C. 34 (1949). To be sure, the facts herein show that petitioners did not reoccupy the house, even temporarily, and it appears that realistically it would have been difficult for Frank to do so during trips to Pine Bluff.4 As a consequence, this element is of minor significance herein.
(3) Some of the decided cases have emphasized the recreational character of the property as militating against the taxpayer's position and there is some indication that buildings not being personally used may, without more, qualify as property ‘held for the production of income.’ See May v. Commissioner, 299 F.2d 725, 727 (C.A. 4, 1962), affirming 35 T.C. 865 (1961). While recreational property such as the yacht involved in May may make the decisional task easier, 5 it does not necessarily follow that buildings fall automatically into a preferred category; the indication to the contrary in May was clearly not necessary to the decision of the Court of Appeals.
(4) Offers to rent are an important element in the taxpayer's favor. See May v. Commissioner, 229 F.2dat 728. We are not included, however, to accept respondent's position that the presence or the absence of rental offers should be the focal point.6 In some cases, their presence may be of minimal significance because of the adverse state of the market for rental property. 7 Moreover, the absence of offers to rent may sometimes be explainable in terms of their adverse impact on efforts to sell the property. See Hulet P. Smith, T.C. Memo. 1967-28, affirmed per curiam 397 F.2d 804 (C.A. 9, 1968); 66 Mich.L.Rev. 562, 567, 569 (1968).
(5) Another element is the presence of offers for sale. Merely offering property for sale does not, as petitioners argue, necessarily work a conversion into ‘property held for the production of income.’ May v. Commissioner supra; Charles F. Neave, supra; Warren Leslie, Sr., supra. But it does not follow, as respondent argues, that offers for sale can never effect such a conversion. There is no requirement under section 212(2) that the income be recurrent in nature, as rent normally is. On particular facts, property held solely for sale may be ‘property held for the production of income.’ So say the committee reports to the 1942 Act. H. Rept. No. 2333, 77th Cong., 2d Sess., p. 75 (1942); S. Rept. No . 1631, 77th Cong.,2d Sess. p. 87 (1942). 8 The regulations echo those reports. Sec. 1.212-1(b), Income Tax Regs. Cf. George W. Mitchell, supra, May v. Commissioner, 299 F.2dat 727. Compare Mary Laughlin Robinson, 2 T.C. 305, 308 (1943), on remand from 134 F.2d 168 (C.A. 3, 1943), with Warren Leslie, Sr., 6 T.C.at 494.
If the taxpayer is merely seeking to recover his investment or a part thereof, it will be difficult to find that the property was ‘held for the production of income.’ May v. Commissioner, 299 F.2dat 728. Any sale under such conditions will not produce a profit since the taxpayer's basis for determining gain will be his cost. Section 61 describes income, among other things, as ‘(3) Gains derived from dealings in property.’ And the committee reports at the time the predecessors of sections 167(a)(2) and 212(2) were enacted state that income is ‘not confined to recurring income but applies as well to gain from the disposition of property.’ See fn. 8 supra. Consequently, it would appear that the property is being held simply for the production of loss and the expenses would not be deductible. Cf. Samuel Yanow, 44 T.C. 444 (1965), affirmed per curiam 358 F.2d 743 (C.A. 3, 1966).
We are, of course, aware of the provision of respondent's...
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