Rhodes v. Commissioner of Internal Revenue
| Decision Date | 17 January 1939 |
| Docket Number | No. 7572.,7572. |
| Citation | 100 F.2d 966 |
| Parties | RHODES v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Sixth Circuit |
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F. E. Hagler, of Memphis, Tenn., for petitioner.
L. W. Post, of Washington, D. C. (James W. Morris, Sewall Key, and L. W. Post, all of Washington, D. C., on the brief), for respondent.
Before SIMONS, ALLEN and HAMILTON, Circuit Judges.
This is a petition to review a decision of the Board of Tax Appeals redetermining a deficiency of $3,222.13 in the income taxes of the petitioner for the calendar year 1927.
On August 10, 1925, the petitioner, by land contract, agreed to purchase for $20,000 Lot 4, Block 18, LaGorce Subdivision in the city of Miami Beach, Dade County, Florida. The purchase price to be paid was $13,250 cash within thirty days and a mortgage of $1,500, payable $500 per annum and the assumption of an existing land contract on the property with an unpaid balance of $5,250.
Payments of $15,762.50 were made under the contract and the petitioner paid accruing city, state and county taxes to and including 1926, the last year's taxes being paid on April 29, 1927, but no deed was made to the property.
As the result of a hurricane in September, 1926, and again in September, 1927, the property was covered with debris and additional deposits of sand. The petitioner made several trips to Florida during these two years seeking a purchaser for the property without success, having purchased it for the purpose of resale.
After the second hurricane, the petitioner concluded the property was worthless as he could find no purchaser for it and refused to make further payments under his purchase contract, sought to abandon it and charged off of his books of accounts as a loss the sum of $15,762.50 which he had paid and deducted this amount as a loss from gross income in his income tax return for 1927.
In the spring of 1928, he received an unsolicited cash offer of $1,000 or $1,100 which he accepted and assigned his contract to the purchaser. The respondent disallowed the petitioner's deduction for the calendar year 1927 on the ground that the loss occurred in the year 1928, and was sustained by the Board.
On August 13, 1925, the petitioner and J. A. Carroll jointly purchased from a man named Spann and his wife, Lots 1 and 2, Block 13, of the Dixie Highway Tract situated in Dade County, Florida, on the Dixie Highway about sixteen miles north of Miami, petitioner having three-fourths interest and Carroll one-fourth. The lots were small, vacant and sandy, covered with palmetto brush and had no value except for building. No development had taken place in the immediate vicinity and the purchase was solely for the purpose of speculation.
The purchase price was $60,000, payable $12,500 cash, the assumption of a first and second mortgage for $5,500 and $2,500 respectively and the balance of $39,500 payable in four annual installments of $9,875 each, secured by a third mortgage on the property. The deed was taken in the name of the petitioner and the notes for the deferred payments signed by him. The initial cash payment and a part of those maturing in 1926 and 1927 were paid by petitioner and his joint adventurer, Carroll.
In December, 1926, the sellers instituted a suit against the petitioner under an acceleration clause of the mortgage because of default in payment and obtained judgment against him in 1927 which he and Carroll paid.
In 1927, the property was sold for unpaid 1926 taxes due the city of Miami, the County of Dade and the State of Florida, and was purchased by the respective governmental units with statutory certificates of purchase issued to them. This property was also in the path of the 1926 and 1927 hurricanes and received further deposits of sand and debris.
At various times the petitioner and his associate made diligent, but unsuccessful, efforts to find a purchaser and in 1927 after the last hurricane and after the Florida land bubble had burst, they concluded the property had no market value and was worthless and made no further investment in it and ceased all efforts to sell it. They had no offers to sell it at any price.
Near the close of the calendar year 1927 the petitioner charged off of his books of accounts as a loss $28,875, the amount he had expended for this purchase, and deducted this sum from gross income on his income tax return for that year. The respondent disallowed it on the ground that petitioner still retained title to the property and was sustained by the Board. The losses were deducted by the petitioner under the Revenue Act of 1926, c. 27, 44 Stat. 9, 26, Section 214(a) which provides:
"(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
"(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *." and Treasury Regulations 69:
Common sense interpretation is the safest rule to follow in the administration of income tax laws. Gross income and deductions flow from trade, commerce and dealings in property carried on in the ordinary business way and in the determination of taxes men should measure both by ordinary, everyday business standards. Compare Woolford Realty Co. v. Rose, Collector, 286 U.S. 319, 332, 52 S.Ct. 568, 76 L. Ed. 1128; United States v. Hardy, 4 Cir., 74 F.2d 841.
In arriving at losses the taxpayer should determine in the first instance the tax year in which sustained and such deductions should be allowed by the Commissioner of Internal Revenue unless it appears from the facts that the taxpayer was clearly unreasonable and unfair at the time he was compelled to make his decision. Subsequent events may show a taxpayer to have been wrong but these must have been ascertainable by the exercise of ordinary business care and judgment at the time he made his income tax return.
Two basic facts must always be present to authorize the taxpayer to deduct a loss; first, the amount thereof, second, an identifiable event clearly showing the year it occurred. Generally speaking, the income tax law is concerned only with realized gains and ascertained losses. There is an exception to this rule, however, in the case of losses which are so reasonably certain in fact and ascertainable in amount as to justify their deduction and in certain circumstances even before they are absolutely sustained. Lucas, Commissioner v. American Code Company...
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