Rogers v. Commissioner of Internal Revenue
| Decision Date | 18 May 1938 |
| Docket Number | 84896.,Docket No. 84895 |
| Parties | BETTY ROGERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. BETTY ROGERS, O. N. BEASLEY, OSCAR LAWLER, JAMES K. BLAKE, EXECUTORS OF THE ESTATE OF WILL ROGERS, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Claude I. Parker, Esq., John B. Milliken, Esq., Bayley Kohlmeier, Esq., and L. A. Luce, Esq., for the petitioners.
DeWitt M. Evans, Esq., for the respondent.
These consolidated proceedings involve deficiencies in income taxes for the year 1933 in the amount of $17,055.90 in Docket No. 84895 and $16,894.61 in Docket No. 84896. The respondent decreased a marital community loss, one-half of which was deducted by each member of the community as an ordinary loss, from $57,643.46 to $54,055.25, and treated it as a capital loss sustained equally by each member of the community. The only question involved is whether such loss is a capital loss or an ordinary loss.
The proceedings were submitted upon two stipulations of facts which, except for the purely formal parts, are substantially the same. These stipulations are included herein by reference, a combined summary being sufficient for the purpose of the report.
The petitioner, Betty Rogers, a resident of California, is the widow of Will Rogers, who died testate, a resident of California, on August 15, 1935. She, and the others shown in the caption in Docket No. 84896, were appointed executors of the estate of the decedent by the Superior Court of the State of California in and for the County of Los Angeles, on September 17, 1935.
During September 1927 the decedent and his wife purchased for profit certain business real estate situated in the county of Los Angeles, California, at a price of $105,000, payable as follows: $15,000 cash at the time of purchase, the assumption of a note in the amount of $52,000, which was secured by a mortgage on such property and became due and payable in 1930, and the giving of their promissory note for the balance of $38,000, secured by a trust deed on the property.
The decedent and his wife paid the $15,000 cash and prior to 1933 paid in full the $52,000 note.
The note for $38,000 and the beneficial interest under the deed of trust which secured it were transferred and assigned to the California Trust Co., a corporation. The note became due and payable on August 19, 1932.
On August 25, 1932, payment of the note and accrued interest thereon was demanded of decedent and his wife and notice was given that, unless the principal and interest were paid, the holder of such note would proceed to enforce its rights under the provisions of the deed of trust given to secure payment of it.
Thereafter it was agreed by and between decedent and his wife and the holder of the $38,000 note and trust deed that the property be conveyed by the former to the latter and that the note be canceled and surrendered. Thereafter the property was reconveyed by the Title Guarantee & Trust Co. to the decedent and his wife and on April 21, 1933, they transferred and conveyed it to the California Trust Co., and the $38,000 note was surrendered to decedent and his wife and canceled.
In addition to the $67,000 paid by the decedent and his wife upon the purchase price of the property they also paid, prior to April 21, 1933, escrow expenses in the amount of $212.02, or a total of $67,212.02. For the years 1927 to 1932, inclusive, they were allowed depreciation on the improvements on the property in the total amount of $13,156.77. Their total unrecovered cash investment in such property at the time of its conveyance to the California Trust Co. was $54,055.25. The decedent and his wife each sustained a loss in 1933 from the transaction in the amount of $27,027.62.
The decedent and his wife filed separate returns for 1933. They computed a loss on the transaction in the amount of $57,643.46 and each deducted one-half of that sum, or $28,821.73, as an ordinary loss, under the provisions of section 23 (e) of the Revenue Act of 1932. The respondent reduced the amount of the loss to $54,055.25, and, in recomputing the tax liability of each of them, treated the loss as a capital loss within the meaning of section 101 of the Revenue Act of 1932. The deficiencies result from respondent's determination that the loss was a capital loss.
The pertinent provisions of the Revenue Act of 1932 are shown in the margin.1
Petitioners argue that Rogers and his wife did not "have whole title to the property * * * but * * * merely an equity and a right to receive whole and complete title on completion of payment of the purchase price." That may be true; however, the property was deeded to them subject to the indebtedness which they assumed and paid, and it is stipulated that they claimed and were allowed depreciation on the improvements on it in the total amount of $13,156.77. The property was acquired in a transaction entered into for profit. It will be noted that "`capital assets' means property held by the taxpayer for more than two years." Under the facts as stipulated, we think that the conclusion is inescapable that the real estate was "held" for more than two years within the purview of the statute.
Petitioners insist, however, that even though the property was a capital asset, the loss sustained upon its disposition was not a capital loss, as defined by the statute, because it was neither sold nor exchanged. Having decided that the property was a capital asset, the only remaining question is whether it was sold or exchanged.
On brief petitioners argue that when the entire transaction was completed they were left with nothing which they did not have prior to entering into the contract or purchase and that they had suffered an actual loss in the amount of $54,055.25 ($67,212.02 less $13,156.77); that in construing or interpreting a statute the ordinary meaning of the words used therein should be taken, citing Old Colony Railroad Co. v. Commissioner, 284 U. S. 552; and that the transaction in question did not involve a "sale or exchange" within the ordinary meaning of these words because they connote an acquisition of property by the bargaining parties through the exercise of a free will to buy and sell rather than the compromise of an outstanding indebtedness, the enforced collection of which had been threatened by means of legal proceedings.
We agree with petitioners that in construing or interpreting a statute the ordinary meaning of the words used should be taken. "A sale, in the ordinary sense of the word is a transfer of property for a fixed price in money or its equivalent." Iowa v. McFarland, 110 U. S. 471, 478. "An exchange of property is a mutual transfer of one or more pieces of property for property other than money." 23 C. J. 184. " " Hale v. Helvering, 85 Fed. (2d) 819.
Prior to the transaction here involved petitioners had paid for the real estate $67,212.02 in cash, and had given their note for $38,000 to the vendor. This note had been transferred and assigned by the vendor to the California Trust Co. It is apparent, therefore, that the real property cost petitioners $105,212.02 and this amount (less depreciation allowed, $13,156.77) was their basis for gain or loss upon its sale or other disposition. We are not impressed with petitioners' argument that when they transferred the property to their creditor they merely paid their debt of $38,000, and that therefore there was no sale or exchange. We agree that they paid a debt; but the payment of a debt does not entitle a taxpayer to a loss deduction. Petitioners' claim for a deduction is based on the fact that they made a disposition of property and thereby sustained a loss. It can not be said that they received no consideration because then their loss would have been $92,055.25 ($105,212.02 less $13,156.77) and not $54,055.25. By reason of the transfer of the property to their creditor petitioners were released from their promise to pay $38,000, and their creditor relinquished its right to collect this amount. In our opinion the transaction should be treated either as a sale of petitioners' right, title, and interest in the property for the price of their obligation or as an exchange of real estate for the obligation, both properties having an equal value. We prefer to regard the transaction as a sale. This view is supported by a decision of the Supreme Judicial Court of Massachusetts in Gallus v. Elmer, 193 Mass. 106; 78 N. E. 772. In that case Gallus, who conducted a butcher and grocery business, sold certain fixtures, tools, utensils, and goods used in carrying on that business to one Kopec for $500, of which $100 was paid in cash, and the balance was to be paid on June 9, 1905. On June 9 Gallus demanded payment of the amount due, which was not paid. Kopec stated he was willing that Gallus should take all of the property in payment of the debt due, and an instrument was prepared reciting that Kopec, in consideration of $400 paid by Gallus, sold, transferred, and delivered all of the property back to Gallus. The question arose whether the transfer of the property to Gallus in payment of the debt due constituted a sale under the "Bulk Sales" act. In holding that it did the court said:
* * * While it is true that in its strictest sense a sale is a transfer of personal property in consideration of money paid or to be paid, still in the interpretation of statutes it is often held to include barter and any transfer of personal property for a valuable consideration. "In a general and popular sense, the sale of an article signifies the transfer of property...
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