Schwarcz v. Comm'r of Internal Revenue, Docket No. 48795.
| Decision Date | 22 July 1955 |
| Docket Number | Docket No. 48795. |
| Citation | 24 T.C. 733 |
| Parties | ADOLF SCHWARCZ, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner was a Hungarian national until he became a citizen of the United States in 1948. He first came to this country in 1939 and during the years 1942, 1943, and 1944 he was a resident alien in the United States. He owned property in Hungary on June 5, 1942, when the United States declared war on Hungary. Held:
1. Petitioner suffered war losses in 1942 within the meaning of section 127 of the Internal Revenue Code of 1939.
2. Certain of the war losses were attributable to petitioner's business of operating apartment houses or petitioner's individual jewelry business. Respondent was in error in denying a net operating loss deduction carried forward to 1944 to the extent the war losses were attributable to the businesses.
3. Certain of petitioner's war losses were not attributable to any trade or business regularly carried on by him, and respondent properly disallowed the net operating loss deduction carried forward to 1944 to the extent that it was based thereon. Isidore R. Tucker, Esq., for the petitioner.
Maurice E. Stark, Esq., for the respondent.
Respondent determined a deficiency of $7,953.10 in the income tax of petitioner for the fiscal year ended September 30, 1944. The petition herein alleges an overpayment for that year in the amount of $35,804.21.
The principal question for decision is whether and to what extent petitioner is entitled to a net operating loss deduction in the fiscal year ended September 30, 1944, based upon war losses sustained by the petitioner in the fiscal year ended September 30, 1942, as contemplated by section 127 of the Internal Revenue Code of 1939.
Certain adjustments covered by the deficiency notice and not contested by petitioner will be given effect under Rule 50.
The stipulated facts are found as facts and incorporated herein by reference.
Petitioner originally was a native and resident of Budapest, Hungary. In April 1939, he came to the United States with his wife and in January 1940 they decided to take up permanent residence in New York City. Petitioner became a naturalized citizen of the United States in 1948. Petitioner's wife died prior to the hearing in this cause.
Petitioner filed individual income tax returns for the fiscal years ended September 30, 1942, 1943, and 1944 with the collector of internal revenue for the third district of New York.
On October 6, 1931, a 3-story apartment house containing several rental apartments and rental stores, located at 76 Andrassy UT, Budapest, Hungary, hereinafter referred to as Andrassy, was purchased in the names of Mrs. Adolf Schwarcz and Mrs. Odon Vogel for 383,000 pengos (Hungarian currency). On May 27, 1933, one-half of the property interest in the name of Mrs. Adolf Schwarcz was transferred to petitioner's daughter, Livia Schwarcz. The property was in existence on June 5, 1942, and on that date the Hungarian Ground Register, the official record of property ownership in Hungary during the period in question, indicated that one-fourth of the title ownership of the property was in the name of Mrs. Adolf Schwarcz. On June 5, 1942, the building had depreciated to the extent of 33 1/3 per cent.
On December 31, 1938, a 4-story apartment house containing several rental apartments and rental stores located at 35 Terez Kit, Budapest, Hungary, hereinafter referred to as Terez, was purchased in the names of Mr. and Mrs. Adolf Schwarcz and Mr. and Mrs. Odon Vogel for 240,000 pengos. On that date, petitioner and Vogel paid 16,800 pengos for legal fees, recording fees, and other items of a capital nature. Shortly after the acquisition of the Terez property, petitioner and Vogel paid 100,000 pengos for a new elevator, new bathrooms, and other capital additions. The property was in existence on June 5, 1942, and on that date the Hungarian Ground Register indicated that one-half of the title ownership of the property was in the name of Mr. and Mrs. Adolf Schwarcz. As of June 5, 1942, the building had depreciated to the extent of 10 per cent.
On June 22, 1940, a 3-story apartment house containing several rental apartments, rental stores, and rental warehouse space located at 3 Dob utca, Budapest, Hungary, hereinafter referred to as Dob, was purchased in the names of Mr. and Mrs. Adolf Schwarcz and Mr. and Mrs. Odon Vogel for 140,000 pengos. The property was in existence on June 5, 1942, and on that date the Hungarian Ground Register indicated that one-half of the title ownership of the property was in the name of Mr. and Mrs. Adolf Schwarcz. As of June 5, 1942, the building had depreciated to the extent of 6 per cent.
On June 5, 1942, the fair market value of each of the 3 aforementioned apartment houses was in excess of its cost. Fifty per cent of the original cost of each property was allocable to the building thereon.
Until his departure for the United States in 1939, petitioner was personally engaged in the management and operation of the apartment houses. Thereafter, the properties were under the management and operation of petitioner's associate, Vogel, petitioner's daughter, and her husband.
The Andrassy property was owned by Mrs. Adolf Schwarcz, Mrs. Odon Vogel, and petitioner's daughter. Petitioner had no interest in that property. Petitioner's individual interest in the Terez and Dob properties was limited to a one-fourth ownership.
Petitioner was regularly engaged in carrying on the business of operating the Terez and Dob properties from the time of their acquisition until June 5, 1942.
During a period of 4 or 5 years before he left for the United States, petitioner was regularly engaged individually in the business of purchasing and selling gold, silver, diamonds, and antique watches. He sold his wares primarily at retail.
Upon his departure for the United States petitioner closed out his jewelry business in Budapest and stored his unsold inventory in a bank vault and an office safe. The property was entrusted to the care of petitioner's son-in-law, Elek Brush, and petitioner's son, Laszlo Schwarcz, for safekeeping with instructions that the property was not to be sold, but was to be held awaiting petitioner's return.
On June 5, 1942, petitioner's inventory in the aforementioned business consisted of the following property which was located in Budapest and had a cost basis to petitioner as shown:
+-----------------------------------------------------------------------------+
¦4 kilograms of gold fashioned objects, gold debris, ingots ¦ ¦
+--------------------------------------------------------------+--------------¦
¦and miscellaneous gold items ¦24,000 pengoes¦
+--------------------------------------------------------------+--------------¦
¦6 diamonds, totaling 20 karats ¦60,000 pengoes¦
+--------------------------------------------------------------+--------------¦
¦2 cases, 65 kilograms of silverware each, totaling 130 ¦19,500 pengoes¦
¦kilograms ¦ ¦
+--------------------------------------------------------------+--------------¦
¦Various antique gold watches ¦2,000 pengoes ¦
+-----------------------------------------------------------------------------+
Watches Trading Company, Limited, first organized in 1924, was at all times pertinent hereto a corporation with characteristics for tax purposes similar to those of a United States domestic corporation. Its business was essentially a wholesaling operation. Throughout the period here in question, petitioner and Vogel were the principal stockholders and directors. The corporation was in existence and operating on June 5, 1942.
As of December 31, 1942, the books of Watches Trading Company, Limited, reflected an amount of 121,016 pengos payable by the company to petitioner. Of that amount, 45,000 pengos represented accounts receivable due petitioner for watches sold in May 1938 to the corporation by petitioner in connection with the operation of his individual business.
In March 1940 petitioner started a wholesale and retail jewelry business in New York City and continued to operate it through 1944.
On June 5, 1942, the United States declared war on Hungary.
The basic question in this case is whether and to what extent petitioner is entitled to a net operating loss deduction for the fiscal year ended September 30, 1944.
Petitioner contends that by reason of war losses sustained in the fiscal year 1942 he had a net operating loss for that year, a part of which he seeks to carry forward to his fiscal year 1944.
Respondent disallowed the losses carried forward in their entirety and relies on several alternative grounds in support of his action. It is respondent's initial contention that as a matter of law, war losses within the meaning of section 1271 of the Internal Revenue Code of 1939, can never be attributable to the operation of a trade or business regularly carried on and that they necessarily fall within the limitation on net operating losses set forth in section 122(d)(5)2 of the Internal Revenue Code of 1939.
Respondent's reasoning, while elaborate and complex, boils down to the theory that section 127 losses should be treated in exactly the same manner for tax purposes as casualty losses within the meaning of section 23(e)(3)3 of the Internal Revenue Code of 1939. Respondent quotes from Regulations 111, section 29.127(a)-1, as follows:
Section 127(a) and (e) provides that the property and investments described above shall be treated as being ‘destroyed or seized’ * * *, and this loss of such property rights is deemed to be sustained by reason of a casualty. * * *
Respondent also quotes from S. Rept. No. 1631, 77th Cong., 2d Sess., where, under section 158,...
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