Shannonhouse v. Comm'r of Internal Revenue (In re Estate of Shannonhouse), Docket No. 38718.
| Decision Date | 31 December 1953 |
| Docket Number | Docket No. 38718. |
| Citation | 21 T.C. 422 |
| Parties | ESTATE OF JAMES M. SHANNONHOUSE, DECEASED, FRANCES W. SHANNONHOUSE, EXECUTRIX, AND FRANCES W. SHANNONHOUSE, SURVIVING WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Bruce Gebhardt, Esq., for the petitioners.
George W. Calvert, Esq., for the respondent.
Where taxpayers realized capital gains in 1947 on the sale by warranty deed of income-producing reality, deductions for amounts paid to the purchasers in 1949 in discharge of liabilities for breach of covenants of title to the property are subject to the capital loss provisions of section 117 of the Internal Revenue Code. Arrowsmith v. Commissioner, 344 U.S. 6.
Respondent determined a deficiency in the income tax of petitioners for the calendar year 1949 in the amount of $1,239.98. Certain of the adjustments covered by the deficiency notice are not contested and will be reflected in the Rule 50 computation.
The sole issue for decision is whether payments made and legal expenses incurred in discharging liabilities for breach of covenants of title in a warranty deed conveying income-producing real property in a prior year are deductible in full or are limited by the capital loss provisions of section 117 of the Code.
The petitioners are Estate of James M. Shannonhouse, deceased, Frances W. Shannonhouse, executrix, and Frances W. Shannonhouse, surviving wife. Prior to his death, James M. Shannonhouse, and Frances W. Shannonhouse were husband and wife, residing in Charlotte, North Carolina. James M. Shannonhouse died April 17, 1950, Frances W. Shannonhouse qualified and was appointed executrix on April 24, 1950.
For the taxable year ended December 31, 1949, James M. Shannonhouse and Frances W. Shannonhouse filed a timely joint income tax return on the cash basis with the collector of internal revenue at Greensboro, North Carolina. In March 1951, an amended joint return for 1949 was filed.
On or about February 12, 1938, there was conveyed to Frances W. Shannonhouse Lot 513 in the subdivision known as Sunset Shores in Carteret County, North Carolina. On or about October 16, 1939, Frances W. Shannonhouse acquired the eastern 39 feet of Lot 514 which adjoined Lot 513. All the property was near the beach at Morehead City, North Carolina.
The taxpayers erected a 2-story summer home on the property some time in 1938 or 1939. Another structure was also built which had space for two automobiles as well as two rooms and a bath used for servant's quarters. The property was used as a summer home through 1941. Thereafter it was converted into income-producing property with the actual rental being handled by Frances W. Shannonhouse's mother, Mrs. Graham Woodard.
In April 1947, the property was sold for $23,500 by warranty deed to Romaine C. Woodard of Wilson, North Carolina. The sale resulted in a gain which was reported on the 1947 income tax return of Frances W. Shannonhouse as a long-term capital gain.
Late in 1948 the new owners of the property discovered that the garage and servant's quarters encroached upon the adjoining lot of another owner. Prior to that time Frances W. Shannonhouse had no knowledge of such encroachment.
Romaine C. Woodard and her husband, David W. Woodard, spent $3,331.50 in eliminating the encroachment. They agreed to release James M. and Frances W. Shannonhouse from all claims under the warranty deed upon payment of the $3,331.50 expended by them. This money was paid on or about June 4, 1949, and thereupon James M. and Frances W. Shannonhouse were released by the Woodards from all claims for damages and expenses incurred because of the encroachment.
In addition to the aforesaid payment of $3,331.50, James M. Shannonhouse and Frances W. Shannonhouse paid attorney fees of $950 during 1949 in connection with the relocating and rebuilding of the garage and servant's quarters on the property sold to the Woodards.
The payments of $3,331.50 and $950 made by the petitioners were not compensated for by insurance or otherwise.
On their 1949 income tax return, James M. and Frances W. Shannonhouse claimed deductions for the full amounts paid for the release and as attorney fees.
Petitioners sold income-producing real property in 1947 by...
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