Stewart Title Guar. Co. v. Comm'r of Internal Revenue
| Decision Date | 18 June 1953 |
| Docket Number | Docket Nos. 38028,38056. |
| Citation | 20 T.C. 630 |
| Parties | STEWART TITLE GUARANTY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.STEWART TITLE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
W. Carloss Morris, Jr., Esq., and Robert H. McCanne, Esq., for the petitioners.
Joseph P. Crowe, Esq., for the respondent.
1. LOSS— CAPITAL OR ORDINARY.— Each of the petitioners sold an abstract plant. One plant, which was retained as surplus, was not used in the trade or business; the other plant was used in the trade or business. Held, the loss sustained on the sale of the surplus plant was a capital loss; held, further, the loss sustained on the sale of the other plant was an ordinary loss.
2. OBSOLESCENCE.— Held, abstract plants are subject to obsolescence.
3. DEPRECIATION— Amortization OF A CONTRACT.— Petitioner Stewart Title Guaranty Company exchanged property for a contract for 5 years of future services. Held, petitioner entitled to amortize the reasonable value of the future service contract over the life of the contract.
The respondent determined deficiencies in income tax as follows:
+------------------------------------------------------+
¦Docket No.¦Petitioner ¦Year ¦Deficiency¦
+----------+--------------------------+-----+----------¦
¦38028 ¦Stewart Title Guaranty Co.¦(1946¦$12,017.04¦
+----------+--------------------------+-----+----------¦
¦ ¦ ¦(1947¦324.80 ¦
+----------+--------------------------+-----+----------¦
¦38056 ¦Stewart Title Co. ¦1946 ¦5,924.01 ¦
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The issues in these consolidated proceedings are: (1) Whether petitioners realized ordinary losses or long-term capital losses on the sale of their abstract plants during the year 1946; (2) were petitioners entitled or required to take certain deductions for obsolescence?; and (3) was petitioner Stewart Title Guaranty Company entitled to certain business deductions?
Some of the facts are stipulated and are so found.
Petitioners were incorporated under the laws of the State of Texas and their principal offices are in Houston, Texas. Their returns were filed with the collector of internal revenue for the first district of Texas. Stewart Title Guaranty Company will hereinafter be referred to as Stewart Guaranty and the Stewart Title Company will be referred to as Stewart Title.
In 1926 Stewart Guaranty acquired all the capital stock of the Texas Title Company (hereinafter referred to as Texas Title), for $52,500. The principal asset of Texas Title was an abstract plant located in Fort Worth, Texas, pertaining to real property in Tarrant County, Texas. The term ‘abstract companies. From June 1926 until March 1932 Texas Title was operated as a separate corporate entity. On March 15, 1932, Texas Title was dissolved and its assets transferred to Stewart Guaranty in exchange for all of the stock of Texas Title. The fair market value of the abstract plant owned by Texas Title at the time of its dissolution, exclusive of made-up titles and wall maps, was $51,450.
From March 15, 1932, to September 1932, Stewart Guaranty operated the Texas Title plant under its own name in Fort Worth. Stewart Guaranty used the abstract plant acquired from Texas Title for making abstracts and issuing title policies. In September 1932 Stewart Guaranty closed its offices in Fort Worth. However, Stewart Guaranty made a contract with the Home Abstract Company, also doing business in Fort Worth, whereby the Home Abstract Company agreed to act as Stewart Guaranty's agent in issuing title policies. At this time the abstract plant acquired from Texas Title was placed in storage. Stewart Guaranty made no active use of the plant from 1932 to 1946. Daily take-off cards were made for the stored plant but these cards were not filed. They were merely bundled together with string and stored with the rest of the plant.
In April 1939 Stewart Guaranty acquired the abstract plant of the Home Abstract Company in Fort Worth and continued to operate it under the name of Stewart Title Guaranty Company.
On January 2, 1946, Stewart Guaranty sold to Jack Rattikin the stored abstract plant (formerly Texas Title). The take-off cards for this plant were current at the time of sale. Rattikin gave Stewart Guaranty a promissory note for $17,500 and agreed to give Stewart Guaranty a complete daily take-off of all instruments affecting real estate filed in the offices of the county and district clerks of Tarrant County for 5 years, so long as all of the abstract and title companies in Fort Worth continued to remain closed on Saturdays. The value of these daily take-off cards for Stewart Guaranty was estimated to be $200 per month, or $12,000 for the 5-year period. No depreciation or obsolescence had been taken by Stewart Guaranty or Texas Title on the abstract plant sold to Rattikin.
The Texas Title plant which Stewart Guaranty sold to Rattikin was surplus property not used in its trade or business. This plant was a capital asset, and the loss sustained on the sale was a capital loss. The aggregate consideration received for the plant was $29,500. The books of Stewart Guaranty were kept on an accrual basis.
Petitioner Stewart Guaranty is entitled to amortize over the life of Rattikin's service contract the reasonable value of his annual services. The reasonable value of these services annually is $2,400; petitioner is entitled to this annual deduction for 5 years.
Stewart Guaranty originally acquired the stock of the Tom Green County Abstract Company (hereinafter referred to as the Green Company), in 1929 for $25,500. The principal asset of the Green Company was an abstract plant in San Angelo, Texas, pertaining to real property located in Tom Green County. The Green Company was dissolved in 1932 and its assets were transferred to Stewart Guaranty. The fair market value of the Green Company plant was $20,000 at the time of its transfer to Stewart Guaranty.
On or about January 1, 1934, Stewart Guaranty transferred to the Stewart Abstract Company the Green Company plant (worth $20,000) and $20,409.71 in accounts receivable in exchange for $40,000 in par value stock of the Stewart Abstract Company. In 1939 the name of the Stewart Abstract Company was changed to Stewart Title Company. No gain or loss on the exchange was recognized or claimed. No depreciation or obsolescence was taken on the Green Company plant.
The Green Company plant was transferred to Runge and Hardeman in 1946 for $10,000 in cash; other assets transferred had no basis for income tax purposes.
The Green Company plant which Stewart Title sold to Runge and Hardeman was property used in Stewart Title's trade or business of a character subject to the allowance for depreciation provided for in section 23(1), Internal Revenue Code. The plant was not a capital asset, and the loss sustained was an ordinary loss.
Petitioners contend that the losses resulting from the sale of the abstract plants are ordinary losses and deductible in full because the abstract plants are excluded from the term ‘capital assets‘ by section 117(a)(1)(B) of the Code. This section provides that property used in a trade or business of a character subject to the allowance for depreciation provided for in section 23(1) is not a capital asset. Section 23(1) provides a deduction for ‘A reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)‘ of property used in the trade or business. Petitioners urge that even though the abstract plants might not be subject to depreciation they were subject to obsolescence and hence come within the meaning of the Code.
In opposition respondent maintains that the abstract plants are not property used in a trade or business of a character subject to depreciation under section 23(1), and therefore must be deemed to be capital assets under section 117.
There is no doubt that an abstract plant is subject to obsolescence. Crooks v. Kansas City Title & Trust Co., 46 F.2d 928; see I.T. 1775, II-2 C.B. 145, and also Real Estate-Land Title & Trust Co. v. United States, 309 U.S. 13. However, an additional requirement for property to be excluded from the definition of capital assets is that the property must not be used in petitioners' trade or business. The evidence indicates that the Texas Title plant was stored from 1932 to 1946....
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