Goodman v. Commissioner , 40 B.T.A. 22 ( 1939 )

JULIUS GOODMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

LOUIS H. HARRISON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Goodman v. Commissioner

Docket Nos. 87552, 87553.

United States Board of Tax Appeals

40 B.T.A. 22; 1939 BTA LEXIS 913;

June 6, 1939, Promulgated

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Real estate purchased for subdivision and sale in lots, but inactively held for nine years and then transferred to the mortgagee in consideration of $960 and cancellation of the mortgage notes, held, within section 117(b), Revenue Act of 1934, "primarily for sale to customers in the ordinary course of taxpayer's trade or business", and loss consequent upon such transfer held deductible as an ordinary loss.

Harry Thom, Esq., and Benjamin A. Ragir, Esq., for the petitioners.

Gerald W. Brooks, Esq., for the respondent.

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STERNHAGEN

The Commissioner determined deficiencies of $2,366.82 and $1,335.28 in petitioners' respective income taxes for 1934, by increasing the income of the partnership in which each owned a half interest. He treated losses sustained on the disposition of real estate as capital losses, and petitioners claim that they were ordinary losses.

FINDINGS OF FACT.

Petitioners, residents of Chicago, Illinois, orally formed an equal partnership in 1923 for the operation of motion picture theaters under the firm name of Goodman & Harrison, and have been actively engaged in that business ever since. The partnership also received rents from the lease of buildings.

On July 7, 1925, petitioners, Harry A. Roth, Max M. Gordon, Edward Berkson, and Solomon Harrison entered into an agreement for the formation of a syndicate, to be known as the Harrison Trust, for the purchase, subdivision, and sale of unimproved real estate. Two days later a selling contract was given to Roth & Gordon, Inc., which agreed to bear all selling expenses, including the "cost of plat, subdividing, street signs, commissions to brokers, advertising", for a commission equal to one-third of the selling prices. The trust purchased 12 tracts in Niles Center, northwest Chicago, which were subdivided and improved and from which lots were sold in 1925 and 1926. The participants were not engaged in carrying on business in the form of a corporation. Petitioners also purchased a one-fourth interest in the Broadview Trust, a syndicate of 10 participants which acquired, subdivided, and sold 62 1/2 acres on Dempster Street. For the purchase of interests in both these trusts petitioners used partnership funds.

In 1925 petitioners, as partners, purchased a 117-acre tract of land at 175th Street and Kedzie Avenue, and a 150-acre tract at 167th Street and Kedzie Avenue in Homewood, a section south of Chicago. Of the purchase prices, $475,000 was raised by loans on two of their theater buildings. Petitioners planned to subdivide these tracts in parcels of from 5 to 20 acres each, having appropriate clauses inserted in trust deeds on the properties for the release of subdivided parcels as payments were made on the mortgage notes. No subdivisions were made, however. The 167th Street tract was sold at a profit six months later to Louis Albert, who immediately subdivided it for resale. Before all the lots in Niles Center had been disposed of, the demand dropped sharply in 1927, although some sales were made there until 1932. The 175th Street property was merely held. In 1928 the Harrison Trust's operations had become so restricted that it moved its offices into smaller quarters, and in 1931 conducted its business from one room and employed one girl for office work. In 1934 it closed that office, and the books and records were taken to a lawyer's office.

In 1934 the Harrison Trust still had 200 lots unsold, and petitioners kept in constant touch with its affairs, going to the office three or four times a week, consulting with their associates about adjustments, compromises, and settlement with lot purchasers, and signing orders, with another participant, for withdrawal of trust funds.

In 1932 petitioners ceased paying taxes on the 175th Street property and interest on the note secured by it. To prevent threatened foreclosure proceedings, it was deeded to the mortgage holder in February 1934 in consideration of $960 and cancellation of mortgage notes for $50,700. The partnership thereby sustained a loss of $71,190. The 175th Street property was held by petitioners primarily for sale to customers in the ordinary course of their business.

OPINION.

STERNHAGEN: The petitioners, upon the theory that their partnership had sustained a loss, each deducted a distributive share of the loss upon his individual return. The Commissioner determined a deficiency as to each, saying:

You reported a loss of $4i,036.89 as your pro rata share from the Goodman and Harrison partnership. As the result of an investigation of the books and records of the partnership, it has been determined that your share of the taxable income from the partnership is $703.46 [$703.47].

He thus adopted the partnership theory but disallowed the proportionate losses of the individual members.

Although the pleadings were not clear, the parties agreed at the opening of the trial that the issue was whether the undisputed loss on the 175th Street property in 1934 was deductible as a capital loss under the Revenue Act of 1934, section 117(b), or as an ordinary loss. Upon this issue, it is not of primary importance whether these petitioners carried on all of their activities in partnership, as they contend, or whether their interest in the Harrison Trust, which held the Niles Center property, was that of individual members or of the partnership. These are but evidentiary questions. The loss here in question occurred in 1934 from the transfer to the mortgagee of the 175th Street property to discharge the mortgage and the petitioners' obligation thereon, and the only question is whether this loss was a capital loss. This in turn depends upon whether the 175th Street property was held by the taxpayers "primarily for sale to customers in the ordinary course of their trade or business."

If the holding of this property were an isolated holding dissimilar from any other transaction and unrelated to the history of the petitioners' activities, it might be questionable whether the mere purchase of the property, subjecting it to a mortgage, holding it for nine years, and then, without more, transferring it to the mortgagee for the acquittance of the mortgage, would be sufficient to constitute a statutory capital loss. It might be still more unfavorable to the petitioners if the only circumstances were that they had bought another tract which within six months they had sold en bloc at a gain. These two transactions by themselves would fall short of establishing that the properties or either of them had been held by the owners for sale to customers in the ordinary course of their business. Compare ; but see .

But the petitioners have established that they bought this property as the Harrison Trust had bought the Niles Center property, for subdivision and sale in lots to customers as they could be found. The evidence leaves little room for doubt that this was the primary purpose of the petitioners with regard to the 175th Street property, as it demonstrably was with regard to the Niles Center property. It is true that the 175th Street property remained inactive. This was due first to the activity at Niles Center which took so much time and attention that the 175th Street property was for the time being neglected, and then to the slump in the real estate market which reasonably compelled suspense. The original purpose, however, remained. It can not be that business adversity of itself converted it into a purpose of investment, nor did the demand of the mortgagee. Those seem to us to have been disappointing incidents of the primary purpose of ordinary business - no less so than a failure to succeed in the grocery business.

The fact has been found, therefore, from the evidence, that the property was held, as the statute prescribes, primarily for sale to customers in the ordinary course of the taxpayers' business. The loss is, therefore, deductible as an ordinary loss, and the Commissioner's determination is reversed.

Decisions will be entered under Rule 50.