United States v. Rogers , 120 F.2d 244 ( 1941 )

HANEY, Circuit Judge.

Two appeals regarding recovery of income taxes paid by the taxpayers for the years 1929 and 1930 are presented.

The taxpayers in 1920 purchased for $55,000 a parcel oí real property in Beverly Hills, California, improved with a residence, and in the following year made alterations to and installed improvements in the house at a cost of $48,777.33. At the same time they made further improvements to the property as follows: swimming pool at a cost of $1,930.15; fence at a cost of $4,650; barn al a cost of $8,366.-25; garage at a cost of $6,124.98; shrubbery al a cost of $1,962.04. The taxpayers occupied the property as a residence from 1920 to August, 1929.

In August, 1929, while preparing to make alterations and additions to the house, the taxpayers discovered that the house had been damaged or was deteriorated extensively from some cause of the nature of termites or dry rot. Upon the advice of their architect, the taxpayers razed the house. In their income tax returns for the year 1929, the taxpayers claimed a deduction totalling $62,854.02 for the loss resulting from the damage by termites or dry rot. The deduction was disallowed by the Commissioner of Internal Revenue.

In 1930, the taxpayers sold the property, without having rebuilt the house for $150,-000. In their returns for the year 1930, the taxpayers repoited no gain from the sale of the property, but they now concede a taxable gain of $23,189.25 arrived at by deducting from the sales price ($150,000) the total of the original cost plus the cost of improvements which is $126,810.75. The Commissioner determined that the gain was $71,996.58. In computing the amount to be subtracted from the sales price of $150,000, the Commissioner deducted from the total cost of the property ($126,810.75) the cost of the house and improvements, on the theory that since the house was not sold, it could not be used to increase the cost of the property.

In 1926, taxpayer Will Rogers had income from sources in the United States amounting to $126,699.84 and income from sources in England amounting to $19,922.-51. He paid income taxes on the total income from both sources to the United States for the year 1926. In 1930, the taxpayer paid $5,834.85 in income taxes to England on the income from sources in England in 1926. In his return for the year 1930, the taxpayer claimed a credit for the income taxes paid to England during that year. The Commissioner disallowed the credit. Will Rogers had no income from England in 1930. He did not elect to claim a credit in his return to the United States for the taxable year 1926, for income taxes accrued in 1926 to England. He filed his returns for the years 1926 to 1930, both inclusive, on the cash receipts and cash disbursements basis. The taxpayers paid the additional taxes due which resulted from the action of the Commissioner, and brought these actions to recover for the alleged overpayments.

The court below held that the taxpayers were not entitled to the deduction for the loss claimed in the returns for the year 1929, because the loss was not sustained from casualty within the meaning of the statute; that the gain from the sale of the property was $23,189.25, because the property should be considered as a single thing and not as separate parts; and that the credit for the income taxes paid to England in 1930 in the return for that year was proper. Judgments were entered accordingly. The United States appeals from those portions of the judgments which grant recovery to the taxpayers in connec-. tion with the 1930 returns, and the taxpayers appeal from those portions of the judgments which deny recovery in connection with the 1929 returns, in order to present their contentions in the alternative.

The taxpayers do not contend that they are entitled to deduct the loss in 1929, and compute the gain on the sale of the property in 1930 by deducting the cost of the house and improvements from the sales price. They do contend that they are entitled to one of the two alternatives. The government contends that they are entitled to neither.

Section 23(e) (3) of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev.Acts, page 357, provides in part:

“In computing net income there shall be allowed as deductions: * * *

“(e) In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise _ * * *

“(3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft.”

It is contended here that the loss of the house was a loss from “other casualty”. The court below held that as used the word “casualty” included the sense of suddenness which was lacking here, and denied the deduction. We think the trial court was right. There being no contrary intention shown, we must take the word “casualty” as including all the ordinary and accepted meanings. Webster’s New Int.Dict., 2d Ed., p. 419, defines “casualty” in part as follows:

“1. Chance; accident; contingency; also, that which comes without design or-without being foreseen; an accident * * *

“2. An unfortunate occurrence; a mischance; a mishap; a serious or fatal accident ; a disaster * * * ”

It can be seen that “casualty” may properly be used in the sense of “accident”. The latter word is defined by the same source as “An event that takes placé without one’s foresight or expectation; an undesigned, sudden, and unexpected event”. Showing that casualty may have the sense of suddenness is the definition in 1 Bouv. Law Diet., Rawle’s 3d Rev., p. 430, as follows: “Inevitable accident. Unforeseen circumstances not to be guarded against by human agency, and in which man takes no part”. Such definition is in accord with that given in Matheson v. Commissioner Of Internal Revenue, 2 Cir., 54 F.2d 537, 539.

Since damage by termites or dry rot is not a sudden occurrence but is a development over a longer period of time we think the deduction was improper.

Regarding the gain on the sale of the property, the following provisions of the Revenue Act of 1928 are pertinent:

“§ 22. (a) ‘Gross income’ include gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property. * * *

“(e) In the case of a sale or other disposition of property, the gain or loss shall be computed as provided in sections 111, 112, and 113.” 26 U.S.C.A. Int.Rev.Acts, pages 354, 356.

Ҥ 111. (a) * * * the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113. * * *

“(d) In the case of a sale or exchange the extent to which the gain or loss determined under this section shall be recognized for the purposes of this title, shall be determined under the provisions of section 112.” 26 U.S.C.A. Int.Rev.Acts, page 376.

Ҥ 112. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized * * 26 U.S.C.A. Int. Rev.Acts, page 377.

Ҥ 113. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property * * 26 U.S.C.A. Int.Rev. Acts, page 380.

The amount realized from the sale is not in dispute. The gain, according to § 111(a) is the excess of the amount realized over the basis provided in § 113. The latter section says such basis is “the cost of such property.” What property? It is the property sold. What property was sold? It was a parcel of land with certain improvements, but without a house. The cost of such property is the amount fixed by the Commissioner, and we think that determination is right.

The trial court thought, and th taxpayers contend, that when a building is attached to real property it becomes a part thereof, and cannot be separated from the real property, but must be considered as a whole. While that is true for certain purposes, it does not follow that such a rule is applicable here. Cost of the property may be allocated among various things. For example, suppose the taxpayers had sold for $10,000 a part of the ground without improvements. It must be conceded that they did not sustain a loss of the difference between that sum and the cost of the whole property. Actually in such a case the cost of the whole property would be allocated between the part sold and the part retained.

There seem to be no cases bearing on the point involved. The government cites Dayton Co. v. Commissioner, 8 Cir., 90 F.2d 767, but that case deals only with the point as to when a loss occurred.

Respecting the right to the credit for the income tax for 1926 paid to England in 1930, the following provisions of the Revenue Act of 1928 are pertinent:

Ҥ 131. (a) The tax imposed by this title shall be credited with:

“(1) In the case of a citizen of the United States * * * the amount of any income * * * taxes paid or accrued during the taxable year to any foreign country. * * *

“(b) In no case, shall the amount of credit taken under this section exceed the same proportion of the tax (computed on the basis of the taxpayer’s net income without the deduction of any income * * * tax any pari: of which may be allowed to him as a credit by this section), against which such credit is taken, which the taxpayer’s net income (computed without the deduction of any such income * * * tax) from sources without the United States bears to his entire net income (computed without such deduction) for the same taxable year. * * *

“(d) The credits provided for in this section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country * * * accrued * * 26 U.S.C.A. Int. Rev.Acts, page 394.

Art. 697 of Regulations 74 promulgated under the act in question, provides in part: “The credit for taxes provided by section 131(a) may ordinarily be taken either in the return for the year in which the taxes accrued or in which the taxes were paid, dependent upon whether the accounts of the taxpayer are kept and his returns filed upon the accrual basis or upon the cash basis. Section 131(d) allows the taxpayer, at his option and irrespective of the method of accounting employed in keeping his books to take such credit for taxes as may be allowable in the return for the year in which the taxes accrued * * * ”

It is obvious that the credit is proper under § 131(a) (1) because the income tax was “paid * * * during the taxable year” to a foreign country, unless subdivision (b) denies the credit. The government contends “that a credit for foreign taxes paid may not be allowed in any year in which the taxpayer’s income fails to disclose income from foreign sources” and since Will Rogers had no income from England in 1930, no credit may be taken. Assuming, without so deciding, that the government’s contention is sound, which we doubt, the presumption of correctness attending the trial court’s determination requires affirmance thereof. Subdivision (b) does not speak of income from a “foreign country”, but income “from sources without the United States”. While it is stipulated that Will Rogers had no income from “England” in 1930, there is no such stipulation regarding “sources without the United States”. It is obvious that income from a foreign country other than England, would be income “from sources without the United States”.

The burden is on appellant — the government in this part of the case — to show error. Lynch v. Oregon Lumber Co., 9 Cir., 108 F.2d 283, 285. It has failed to do so. In the absence of any showing that the decision of the court below was wrong, we presume it to be correct. Leftwitch v. Lecanu, 71 U.S. 187, 4 Wall. 187, 189, 18 L.Ed. 388. However, since in our opinion the trial court erred in determining the amount of the gain on the sale of the property, as above indicated, the judgments from which the government appeals must be reversed so that they may be made to conform to our holding on that point.

The ’ judgments from which the taxpayers appeal are affirmed; the judgments from which the government appeals are reversed, and the causes are remanded with directions to enter judgments in accordance with the views herein expressed.