Meyer v. Commissioner ( 1960 )

Harold K. and Verda Meyer, Petitioners, v. Commissioner of Internal Revenue, Respondent

Meyer v. Commissioner

Docket No. 78343

United States Tax Court

34 T.C. 528; 1960 U.S. Tax Ct. LEXIS 125;

June 21, 1960, Filed

---

Decision will be entered for the respondent.

1. In 1954, petitioners, for family convenience, purchased residential property in a new subdivision in Spokane called Chester Hills. At that time they had under construction a residence more expensive than the one purchased which they expected to occupy when completed. They expected to make a profit on the residence purchased in the new subdivision when it should subsequently be sold. They expected, however, to reside in this new residence until the one then under construction was completed, and this they did. Just prior to the completion of their more expensive residence they sold the subdivision residence and incurred a loss which respondent has disallowed. Held, the loss is not an allowable deduction under section 165(a) and (c)( 2), I.R.C. 1954, and Income Tax Regs., section 1.165-1(e)-9, relating to the sale of residential property.

2. Petitioners incurred an expenditure of $ 115 legal fee in the taxable year in connection with a dispute over the landscaping of the subdivision residence which they had purchased in 1954. This deduction was disallowed by respondent. Held, respondent is sustained for the same reason as the disallowance of the loss on the sale of the property. See headnote par. 1.

Francis J. Butler, Esq., for the petitioners.

Wilford H. Payne, Esq., for the respondent.

Black, Judge.

---

BLACK

The Commissioner has determined a deficiency in petitioners' income tax for the year 1955 of $ 1,327.02. The deficiency is due to three adjustments made by the Commissioner to the income reported by petitioners on their return. These adjustments are:

(a)	Royalties	$ 28.41
(b)	Loss on sale of personal residence	2,588.98
(c)	Legal fees	115.00

Petitioners do not contest adjustment (a). Adjustment (b) is explained in the deficiency notice as follows:

(b) In computing adjusted gross income on your return you deducted $ 1,741.50 claimed as the excess of losses over gains on the sale of capital assets. Included in the computation of the deduction is a loss of $ 3,436.46 sustained on property described as "Investment House". It has been determined that the loss of $ 3,436.46 was sustained on the sale of a personal residence and is therefore not deductible. Adjusted gross income is accordingly increased by $ 2,588.98, * * *

[Here follows a computation, unnecessary to set out here, which reaches the figure "Income increase $ 2,588.98."]

Adjustment (c) is described in the deficiency notice as follows:

(c) The amount of $ 115.00, representing legal fees paid in connection with a dispute over the cost of landscaping improvements made to the personal residence sold, is disallowed. Your reported income is accordingly increased.

Petitioners by appropriate assignments of error contest the correctness of adjustments (b) and (c).

FINDINGS OF FACT.

Some of the facts have been stipulated and are included herein by this reference.

The petitioners are husband and wife and are residents of Spokane, Washington. The return for the taxable year here involved was filed with the district director of internal revenue in Tacoma, Washington. Petitioner Harold K. Meyer will sometimes hereafter be referred to as petitioner.

Prior to the taxable year 1955, and at all times material hereto, petitioners were the owners and operators of a motel located in Spokane known as Woodland Park Motel. For many years prior to June 1954, petitioners, with their four children, resided in one of the units of the motel. The unit occupied in the motel by the petitioners' family was a house which was part of the motel containing an office in the front portion of the building. The house had three bedrooms.

During the year 1953, petitioners expended the amount of $ 4,500 as initial costs in construction of a new home located on the back part of the motel property, to be used by them as a personal residence, the total cost of which, when completed, was expected to be approximately $ 50,000. This property will sometimes hereafter be referred to as the Sprague Avenue property.

During December 1953, Verda became pregnant. At this time petitioners' plans with regard to completing the new house on Sprague Avenue over a period of time changed, and it was decided that the house would be finished as soon as possible since the petitioners decided to move from the motel to larger quarters due to the impending new arrival. Petitioners contacted a real estate agent, whom they had known for years, with a view of renting a suitable residence in Spokane until construction of the Sprague Avenue property was completed. The agent was unable to locate suitable rental property and none was immediately available.

At this time, and at all times material hereto, petitioner was engaged in business in the Spokane Valley manufacturing sprinkling equipment. Prior to 1954, petitioner had bought and sold some property as an investment and at a profit.

Unable to find suitable rental property, the real estate agent took petitioner to a real estate development in Spokane known as Chester Hills. Petitioner had never before been to the Chester Hills area. At this time lots in the Chester Hills area were selling fast, there were 10 to 12 houses constructed, and the area was an attractive development. When the agent took petitioner to Chester Hills he showed him a house that was for sale and suggested that he buy it, complete the work on the house, and sell it for a profit. Petitioner bought the house primarily for a residence in which to reside until his other house then under construction was completed and ready for occupancy. Petitioner expected to sell this Chester Hills residence later at a profit. Petitioner purchased the house in Chester Hills the same day that it was shown to him. The house was not fully completed when purchased by petitioner for $ 24,500, and petitioner's family moved into the house. Petitioners' fifth child, Heide Sue Meyer, was born August 18, 1954.

In addition to the purchase price, the petitioners finished the interior of the house and finished the basement in the fall and winter of 1954 to provide two additional bedrooms, a rumpus room, and a laundry. In the spring of 1955, petitioners landscaped the property they had purchased. The total cost of the property to petitioners after completion of the additions and improvements thereto was $ 28,139.71. The purpose of the improvements was twofold: (1) For the convenience and use of petitioner and his family, and (2) to upgrade the property for future sale so he could make a profit. Although two additional bedrooms were completed, the family used only one of them.

Petitioners lived in the Chester Hills home for a total of 16 months. Shortly after petitioners moved to Chester Hills a new builder came into the Chester Hills area and constructed homes that were sub par and this factor caused the area to go down in value. In the summer of 1955 petitioners advertised the house in Chester Hills as being for sale. Petitioners gave an exclusive 30-day listing to sell the house to a realty corporation located in the Spokane Valley, dating from August 10, 1955, to September 10, 1955. The asking price for the house was $ 29,000. Neither the advertising, verbal listing, nor exclusive listing produced a buyer for the Chester Hills home.

The Chester Hills home was not listed until the house on Sprague Avenue was almost completed. The Sprague Avenue home was completed by petitioners on or before November 1, 1955. On October 10, 1955, petitioners sold the Chester Hills house to a business associate at a price of $ 25,000, and sustained a loss thereon of $ 3,436.46. Shortly before November 1, 1955, petitioners moved to the new house on Sprague Avenue.

Petitioners paid a legal fee of $ 115 during the taxable year 1955 in connection with a dispute over the cost of landscaping improvements made on the Chester Hills property.

Both the legal fee of $ 115 and the loss on the sale of the Chester Hills residence ($ 3,436.46) were deducted on the Federal income tax return as filed by the petitioners for the taxable year 1955. Both were disallowed by the respondent in his determination of the deficiency.

OPINION.

The first issue we have to decide is whether petitioners are entitled to deduct their loss on the sale of their Chester Hills residence in 1955. There is no dispute that they did have a loss on such sale and there is no dispute as to the amount of the loss.

The applicable statute and regulations are printed in the margin. ^{*133 It is true, we think, that when petitioner purchased the Chester Hills property in 1954 he fully expected to make a profit on its ultimate sale. He so testified at the hearing and we have no reason to question the good faith of his testimony. We think the facts further show that at the time he purchased the Chester Hills property the prospects were good that he would be able to make a profit on its ultimate sale. While these facts are true, it is also true that petitioner purchased the property for use as his residence and the residence of his family until the Sprague Avenue property, construction of which was then under way, was completed. He did, in fact, use the Chester Hills residence until the Sprague Avenue property was ready for occupancy. Income Tax Regs., sec. 1.165-9, relating to losses incurred by a taxpayer in the sale of residential property, reads:}

A loss sustained on the sale of residential property purchased or constructed by the taxpayer for use as his personal residence and so used by him up to the time of the sale is not deductible under section 165(a).

It seems to us that there can be no doubt but that the foregoing regulations are applicable to the facts of the instant case. The fact that petitioner expected to make a profit when he purchased the Chester Hills property does not change the fact that he fully intended to use the property as the personal residence of himself and family and did so use it up to the time of sale. Under these circumstances, we think petitioners' claimed deduction for loss must be denied. Cf. Richard P. Koehn, 16 T.C. 1378">16 T.C. 1378; Gilbert Wilkes, 17 T.C. 865">17 T.C. 865.

Petitioners cite several cases which they claim are in their favor. We have read and carefully considered those cases but we think they are distinguishable on their facts. For example, petitioners cite as a case in their favor, Marjorie G. Randall, 27 B.T.A. 475">27 B.T.A. 475. That case, which was decided in the taxpayer's favor, contains a finding of fact that, "The property in question was purchased by the petitioner primarily for the purpose of deriving a gain upon the sale thereof." (Emphasis supplied.) We can make no such finding in the instant case. While we have made a finding that petitioners expected to make a profit on the transaction, we have also made a finding that, "Petitioner bought the house primarily for a residence in which to reside until his other house then under construction was completed and ready for occupancy." (Emphasis supplied.) It is this finding of ours which makes the instant case distinguishable on its facts from Marjorie G. Randall, supra, and other cases cited and relied upon by petitioners.

The remaining issue is whether the amount of $ 115 paid by the petitioners during the taxable year in connection with a dispute as to landscaping on the Chester Hills property is deductible. There is no dispute but that the legal fee was incurred and paid in the taxable year -- it has been so stipulated. Both parties agree, however, that the decision on this issue is controlled by what we decide on the main issue. Petitioner contends that we should allow the deduction because we should allow the loss on the sale of the Chester Hills property. Respondent contends that the $ 115 legal fee should not be allowed because it was an expenditure made in connection with a landscaping dispute connected with the Chester Hills property. We have sustained respondent on the main issue. Likewise, we think we must sustain him on this issue. We do not think a legal fee of $ 115 incurred in connection with a dispute over the cost of landscaping improvements made on a taxpayer's personal residence is deductible. We so hold.

Decision will be entered for the respondent.

---

Footnotes

• 1. Internal Revenue Code of 1954.

  SEC. 165. LOSSES.

  (a) General Rule. -- There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

  * * * *

  (c) Limitation on Losses of Individuals. -- In the case of an individual, the deduction under subsection (a) shall be limited to --

  * * * *

  (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; * * *

  Income Tax Regs.

  Sec. 1.165-1Losses. -- (a) Allowance of deduction. Section 165(a) provides that, in computing taxable income under section 63, any loss actually sustained during the taxable year and not made good by insurance or some other form of compensation shall be allowed as a deduction subject to any provision of the internal revenue laws which prohibits or limits the amount of deduction. This deduction for losses sustained shall be taken in accordance with section 165 and the regulations thereunder.

  * * * *

  (e) Limitation on losses of individuals. In the case of an individual, the deduction for losses granted by section 165(a) shall, subject to the provisions of section 165(c) and paragraph (a) of this section, be limited to --

  * * * *

  Sec. 1.165-9Sale of residential property. -- (a) Losses not allowed. A loss sustained on the sale of residential property purchased or constructed by the taxpayer for use as his personal residence and so used by him up to the time of the sale is not deductible under section 165(a)↩.