Cullman v. Commissioner , 16 B.T.A. 991 ( 1929 )

JOSEPH F. CULLMAN, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Cullman v. Commissioner

Docket No. 29089.

United States Board of Tax Appeals

16 B.T.A. 991; 1929 BTA LEXIS 2471;

June 11, 1929, Promulgated

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1. Petitioner purchased property for a residence and used it for that purpose for several years until 1920. In that year he placed a caretaker in possession and offered it for sale or rent. In 1922 he rented it and in 1923 he sold it. Held that the use of the property to produce revenue constituted a transaction entered into for profit, and that petitioner is entitled to deduct as a loss the difference between the value when rented and the selling price, but not more than the actual loss sustained.

2. The conversion of property from residence to business uses does not take place when abandoned as a residence and offered for sale or rent. Such an act does not constitute a transaction entered into for profit. When the property is leased, such a transaction takes place. Heiner v. Tindle,276 U.S. 582">276 U.S. 582, followed.

W. W. Spalding, Esq., for the petitioner.

F. Easby-Smith, Esq., for the respondent.

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PHILLIPS

The Commissioner determined a deficiency of $2,599.58 in income tax for 1923. The petitioner instituted this proceeding for a redetermination of the deficiency alleging that he had sustained a loss of $29,013.96 on the sale of certain property, which loss the Commissioner had refused to allow as a deduction.

FINDINGS OF FACT.

The petitioner in 1909 purchased a parcel of real estate property in Far Rockaway, Long Island, N.Y., on which a residence was located at the date of purchase. After its purchase in 1909 the petitioner, during that same year, sold about one-half of the land on which this residence was located, and which consisted of the rear portion of the lot, for the sum of $25,000. Prior to the purchase of this property the petitioner had rented and used it for his residence for about three years, or from 1906.

After acquiring the property in 1909 the petitioner, during 1909 and 1910, erected a residence and garage on that part of the land not sold by him, at a cost of $38,498.70. During the years 1918 to 1920 improvements were made to this residence at a cost of $2,526.19. In 1920 the petitioner purchased a piece of property, adjoining his original lot, for $2,502.08, on which was located a cottage. Improvements were then made on this cottage at a cost of $4,602.53, making the total cost of this adjoining property, in 1920, $7,104.61.

The petitioner occupied and used this property as his residence for a part of each year continuously from the date of its purchase in 1909 to 1920. When the property was definitely abandoned as his summer residence in 1920 the petitioner offered it for sale or lease. During 1920 and 1921 the property was occupied by a caretaker. It was leased on April 1, 1922, and remained rented up to the date of sale on August 1, 1923.

This entire property was sold on August 1, 1923, by petitioner for $35,000. Petitioner paid a selling commission of $1,750 and legal expenses in connection with the sale of $200.

One of the reasons which induced the petitioner to abandon this property as his summer residence was the fact that the character of the neighborhood had changed and Far Rockaway had become a Sunday sporting place, similar to Long Beach and Coney Island, and petitioner's family preferred not to live there. The petitioner and his family, after abandoning this property as their summer residence in 1920, spent the summers at Balgrade Lakes, Me.

The buildings on the property here in question were at all times kept in good repair by the petitioner. The depreciation on same for the period for which it is to be computed and deducted in determining the loss sustained was 3 per cent per annum.

This property (building and land) had a fair market value of $47,000 from January to April 15, 1922, at the time it was rented. The fair market value of the land was $27,000 and that of the buildings $20,000. The fair market value of the land and buildings thereon at March 1, 1913, was $15,000 and $45,000 respectively.

In computing the deficiency the Commissioner allowed a deduction of $3,600 as a loss on such sale.

OPINION.

PHILLIPS: In 1909 the petitioner purchased a residence property. He used this as his principal residence for some years. Later, he used it only as a summer residence. This continued until 1920. The character of the neighborhood having changed and petitioner's family finding it undesirable, it was definitely abandoned as a residence for his family in 1920. It was offered for rent and for sale and a caretaker was placed in possession. In April, 1922, it was rented and in August, 1923, it was sold. It seems clear that under such circumstances petitioner is entitled to deduct the loss, if any, which was sustained. .

The deficiency notice was mailed prior to the decision cited. The Commissioner took the position that no loss could be allowed on property acquired as a residence. The basis for the allowance of a loss of $3,600 does not clearly appear, but presumably it was on the cottage property, which petitioner did not occupy as a residence.

The question arises whether the loss is to be computed upon the basis of its value when abandoned as a residence and offered for sale or for rent, or its value when rented. The first took place in 1920 and the record contains no evidence of value as of that date. The petitioner takes the position that the value at the time the property was leased should be used and has introduced evidence of the value at that time. The decision cited above appears to support this contention. The use of property to produce revenue is there characterized as a transaction entered into for profit. Until there was some appropriation of the property to rental purposes, it still maintained its character as a residence, rather than a business property.

The evidence respecting value in April, 1922, is most unsatisfactory, consisting of the testimony of one real estate operator, who showed little familiarity with prices in this neighborhood, and the record of assessed valuation for taxing purposes. The operator expressed the opinion that the property was worth $60,000 in April, 1922. It was assessed at $47,000. It sold in August, 1923, for $35,000, of which only $6,000 was cash. There is nothing to indicate any substantial drop in prices between 1922 and 1923. We do not feel that any reliance may be placed upon the opinion testimony and are forced to accept the assessed valuation as the only reliable evidence in the record. This makes little difference, however, since the allowable loss can not exceed the actual loss, based upon the difference between cost and selling price with proper allowance for depreciation. ; . The evidence is sufficient to establish a cost of only $48,129.50, although undoubtedly this does not represent the entire cost.

Adjustments to both the established cost and the value in April, 1922, should be made for depreciation in accordance with our decision in , and the net sales price deducted from the smaller of the two resulting amounts to ascertain the deductible loss sustained.

Decision will be entered under Rule 50.