Camden v. Commissioner

J. N. CAMDEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Camden v. Commissioner

Docket No. 11505.

United States Board of Tax Appeals

11 B.T.A. 232; 1928 BTA LEXIS 3847;

March 26, 1928, Promulgated

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In the case of a loss arising from the destruction of property by fire in 1922, where the property so destroyed was acquired subsequent to March 1, 1913, the deduction on account of such loss, under section 214(a)(6) of the Revenue Act of 1921, shall be computed upon the basis of the cost of such property. Loss disallowed for lack of evidence as to cost.

Ward Loveless, Esq., for the petitioner.

Henry Ravenel, Esq., for the respondent.

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LITTLETON

This action results from the Commissioner's determination of a deficiency in the amount of $8,466.73, income tax for the calendar year 1922.

Petitioner alleges error in that the Commissioner disallowed a claim for loss on account of the destruction of horses by fire.

FINDINGS OF FACT.

Petitioner is a resident of Versailles, Ky., and was during 1922, and for many years prior thereto, engaged in farming, breeding, raising, training and selling thoroughbred horses and operating a racing stable. On May 9, 1922, petitioner's stable at Lexington, Ky., burned with the resulting destruction by fire of 20 racing horses, all of which had been raised and trained by petitioner subsequent to March 1, 1913. The petitioner received no compensation by way of insurance or otherwise for the horses destroyed.

The petitioner kept his accounts on a cash receipts and disbursements basis and made his income-tax returns for the years 1913 to 1921, inclusive, on that basis, showing no inventory of horses or other property owned. Expenses of farming and cost of breeding and training his horses were claimed each years as deductions from gross income and the selling prices of horses, as well as other products, were regularly reported as gross income.

For the year 1922, in making his income-tax return, the petitioner modified his previous methods by setting up an inventory of thoroughbred horses, totaling $274,000 as of January 1, 1922, and a similar inventory as of December 31, 1922, totaling $127,833.33, and claimed the difference between these figures as a loss resulting from the fire of May 9, 1922. In other respects the 1922 return was made upon the same basis and accoridng to the same methods as previously followed. Upon audit of the 1922 return the Commissioner disallowed the loss claimed as the result of the fire.

OPINION.

LITTLETON: The record of this action contains the testimony of the petitioner and two other witnesses, all of whom are well known in Kentucky as raisers and trainers of thoroughbred horses and racing horses. The evidence goes at much length into the discussion of pedigrees, trials, races, form, and values of the 20 horses destroyed, and the witnesses all agreed that these 20 horses were, on the morning of May 9, 1922, worth $150,000.

Upon consideration of this testimony we are convinced that all of these witnesses had in mind the selling values of the horses; the amounts which the petitioner should ask as his selling prices and which he might reasonably expect to receive in the event of a purchaser completing a bargain for the sale of one or more of the horses. This testimony is wholly uncontroverted and standing in the record as it does we might be justified in finding that the selling market value of these 20 horses was, on the morning of May 9, 1922, $150,000.

The petitioner has presented and argued his case on the theory that, under the provisions of section 214(a)(6) of the Revenue Act of 1921, the measure of his loss is the amount of $150,000, as testified to by the witnesses, and that inasmuch as said section 214(a)(6) of the Revenue Act of 1921 contains no provision respecting the basis of computing a loss upon property produced or acquired after March 1, 1913, that said section must be interpreted to mean that the measure of such loss is the market value of the property at the time of the loss, without any reference to what may have been the production cost or a possible buying market.

On the other hand, the respondent maintains that, inasmuch as the petitioner has, during the years when these horses were produced, raised, and trained, taken as deductions in his annual income-tax returns all the cost of labor, material, and supplies used in carrying on his farm and in raising and training his horses, there is, therefore, no basis upon which a loss of the petitioner's horses can be predicated.

While it appears to be true that the Revenue Act of 1921, either in section 214(a)(6) or in other parts of said Act, does not contain a specific provision for measuring a loss from destruction or damage to property which was acquired subsequent to March 1, 1913, the Board is of the opinion that the deduction on account of such loss is to be computed upon the basis of the cost of such property. The statute does provide (section 214(a)(6)) that where the property destroyed or damaged was acquired prior to March 1, 1913, "the deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913." Section 202 provides the basis for determining the loss on a sale or other disposition of property, whether acquired prior or subsequent to March 1, 1913. The question of the true measure of gains realized and losses sustained on account of property acquired prior to March 1, 1913, and sold, or otherwise disposed of, subsequent to this date, has been before the Supreme Court on various occasions and there judicial determinations made which we think afford a guide in measuring losses which are deductible. (; ; ; .) The basis of these decisions is, as we understand them, that only "actual gains" are taxable and only "actual losses" are deductible, and that in determining what constitutes an "actual gain" or "actual loss," cost is the starting point, subject to the limitation provided on account of the value which existed on March 1, 1913. That is, the loss to be recognized would be on account of capital which had been invested or which existed on March 1, 1913. We are of the opinion that the same principle is here applicable and that the loss to be allowed on account of property acquired subsequent to March 1, 1913, can not exceed the amount invested in such assets, that is, cost. In , the Board said:

The statute provides for a deduction on account of losses sustained during the taxable year. The expression "losses sustained" means actual losses and not paper losses. Where the March 1, 1913, value of property was greater than the cost, the actual loss sustained when the property is destroyed or demolished must be based on the cost of the property. Any other interpretation would be inconsistent with the principle announced in ; and . While in those cases losses on the sale of assets and not losses on account of destruction of property were involved, the basic principle is the same. In the case of a loss on the sale of property the statute expressly provides that, for the purpose of ascertaining the gain derived or loss sustained in the case of property acquired before March 1, 1913, the basis for determining the deductible loss is the March 1, 1913, value. Yet the court held that the March 1, 1913, value was merely a guide-post to determine whether a loss had been sustained since March 1, 1913, and that the loss was not to be based on March 1, 1913, value unless that value was less than cost. The principle applies with equal force in the case of a loss on account of destruction of property.

See also George B. Friend, B.T.A. 712.

To hold otherwise in the instant case would be to permit losses on account of unrealized profits and to apply a principle which is not only inconsistent with that followed in thecases of other losses, but also which produce results which are absurdly inconsistent with the loss allowable on account of property acquired prior to March 1, 1913. The following supposititious case will illustrate the results which would follow from petitioner's theory: An asset was acquired prior to March 1, 1913, at a cost of $50 and this asset had a value on March 1, 1913, of $50. Another asset substantially comparable was acquired in 1915 at a cost of $50. Each asset had a value of $300 in 1922 when they were destroyed by fire. On the first asset acquired the petitioner would permit a deduction of $50 and on the second asset $300. The Board is unwilling to impute to Congress the enactment of a statute which would effect such results, and is of the opinion that, when the statute is viewed as a whole, no such results were either intended or accomplished.

An application of the principle which we have set out above as the basis for determining the deductible loss here in question makes necessary the affirmation of the deficiency as found by the Commissioner, for the reason that the only evidence presented by the petitioner was as to the market value of the horses when destroyed and no evidence was furnished as to their cost.

Reviewed by the Board.

Judgment will be entered for the respondent.