Kahn v. Commissioner

MORTON L. KAHN AND BEULAH KAHN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kahn v. Commissioner

Docket No. 99877.

United States Board of Tax Appeals

44 B.T.A. 84; 1941 BTA LEXIS 1382;

April 8, 1941, Promulgated

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In January 1928 the petitioner, his father, and a third person being taken in the name of the father. In 1929 the petitioner, unable to contribute additional funds for the improvement of the property, agreed with his father that he should receive reimbursement for his investment only out of proceeds from the sale. The father died in 1930. The value of the property at that time was much less than the amount of the mortgages upon it. In 1936 the petitioner relinquished all right, title, and interest in and to the property in favor of his mother. Held, that the petitioner sustained no deductible loss in 1936 from such relinquishment.

Max C. Baylinson, Esq., for the petitioners.

Paul E. Waring, Esq., for the respondent.

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SMITH

This proceeding involves a deficiency of $1,757.91 in petitioners' income tax for 1936, of which only $1,127.48 is in controversy. Petitioners are husband and wife and filed a joint return for 1936. The only question in issue is whether a loss claimed in 1936 on an investment in real estate is deductible in that year.

FINDINGS OF FACT.

On December 27, 1927, and January 27, 1928, respectively, Morton L. Kahn, hereinafter referred to as the petitioner, his father, Jacob Kahn, and a third party, Jacob Kleeblatt, purchased two parcels of real estate in Philadelphia, Pennsylvania, described as 3537 and 3539 Germantown Avenue. Each party contributed $5,000 cash toward the purchase price. Title to both parcels was taken in the name of Jacob Kahn, who alone became liable upon the mortgages and mortgage notes.

On February 7, 1928, Jacob Kahn and Fannie Kahn, his wife, executed a declaration of trust reading in material part as follows:

WHEREAS, on or about the 27th day of December, 1927, certain real estate known and described as 3539 Germantown Avenue, Philadelphia, was conveyed and the title therein and thereto be taken in the said Jacob Kahn, subject to the encumbrances in the said deed, more particularly set forth and - Whereas, Jacob Kahn created at settlement a 1st mortgage of $25,000. and a 2nd B&L Ass'n mortgage of $12,000. for the benefit of the parties in interest.

WHEREAS, on or about the 27th day of January, 1928, certain real estate known and described as 3537 Germantown Avenue, Philadelphia, was conveyed to and title vested in said Jacob Kahn, subject to encumbrances, as in the said deed more particularly set forth, and - Whereas, Jacob Kahn created at settlement a 2nd B&L Ass'n mortgage of $15,000, for the benefit of parties in interest.

WHEREAS, the title to the said premises, 3537 and 3539 Germantown Avenue is now of record, pursuant to the said deeds in the name of the said Jacob Kahn, and -

WHEREAS, the consideration money for the purchase of the said premises was paid and contributed in equal one third parts or amounts by the said Jacob Kahn, Morton L. Kahn and Jacob Kleeblaat.

Now KNOW YE, that we said Jacob Kahn, and Fanie, his wife, do by these presents make known, admit and declare that the above mentioned premises are now held and will be continued to be held by the said Jacob Kahn, in trust only, to and for the following uses and purposes, to wit: For the interest of the said Jacob Kahn, Morton L. Kahn and Jacob Kleeblaat, in equal one third undivided interests and rights therein and thereto, and to and for their, and each of their respective heirs and assigns, to the extent of the above mentioned interests.

From the date of the purchase of the properties Jacob Kahn collected the rents and made all payments of taxes, interest, and other expenses, either out of rents collected or out of his own funds.

The properties were purchased with the expectation of a resale at a profit within a short period. No such resale was effected. In 1929 a prospective tenant for the property at 3539 Germantown Avenue agreed to pay a much greater rental for a new building upon the property. Jacob Kahn requested his son and Kleeblatt each to advance one-third of the amount necessary to erect a new building. They were unwilling or unable to do so. They did agree, however, with Jacob Kahn that if he would go ahead and make the improvements they would relinquish their claim to a one-third interest in the properties and would receive reimbursement of their investments of $5,000 each in the properties in case of a sale. Thereupon, Jacob Kahn razed the building at 3539 Germantown Vavenue and erected a new building on the land in 1929 at a cost of $9,794.

In 1930 it became necessary to make extensive improvements or repairs to the property at 3537 Germantown Venue. Jacob Kahn spent our of his own funds $4,624 for such improvements or repairs.

Jacob Kahn died on October 30, 1930, leaving a will whereby the two parcels of property on Germantown Avenue were devised to his widow, Fannie Kahn, as residuary devisee. The petitioner and Fannie Kahn were executors of the will. As such executors they filed an estate tax return for the estate with the collector at Philadelphia, in which the property at 3537 Germantown Avenue was reported as having an assessed value of $20,000, a fair market value at the date of decedent's death of $32,000, and mortgages on the property of $37,125. The property at 3539 Germantown Avenue was returned as having an assessed value of $20,000, a fair market value of $30,000, and mortgages thereon of $35,200. After the death of Jacob Kahn his widow collected the rents from the above described properties, paid the taxes and expenses thereon and interest upon the mortgages, and made large payments on the principal.

In 1936 a demand was made on Fannie Kahn by the mortgagee of the property at 3539 Germantown Avenue for a further reduction of the first mortgage, then amounting to $15,000. Fannie Kahn stated to the petitioner and Kleebatt that she was unwilling to make further payments on the principal of the mortgages unless they would relinquish whatever interest they held in the properties by virtue of the declaration of trust executed by Jacob Kahn and herself on February 7, 1928. They agreed to do so and accordingly, under date of October 15, 1936, an agreement was executed by Fannie Kahn, Morton L. Kahn, and Jacob Kleeblatt, which, after reciting some of the above stated facts pertaining to the acquisition and ownership of the properties, provided that:

WHEREAS, the original contribution in the purchase of the aforesaid properties of MORTON L. KAHN was in the sum of $5,000, and JACOB KLEEBLATT, the sum of $5,000.; and

WHEREAS, the said FANNIE KAHN has demanded and requested of the said parties of the second part that they contribute and pay to her their proportionate share of the monies heretofore advanced by her for the preservation, care and maintenance of said properties together with the monies paid in reduction and satisfaction of the mortgages and encumbrances thereon, to wit, the sum of $41,000, and the said parties of the second part have been unable to make said contributions and by reason thereof, have agreed to relinquish to the party of the first part all their right, title and interest in and to the aforesaid premises.

NOW THIS AGREEMENT WITNESSETH:

That said parties of the second part, for and in consideration of the sum of One Dollar and other good and valuable consideration, lawful money of the United States of America, unto them well and truly paid by said party of the first part, at and before the sealing and delivery of these presents, the receipt whereof is hereby acknowledged, have granted, bargained, sold, aliened, released and confirmed, and by these presents do grant, bargain, sell, alien, release and confirm unto the said FANNIE KAHN, her heirs and assigns, all their and each of their one-third undivided interest in and to the aforesaid premises, to wit, 3537 and 3539 Germantown Avenue, in the City and County of Philadelphia.

Neither the petitioner nor Kleeblatt received any consideration whatever for the execution of the instrument above referred to.

Thereafter, and during 1937, Fannie Kahn made further payments in reduction of the mortgages on the properties and has continued to exercise ownership and control over them up to the present time.

In his income tax return for 1936 petitioner deducted $5,000 from gross income, with the explanation: "Extinguishment of declaration of trust (1/3 interest) on property 3537-39 Germantown Ave., Phila., Pa., created 2/7/28 - extinguished 10/15/36." The respondent disallowed the deduction on the ground that the loss was a nondeductible loss under the provisions of section 24(a)(6) of the Revenue Act of 1936.

The petitioner's investment in the properties at 3537 and 3539 Germantown Avenue became worthless prior to 1936.

OPINION.

SMITH: Section 24(a)(6) of the Revenue Act of 1936 provides in part as follows:

SEC. 24. ITEMS NOT DEDUCTIBLE.

(a) GENERAL RULE. - In computing net income no deduction shall in any case be allowed in respect of -

* * *

(6) Loss from sales or exchanges of property, directly or indirectly, (a) between members of a family, * * * and (D) the family of an individual shall included only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendats.

The petitioner contends that the above quoted provisions of the Revenue Act of 1936 do not apply in this case for the reason that there was no sale or exchange of property by him as the result of his relinquishment of his interest in the properties at 3537 and 3539 Germantown Avenue. He submits that he received no consideration for the execution of the deed of relinquishment. He further submits that the evidence shows that he made an investment of $5,000 in the properties and that the proof is clear that he had no interest in the propertis after the deed of relinquishment, and that the deed of relinquishment was the indentifiable event which established the loss as having occurred in 1936.

We think it plain from the evidence in this case that the petitioner's investment in the so-called joint adventure in 1937 or 1928 was lost long prior to 1936. This is indicated by the fact that in the estate tax return filed for the estate by the petitioner ane his mother the properties were then returned as having a fair market value less than the amount of the mortgages thereon, and further by the fact that the estate tax return does not show any liability of the estate to the petitioner or to Kleeblatt in respect of the investment by each of $5,000.

in , we held that, where the interest of the taxpayers in improved real estate owned by them subject to a mortgage became worthless in 1934, they were entitled to deduct the loss in that year under section 23(e)(2) of the Revenue Act of 1934, although title remained in them until foreclosure was completed in the following year, despite their effort to abandon their interest in the property during 1934. Our decision in that case was affirmed, per curiam . In its per curiam opinion the court stated:

The commissioner seeks reversal of a decision of the Board holding that under section 23(e)(2) of the Revenue Act of 1934 the taxpayers were entitled to deduct from gross income a loss sustained in 1934, when the interest in improved real estate owned by them subject to a mortgage upon which they had not assumed liability, became worthless and they abandoned their interest and so advised the mortgagee, although title remained in them until completion of foreclosure proceedings in the following year. . Upon amply sufficient evidence the Board found specifically that the taxpayers' interest in the property became worthless in 1934. We see no valid ground to differentiate between a loss suffered on real estate and one personalty, if worthlessness is definitely established. Compare . On the authority of and the Board's decision is affirmed.

The action of the respondent in disallowing the claimed deduction is approved.

Decision will be entered for the respondent.