Cummins v. Commissioner

Samuel Cummins, Petitioner, v. Commissioner of Internal Revenue, Respondent

Cummins v. Commissioner

Docket No. 32763

United States Tax Court

19 T.C. 246; 1952 U.S. Tax Ct. LEXIS 45;

November 17, 1952, Promulgated

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Decision will be entered for the respondent.

Held, seat on New York Produce Exchange is a capital asset, and loss on sale is subject to limitations of section 117 (d) (2), I. R. C.

Henry Pearlman, Esq., for the petitioner.

Francis Butler, Esq., for the respondent.

Raum, Judge.

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RAUM

The respondent determined a deficiency in the income tax of petitioner for the year 1943 in the amount of $ 11,873.71.

The sole question is whether the petitioner sustained an ordinary loss, deductible in full, or a loss on the sale of a capital asset subject to the limitations imposed on capital losses by section 117 (d) (2) of the Internal Revenue Code, as the result of a sale in 1943 of a seat on the New York Produce Exchange for an amount less than its cost in 1928.

FINDINGS OF FACT.

Petitioner is a resident of New Rochelle, New York. His income tax return for the year 1942 was filed with the collector of internal revenue for the third district of New York, and his return for the year 1943 was filed with the collector of internal revenue at Baltimore, Maryland.

In 1928 the petitioner purchased a seat on the New York Produce Exchange for $ 21,000. This seat was used by him primarily to trade in commodities for his own account. The benefit which petitioner derived by being a member of the exchange was to save commissions. If he traded on the floor himself, he kept the full commission.

The New York Produce Exchange is a membership corporation to each member of which there is issued a certificate. The certificate issued bears the corporate seal of the exchange and the signatures of the president and the secretary.

The stated objects of the New York Produce Exchange were, among others, to provide a suitable room or rooms for a produce exchange in the city of New York; to inculcate just and equitable principles in trade; to establish and maintain uniformity in commercial usages; to acquire, preserve and disseminate valuable business information; to adjust controversies and misunderstandings between persons engaged in business; and to make provision for the widows and families of deceased members.

There were certain obligations which attached to the ownership of a seat on the exchange. When a member died all of the members were assessed to make provision for the widow and family of the deceased. They were also subject to assessments to defray expenses of the exchange, and to meet amortization payments on the issued and outstanding bonds and mortgages of the exchange and for other capital purposes.

The by-laws of the New York Produce Exchange provided that a certificate of membership was transferable only to a person elected to membership, upon the payment of an initiation fee of $ 300, and any unpaid assessment due thereon.

The petitioner was expelled from the exchange in November of 1942, for failure to pay dues and death benefit assessments. Prior to this time, he had ceased his activity as a member. In 1943, he sold, through the exchange, his seat for $ 350, and returned to the exchange his certificate of membership. In addition to the price paid for the seat, the buyer was required to pay the dues and assessments that were in arrears.

In his income tax return for the year 1943, the petitioner reported the sales price of the exchange seat to be $ 375; its cost to be $ 21,000; and deducted a loss from the sale of property other than capital assets of $ 20,625. The respondent determined that the loss sustained was a long term capital loss which, after being offset against a capital gain of $ 438.34, was deductible in the year 1943 only to the extent of $ 1,000, in accordance with the provisions of section 117 (d) of the Internal Revenue Code.

OPINION.

The controversy in this proceeding arises from the respondent's determination that the loss sustained by the petitioner from the sale of his exchange seat was a loss from the sale of a capital asset held for more than six months, the deduction of which is limited by the provisions of section 117 (d) (2) of the Internal Revenue Code.

The petitioner contends that he is entitled to deduct the entire amount of the loss sustained and urges that the exchange seat is property which is specifically excluded from the term "capital assets" in section 117 (a) (1) of the Code.

The pertinent provisions of the Code are set forth in the margin. ^{*50 Section 117 (a) (1) defines a capital asset to include all property held by a taxpayer, whether or not connected with his trade or business, with certain exceptions. Petitioner was engaged in the business of buying and selling commodities. He bought a seat on the New York Produce Exchange so that he could deal in commodities on the market and save commissions. He was not in the business of selling seats on the exchange. The seat he sold was not, therefore, part of his stock in trade or property held primarily for sale to customers in the ordinary course of his trade or business. Moreover, the fact that he used the exchange seat in connection with his trade or business does not bring it within any of the exceptions listed in section 117 (a) (1) unless it was property of a character which is subject to the allowance for depreciation provided in section 23 (l), or real property used in his trade or business. An exchange seat is intangible personal property and not real property. The fact that ownership of this seat may have given petitioner some indirect interest in property owned by the exchange, which was depreciable and depreciated in value during the period he owned the seat, does not entitle him as owner of the seat to any allowance for depreciation. This fact does not determine the character of the seat as a depreciable asset. In order for intangible property to be subject to depreciation, it must have a definitely limited useful life in the trade or business. Treasury Regulations 111, section 29.23 (l)-3. The use of the exchange seat in petitioner's business was not definitely limited in duration. It does not, therefore, qualify as property subject to depreciation which is excluded as a capital asset by section 117 (a) (1). The respondent's determination that the exchange seat sold was a capital asset is approved.}

Petitioner also makes the contention that his interest in the seat became worthless, and that he was therefore entitled to deduct its value from his gross income as a loss sustained. In support of this contention he points not only to his testimony to the effect that the value of his seat decreased because there was practically no trading on the exchange during the war but also to other factors, such as the decline in the value of the exchange building and the inability of the exchange to meet its obligations. This contention is without merit. That the seat was not worthless in 1943 is evidenced by the fact that when he sold it he received $ 350 therefor. He sustained a long term capital loss from this sale the deduction of which was limited, as determined by the respondent, by the provisions of section 117 (d) (2) of the Internal Revenue Code.

Decision will be entered for the respondent.

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Footnotes

• 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.

  (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise --

  (1) if incurred in trade or business; or

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

  (3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft. No loss shall be allowed as a deduction under this paragraph if at the time of the filing of the return such loss has been claimed as a deduction for estate tax purposes in the estate tax return.

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  (g) Capital Losses. --

  (1) Limitation. -- Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section 117.

  * * * *

  (l) Depreciation. -- A reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) --

  (1) of property used in the trade or business, or

  (2) of property held for the production of income. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.

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  SEC. 117. CAPITAL GAINS AND LOSSES.

  (a) Definitions. -- As used in this chapter --

  (1) Capital assets. -- The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include --

  (A) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

  (B) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), or real property used in his trade or business.

  * * * *

  (5) Long-term capital loss. -- The term "long-term capital loss" means loss from the sale or exchange of a capital asset held for more than 6 months, if and to the extent such loss is taken into account in computing net income.

  * * * *

  (d) Limitation on Capital Losses. --

  * * * *

  (2) Other taxpayers. -- In the case of a taxpayer, other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus the net income of the taxpayer or $ 1,000, whichever is smaller.

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