">*173 The Commissioner determined a deficiency of $ 2,374.55 in petitioner's income and victory taxes for 1943 and the unforgiven part of such taxes for 1942 by the disallowance of deductions claimed as losses on the abandonment and sale of real estate and as office and medical expenses. Petitioner assails the determination, contending that the sale and abandonment of real estate involved noncapital ">*303 assets, so that the losses are deductible in full, and that he required and used the office only for his business. An issue involving the deduction of medical expenses was settled by stipulation.
FINDINGS OF FACT.
Petitioner, an individual residing at Pittsburgh, Pennsylvania, filed his income tax returns for 1942 and 1943 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh. He owns, rents, and operates 13 apartment houses, 2 rooming houses, and 2 dwellings located in Pittsburgh and 3 dwellings at Dormont and 2 at Brookline, near Pittsburgh. He acquired the apartment houses in 1920 by inheritance from his mother and spent $ 40,000 in improving them. He acquired the dwellings by foreclosure in 1938 and held them for renting. During the past 6 years he has received annually ">*174 gross rents of over $ 10,000 from these properties. Petitioner also owns securities from which he received and reported dividends of $ 16,427.02 in 1942 and of $ 14,676.40 in 1943; for the same years he received nontaxable income of $ 2,646.14 and $ 2,257.34, respectively, from annuities and tax-exempt bonds. His total gross income for 1942 was $ 30,456.40; ">*304 for 1943, $ 26,391.73.
Prior to 1930 petitioner made occasional purchases of real estate for resale. He frequently visits a daughter living in Philadelphia, and while there in 1927 he became interested in unimproved lots along a boulevard in Brigantine, New Jersey. He purchased five lots, selling two at a profit the same year, and listed the remaining three with a broker for sale at a better price, but was never able to sell them. In 1938 a bridge to Brigantine was destroyed and was never rebuilt, Brigantine property declined rapidly in value, and a plan thereafter proposed to extend the boulevard on which the lots were situated to New York was never consummated. The lots continued to decline in value, and in 1942 petitioner determined that there was no use in holding them longer, as they had no value to him, and in October 1942 he offered the lots to the taxing authorities at Brigantine for the purpose of abandonment. The taxes on the lots aggregated $ 52 a year and had not been paid for 1941 and 1942. While petitioner was financially able to pay same, he decided the lots were not worth the amount of the taxes, and in October 1942 he offered the city of Brigantine a quitclaim">*305 deed to them. The city objected to a quitclaim deed, as it might raise some question as to the validity of the title, but agreed to accept a deed without the general warranty clause, and at petitioner's request, it prepared the draft of such a deed and submitted it to petitioner's attorney. Petitioner executed and delivered it on October 30, 1942, conveying the title to the three lots to the city of Brigantine, the consideration recited in the deed being one dollar, which was not paid, "and the release by the grantee [city of Brigantine] of all municipal liens and claims now due on said premises." These lots cost petitioner $ 7,300.
In 1926 petitioner made a trip to North Carolina to aid in the establishment of a school for colored boys near Morehead. While there he purchased 31 lots near a beach for $ 3,000 and listed them with a broker for sale. Morehead City, near which the beach was located, had a boom on when the lots were bought, but the boom did not continue and the beach was never developed as planned. It remained an undeveloped beach, and petitioner decided in 1943 that the lots had no further value to him and he decided to abandon them. At that time there were unpaid">*306 taxes due Carteret County, North Carolina, of $ 35.71 for 1940, $ 30.17 for 1941, and $ 27 for 1942. Petitioner was financially able to pay these taxes, but in January 1943 ">*175 he communicated with the taxing authorities in Carteret County, North Carolina, and offered to deed them to the county. The offer was accepted. Petitioner executed and delivered the deed (without warranty) dated January 15, 1943, conveying title to all of the 31 lots to Carteret County, North Carolina, the consideration recited therein being "one dollar, and accrued taxes, due to Carteret County, against property hereinafter described." The deed also contained this clause: "This conveyance is made without consideration moving to first party and abandons the described properties by reason of the accrued taxes thereon due to Carteret County." The dollar consideration recited in the deed was not paid to petitioner.
The petitioner never made any improvements on either of the 3 Brigantine lots or the 31 lots in North Carolina, and never received any income from any of them, and after executing and delivering the deeds to such properties, he exercised no further possession, authority, or claim over them.
">*307 In 1938 petitioner acquired by foreclosure a brick veneer dwelling at Dormont, Pennsylvania, and rented it. The dwelling was not in a satisfactory condition, and after consultation with a real estate agent in 1943 he decided not to make repairs, but to offer it for sale. He sold it in 1943 for $ 5,250, sustaining a loss of $ 106.37.
Between 1896 and 1930 petitioner made occasional purchases of improved and unimproved real estate in Pittsburgh, New Jersey, Florida, and North Carolina. These purchases included lots and acreage in New Jersey and in Florida which he expected to sell at a profit and in some instances did so. Since 1930 petitioner has made no purchases. In 1938 he acquired by foreclosure five houses in or near Pittsburgh which he has held for renting. One at Dormont, above mentioned, was sold in 1943.
In 1942 and 1943 petitioner was engaged in the business of renting improved real estate. For 42 years he has had an office in the Farmers Bank Building, Pittsburgh, and during the years 1942 and 1943 spent $ 3,379.07 and $ 3,694.94, respectively, in its maintenance. He normally goes to his office every day when in Pittsburgh, but has no regular hours. Only his name">*308 appears on the door. He does no advertising and has no regular clients. He employs an agent to collect rents.
In 1942 petitioner paid $ 859.13 on account of medical expenses.
OPINION.
Issue No. 1. -- In computing petitioner's taxable income, the Commissioner disallowed the deduction of $ 7,300 claimed for 1942 as a loss sustained by the abandonment of 3 lots in Brigantine, New Jersey, and the deduction of $ 3,000 claimed for 1943 as a loss sustained by the abandonment of 31 lots near Morehead, North ">*176 Carolina. Respondent does not dispute the amounts of the losses claimed and that petitioner deeded the lots to the respective states in order to avoid payment of taxes, as the evidence establishes. But he contends that these losses are capital in nature, and that their deduction is subject to section 117 (d) (2), Internal Revenue Code, 1947 U.S. Tax Ct. LEXIS 301">*309 Petitioner assails the determination that the deductions claimed involved losses from the sale or exchange of capital assets as defined by section 117 (a). section 117 (d) of the code. He cites Commonwealth, Inc., 36 B. T. A. 850, and James B. Lapsley, 44 B. T. A. 1105, as supporting the deduction of an ordinary loss under the circumstances shown. In these cases this Court held that an ordinary loss resulted where the owner of realty subject to a mortgage deeded the property to the mortgagee without consideration and thereby sustained a loss, since the owner was not personally liable for the indebtedness covered by the mortgage.
">*310 Respondent asserts in his brief "that in conveying title to the taxing authorities petitioner was making a forced conveyance which the courts hold the equivalent of a foreclosure sale," and cites Helvering v. Nebraska Bridge Supply & Lumber Co. (1941), 312 U.S. 666">312 U.S. 666, and Helvering v. Hammel (1941), 311 U.S. 504">311 U.S. 504.
In the pending case there was nothing to indicate a "forced conveyance," as there was no evidence that the taxing authorities had brought or threatened foreclosure of the tax lien, but, on the contrary, it appears that the taxpayer's action in deeding both properties was voluntary and he manifested to the taxing authorities his desire to deed the properties as he wished to abandon same, having decided that their value was less than the taxes thereon.
">*177 The laws of New Jersey and North Carolina, in which two states these properties are located, both expressly provide that there is no personal liability against the owners of realty for taxes due thereon. The dollar consideration recited not being paid and petitioner not being">*311 personally liable for the taxes, the conveyances of both properties were without consideration. As was said in Commonwealth, Inc., supra, "Inasmuch as there was in fact no consideration to the petitioner, the transfer of title was not a sale or exchange. The execution of the deed marked the close of a transaction whereby petitioner abandoned its title."
The cases of Helvering v. Hammel and Helvering v.Nebraska Bridge Supply & Lumber Co., cited by respondent, are clearly distinguishable from this case. In both of these cases the title to the property passed, not by a deed voluntarily executed without consideration for an abandonment of the property, but in the former by virtue of a foreclosure sale, based upon a court decree foreclosing the lien, and in the latter by tax sale. In the Hammel case the taxpayer was one of a syndicate which defaulted in payment of indebtedness secured by lien on realty. The holder of the indebtedness obtained judgment and a foreclosure decree without equity of redemption and thereafter the "Sheriff sold the property at public auction" and the taxpayer lost the amount he had invested therein. The">*312 taxpayer contended, and the Circuit Court held, 108 Fed. (2d) 753, that, since the taxpayer was not a party to the sheriff's sale and neither contracted for nor consented to it and received no part of the consideration and was deprived of his interest in the property, not by sale, but by adverse judicial proceeding, the sheriff's sale was not a sale within the meaning of section 117 (d). The Supreme Court, however, reversed the Circuit Court and held that the word "sale" in section 117 (d) was comprehensive enough to cover a forced sale or a sale foreclosing the lien and was not restricted to a private or voluntary sale, as had theretofore been held. We quote from the Supreme Court's opinion in the Hammel case:
* * * the sale was the definitive event establishing the loss within the meaning and for the purpose of the revenue laws. They are designed for application to the practical affairs of men. The sale, which finally cuts off the interest of the mortgagor and is the means for determining the amount of the deficiency judgment against him is a means adopted by the statute for determining the amount of his capital gain or loss from ">*313 the sale of the mortgaged property. [Italics supplied.]
In the Nebraska Bridge case, supra, the taxpayer owned land upon which there were delinquent taxes secured by a tax lien, but no personal liability against the owner, and the taxpayer's property was divested, not by a conveyance without consideration, but the state foreclosed its lien and "the lands were bought in by the state at a regular tax sale for the amount of the delinquent taxes."
">*178 The Circuit Court of Appeals for the Eighth Circuit, at 115 Fed. (2d) 288, held in favor of the taxpayer that such transaction did not constitute a sale and that the loss was an ordinary one and not limited by section 117 (d), but the Supreme Court, following its decision in the Hammel case, decided shortly prior thereto, reversed the judgment of the Circuit Court without a written opinion.
Subsequent to the decisions by the Supreme Court in the Hammel and Nebraska Bridge cases, this Court decided the Lapsley case, supra, where the property involved was subject to a mortgage which the taxpayer had not assumed or agreed to pay, and during the taxable year it was deeded to">*314 the mortgagee without consideration, petitioner thereby sustaining a loss. We held that the loss was an ordinary one, deductible in full and not subject to the limitation contained in section 117 (d). In that case, as in this, the respondent asserted that the decision in the Commonwealth, Inc., case had been reversed by the Hammel and Nebraska Bridge cases, and in disposing of that contention this Court said:
The Board has not taken the view that the Commonwealth case was in effect reversed or overruled by the cited cases. Our view, expressed in W. W. Hoffman, 40 B. T. A. 459, that an ordinary loss, deductible in full, was sustained by a taxpayer who abandoned real estate subject to mortgages which he had never assumed, was recently affirmed by the Circuit Court of Appeals for the Second Circuit. Commissioner v. Hoffman, 117 Fed. (2d) 987. A similar conclusion was reached in Warner G. Baird, 42 B. T. A. 970, where a quitclaim deed was given, "not to relieve petitioner of a liability, but only to simplify the transfer of title." It was pointed out that as to petitioner">*315 the transaction "had no aspect of a sale or exchange," the Commonwealth case being cited. After the Supreme Court handed down its opinions in the Hammel and Electro-Chemical cases respondent filed a motion to vacate. In a Memorandum Sur Decision Under Rule 50 and Denial of Motion to Vacate subsequently published in 43 B. T. A. 415, it was said: "These opinions of the Supreme Court have been duly considered and are found to be distinguishable and to require no modification of the Board's opinion in the present proceeding." In Bert B. Burnquist, 44 B. T. A. 484, the petitioner "had no continuing liability" on a mortgage at the time a quitclaim deed was given to the mortgagee. We followed the Commonwealth case and held that, since there was no sale or exchange of a capital asset, the loss should be allowed as an ordinary loss, not limited by section 117 (d) of the Revenue Act of 1936.
In the more recent case of George Hewitt Myers, 3 T.C. 1044, where the loss sustained was by reason of unpaid stock assessment for which petitioner had no personal liability, the stock was sold">*316 pursuant to the state statute and bought in by the issuing corporation, we held that, since the title passed by forced sale, such loss was governed by the Hammel case and subject to capital loss limitation of section 117 (d), but the opinion expressly states that if there had been no sale the doctrine announced in the Commonwealth, Inc., case would be applicable. We quote from the Myers opinion:
">*179 * * * Thus a mere abandonment in favor of the lien holder without the interposition of any sale falls outside the definition. E. g., Bert B. Burnquist, 44 B. T. A. 484; appeal dismissed (C. C. A., 8th Cir.), 123 Fed. (2d) 64; James B. Lapsley, 44 B. T. A. 1105; Stokes v. Commissioner (C. C. A., 3d Cir.), 124 Fed. (2d) 335. But it is not entirely apparent that petitioner denies the existence of a sale here. In any event, we find it impossible to do so. * * *
In Stokes v. Commissioner, 124 Fed. (2d) 335, the Circuit Court of Appeals for the Third Circuit held that if the taxpayer who is not personally liable conveys">*317 the mortgaged premises to the mortgagee, who accepts the deed without paying or promising to pay anything therefor, the transaction is not a "sale" or "exchange" within the meaning of section 117 (d). In that case, as in the pending one, the Commissioner contended that the Hammel and the Nebraska Bridge cases were in conflict with such holding, and the opinion of the Circuit Court in the Stokes case, in answering such argument, used this language:
It is contended on behalf of the Commissioner that the case is governed by Helvering v. Nebraska Bridge Supply & Lumber Co. (1941), 312 U.S. 666">312 U.S. 666, 312 U.S. 666">667, 61 S. Ct. 827">61 S. Ct. 827, 85 L. Ed. 1111">85 L. Ed. 1111, which follows Helvering v. Hammel (1941), 311 U.S. 504">311 U.S. 504, 61 S. Ct. 368">61 S. Ct. 368, 85 L. Ed. 303">85 L. Ed. 303, 131 A. L. R. 1481, and Electro-Chemical Engraving Co., Inc. v. Commissioner of Internal Revenue (1941), 311 U.S. 513">311 U.S. 513, 61 S. Ct. 372">61 S. Ct. 372, 85 L. Ed. 308">85 L. Ed. 308. Each of these cases, however, involved a sale, i. e., a foreclosure sale or a tax sale; the only issue being">*318 whether such forced sales were outside the contemplation of Congress in referring to sales. * * *
A case in which the essential facts are very similar to those here considered is Bickerstaff v. Commissioner, 128 Fed. (2d) 366, decided by the Circuit Court of Appeals for the Fifth Circuit subsequent to the Supreme Court's opinion in the Hammel and Nebraska Bridge cases. A comparison of this case and the Bickerstaff case reveals that both involve deductions based on realty abandoned as worthless by the taxpayer to the taxing authorities on which there were delinquent taxes secured by tax lien but no personal liability against the owner.
Comparing further, the term of tax delinquency in both cases was practically the same, Bickerstaff being three years in arrears and in this case two years on the Brigantine lots and three on the North Carolina lots being unpaid. The aggregate amount of delinquent taxes unpaid is practically the same, Bickerstaff being $ 75 and in this case the total unpaid taxes on the Brigantine lots were $ 104, and on the North Carolina lots $ 82.88. In both cases the taxpayer was financially able to pay the taxes, ">*319 but determined that the properties were not worth the taxes due on them, and in each case the taxpayer wrote the taxing authorities that he desired to stop further tax payments on the property and abandon same, and in both the taxpayer made deeds conveying the properties to the taxing authorities ">*180 and the owners thereafter exercised no further possession or claim to them. The deed in the Bickerstaff case was received and retained by the tax collector but not recorded, since its attestation was not in compliance with law. The deeds in this case were legally executed and accepted.
While such details of accidental factual analogy are not severally factors of decisive importance, in the aggregate they present a set of circumstances which can not be distinguished from those out of which this issue arises. And although the year of loss was the subject of controversy in the Bickerstaff case, while the issue here is whether the loss was produced by a sale or exchange or resulted from an abandonment, it would seem that the opinion is nonetheless pertinent because the Circuit Court held specifically that Bickerstaff had abandoned his property in 1935 and a finding of abandonment">*320 was essential to the decision rendered, inasmuch as no deed, sale, or affirmative transfer of the property was effective until 1937.
There was more reason to assert in the Bickerstaff case, as respondent has here done, that the taxpayer's action was a "forced conveyance," for in the Bickerstaff case, prior to the taxpayer's action in deeding the property, the tax authorities had issued a tax certificate for delinquent taxes, authorizing sale of the property, while in this case no action of any kind is shown to have been taken by the taxing authorities looking toward a foreclosure of the tax lien; but it appears the petitioner voluntarily initiated action which resulted in his abandonment in deeding the properties.
In the Bickerstaff case, two years after the taxpayer deeded the property to tax authorities the state sold it to a third party by virtue of the delinquent tax certificate, and the Commissioner contended that, since the taxpayer's deed was defective,the loss did not occur in 1935, when such deed was made, but in 1937, when the state deeded the property to a third party, and, further, that it had not been shown that the property became worthless in 1935, the taxable">*321 year involved. This latter contention respondent makes here.
The Circuit Court, in the Bickerstaff case, held that the loss was sustained in 1935 and the taxpayer's deed, though not legally executed, was evidence of his abandonment of the property and its worthlessness to him at that time and entitled him to the deduction as claimed. We quote from this opinion:
It appears that the taxpayer was financially able to make payment of the taxes assessed against the property. He refused to make the payments, and made a bona fide attempt to divest himself of title. His attempt to divest himself of title, although ineffective under Florida law because of improper attestation of the deed, was clear evidence of his intention to abandon the property and of its practical worthlessness to him. All that is required is that property actually be abandoned; a technical, legal abandonment and relinquishment of title is not always required. * * *
">*181 In this case we are convinced from the testimony and petitioner's action, that the petitioner in 1942, as to the Brigantine lots, and in 1943, as to the North Carolina lots, then determined that no profit could be expected from his investment">*322 and that the respective properties were not worth the amount of taxes assessed against them and they were therefore worthless and he abandoned them in those years. The record discloses no act manifesting petitioner's abandonment or intention to abandon prior to these dates.
Under the circumstances we are of the opinion that his renunciation of title in the exercise of reasonable business judgment may be deemed to indicate the time of worthlessness. Helvering v. Gordon (C. C. A., 4th Cir.), 134 Fed. (2d) 685; Larus v. Commissioner (C. C. A., 2d Cir.), 123 Fed. (2d) 254; Helvering v. Jones (C. C. A., 8th Cir.), 120 Fed. (2d) 828. Or, as we said in Commonwealth, Inc., supra, the execution of the deeds by the petitioner to these properties marked the close of a transaction whereby petitioner abandoned his properties. We find, further, that the transaction as to both properties was not a "sale" or "exchange" within the purview of section 117 (d) and the amount of losses on such properties is not limited thereby.
We therefore hold that petitioner sustained">*323 ordinary and not capital losses in 1942 as to the Brigantine lots and in 1943 as to the North Carolina lots and is entitled to deduction for the full amount of his losses on both.
Issue No. 2. -- For 1943 the Commissioner disallowed a claimed loss of $ 106.37 resulting from petitioner's sale of a dwelling at Dormont. The parties are not in dispute that the loss occurred in the amount and during the year claimed, but the Commissioner determined that the dwelling was a capital asset and, as he had allowed the deduction of other capital losses in the amount of $ 1,000 maximum deductible, he disallowed the loss in controversy. Petitioner assails the determination, alleging that the property was used in his business of renting improved real estate, and as such, does not fall within the definition of a capital asset. The evidence establishes that for many years petitioner had acquired, repaired, and rented apartment houses and dwellings in Pittsburgh and that he derived a gross annual income of over $ 10,000 from this business. The dwelling sold was acquired with four others by foreclosure in 1938. All were rented, and petitioner's decision to sell this one resulted from the necessity">*324 for repairs which he was not disposed to make. It is settled that the renting of dwellings may constitute a trade or business, George S. Jephson, 37 B. T. A. 1117, and recent decisions support the view that:
* * * where the owner of depreciable property devotes it to rental purposes and exclusively to the production of taxable income, the property is used by him in a trade or business, * * *
">*182 and, "being subject to the allowance for depreciation," such property does not fall within the definition of a capital asset, so that on disposition the resulting gain or loss is governed by the provision of section 117. Fackler v. Commissioner (C. C. A., 6th Cir.), 133 Fed. (2d) 509; affirming 45 B. T. A. 708. To the same effect are Leland Hazard, 7 T.C. 372, and N. Stuart Campbell, 5 T.C. 272. The Commissioner erred in disallowing this loss.
Petitioner also contended that the foregoing losses were deductible in full because he held the properties primarily for sale to customers in the ordinary course of his trade or business. ">*325 If so, they are expressly excluded from the limitations imposed by section 117 (a) (1). He argues that he was regularly engaged in the business of buying and selling real estate. In view of the foregoing disposition of the issue in petitioner's favor, we find it unnecessary to decide the question so raised.
Issue No. 3. -- During 1942 and 1943 petitioner paid and deducted on his income tax returns $ 3,379.07 and $ 3,694.94, respectively, as the expenses of maintaining an office. The Commissioner disallowed $ 293.58 and $ 316.04 of these deductions as being "that portion of such expenses allocable to the collection of nontaxable income." These figures result from a computation whereby office expenses were allocated to taxable income and nontaxable income of such years in the proportion that each bears to the total of the taxable and nontaxable income of the petitioner for such years. Petitioner properly does not contest the propriety of disallowing any portion of office expenses which should be allocated to nontaxable income, such portion being expressly nondeductible under section 24 (a) (5), Internal Revenue Code. He contends, however, that no portion is allocable to such">*326 income because he merely collected it and did not need an office for that purpose. As he was engaged in renting properties and also had substantial investments from which he derived the major part of his income, we shall not assume that he used the office exclusively for his business of renting. His testimony concerning its use discloses merely that he normally went to it every day when in Pittsburgh, but had no regular hours. It is at least compatible with the meager evidence adduced that he made general use of it for purposes connected with his renting business and also with the management of his investments, regardless of the taxability of income. To support his contention he has not offered evidence affording any basis for an allocation of expenses among such uses. In Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212, the Supreme Court recognized the propriety of dividing the cost of office maintenance between a taxpayer's real estate business and the care of his investments, and because the latter did not constitute a business, the portion allocable to it was held nondeductible. Petitioner has neither proved nor alleged that the care ">*183 of ">*327 his security investments was a business, or that he did not use his office for purposes connected with them. In any event it is not to be presumed that he did not use the office for that part of his income which was tax-exempt. This case seems indistinguishable from Edward Mallinckrodt, Jr., 2 T.C. 1128; affd., 146 Fed. (2d) 1; certiorari denied, 324 U.S. 871">324 U.S. 871, wherein we said:
* * * Since the parties submitted no evidence bearing directly on the question as to what portion of the expenditures should be allocated to nontaxable income, and in the absence of evidence indicating what would constitute a more reasonable basis for such allocation, we hold such expenditures for the respective years are to be allocated to taxable income and nontaxable income of such years in the proportion that each bears to the total of the taxable and nontaxable income of the petitioner for such years.
We adhere to the rule so stated for application here and, as the Commissioner has given effect to it in computing the amounts of expenses disallowed, we approve his determination.
Of the medical expenses claimed by the petitioner">*328 for 1942, the Commissioner disallowed $ 322.73. The parties have stipulated that such expenses in the amount of $ 859.13 were paid by petitioner, and proper adjustment should be made therefor.
Decision will be entered under Rule 50.