Opinion
Docket No. 9534.
1947-10-23
GEORGE W. CARNRICK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Albert E. James, Esq., for the petitioner. Neil D. McCarthy, Esq., for the respondent.
1. Petitioner's 1941 return was filed on March 16, 1942. From February 1944 to February 1945 petitioner, then in the armed forces of the United States, was continuously outside the Americas and in the European theater of operations. The notice of deficiency for 1941 was mailed to petitioner in August 1945. Held, in view of section 3805, I.R.C., the deficiency notice was timely mailed.
2. Petitioner's mother died in 1933, when petitioner and his sister were minors. She left all her property in a testamentary trust which was to continue until the younger of the two children (petitioner) attained majority. The net income of the trust was payable to the children equally. Included in the trust property was a residence property which the decedent had occupied until her death. The trustees had the power to sell any of the property in the trust, real or personal, and reinvest the proceeds. After her death petitioner and his sister were permitted to live in the house, and the trustees collected rent from their guardian. Petitioner's sister died without issue in 1937, while petitioner was still a minor. Petitioner thereupon moved out and lived with his guardian, and the trustees listed the property for rent or sale. Petitioner reached his majority in 1939, at which time the trust terminated and petitioner became entitled to possession of the residence property. He actively undertook to rent or sell it. He sold the property in 1941 for an amount considerably less than its value at the date of the decedent's death. Held, petitioner is entitled to deduct the loss on the residence as an ordinary loss and the loss on the land as a capital loss. Albert E. James, Esq., for the petitioner. Neil D. McCarthy, Esq., for the respondent.
The respondent determined a deficiency of $4,375.98 in petitioner's income tax for 1941. Petitioner claims an overpayment.
A preliminary question arises as to whether the deficiency notice was timely mailed. On the merits, the question is whether petitioner sustained deductible losses upon the sale in the taxable year of certain real property inherited from his mother and, if so, in what amounts.
FINDINGS OF FACT.
The petitioner is a resident of Upper Montclair, New Jersey. His return for the taxable year was filed with the collector of internal revenue for the fifth district of New Jersey, on March 16, 1942. The deficiency notice herein was mailed to petitioner on August 13, 1945.
Petitioner's mother, Katherine S. Carnrick, died testate on May 14, 1933, a resident of Montclair, New Jersey, and her will was duly admitted to probate. The will of the testatrix provided that after the payment of debts and funeral expenses all the rest and residue of her property, real and personal, should be held in trust, with the income therefrom to be paid one-half to her daughter, Alice Carnrick, and one-half to her son, the petitioner. The trust was to continue until the younger of these two children attained the age of 21, at which time the corpus was to be distributed equally to them. In the event either should die during the trust term, leaving issue, his share of the income was to go to his issue; but if no issue, then to the survivor. And upon termination of the trust, the corpus was to be distributed in like manner.
The executors and trustees were authorized to sell or retain all or any part of the testatrix's real or personal estate and make such investments as they should deem best in the interests of the estate and the testamentary trust.
Charles F. Longfellow, Russell G. Cory, and Millard Carnrick (half brother of the petitioner and Alice Carnrick) were appointed executors and trustees under the will. Millard Carnrick was appointed guardian of the petitioner and Alice during their minority.
Included in the property left to the executors and trustees was a residence situated at 185 South Mountain Avenue, Montclair, New Jersey, and occupied by the decedent as her residence to the time of her death. The fair market value of the property at the date of the decedent's death was, and was determined by the Commissioner of Internal Revenue to be, $14,407.50 in respect of the land, and $11,800 in respect of the buildings situated thereon. A reasonable rate of depreciation on the buildings was 2 1/2 per cent a year.
Petitioner was born January 23, 1918, and his sister Alice was born July 10, 1915. Alice died without issue on December 3, 1937.
The executors and trustees named in the will of the decedent duly took possession of the property placed in trust, including the residence property at 185 South Mountain Avenue, and administered the same.
During the administration of the estate the executors permitted the minors, petitioner and his sister, to occupy the decedent's residence. The property was maintained by a caretaker when petitioner and Alice were away in school, and they returned to the residence during vacations.
Beginning May 1, 1936, and continuing through December 31, 1937, the trustees collected rent from the guardian, Millard Carnrick, at the rate of $150 a month for the children's use of the residence. When Alice attained her majority, she paid her half of the monthly rental individually.
After Alice's death, petitioner went to live with his guardian and removed his personal belongings from the residence at 185 South Mountain Avenue in January 1938. At no time since then has petitioner occupied the property. The rest of the household furniture was placed in storage, and the trustees listed the property with real estate brokers for rent or sale.
Upon reaching his majority on January 23, 1939, petitioner became entitled to the property and actively undertook to rent or sell it. He had the house painted and listed the property with several real estate brokers. At first he offered to rent it for $125 a month and later for as little as $80, but was unsuccessful in obtaining a tenant.
On May 15, 1941, petitioner sold the property for $6,500, of which $3,500 was allocable to the land and $3,000 to the improvements. In his return for the taxable year petitioner claimed a long term capital loss on the land and an ordinary loss on the buildings, both of which the respondent disallowed.
On February 28, 1944, petitioner, then a member of the military forces of the United States, embarked for the United Kingdom in the European theater of operations, arriving there on March 14, 1944. He was continuously absent from the Americas from that time to January 25, 1945, on which date, pursuant to orders, he embarked from the European theatre of operations, arriving in the United States February 9, 1945. On February 15, 1945, he notified the Commissioner of Internal Revenue of his return. On or about March 25, 1945, he was regularly discharged from the military forces of the United States.
OPINION.
ARUNDELL, Judge:
We first address ourselves to petitioner's contention that the notice of deficiency was not mailed within the prescribed time. Since the petitioner's return was filed on March 16, 1942, the statute of limitations would ordinarily have expired on March 16, 1945. However, by reason of section 3804(a) of the Code,
the statute was tolled when petitioner embarked for the United Kingdom in February 1944, after the statute had run for less than two years. Under the provisions of that section, the period of time during which petitioner was continuously outside the Americas, and the next 90 days thereafter, are to be disregarded in determining whether the respondent sent the notice of deficiency within the prescribed time. Petitioner returned to this country in February 1945. Thereafter, the statute of limitations still had more than a year to run. Notice of deficiency was sent in August 1945, and so there can be no question but that its mailing was timely. We therefore pass to a consideration of the case on its merits.
SEC. 3804. TIME FOR PERFORMING CERTAIN ACTS POSTPONED BY REASON OF WAR.(a) INDIVIDUALS.— The period of time after December 6, 1941, during which an individual is continuously outside the Americas (if such period is longer than ninety days), and the next ninety days thereafter, shall be disregarded in determining, under the internal revenue laws, in respect of any tax liability (including any interest, penalty, additional amount, or addition to the tax) of such individual—(1) Whether any of the following acts was performed within the time prescribed therefor:(H) giving or making any notice or demand, for the payment of any tax, or with respect to any liability to the United States in respect of any tax.
Respondent denied any loss deduction to the petitioner on the sale of the property at 185 South Mountain Avenue on the ground that the claimed losses were not incurred in a transaction entered into for profit. In Estelle G. Marx, 5 T.C. 173, we said that the fact that property is acquired by inheritance is, by itself, neutral. The important inquiry is what the taxpayer thereafter does with the property. We pointed out in Marx the distinction between inherited property and cases where property had been used for residential or other personal purposes by the taxpayer, such as in Morgan v. Commissioner, 76 Fed.(2d) 390, and where a change of intention must therefore affirmatively appear.
In N. Stuart Campbell, 5 T.C. 272, the taxpayer inherited from his father in 1934 a house and land which the father had occupied as a residence until his death. As soon as possible the taxpayer listed the property for rent or sale. He was unsuccessful in obtaining a tenant and sold the property in 1941 at a loss. We held that he was entitled to deduct the loss on the house as an ordinary loss and the loss on the land as a capital loss. The principal difference between that case and this one is that here the petitioner was a minor when his mother died and the property in question was left in a testamentary trust.
The respondent's position appears to be that, because the petitioner occupied the residence after his mother's death and during a part of his minority, there was a dedication to personal use, and that the mere listing for rent or sale thereafter is not sufficient to work a conversion to business use. It is clear, however, that the petitioner never occupied the residence as an owner, but at best as a tenant. The residence property was a part of the testamentary trust provided for in his mother's will. Title to the property was in the trustees so long as the trust continued, that is, until petitioner attained his majority. The use and disposition thereof were absolutely in the discretion and control of the trustees. Neither petitioner nor his guardian, as such, had any power to control the use to which it was put. The trustees were under obligation to manage this property, together with all the other property in the trust, and make it productive. Doubtless that was what prompted the trustees to charge rent for the occupancy of the property. They had full power to sell the property and reinvest the proceeds. Had they decided to sell it on the day before petitioner reached 21, he would have been powerless to stop them.
It is thus apparent that the earliest point in time that the petitioner had any power to determine to what use the property should be put was the day he attained his majority, the trust terminated by its own terms, and he became entitled to possession of the trust corpus as then constituted. His decision was to put it to productive rather than to a personal use. He had not occupied the property for at least a year prior to that time.
So viewed, we think the instant case falls within the rationale of the Marx and Campbell cases, supra. The fact that here the petitioner was a minor at the time of his mother's decease and the property was held in trust during his minority should not give rise to a different result. Cf. I.T. 3776, 1946-1 C.B. 65, holding that a remainderman who inherited property in 1935, subject to a life estate, was entitled to deduct a loss upon its sale in 1940 after the life tenant's death, where he had listed it for sale immediately after the life tenant died and he became entitled to possession. We accordingly hold that petitioner is entitled to deduct the losses he sustained.
There remains the question of petitioner's basis. Since the property was acquired by bequest, devise, or inheritance, we think his unadjusted basis must be taken as the fair market value at the date of the decedent's death, notwithstanding that his interest was contingent until he reached majority. Malcolm Clifton Davenport, 6 T.C. 62; Helvering v. Reynolds, 313 U.S. 428. His basis on the building, of course, must be adjusted for depreciation at the rate of 2 1/2 per cent a year from the date of the decedent's death to the time of sale.
Relying on Leland Hazard, 7 T.C. 372, petitioner contends that the loss on both the land and the building was an ordinary loss. That case, however, involved a sale in the year 1943, after Congress had changed the law in 1942 to remove teal property used in a trade or business from the category of capital assets. The sale here took place in 1941 before the law was changed, and, therefore, as in N. Stuart Campbell, supra, it is held that the loss on the building was ordinary and that on the land was a capital loss.
Reviewed by the Court.
Decision will be entered under Rule 50.