Opinion
Docket Nos. 11867 11868.
1948-07-28
HELEN D. EMMET, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.H. L. R. EMMET, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
W. Pitt Gifford, Esq., and Frederick F. Jones, Esq., for the petitioners. Stanley W. Herzfeld, Esq., for the respondent.
Upon the record, held, petitioners did not appropriate their former residential property to an income-producing purpose prior to its sale in accordance with section 23(e)(1) of the Internal Revenue Code and section 29.23(e)-1 of Regulations 111 and, therefore, are not entitled to deduct from their income the loss incurred through such sale; held, further, since petitioners failed to establish the adjusted basis of their property at the time it purportedly was converted to an income-producing purpose, they did not prove any deductible loss from the sale of the property. W. Pitt Gifford, Esq., and Frederick F. Jones, Esq., for the petitioners. Stanley W. Herzfeld, Esq., for the respondent.
These proceedings were duly consolidated for hearing. They involve deficiencies in income tax of the petitioners for the year 1943 as follows:
+-----------------------------------------------------------------------------+ ¦ ¦Helen D. ¦H.L.R. ¦ ¦ ¦Emmet ¦Emmet ¦ +----------------------------------------------------+------------+-----------¦ ¦Deficiency disclosed by notice of deficiency ¦$6,625.12 ¦$6,625.12 ¦ +----------------------------------------------------+------------+-----------¦ ¦Assessed (Oct. 1946) subsequent to deficiency notice¦665.38 ¦665.38 ¦ ¦(paid) ¦ ¦ ¦ +----------------------------------------------------+------------+-----------¦ ¦Amount in controversy ¦5,959.74 ¦5,959.74 ¦ +-----------------------------------------------------------------------------+
The deficiencies determined arise from an adjustment by respondent by which petitioners' tax liabilities for 1942 were increased, thereby increasing their tax liabilities, as reported, for 1943, under the provisions of the Current Tax Payment Act of 1943.
The two issues presented are: (1) Whether petitioners' residential property was, prior to its sale, appropriated to an income-producing purpose so that the loss from the sale may be deducted under section 23(e)(1) of the Internal Revenue Code and section 29.23(e)-1 of Regulations 111; and, is so, (2) whether the loss, in the amount claimed by petitioners, or in any amount, was established by the evidence.
Petitioners filed their joint income tax return for the year 1942 and their separate income tax returns for the year 1943 with the collector of internal revenue for the twenty-third district of Pennsylvania at Pittsburgh.
FINDINGS OF FACT.
Such of the facts as were stipulated are accordingly found.
The petitioners are husband and wife and reside at Parker Road, R.F.D. No. 4, Erie, Pennsylvania. In April 1929 they acquired title as tenants by the entirety to the house and lot located at 446 West Sixth Street, Erie, Pennsylvania, for $47,500. After considerable remodeling, which cost $70,000, they used the premises as their personal residence. The petitioners continued in occupancy of this property until May 1940, when they abandoned it as a residence and moved to their present residence. Shortly thereafter petitioner H. L. R. Emmet was approached by a representative of the Erie Chapter of the American Red Cross for the purpose of determining whether it could use the property. Both H. L. R. and Helen Emmet were active in charitable work in Erie during 1940, the former having been president of the local Community Chest for several years and the latter being particularly interested in the activities of the local chapter of Bundles for Britain. An attorney, since deceased, acted on behalf of petitioners in the negotiations leading to the final arrangement with the Red Cross. The latter also was represented during the transactions by a local attorney. The parties agreed that Red Cross could occupy the premises, in return for which it was to keep up the property and to lend its best efforts to secure an abatement of local taxes.
The Red Cross went into occupancy of the property during the second week in May 1940. Shortly thereafter it, through its attorney, took steps to effect an abatement of local taxes on the property. The attorney appeared before the commissioners of Erie County, the Erie city council, and the board of the school district of the city of Erie. The commissioners and the city council agreed, effective June 1, 1940, to the exemption of taxes on the property for the period during which it was occupied by the local chapter of the American Red Cross. The school board, however, refused to grant any exemption of taxes.
In August 1940 Bundles for Britain, a nonprofit, charitable organization engaged in war work, arranged with the Red Cross to share in the occupancy of the above mentioned property and to pay one-fourth of the maintenance expense.
During the latter part of December 1941 the Red Cross vacated the property and moved to their own building. Bundles for Britain continued in possession until October 1942.
During the time both the Red Cross and Bundles for Britain occupied the premises petitioners benefited from the exemption of city and county taxes as follows:
+-------------------------+ ¦1940 (5 months) ¦$268.93¦ +-----------------+-------¦ ¦1941 ¦622.51 ¦ +-----------------+-------¦ ¦1942 (11 months) ¦570.61 ¦ +-------------------------+
During the time of its occupancy the Red Cross paid out the following amounts for the items indicated:
+-----------------------+ ¦Heat and light ¦$510.73¦ +---------------+-------¦ ¦Telephone ¦94.44 ¦ +---------------+-------¦ ¦Water rent ¦14.28 ¦ +---------------+-------¦ ¦Repairs ¦148.04 ¦ +---------------+-------¦ ¦Cleaning ¦229.57 ¦ +---------------+-------¦ ¦Total ¦997.06 ¦ +-----------------------+
The Red Cross was reimbursed in the sum of $204.14 by Bundles for Britain in accordance with the above mentioned agreement.
During the time it occupied the premises alone Bundles for Britain paid out the following amounts for the items indicated:
+-------------------------------+ ¦Heat and light ¦$379.55¦ +-----------------------+-------¦ ¦Upkeep and maintenance ¦105.00 ¦ +-----------------------+-------¦ ¦Total ¦484.55 ¦ +-------------------------------+
The assessment records for the city of Erie showed the following assessed value of the property:
+-------------------------+ ¦Triennium ¦Assessment ¦ +-----------+-------------¦ ¦1931-32-33 ¦$48,068 ¦ +-----------+-------------¦ ¦1934-35-36 ¦38,630 ¦ +-----------+-------------¦ ¦1937-38-39 ¦32,810 ¦ +-----------+-------------¦ ¦1940-41-42 ¦30,550 ¦ +-------------------------+
In mid-November 1942 petitioners sold the property in question for $12,000. They claimed a net loss from that sale in their joint tax returns for the calendar year 1942 in the amount of $27,702.24, computed as follows:
+-------------------------------------------------------------+ ¦Fair market value, May 1940 ¦ ¦$40,000.00¦ +---------------------------------------+----------+----------¦ ¦Less depreciation allowed and allowable¦ ¦824.40 ¦ +---------------------------------------+----------+----------¦ ¦Adjusted value of property ¦ ¦39,175.60 ¦ +---------------------------------------+----------+----------¦ ¦Sales price of property ¦$12,000.00¦ ¦ +---------------------------------------+----------+----------¦ ¦Less cost of sale ¦526.64 ¦ ¦ +---------------------------------------+----------+----------¦ ¦ ¦ ¦11,473.36 ¦ +---------------------------------------+----------+----------¦ ¦Net loss from sale ¦ ¦27,702.24 ¦ +-------------------------------------------------------------+
In the ‘Explanation of Adjustments‘ attached to the notice of deficiency to petitioner H. L. R. Emmet, respondent stated as follows:
(b) It is determined that the amount of $27,702.24 claimed in the joint return for the year 1942 filed by you and your wife, Helen D. Emmet, as a loss incurred in the sale of residential property which you formerly occupied is not an allowable deduction; (1) since it was not incurred under the provisions of Section 23(e) of the Internal Revenue Code in a trade or business or in connection with a transaction entered into for profit; and (2) since you have failed to establish the amount, if any, of the loss.
The loss, if any, sustained upon the sale of the property, was not incurred in trade or business or in any transaction entered into for profit. The property in question, including the lot and the buildings thereon, had a fair market value of $15,000 in May 1940.
OPINION.
HILL, Judge:
The first question for consideration is whether petitioners appropriated their former residential property to an income-producing purpose prior to its sale. If they did not so convert it, no loss from the sale would be deductible under section 23(e)(1) of the Internal Revenue Code and section 29.23(e)-1 of Regulations 111.
If they did so convert it, such loss as may be determined from the evidence, if any, from the sale of the property is properly deductible for income tax purposes in 1942. Our primary consideration, therefore, is whether the property was converted to an income-producing purpose prior to its sale.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(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; orSEC. 29.23(e)-1 (Regulations 111). LOSSES BY INDIVIDUALS.—* * * 8A loss on the sale of residential property purchased or constructed by the taxpayer for use as his personal residence and so used by him up to the time of the sale is not deductible. If, however, property so purchased or constructed is prior to its sale rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale, a loss from the sale of the property, computed as provided in section 111, is, subject to the limitations provided in section 117, an allowable deduction in an amount not to exceed the excess of the value of the property at the time it was appropriated to income-producing purposes (with proper adjustment for depreciation) over the amount realized from the sale.
There was no agreement between petitioners and either the Red Cross or Bundles for Britain providing for the payment of rent. Petitioners argue, however, that ‘the rental was the promise on the part of the lessee to secure an abatement of the local real estate taxes on the property and to maintain the premises in good repair during occupancy.‘ It is true that the Red Cross was successful in securing an abatement of certain local taxes on the property and that both the Red Cross and Bundles for Britain expended money for its maintenance and upkeep. From the record, however, we think petitioners' motive in permitting those organizations to occupy the property was associated with charity rather than with production of income. Both H. L. R. and Helen were actively interested in charitable work, the latter being particularly concerned with Bundles for Britain. The repairs made on the premises were exclusively for the benefit of the Red Cross and Bundles for Britain.
Abatement of taxes is not income and the amount thereof is not taxable unless it represents a refund of taxes previously paid and deducted for income tax purposes. The aphorism that ‘a penny saved is a penny earned‘ has no significance taxwise. There is no proof in the record that either of the petitioners ever treated the taxes saved or the expenditures made for maintenance and upkeep by organizations as income in their tax returns. This fact is convincing proof that they did not consider such items as rent or intend the arrangement with Red Cross and Bundles for Britain to be an appropriation of their former residential property to an income-producing purpose. We stated in Maurice P. O'Meara, 8 T.C. 622, 633, ‘A taxpayer may not take a loss in connection with an income item unless it has been previously taken up as income in an appropriate tax return.‘ See also cases therein cited.
In view of the above, we are of opinion that, although the arrangement made by petitioners providing for the use of their former home by the above mentioned organizations was a commendable one, the property was not converted to an income-producing purpose prior to its sale. Petitioners may not, therefore, deduct any loss resulting from such sale. See Mertens, Law of Federal Income Taxation, section 28.78, and cases cited.
The loss claimed by petitioners is not deductible for another reason. We believe petitioners have failed to prove that the fair market value of the property was $40,000 in May 1940. Petitioners' expert witness stated that he would ‘like‘ to place the fair market value of that property in May 1940 in a range of between $25,000 and $30,000. He gave none of the underlying facts upon which such valuation was based. His estimated fair market value apparently was based primarily upon the city of Erie's assessed valuation of the property for the triennium 1940 through 1942. He failed to testify, however, with respect to the basis for such assessed valuation. In Mertens, Law of Federal Income Taxation, section 59.85, it is stated:
If there is no showing as to the basis of the assessment, that is, if the ratio between market value and assessed value is not proved, no attention will be paid to the tax assessments. Of course, if it is shown affirmatively that the assessed valuation bears little relation to market value because the assessment is based on cost of reproduction, or for any other reason, the evidence is considered of slight importance.
Respondent's expert of some 21 years experience in local real estate business testified that in his opinion there was little relation between the city's assessed valuation and the fair market value of the property. He further stated that in his opinion the property's fair market value at the time it was first occupied by Red Cross was $15,000. In reaching his conclusion he checked transactions involving similar and other property in the area of petitioners' former residence, he studied trends in the neighborhood, he inspected neighboring dwellings, and he considered the operating costs of petitioners' property. In Mertens, supra, section 59.04 (vol. 10, pp. 445, 446), it is stated:
A common fallacy in offering opinion evidence is to assume that the opinion is more important than the facts. To have any persuasive force, the opinion should be expressed by a person qualified in background, experience, intelligence, familiarity with the property, and with the valuation problem involved. It should also refer to all the underlying facts upon which an intelligent judgment of valuation should be based. The facts must corroborate the opinion; otherwise, the opinion will be discounted. * * *
In view of the above, we hold that the fair market value of the property in May 1940 was $15,000.
Petitioners, moreover, neither introduced evidence of the useful life of such property nor proved the value allocable to the buildings at the time the Red Cross went into occupancy. Petitioners mentioned these points for the first time in their reply brief, but their arguments there fall far short of overcoming the lack of proof on these points in the record.
Section 29.23(e)-1 of Regulations 111 provides that:
* * * a loss from the sale of the property, computed as provided in section 111, is, subject to the limitations provided in section 117, an allowable deduction in an amount not to exceed the excess of the value of the property at the time it was appropriated to income-producing purposes (with proper adjustment for depreciation) over the amount realized from the sale.
Without evidence of the useful life and the allocable value of the buildings it is impossible to make a proper adjustment for depreciation, which, in accordance with the regulations, is prerequisite to determining the adjusted value of property at the time it is appropriated to an income-producing purpose.
Since we do not know the adjusted value of petitioners' property at the time the Red Cross first went into occupancy, we have no basis upon which to determine the amount of the loss from the sale of such property. Hence, we hold that petitioners have failed to establish that they incurred any deductible loss when they sold the property in question.
It follows that respondent did not err in his determination.
Decisions will be entered for respondent.