1942 BTA LEXIS 628 | B.T.A. | 1942
Lead Opinion
The record in this proceeding discloses a conveyance of a life estate in real estate from petitioner Agnes McEvoy Camden to petitioner Johnson N. Camden, her husband, with remainder to the wife. The respondent urges us to consider it as in effect transferring only a lease and therefore to regard the consideration paid by the husband as prepaid rental upon the lease, taxable as ordinary income to the wife. The petitioners, on the other hand, contend that a life estate was both in form and fact conveyed, that the amount received by the wife for such conveyance was for a capital asset, and that the husband, becoming the owner of such life estate, is entitled to depreciation upon the improvements upon the property. No question is raised as to the consideration paid.
There is nothing irregular about the conveyance, though the property had belonged to the wife, and was conveyed by deed by the wife and husband to a trustee and immediately upon the same day conveyed back to the husband for life, with remainder to the wife. This procedure appears to be required by the law of Kentucky in case of conveyance from husband to wife, and respondent seems to base no contention upon such form of conveyance. The conveyance to the husband with remainder to the wife is not designated as a deed, but it specifically conveys the property for life to the husband and “to the second party, Agnes M. Camden, the remainder in said property after the life estate of J. N. Camden”; and the parties by stipulation refer to both conveyances as deeds. The habendum clause recites, “To Have and to Hold unto the party of the second part, J. N. Camden for life with remainder after said life estate to Agnes M. Camden, her heirs and assigns forever.” The granting clause grants and conveys “the hereinafter described property” and recites its descriptions by metes and bounds. In short, in form there is a plain conveyance of life estate with remainder over. This, the respondent contends, however, amounts to and should be viewed as a leasehold. As reasons for so regarding the conveyance, it is urged that the wife testified that the reason for the execution of the instrument to the trustee and by him to the husband for life, with remainder over to the wife, “was to make Senator Camden independent so that he could do whatever
The respondent cites a number of cases to support his view that for tax purposes we should regard the conveyance as a lease; but we find none of them parallel with the present situation. In none do we find an unequivocal conveyance of a life estate held to convey only a leasehold so that the consideration paid therefor is ordinary income. That a life estate is a capital asset can, we think, hardly be doubted, in the light of the language of section 117 (b) of the Revenue Act of 1936.
It is suggested upon brief also, that petitioner Agnes McEvoy Camden has not properly proved a cost basis for the life estate sold. In the condition in which we find the record, we think there is no real controversy before us in that respect. The petitioner, reporting upon a basis of sale of capital asset, computed a loss of $985.86, by deducting from $58,904, the consideration received for the life estate, the sum of $59,889.86 as the depreciated cost of the life estate, or 32.95 percent of $181,759.82, the depreciated cost of the property. At the hearing it was agreed that there was no argument as to the original cost basis. The Commissioner in determining the deficiency did not disallow the loss claimed, but merely added to income as reported by the petitioner the $58,904 received for the life estate, as representing taxable income, and computed depreciation on improvements of a cost of $99,084.44 (though petitioner Agnes McEvoy Camden had claimed no depreciation deduction.) The petitioner computed the same amount for improvements, and, like the Commissioner, computed depreciation at
We therefore conclude and hold that the Commissioner was in error in adding to the income of petitioner Agnes McEvoy Camden the proceeds of the sale of the life estate.
This leaves for consideration the question as to whether Johnson N. Camden, as owner of the life estate, is entitled to deductions for depreciation. In our opinion, error on the part of the respondent in denying such deductions has not been shown. Assuming, without finding it necessary to decide that the proper and necessary basis for deduction was used by him, we find absence of a fact indispensable to such allowance, that is, that the property was “used in the trade or business” of Johnson N. Camden. The only evidence with reference to the nature of the use of the property is that “We have a residence, and Senator Camden uses it as a horse farm, he raises horses” and that it is equipped for the handling of race horses. Obviously, if this were a case, like many which we have entertained, with reference to whether property was used as a business purpose or a hobby, the language just above quoted would not be sufficient to prove use in trade or business, for it is apparent that the raising of horses or the handling of race horses may be a business or it may be a mere hobby. Though the evidence is that the property was equipped for the handling of race horses, it is not shown that it was so used, or that there was any use in trade or business. We find such evidence insufficient. The petitioner urges, however, that the respondent allowed depreciation to the wife though she had not asked for it, and that therefore the respondent can not logically deny it to the husband. We do not think that such conclusion follows from the fact. In connection with allowing depreciation to the wife the Commissioner was taking the view that she should
We conclude and hold that there was no error in denying claim of depreciation by petitioner Johnson N. Camden.
The above conclusions render the other issues unnecessary of consideration.
Reviewed by the Board.
Decision will be entered under Rule 50.
SEC. 117. CAPITAL GAINS AND LOSSES.
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(b) Definition of Capital Assets. — For the purposes of this title, “capital assets” means property held by the taxpayer (whether or not connected with his trade or busitiess), but does not include 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.