1926 BTA LEXIS 2508 | B.T.A. | 1926
Lead Opinion
In this appeal the Commissioner has disallowed a deduction of a loss resulting from the sale of real property, solely upon the ground that it was originally acquired for residential purposes and that the acquisition was not a transaction originally entered into for profit. Section 214 (a) (4) (5) of the Revenue Act of 1918 provides:
Sec! 214. (a) That in computing net income there shall be allowed as deductions:
⅜ * * ⅜ ⅜ * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; ⅜ ⅞ *. [Italics ours.]
It is undisputed that since 1910 the property was abandoned as a residence by the taxpayer, she having removed with her husband to New York, and that the property was rented and leased to various parties and was always on the market for sale until 1920, at which time it was sold for a gross sum of $50,000. The evidence is also clear that the property was transferred to the taxpayer by her father as an inducement for her to remain in Philadelphia and be near him, as he was old, in ill health, and a widower. The evidence is also convincing that the taxpayer and her husband intended to live in Philadelphia only so long as the father lived, and that, in selecting the property, they had in mind its future sale at a profit. This is borne out by the fact that they remodeled the house to make it adaptable for professional or other office use, as well as a residence; that is, in such a manner that a doctor, architect, or other professional man could use it as a combination office and residence. They also selected it within a developing business district and within a few blocks of the City Hall, towards which business and professional buildings were moving. The contention of the taxpayer is further substantiated by the fact that, as soon as the father died, they promptly carried out their original intention and moved from Philadelphia to New York put the house on the market, and received a revenue from it until September 1,1920, when it was sold to a doctor.
We are of the opinion that a predominating factor in the selection of the premises was the prospect of future profit, either from the sale or the conversion into business property. There was a definite course of action directed toward that end. The expectation of profit was the prevailing factor in the final selection and mode of construction of the particular building. We are of the opinion that this
The proper basis for ascertaining the loss should be the March 1, 1913, value, since the value on that date was lower than the cost, United States v. Flannery, 268 U. S. 98, the total cost being $86,019.83 and the March 1, 1913, value having been found to be $60,000. So, also, since the property was held subsequently as a business property, the March 1,1913, value must be depreciated, whether the taxpayer claimed a deduction for such depreciation in prior income-tax returns or not. Appeal of Even Realty Co., 1 B. T. A. 355; Appeal of Esther Firestone, 2 B. T. A. 309. We have found a reasonable rate of depreciation to be 2 per cent. Applying this rate to the value of the building for the period March 1, 1913, to September 1, 1920, we get a total depreciation of $4,800, leaving a net basis of computing a loss at $55,200. Summarizing the transaction, the resulting loss is as follows:
March 1, 1913, value_$60, 000
Less depreciation_•_ 4, 800
Net value- 55,200
Net sale price_ 48, 700
Loss sustained_ 6, 500
Order of redetermination will be entered on 15 days’ notice, under Rule 50.