Moses v. Commissioner

*226 The Commissioner determined a deficiency of $1,534.94 in the petitioner's income tax for the year 1925. The petitioner alleges that the Commissioner erred in disallowing a deduction of $27,249.42 representing a loss from the sale of a property which he once used as a residence.

FINDINGS OF FACT.

The petitioner has been a resident of Washington, D.C., since 1861. In that year his father, W. B. Moses, opened a furniture store at Seventh and Market Space. The business grew and the store was moved to Eleventh and F Streets in 1884. W. B. Moses acquired additional property from time to time. He died in 1892.

The petitioner had always been connected with his father's business in Washington, was a member of the firm, and had almost complete control of the business prior to his father's death. He was active in the management of the firm of W. B. Moses & Sons until his retirement a few years prior to the hearing in this case. *1896 During all of these years it was convenient and desirable for the petitioner to live in Washington. Prior to 1895 he had lived for a number of years at 1759 P Street. This was a row house about 18 1/2 feet wide, consisting of three stories and a basement, on a lot 90 feet deep. The house contained 10 or 12 rooms.

In 1894 the petitioner purchased a vacant lot on Wyoming Avenue between Connecticut Avenue and Twenty-Third Street for $22,250. It had a frontage of 100 feet on Wyoming Avenue and extended back a distance of 162 1/2 feet. The petitioner believed that the locality in which this lot was situated would ultimately become a fine residential section of the city. He engaged an architect with whom he and his wife discussed the plans for a house. The architect designed a house according to the desires of his clients. The house was of brick and frame construction, 34 feet wide, three stories high and contained about 16 rooms and several baths. The construction of the house was started in 1894 and completed in 1895 at a total cost of $35,000. In the meantime, the house on P Street had been put up for sale. The petitioner and his family moved into *227 the new house*1897 in 1895, and, except for certain periods hereinafter mentioned, occupied it as their residence until some time in 1923 or 1924. When the petitioner moved into the new house, his family consisted of his wife and one son. An older son had died before the family moved into the new house.

Between 1895 and March 1, 1913, at dates undisclosed by the record, the petitioner expended the following amounts in connection with the property:

At some undisclosed date after March 1, 1913, the petitioner installed a bathroom on the third floor of the house at a cost of $750.

The petitioner told several real estate dealers in 1905 that he would accept an offer of $100,000 for this property. He placed a sign on the property in 1910 stating that it was for sale and he listed it with a real estate dealer in 1911. The house was closed at some time between 1911 and 1916 for a period undisclosed by the record. This closing was due to*1898 the fact that the petitioner's wife was ill. Later she was operated on and thereafter she, her mother, her son and her son's family were occupants of the house. It was rented for a part of the year 1916 and for all of the years 1917 and 1918. The son was a Naval officer and during the war he was in Europe. Later, while stationed at Washington, he and his family lived in the petitioner's house. Thereafter, he resigned from the Navy and went into the firm of W. B. Moses & Sons. About 1922 he acquired a house of his own in Washington and moved from the petitioner's house.

In 1923 or 1924 the petitioner's wife, who was then the sole resident of the house, decided that she would no longer occupy it as her residence. She thereupon moved out of the house and some of the furnishings of the petitioner's house were removed. Much of the furniture had been especially selected for the house and was so large that it was not adaptable for use elsewhere.

In January, 1925, the petitioner sold the property for $50,000. In his return for that year he claimed a loss of $27,249.42 on account of the sale of this property. The loss claimed on the return was stated to be the difference between*1899 $75,500, representing the value of the property on March 1, 1913, and $48,250.58, the net amount received from the sale. On this return the cost of the property was shown as $65,500. The Commissioner disallowed the deduction.

*228 On his income-tax return for 1917 the petitioner reported $1,569 as rent from this property and deducted $1,000 for repairs and $500 as depreciation at the rate of 2 per cent on a cost of $25,000. On his income-tax return for 1918 he reported $4,734 as rent from this property and deducted $1,525 for repairs.

For 1913 and 1923 the property was assessed as follows:

OPINION.

MURDOCK: The petitioner in this case has attempted to support his claim for a deduction, under section 214(a)(5) of the Revenue Act of 1924, representing a loss sustained during the taxable year in a transaction entered into for profit. He has not made clear just how much of a loss he claims to have sustained, just how it should be computed, or when the alleged transaction for profit was entered into. If his claim is that he originally purchased the lot and built the house*1900 as a transaction entered into for profit, it is not supported by the evidence. Cf. ; . It is probably true that when the petitioner acquired the lot and built the house, he hoped or expected to make a profit when and if he should sell it. Almost everyone who acquires a home has such a hope and expectation, but still such transactions are not the kind contemplated by the above mentioned section. In the meantime, he intended to occupy it as a home and he or his family did occupy it as a home for many years until the family was separated. The property was rented for several years, but thereafter it was again occupied by the petitioner's family for a number of years, and he does not claim that this renting initiated the transaction for profit from which the loss resulted. After some time in 1923 or 1924 the house was no longer occupied by any member of the petitioner's family. Some of the furnishings were moved out, others which had been especially selected for the house and for which it would be difficult to find use elsewhere, were left in the house. Thereafter, it was never rented by*1901 the petitioner but was sold in 1925. In , we said:

The use of property to produce revenue is there [ characterized as a transaction entered into for profit. Until there was some appropriation of the property to rental purposes, it still maintained its character as a residence, rather than a business property.

In the present case there was no appropriation of the property to rental purposes between the time the petitioner finally moved out *229 of the house and the time when it was sold. We do not know that he even offered the property for rent during this period. Cf. .

Thus, the petitioner has failed to show that the loss was incurred in a transaction entered into for profit. Indeed, although it is unnecessary to do so, the case might be stated more strongly against the petitioner because the evidence indicates that the loss resulted not from a transaction entered into for profit, but from the fact that the petitioner expended considerable money on a house to suit his own purposes and convenience, and after*1902 living in the house until he no longer had any use for it, found that he was unable to sell it for what he had invested in it. The revenue act allows him no deduction to offset the amount which he paid for this purpose.

If, however, the petitioner had shown that he had entered into a transaction for profit, we would still be unable to determine the amount of his loss. The basis for the loss would have to be adjusted for any expenditure properly chargeable to capital account, and for any item of loss, exhaustion, wear and tear, obsolescence, amortization, or depletion, previously allowed with respect to such property. The petitioner has failed to furnish us facts from which these adjustments could be properly made. He contends that under section 204(b) the basis for determining the loss should be the cost or fair market value of the property as of March 1, 1913, whichever is greater, since he acquired the property before March 1, 1913. , was decided under a different revenue act, which allowed a loss based on the lower of these two values, and in that case it was held that the value of the property at the time it was converted to profitable*1903 purposes was important in determining the amount of the loss. If other obstacles were removed in this case we would still have to decide whether or not the precise language of section 204(b) would apply in this case, or whether the basis for the petitioner's loss would be the value of the property at the time that the alleged transaction for profit was entered into.

Judgment will be entered for the respondent.