Croker v. Commissioner , 12 B.T.A. 408 ( 1928 )

RICHARD CROKER, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Croker v. Commissioner

Docket No. 6096.

United States Board of Tax Appeals

12 B.T.A. 408; 1928 BTA LEXIS 3538;

June 6, 1928, Promulgated

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">*3538 1. Where real property is purchased in 1906 for the purpose of resale at a profit the petitioner is entitled to deduct a loss sustained by him in 1920 resulting from the sale thereof.

2. The petitioner is entitled to deduct lawyers' fees paid in 1920 and 1921 for the conduct of litigation against his father growing out of their business relationship.

Meyer Epstein, C.P.A., for the petitioner.

S. S. Faulkner, Esq., for the respondent.

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MORRIS

">*408 This proceeding is for the redetermination of deficiencies in income tax amounting to $10,472.75 and $1,078.72 for the calendar years 1920 and 1921, respectively.

The allegations of error upon which the parties have joined issue are:

(1) The action of the respondent in disallowing as a deduction in 1920 the sum of $46,381.66, representing a loss resulting from the sale of real property, on the ground that said property was purchased for a country home, and

(2) The action of the respondent in disallowing as a deduction in 1920 and 1921 legal expenses paid in those years amounting to $13,397.10 and $6,074.64, respectively, on the ground that they were personal expenditures.

FINDINGS OF">*3539 FACT.

The petitioner is an individual engaged in the real estate and general investment business in New York City.

In 1906 the petitioner purchased two contiguous parcels of land, known as "Port Chester" property, located in Rye, Westchester County, N.Y., one which comprised about 28 acres and the other about 60 acres, for which he paid $127,500. The first parcel purchased, consisting of 28 acres, situated on Ridge Street, had a dwelling house of 16 rooms and 5 baths and several outbuildings, such as stables and barns, etc. The dwelling, which was of frame construction, was built in 1902 and was very heavily lined with brick. The outbuildings were erected about the same time, and they, too, were of frame construction. The second parcel purchased, the 60-acre tract, had an old farm house thereon, not in as good condition as the dwelling on the Ridge Street parcel, which had been built 40 or more years prior to the acquisition thereof by the petitioner in 1906, and also several outbuildings, all of which were of frame construction. Outside of the property immediately surrounding these buildings, ">*409 approximately three or four acres, all of the land was unimproved">*3540 and in a dilapidated condition.

Both of the foregoing tracts of land and the houses thereon were acquired by the petitioner for resale at a profit, without any intention of living there himself, nor did he or his family ever thereafter occupy the premises except for very short periods of time, varying from one day to three weeks, during the time when it was found necessary to remain on the premises to supervise the improvements then in progress.

Immediately upon acquisition of these properties the petitioner listed them for sale with real estate brokers and they remained so listed until finally sold in 1920, and in order to make them more attractive to prospective buyers he contracted to have certain improvements made thereon. A swampy area of the land was drained at a cost of about $15,000; the land was cleared of tree stumps and stones, etc., and fences were replaced at a cost of about $10,000; an old barn was rebuilt at a cost of $7,500 and a large storage barn was erected at a cost of $5,000; the windmill supplying water for the premises was replaced at a cost of $5,000, making the total expenditures for improvements $42,500, $9,500 of which amount was expended subsequent">*3541 to March 1, 1913. Between the date of acquisition and March 1, 1913, the petitioner paid taxes on the premises of about $5,000 and $7,000 on a mortgage indebtedness against the property.

The value per acre at March 1, 1913, of the entire 88-acre tract was $1,500, or a total value of $132,000, and the buildings had a value at that date of $60,000, making the total March, 1, 1913, value $192,000. The life of the buildings from March 1, 1913, was 33 1/3 years.

The property was sold in 1920 for $135,000, and the petitioner claimed a loss of $46,381.66 in his tax return for that year which was disallowed by the respondent.

Beginning with 1905 the petitioner spent his summers in Ireland with his father, except in 1912, and he has at all times maintained a residence in New York City.

Up to 1916 the petitioner acted as an agent for his father. In 1919 he, through the law firm of McCombs & Ryan, instituted action against his father for $150,000 for moneys advanced, in which action a counter claim was interposed for a general accounting of the plaintiff's agency and to compel the reconveyance of a certain warehouse owned by the defendant which was held by and in the name of the">*3542 plaintiff as security for said advances, in which it was alleged that the plaintiff had acted as general agent, and as attorney in fact, for his father, extending over a long period of time, and that the plaintiff had handled various properties and stocks and money purporting to belong to the defendant. The case was referred to a referee, before whom a number of hearings were held; the matter was briefed by ">*410 counsel for both parties, and the referee rendered a report and decision in favor of the plaintiff on practically all issues, which report and decision were confirmed by the presiding justice of the special term substantially as rendered by the referee, except that he disallowed a claim of the plaintiff for interest on advances to his father for a certain period of time, and also a small item based on a claim for services rendered in connection with the warehouse managed by the plaintiff. Thereafter an appeal was taken by the defendant, based on the judgment as rendered against him, and the plaintiff also appealed from so much of the court's decision which disallowed the interest referred to and compensation for services in connection with the management of the warehouse">*3543 property. The appellate division of the court modified the judgment by sustaining the judgment rendered below in favor of the plaintiff and in addition allowed the interest contended for, which was allowed by the referee but denied by the lower court on review.

The petitioner and his father kept a joint safe-deposit box in which certain securities belonging to each of them were lodged. At the time their securities were taken from the safe-deposit box and separated in 1916, certain Westinghouse and Wabash stocks belonging to the petitioner were taken therefrom and delivered to his father through mistake. An action was brought by the petitioner against his father for the recovery of the Westinghouse stock, which resulted in the return of that stock to him. An action was also instituted to recover the Wabash stock, to which an answer was filed by the defendant, and a trial was had. During the course of the trial the defendant conceded that the value of the stock belonged to the plaintiff, and it was stipulated in the action that the value thereof should be credited to the plaintiff in the accounting action hereinbefore referred to.

In connection with the foregoing litigation, ">*3544 the petitioner paid the firm of McCombs & Ryan, attorneys, in 1920 fees of $13,397.10 and in 1921 of $6,074.64.

The foregoing actions, brought by the petitioner, were not mere personal transactions growing out of the relationship of father and son, but were transactions entered into in the ordinary course of the business in which the petitioner was engaged for the account of his father.

The petitioner included in his income-tax return for 1923 the interest allowed on advances and the amounts recovered representing compensation for management of his father's warehouse property.

In computing the net income of the petitioner for 1920 and 1921 the respondent disallowed the sums of $13,397.10 and $6,074.64, respectively, representing amounts which the petitioner spent for legal ">*411 expenses during those two years in connection with the foregoing litigation.

OPINION.

MORRIS: The first allegation of error urged by the petitioner relates to the respondent's disallowance of a loss claimed by the petitioner in the computation of net income for 1920 growing out of the sale of real property in that year. The ground upon which the respondent disallowed the loss claimed is">*3545 that it was sustained through the purchase and sale of property bought and used for residential purposes and not primarily for profit.

The uncontradicted evidence in support of the petitioner's contention shows that he acquired the property in question not with the intention of establishing his home thereon but for the purpose of ultimate resale at a profit; that he never at any time used the property as a country home or residence except as he found it necessary to remain on the premises in order to supervise and direct the work of improvements in progress; that he spent his summers, with the exception of 1912, in Ireland with his father; that during all of these years he maintained a home in New York City; that immediately upon the purchase of the property he listed it with brokers for sale, refusing to rent only because he wished to have the property free and clear at all times in the event of a possible sale.

We are, therefore, of the opinion that this property was not purchased for the petitioner's country home or residence as contended by the respondent, but for the purpose of resale at a profit, as contemplated in section 214 of the Revenue Act of 1918, and that the petitioner">*3546 is entitled to the loss sustained on the sale in 1920. As the original cost of the property, namely $127,500, plus the capital expenditures of $33,000 to March 1, 1913, was less than the fair market value on that date, the cost should be used in computing the amount of the loss. To the cost of $160,500 should be added the capital expenditure of $9,500 subsequent to March 1, 1913. Allowable depreciation on the buildings from March 1, 1913, to the date of sale should also be taken into consideration in determining the amount of the loss. . Of the total cost of improvements of $42,500, $17,500 is allocable to the buildings.

The second allegation of error herein relates to the respondent's disallowance of deductions claimed by the petitioner in 1920 and 1921 of legal expenses paid by the petitioner in those years. The respondent contends that these expenses are of a personal nature, not incurred in the conduct of a trade or business and, therefore, not deductible in the computation of net income.

The evidence shows that the petitioner instituted action against his father for moneys advanced by him for his father while acting in ">*412 ">*3547 the capacity of agent and attorney in fact; that a counter claim was interposed by his father for a general accounting of the petitioner's agency and to compel the reconveyance of certain warehouse properties held by the petitioner as security for those advances. The matter having been litigated through the courts of the State, the petitioner succeeded in his action in nearly every particular. The evidence further discloses that petitioner and his father maintained a joint safe-deposit box wherein their several securities were lodged, including certain Westinghouse and Wabash stocks belonging to the petitioner, which were taken therefrom through error and delivered to his father; that he instituted actions against his father which resulted in the return of the Westinghouse stock and in the recovery of the value of the Wabash stock which was credited to the petitioner in the accounting action above referred to; that the legal fees here in controversy were paid in the institution of those actions and in the defense of counter claims growing out of them. We are of the opinion that the sums of $13,397.10 and $6,074.64 disbursed in 1920 and 1921, respectively, for legal expenses, are">*3548 expenses paid during the taxable year in carrying on the trade or business of the petitioner, within the meaning of section 214 of the Revenue Acts of 1918 and 1921, and that those amounts should be deducted in the computation of net income for those years.

Judgment will be entered under Rule 50.