Gordon v. Commissioner , 46 B.T.A. 1201 ( 1942 )

ALICE V. GORDON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Gordon v. Commissioner

Docket No. 103900.

United States Board of Tax Appeals

46 B.T.A. 1201; 1942 BTA LEXIS 761;

May 20, 1942, Promulgated

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Petitioner whose interests in real property bacame worthless in 1937 held entitled to deduct the amount of the loss notwithstanding that she retained legal title throughout the year.

Watson Washburn, Esq., and Royal E. Mygatt, Esq., for the petitioner.

Charles D. Leist, Esq., for the respondent.

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OPPER

Respondent has determined against petitioner a deficiency in her 1937 income tax of $3,903.47, all of which except an item resulting in a tax of 60 cents is challenged by petitioner. By amended petition claim is made for a refund of $39.56.

The issues presented are (1) whether petitioner is entitled to a loss deduction from gross income in 1937 arising out of the alleged loss of her undivided interest in certain real property located in Pittsburgh, Pennsylvania, and (2) whether petitioner is entitled to any further deduction by reason of a one-twentieth undivided remainder interest in the property.

The case was presented by stipulated facts and evidence adduced at the hearing. Those facts hereinafter appearing which are not from the stipulation are facts otherwise found from the record.

FINDINGS OF FACT.

The stipulated facts are hereby found.

On March 15, 1938, petitioner filed her Federal income tax return for 1937 on the cash receipts and disbursements basis with the collector of internal revenue for the district of Maryland.

Upon the death of her father, petitioner, pursuant to the terms of the will of her grandfather, who died in 1899, obtained title to an undivided one-fifth interest in certain real property located in Pittsburgh, Pennsylvania, and known as the Imperial Power Building. Petitioner continued to hold legal title to such undivided share in 1937. During that year another undivided one-fifth interest in the property was held by Peoples-Pittsburgh Trust Co. as sole surviving trustee under the will of petitioner's grandfather for the benefit of Maggie F. Murphy, who was 74 years of age on May 16, 1938, widowed, and without issue. In 1937 petitioner had a one-fourth vested remainder interest in the one-fifth undivided interest in the Imperial Power Building held by the trustee for Maggie F. Murphy. Petitioner was born February 3, 1899.

The land underlying the Imperial Power Building had a fair market value in 1899 of $67,500 and petitioner's undivided interest in fee in such land had a fair market value of $13,500. This is petitioner's 1937 basis for gain or loss. The basis of her undivided onetwentieth remainder interest in 1937 was $2,322.23.

Imperial Power Building was managed by the Peoples-Pittsburgh Trust Co. or its corporate predecessor from 1899 until September 10, 1940, both in the capacity of trustee for the beneficiary of the trust and agent for the coowners. The trust company acted as petitioner's agent at least until the latter part of 1937, and as agent for the other interested parties until September 10, 1940. Petitioner maintained with the Peoples-Pittsburgh Trust Co. an account to which from time to time was credited or debited, as the case may be, her share of the net profit or loss (upon a cash basis) incident to the management and operation of the Imperial Power Building. On January 1, 1937, this account disclosed an overdraft of $2,118.05. On December 4, 1937, by reason of current entries the overdraft had been reduced to $1,756.39.

The operation of the property on a cash receipts and disbursements basis without considering any allowance for depreciation, during the period from 1933 to 1937 resulted as follows:

Year	Receipts	Disbursements	Net profit or loss
1933	$12,397.22	$19,135.37	-$6,738.15
1934	20,499.08	19,670.47	828.61
1935	13,309.06	18,158.01	-4,848.95
1936	15,622.00	17,685.38	-2,063.38
1937	18,294.45	16,958.43	1,336.02
	80,121.81	91,607.66	-11,485.85

The cash disbursements shown above included pay roll expenditures for 1933 of $8,452.53; for 1934 of $8,254.13; for 1935 of $7,616.50; for 1936 of $6,794.51; and for 1937 of $6,067.74. There were no pay roll expenditures after November 8, 1937. The pay roll expenditure for the month of August 1937 was $544.49.

Petitioner's share of the net profit or loss computed upon a cash basis was as follows:

Year	Net profit or (loss)
1933	($1,347.63)
1934	165.72
1935	(969.79)
1936	(412.66)
1937	267.21)
	(2,297.15)

From 1933 to the latter part of 1937, about 50 percent of the rentable space was vacant notwithstanding diligent efforts on the part of the managing agent to obtain tenants. During this period some of the tenants became delinquent in their rent and on March 1, 1937, these delinquencies amounted to $13,006.12. During 1937 approximately $4,000 thereof was collected and is reflected in the cash receipts above indicated for 1937.

Annual taxes were assessed against the property by the city and school district of Pittsburgh, and by Allegheny County. Taxes were paid up to and including the first quarter of 1933, after which they were allowed to become delinquent. The delinquent and unpaid taxes, together with penalty and interest as of December 31, 1936, were $30,171.85; as of September 11, 1937, $38,238.90; and as of December 31, 1937, $38,730.99.

Petitioner, except for occasional visits, was absent from the United States from 1936 to 1938, inclusive. During this time she was a resident of either Haiti or The Netherlands. While absent from this country she placed her business interests under the supervision of Halsey Malone, an attorney of New York, New York, now deceased.

Early in 1936, in light of recurring losses from the operation of the Imperial Power Building property, petitioner instructed Malone to make an effort to secure an offer for the purchase of her one-fifth interest in the property. At such time petitioner hoped, in view of an encouraging valuation of $150,000 placed upon the property by the Peoples-Pittsburgh Trust Co., to get some substantial amount for her interest. In view of this authorization Malone contacted without success, two of the other coowners of the property with a view of interesting them in the purchase of petitioner's interest.

Later in 1936 and in the early part of 1937, petitioner continued her efforts to dispose of her one-fifth interest in the property. With a view of determining a proper price therefor, she directed Halsey Malone to secure an appraisal of the property by one John M. Anderson, and to visit Pittsburgh and investigate the present and future prospects of the property. By letter dated March 6, 1937, Malone submitted his report with respect to the property.

His report showed that he had made a detailed inspection of the property, including the land, building, and equipment; and stated that by reason of its location it was more exposed to flood conditions than any other building in Pittsburgh; that no flood control work had been done by the Federal Government in the area; that the building was antiquated and outmoded and had no market, except possibly for storage; that it probably would never earn enough to pay its taxes, maintenance, insurance and show a return to its owners; that consideration was given to the possibility of razing the building and making automobile parking space; that this would reduce taxes but so much parking space was available the return would hardly be sufficient to pay the remaining taxes; that there was some doubt whether the building could be razed at no cost to the owners; that it was not suitable for storage because of its inflammable construction and lack of a railroad siding; that its tenants were mostly printers and small manufacturers who were in arrears in their rent; that of about $15,000 rental arrears only about 15 percent was collectible; that an attempt to enforce payment would probable empty the building; that taxes were around $7,000 a year and at the end of 1936 were over $26,000 in arrears, including interest and penalties; that a slight reduction in assessment was obtained in 1937 and there was talk of tax relief legislation for delinquent taxes; that fire insurance premiums were $1,700 a year; that cost of coal for the boilers which operate two freight elevators and one passenger elevator is all of proportion to electric power except that the installation cost of electricity would be great; that the overdraft as of March 1937 amounted to $5,050.88 and had been on a steady increase; that petitioner's share of the overdraft amounted to $2,281.01; that her share of the delinquent taxes approximated $5,400; that Anderson's appraisal valued the land encumbered by the building as $73,000, but not for an immediate sale; that if the building were removed the land would carry a value nearer $100,000, but not for an immediate sale; that for a quick sale the value should be discounted by at least 50 percent; that assuming the correctness of the above premise petitioner's interest in the land would be worth about $10,000, subject to the overdraft and back taxes of $7,600, leaving an equity of $2,400; that the building manager who occupied that position for 30 years was convinced that he could bring the building back and put it on a paying basis; that the building manager inquired what petitioner would take for her interest, and on being informed that Malone would recommend $5,000, thought taht some of the coowners would be interested; that Anderson and Malone thought petitioner should go as low as $3,500; that Malone recommended that petitioner sell her interest for almost anything she could get and failing such sale insist that the building be razed and the land offered immediately for sale.

Petitioner, on receiving Malone's report indicated her agreement with the proposed selling price of $5,000, any sale to be subject, however, to the unpaid taxes, penalties and interest assessed against the property and to be contingent upon the assumption of her liability to the Peoples-Pittsburgh Trust Co. for the amount of her overdraft with respect to the property, such overdraft at that time amounting to $2,281.01. She authorized her agent to accept a bid of as low as $3,500 upon the same conditions, and advised him that consideration would be given by her to an even lower figure than that. She was of the view that in the absence of the disposition of her interest the building should be razed and the land offered for sale by all of the coowners of the property.

In view of petitioner's authorization Malone continued his efforts to dispose of petitioner's interest in the property to Kennedy Brown, R. M. Young, and George Mercer, who were coowners of the property. George Mercer soon indicated that he was not interested in the purchase of petitioner's interest, but negotiations were still being carried on with Brown and Young on August 3, 1937, when petitioner filed in the Orphans' Court of Allegheny County a suit for the partition and sale of the property. The partition suit was instituted in the light of a letter received by petitioner from Peoples-Pittsburgh Trust Co. under date of July 1, 1937. The letter stated that the Trust Co. would not continue to carry the overdraft without arrangements being made to cure it; that there were major repairs which must be made to the building at an early date, including replacement of elevators and perhaps a new steam boiler; that one of the boilers in the building had been condemned by the city; and that if petitioner did not wish to cooperate in the operation of the building the institution of partition proceedings was necessary to correct the situation. Petitioner considered it to be in her interest under Pennsylvania practice and procedure, to be the petitioning party in any such proceeding for the partition and sale of the property; and further desired to insure disposition of the property without incurring any additional liability for the suggested "major repairs." She addressed letters to three of the other coowners of the property on August 6, 1937. In these letters petitioner stated that she would not think of consenting to a proposed expenditure of $25,000 for new elevators in the building and that she felt the property should be sold through court proceedings and that such action should be taken in order to avoid further losses. Petitioner had available throughout the year 1937 at least $20,000 in cash or marketable securities.

During the summer of 1937, after petitioner returned from Haiti and before she went sbroad for an extended period, she had numerous conversations with Malone relative to the Imperial Power Building. At this time Malone told her that the situation was rapidly becoming worse and she told him that she had been very anxious to sell her interest but that now she was going abroad for a long time she wished to leave it in his hands to dispose of and get rid of and finish it completely.

By letter dated September 7, 1937, petitioner was further advised by the Peoples-Pittsburgh Trust Co. that one of the two boilers would have to be shut down on September 22, 1937, and the other on December 19, 1937; that any break-down in the latter after the shut-down of the former would prevent the furnishing of elevator service and heat; that the insurance company refused to issue operating certificates for the elevators in the building; that the leases in force with tenants of the building required daily elevator service; that the owners would be responsible for damages on a cessation of service; that the tenants should be notified to vacate on September 30, 1937, or at the latest on October 31, 1937, in order to relieve the owners of liability; that the installation of a new heating boiler and two new electric elevators would cost between $25,000 and $30,000; that it would be necessary to empty the building if the improvements were undertaken; that an American Federation of Labor Union had unionized the service employees of the building and was asking a minimum wage of $25 weekly and a maximum of 48 hours per week which if granted would almost double the present pay roll.

Petitioner, on September 13, 1937, advised the trust company that she would not under any circumstances consent to the improvements and that as far as she was concerned she would like the building closed forthwith and notice to that effect given to the tenants.

On September 21, 1937, with the apparent consent and acquiescence of all the coowners of the property, the Peoples-Pittsburgh Trust Co. served notice upon all the tenants to vacate the premises. Most of the tenants complied with the notice and vacated on or before September 30, 1937. Some of them, however, remained until shortly before December 1, 1937. After December 1, 1937, the building was vacated except for one stock room on the first floor which remained occupied until April 30, 1939, in order to keep insurance rates down.

Petitioner, through her agent Malone, continued her negotiations with Young and Brown with a view to the sale of her one-fifth interest in the property to them until on or about December 6, 1937, when they indicated that they were unwilling to make any offer with respect thereto.

On September 15, 1937, petitioner filed an amended petition in her suit for partition and sale of the property. On October 15, 1937, the Orphans' Court of Allegheny County entered an order granting the petition pro confesso, and a writ of inquest was awarded, directing the sheriff of Allegheny County to select three individuals who as a jury were to determine whether the property could be divided, and if it could not, its value. The return date of the writ was December 1, 1937, which at the sheriff's request was later extended to January 4, 1938.

On December 7, 9, 13, 17, 20, 21, 22, and 23, 1937, the sheriff's inquest was held. His return which was filed in the partition proceeding on January 4, 1938, and which was confirmed nisi by the court on that date indicated that in the opinion of the three individuals constituting the jury the property could not be divided, and had an actual value of less than the amount of delinquent taxes, penalties, and interest assessed against the property.

It appears that Malone was not advised of the result of the sheriff's inquest until February 1938. He, however, had a general knowledge of the evidence that would be offered by the various parties at the inquest and felt that it would be a foregone conclusion that a value less than the amount of taxes would be determined. This general knowledge was first communicated to petitioner by letter dated December 28, 1937, which reached petitioner in The Netherlands on or about January 13, 1938. No further steps were taken in the partition proceedings subsequent to January 4, 1938. Petitioner, in view of the fact that the court would be reluctant to approve the sale in an amount less than the delinquent taxes, penalties, and interest existing with respect to the property, and in view of the fact that if the property was put up at a public sale requested by her and not sold, she would be liable for the advertising expenses incident to such an attempted sale (of which facts Malone was advised in December 1937), abandoned the suit for partition and sale in February 1938, but the suit was never dismissed.

The assessed values for the property in the taxable year 1937 fixed by the taxing authorities of the city of Pittsburgh and county of Allegheny were as follows:

	City assessment	County assessment
Land	$88,350	$92,950
Building	90,000	92,400
Total	178,350	185,350

No effort was made by the taxing authorities to dispose of the property for delinquent taxes, penalties, and interest until in August and September of 1940 the city and school district of Pittsburgh, and the county of Allegheny instituted proceedings for that purpose. A public sale was held on September 10, 1940, and there being no bidders at the sale other than the three taxing bodies, a sheriff's deed was issued, transferring title to the property to them in proportion to their respective tax claims.

The property in question is a corner lot located on the corner of Penn Avenue and Barbeau Street in the downtown district of Pittsburgh. It has a frontage of 90 feet on Penn Avenue, 110 feet on Barbeau Street and runs back to a 20-foot alley in the rear. The property contains 9,900 square feet and was improved with an 8-story brick building erected in 1895 of wall bearing wood timber construction.

The fair market value of the land and building at the end of 1937 was $22,000, consisting of a land value of $27,000 with a charge against the building of $5,000 for the expense of razing it. In the light of existing tax liens the property was a liability to the extent of $16,000.

As of the end of 1936 the property had a fair market value of $32,000 consisting of land at $27,000 and building of $5,000. Tax liens at that time were approximately $30,000. At the end of 1936 the building was a "going concern" susceptible of development and improvement and was worth $5,000. In 1936, there was an improvement of business in Pittsburgh, including an improvement in warehouse operations. In 1937 the rate of occupancy of such property in Pittsburgh was very much less than in 1936.

Petitioner's interests in the property in question became worthless in 1937.

OPINION.

OPPER: A long-standing anomaly in the treatment of real estate losses is only now beginning to be rectified. When the decision in ; certiorari denied, , announced the rule that a parting with title was not the definitive event marking a deductible loss if all value in the property had previously been extinguished, a line of cases had already been instituted, beginning with , applying to real estate losses the rule that a conclusive separation between the owner and title to his property was necessary to justify a loss deduction and that since under the common law real estate could not be abandoned, such a separation would fail of recognition in the absence of a sale. Even in that situation, if there remained a vestige of residual title, as for example an equity of redemption, the loss was allowable only when that residue was finally extinguished. ; affd. (C.C.A., 5th Cir.), ; ; .

Further confusion was added by the distinction between an ordinary loss deductible in full and a capital loss, and perhaps in order to mitigate the harshness of the earlier cases relating to real property losses, it became established that a forced sale of real property in a mortgage or tax foreclosure or even a voluntary conveyance brought about by the threat of such proceedings would be considered an ordinary loss. (Where petitioner had personal liability) ; ; ; (where petitioner had no personal liability) , affirming ; . The recent decisions of the Supreme Court tending to characterize the disposition of real property even in a forced proceeding as a capital transaction, ; , have been fortified by holdings that in comparable situations the same rule applies to personal property, ; certiorari denied, , and by the legislative acceptance of the principle that a loss of that nature even without an actual sale, is nevertheless a capital transaction and is to be treated accordingly. Revenue Act of 1938, sec. 23(g) and (k). The reason these provisions were limited not only to personal property but to "securities" is not apparent. ¹ Here, of course, we are not concerned with the type of loss but only with the year in which it occurred.

At the same time there seems to have been a trend in the direction of restricting the earlier principle that transfer of title to real property was necessary before a loss could be claimed. ; ; affd. (C.C.A., 2d Cir.), ; cf. . Hence, this seems to us an appropriate occasion for clarifying and confirming the treatment of real estate losses apparently justified by the general tendency of the cases noted. Since the sale or abandonment of property has not been accepted as the event establishing loss, if by a practical test and from the standpoint of reality all value had disappeared in a prior year, cf. , we think the logic of the situation requires that if, in the case of either real or personal property, it can be shown that no value whatever remains, a deduction for loss may then be permitted even though a sale, abandonment, or other irrevocable loss of title is postponed to a later period.

And in determining whether value has actually disappeared, we see no reason to distinguish between real and personal property or to require that in one case any more than in the other the taxpayer be an "incorrigible optimist." . Of course, the necessity of something in the nature of an "identifiable event" may still exist, and in appropriate situations that need may be supplied by a sale or even an "abandonment." But that is not applicable here where there is ample basis for concluding that the present year furnishes developments having a decisive and unfavorable effect upon value, such as the increased expense of operating the property, the necessity of its extensive rehabilitation, the excess of liens over even potential value, and most important of all the expulsion of the tenants and the resulting total vacancy of the building. If the owner of stock who can show that it has become worthless may take a deduction for loss even though he retains ownership of the shares and possession of the certificates and there may be some slight or remote possibility that an indeterminate future may restore a value to them, , it seems to us there is no reason for the application of a different rule to the present question.

Judged by the foregoing considerations, it is clear that in the year 1937 petitioner's interest in the real property under consideration became worthless; that it was then properly deductible as a loss; and that the action by respondent in disallowing it must be disapproved. The extent of petitioner's interest and hence of her loss presents no problem, at least if abandonment is not a prerequisite as respondent in effect concedes. Petitioner had a remainder after a life estate as well as her undivided interest in fee. The parties have stipulated the proportion of the entire interest which that remainder represented, and we see no reason why petitioner's deduction should not include the value of that future interest as well as of her present share. Her loss was as real in the one case as in the other even though, of course, its amount might be less due to the diminished value of an expectancy as compared with a present interest.

Reviewed by the Board.

Decision will be entered under Rule 50.

ARUNDELL, BLACK, LEECH, ARNOLD, and KERN dissent.

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Footnotes

• 1. See however Revenue Act of 1938, sec. 117(a)(1). ↩