Source: http://openjurist.org/195/f2d/244
Timestamp: 2013-05-22 09:02:12
Document Index: 553861744

Matched Legal Cases: ['§ 23', '§ 161', '§ 22', '§ 22', '§ 22', '§ 23', '§ 23', '§ 2803']

195 F. 2d 244 - Waterman's Estate v. Commissioner of Internal Revenue	Home195 f2d 244 waterman's estate v. commissioner of internal revenue
This loss deduction was claimed under Sec. 23(e) (2) I.R.C., 26 U.S.C.A. § 23(e) (2), and its allowance is, by the terms of the statute, conditioned upon its having been sustained by the taxpayer in a "transaction entered into for profit". But, whether the decedent acquired it in such a transaction is not decisive since the estate is a taxpayer separate and distinct from the decedent. Sections 161, I.R.C., 26 U.S.C.A. § 161; Herbert's Estate v. Commissioner, 3 Cir., 139 F.2d 756, certiorari denied, 322 U. S. 752, 64 S.Ct. 1263, 88 L.Ed. 1582. The controlling consideration is, therefore, whether the acquisition of the obligation by the executor in behalf of the estate was a "transaction entered into for profit" in the statutory sense. That it was follows from the nature of the duty of the executor in dealing with assets of the estate coming into his hands. That duty excludes the possibility of his holding this asset for any personal use. Cf. Carnwick v. Commissioner, 9 T.C. 756. On the contrary, it required him to dispose of it on the best terms possible and to account to the estate for whatever, if anything, he could legitimately get above the amount at what it was valued when he acquired it. That his collection of the obligation was a disposition of it on the best possible terms stands unquestioned on this record. Collection was a taxable event. Herbert's Estate v. Commissioner, supra; Hatch v. Commissioner, 2 Cir., 190 F.2d 254; Helvering v. Roth, 2 Cir., 115 F.2d 239. Since the most he could get was less than the value of the asset when he acquired it a transaction entered into for profit resulted in a deductible loss.
It fogs the issue to consider the cases where estates have been taxed pursuant to the dragnet provisions of § 22(a), which (as above noted) renders taxable all gains from "any source whatever." For losses and gains differ strikingly: If, on a sale or "disposition, there is a loss, it is ignored for tax purposes &#x2014; unless it stems from a profit-motivated transaction;4 but if there is a gain, it must be included in gross taxable income regardless of any such motive. The courts have held, in the cases cited by my colleagues, that an executor is a new taxpayer, "separate and distinct from the decedent", and that, under § 22(a), a taxable gain ensues if the amount collected by the executor, on any note or debt the decedent had owned, exceeds the estate-tax valuation of that note or debt. See Hatch v. Commissioner, 2 Cir., 190 F.2d 254; Helvering v. Roth, 2 Cir., 115 F.2d 239; Herbert's Estate v. Commissioner, 3 Cir., 139 F.2d 756, certiorari denied 322 U.S. 752, 64 S.Ct. 1263, 88 L.Ed. 1582. As, however, in those cases there had been gains but no losses, the opinions did not discuss the transaction-entered-into-for-profit test in general, nor in particular the problem facing us here, i. e., whether a loan made by a lender without profits in mind will meet that test when, and only because, it passes from the lender to his executor.
Not § 22(a) but § 23(e) (2) governs here; and, in a § 23(e) (2) case, the taxpayer has the burden of proving that, at the time he entered into the transaction, his dominant motive was profit-making.5 A taxpayer who buys an object or loans money, at that time necessarily has an intention, one way or the other, vis a vis the making of profit. But if someone else buys the object or makes the loan, and the taxpayer acquires it from him by inheritance, the taxpayer cannot show that he actually had such a motive at the very moment he "entered into the transaction" &#x2014; the "transaction" of inheriting the property. It is arguable, not unreasonably, however, that whatever the decedent's motive may have been, it should be deemed to continue and to pass to the taxpayer. So when the decedent had no profit motive &#x2014; as where he bought for his own use a residence or a pleasure-yacht &#x2014; the Tax Court has held that the same motive is assumed to continue after his death and is therefore to be ascribed to the inheritor &#x2014; unless he promptly manifests a change to a commercial attitude, as by trying at once to sell or rent the residence or the yacht. See Campbell, 5 T.C. 272; Marx, 5 T.C. 173; Carnrick, 9 T.C. 756; R. Foster Reynolds, 4 T.C.M. 837; affirmed 1 Cir., 155 F.2d 620. In such cases, the Tax Court has warned that "the fact that property is acquired by inheritance is, by itself, neutral. The important inquiry is what the taxpayer thereafter does with the property." Carnrick v. Commissioner, supra, 9 T.C. at page 760.6 "* * * neither does [inheritance] in and of itself demonstrate a motive connected with gain or profit, as might, for example, the purchase of investment property. * * * [I]f nothing more is shown than that property was acquired by inheritance, any loss must be disallowed." Marx, supra, 5 T.C. at page 174.7
1. Section 23(e) also permits deductions of other sorts of losses not here pertinent.
2. Early v. Atkinson, 4 Cir., 175 F.2d 118, 122; Gevirtz v. Commissioner, 2 Cir., 123 F.2d 707, 708.
3. See, e. g., Dexter v. Commissioner, 1 Cir., 99 F.2d 769; Helene I. Fagan, 9 T.C.M. 44 (1950).
4. Or comes under some other explicit lossdeduction provision not here pertinent.
5. Mertens Law of Federal Income Taxation § 2803 (1942 and 1951 Supp.) and cases therein cited.
Home195 f2d 244 waterman's estate v. commissioner of internal revenue