Case Name: Warren Leslie, Sr., and Estate of May K. Leslie, Deceased, Warren Leslie, Sr., Executor, Petitioners, v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1946-03-15
Citations: 6 T.C. 488
Docket Number: Docket No. 4619
Parties: Warren Leslie, Sr., and Estate of May K. Leslie, Deceased, Warren Leslie, Sr., Executor, Petitioners, v. Commissioner of Internal Revenue, Respondent.
Judges: Leech, J., agrees with this dissent.
Reporter: Reports of the Tax Court of the United States
Volume: 6
Pages: 488–499

Head Matter:
Warren Leslie, Sr., and Estate of May K. Leslie, Deceased, Warren Leslie, Sr., Executor, Petitioners, v. Commissioner of Internal Revenue, Respondent.
Docket No. 4619.
Promulgated March 15, 1946.
Warren Leslie, Jr., Esq., for the petitioners.
J. Richard, Biggies, Jr., Esq., for the respondent.

Opinion:
OPINION.
Murdock, Judge:
The petitioners, on their return for 1940, claimed a deduction of $33,003.09 as a loss from storm. They had been allowed a deduction for the hurricane loss in 1938. They now have discarded that theory of the 1940 deduction and claim a deduction of $26,181.77 under section 23 (e) (2) of the Internal Revenue Code as a loss from a transaction entered into for profit not connected with their business. They claim that the property was converted to an income-producing purpose immediately after the hurricane when it was placed in the hands of an agent for sale; its fair market value at that time was not less than $39,640.18a loss of the difference between that value and $11,800, the amount of the mortgage, was sustained when the property Was transferred to the mortgagee. The record does not show that May sustained or incurred any loss in regard to this property in a transaction entered into for profit.
Loss on a personal residence is not deductible for obvious reasons. However, a residence may be abandoned as such and converted to a profit-inspired use from which a deductible loss may be incurred. Joseph F. Cullman, Jr., 16 B. T. A. 991. It must appear that the loss was sustained in the new transaction and was not a carry-over in whole or in part of a loss already incurred in the personal residence use of the property. Cf. Herbert L. May, 19 B. T. A. 229. The personal residence use must be terminated, the loss from that use must be fixed in some way, a new basis for gain or loss must be established, and a profit-inspired transaction must be entered into. There must be a showing that the loss was sustained as a result of the new profit-inspired transaction or use. A decline in value during a period while the owner is merely trying to enter into a profit-inspired transaction with the property is regarded as a part of the loss incidental to the personal use, without which the loss would not have occurred. Frances G. Smith, 23 B. T. A. 1134. Merely permitting the property to be offered for sale after deciding not to occupy it further is not sufficient to terminate the loss from residential use and initiate a new transaction for profit within the meaning of section 23 (e) (2). Rumsey v. Commissioner, 82 Fed. (2d) 158; certiorari denied, 299 U. S. 552; Morgan v. Commissioner, 76 Fed. (2d) 390; certiorari denied, 296 U. S. 601; Gevirtz v. Commissioner, 123 Fed. (2d) 707; Phipps v. Helvering, 124 Fed. (2d) 292; W. H. Moses, 21 B. T. A. 226; Frances G. Smith, supra.
Here, if the above obstacle were not present, there is still an inadequate showing as to the basis of the property in the alleged new use. Value at the date of conversion would fix the amount of the personal-use loss and give a basis for gain or loss in the new use. Joseph F. Cullman, Jr., supra. The petitioners say that the value was $39,640.18 after the hurricane, but they fail to prove it. They rely upon two tax receipts which merely show that in 1939 the assessed value was reduced from $40,000 to $30,000. Was the actual value more or less? A witness for the respondent said it never exceeded the amount of the mortgage after the hurricane. A witness for the petitioner introduced some figures on costs and his unsupported notion of some adjustments thereto after a fire in 1930 and the hurricane in 1938. He did not profess to know anything about the value of the property. The building was old and cost figures are not very helpful. The petitioners suffer as a consequence of the inadequate proof.
The record shows that the house was terribly twisted and torn by the storm. It is reasonable to believe that it had little value thereafter. It does not appear that the value of the entire property after the hurricane exceeded $11,800, the amount of the mortgage. Perhaps an insufficient deduction was allowed for the storm loss in 1988, but the statute does not allow any deduction for that loss in 1940. The petitioners have failed to show that they sustained any loss in 1940 from a transaction entered into for profit.
The petitioners contend that the caretaker expenses are deductible under section 23 (a) (2) as nonbusiness expenses paid in the maintenance and conservation of property held for the production of income. They rely upon Mary Laughlin Robinson, 2 T. C. 305. The applicable regulation provides that ordinary and necessary expenses in connection with the conservation or maintenance of a residence are not deductible, even though efforts are being made to sell, prior to the time the property is rented or otherwise appropriated to income-producing purposes. Regulations 103, sec. 19.23 (a)-15 as amended by T. D. 5196. Here, as in the case of losses claimed on former residences, the necessity for administrative purposes of some unmistakable act of conversion or appropriation is obvious. The property in the Robinson case had been offered for rent and a part of it had been rented. Here the property was not offered for rent and no part of it had been rented. The efforts to sell did not appropriate it to income-producing purposes. It was still just an unoccupied residence. Cf. Eleanor Saltonstall, 2 T. C. 1099; reversed on another point, 148 Fed. (2d) 396. It was not being held for income-producing purposes and the caretaking expenses are not deductible.
The debt from McEneny was worthless when acquired by the petitioner as the result of his payment under his guaranty. It is deductible under section 23 (k).
The petitioners' argument in regard to the insurance premiums is too strained. They have found no case to support it. They contend that those premiums are deductible under section 23 (a) (2) as non-business expenses paid to collect dividends which otherwise would be taken to pay the premiums and were paid to conserve stock held for the production of income, since the policies served to release income-producing stock which otherwise would have been required as collateral. This new provision of the code was not intended to make deductible expenditures which are not in their nature expenses. Don A. Davis, 4 T. C. 329, 334; affd., 151 Fed. (2d) 441; certiorari denied, Feb. 25, 1946. The insurance premiums were paid to keep the policies alive, not to collect income. They served to increase the value of the policies. They are a form of saving. They are not ordinary and necessary expenses under the circumstances of this case. They do not bear a sufficiently reasonable or proximate relation to the collection of the dividends on the stock of May held as collateral or to the conservation of other income-producing securities owned by her to make them deductible under section 23 (a) (2).
Reviewed by the Court.
Decision will be entered wnder Bule 50.