Court Opinion

ID: 4630933
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:08:33.414388+00
Date Added: 2024-06-11T08:00:02.925922
License: Public Domain

EMMETT J. MCCARTHY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.McCarthy v. CommissionerDocket No. 101607.United States Board of Tax Appeals44 B.T.A. 417; 1941 BTA LEXIS 1336; May 6, 1941, Promulgated *1336  DEDUCTION - LOSS - ABANDONMENT OF REAL ESTATE. - Although the legal title was in others, the petitioner was the equitable owner of an undivided one-half interest in real estate upon which he had personally given a mortgage accompanied by his own notes.  The petitioner decided in 1936 to abandon his interest in the property to the coowner because the value of the property was less than the mortgage and he did not want to have any further interest in the property.  He entered into an agreement with his coowner stating that he had no further interest whatsoever in the property.  Held, that he is entitled to deduct a loss in that year under section 23(e) of the Revenue Act of 1936, following Park Chamberlain,41 B.T.A. 10">41 B.T.A. 10. Raymond A. Duggan, C.P.A., for the petitioner.  Gerald W. Brooks, Esq., for the respondent.  MURDOCK *417  The Commissioner determined a deficiency of $1,956.82 in the income tax of the petitioner for the calendar year 1936.  The only issue raised by the petitioner is whether or not he abandoned certain *418  real estate in the taxable year so as to entitle him to a deduction for loss of his investment*1337  in the property.  The Commissioner has raised an affirmative issue alleging that he erred in allowing a personal exemption of $2,500 as head of a family when he should have allowed an exemption of only $1,000.  FINDINGS OF FACT.  The petitioner, a lawyer, filed his individual income tax return for the taxable year with the collector of internal revenue at Chicage, Illinois.  The petitioner, on or about February 18, 1930, took title to an unimproved corner lot 57 by 125 feet in the city of Chicago.  The property was purchased by the petitioner and John B. McCabe and each was to have an equal interest in it.  The purchase price was $41,850, of which the petitioner paid $17,850 in cash, McCabe paid $5,000 in cash, and the petitioner gave a purchase money mortgage for the remaining $19,000, together with his notes for a like amount, with interest at 6 percent, payable in five years.  The petitioner and McCabe had agreed that McCabe would later make payments to the petitioner until the contributions of each towards the property were equal.  They entered into this transaction for profit.  Although legal title to the property was transferred several times, whoever held the legal title*1338  did so for the benefit of the petitioner and McCabe.  The petitioner and McCabe erected a gasoline filling station on the property in 1932 at a cost of $3,838.15, of which the petitioner furnished $1,550.24 and McCabe $2,287.91.  The filling station was then leased and operated by others.  The petitioner soon realized that the purchase had been unwise and would probably result in a loss.  He made no efforts to sell the property because he thought they would be unavailing.  He paid little attention to the property and allowed McCabe to manage it.  McCabe received the rent from the filling station and out of that rent paid the interest on the mortgage as it became due at all times up to the date of the hearing in December 1940.  Neither the petitioner nor McCabe during that time ever paid any taxes on the property.  McCabe reported the income from the property on his own return and took deductions on that return with reference to the property as if it were his own.  The net amount reported by him as income from this property was small.  The gross income from the property was never sufficient to pay interest, taxes, and other expenses of the property.  The petitioner never received*1339  any income from the property.  The property still belonged equally to the petitioner and McCabe on February 6, 1936.  These two men on that day signed a writing which was as follows: *419  BE IT KNOWN that EMMETT J. MCCARTHY and JOHN MCCABE have heretofore had a half interest in the following described property: Lots 123 and 124 in Britigan's Westfield Subdivision in the North East quarter of Section 31, Township 38 North, Range 14, East of the Third Principal Meridian, in Cook County, Illinois, located at the South West corner of 79th Street and Marshfield Avenue.  which property cost about $42,000.00 originally, and which is now encumbered with a $19,000.00 mortgage.  Such property is now subject to unpaid taxes for past years, and, in addition, it is contemplated that the mortgage should be refinanced and certain improvements placed on the land to permit earnings to pay carrying expenses.  Since acquisition the property has depreciated in value over 50% and is now worth only about the amount of the existing mortgage.  Emmett J. McCarthy is unwilling to pay out additional moneys for back taxes, new improvements, etc., and in view of the fact he considers his present*1340  investment (including his personal indebtedness of approximately $10,000.00 to the Receiver of the Bain Banks) as a total loss, and not wishing to have any further connection with the property, it has been agreed between the parties hereto that hereafter the said Emmett J. McCarthy shall have no interest whatsoever in said property and that John McCabe shall be the exclusive owner thereof insofar as Emmett J. McCarthy or any claim by or through him is concerned.  The petitioner believed at that time that he had a loss on the property, and, by signing the writing, he would be enabled to deduct the loss for income tax purposes.  The fair market value of the property at that time was substantially less than the amount of the mortgage.  The mortgagee learned in the latter part of 1940 that the taxes had never been paid on the property and notified the petitioner that he would have to pay the mortgage.  The petitioner compromised with the mortgagee, paid the mortgagee $12,500, and received from the mortgagee the mortgage and notes in the amount of $19,000 in the latte part of 1940.  McCabe, in accordance with his agreement to contribute one-half to the purchase price of the property, *1341  made payments to the petitioner as follows: $5,600 in 1930 or 1931; $500 on July 9, 1935; $500 on November 16, 1936; and $2,417.21 between May 24, 1938, and October 11, 1939.  The petitioner had borrowed money from banks on his notes in 1930 to raise a part of the $17,850 which he paid at that time on the purchase price of the property.  The $2,417.21 which he received from McCabe between May 24, 1938, and October 11, 1939, was used by him to make a payment to the holders of the notes just described.  On his income tax return for the taxable year the petitioner deducted $17,850 as a loss sustained on abandonment of the real estate.  The Commissioner, in determining the deficiency, disallowed that deduction.  The petitioner is unmarried.  His mother has been dead for a number of years.  The petitioner had provided a home for a number of years wherein he, his father, and several of his brothers and *420  sisters had lived.  His father died in 1935.  The petitioner, his two sisters, and two brothers lived in an apartment during 1936.  The petitioner leased that apartment and paid the rent on it.  The two sisters and the two brothers who lived with the petitioner during 1936*1342  were all over 18 years of age.  One brother was a mechanic who earned about $100 a week when he was employed.  One sister, aged 23, was in poor health during 1936.  One brother was a cripple who had recently graduated from law school and was employed in the petitioner's office at a weekly salary of from $10 to $15.  The petitioner had always helped him financially.  This brother and the sister who was not well made no contribution to the living expenses of the group, and it does not appear that the other brother and sister made any contribution for that purpose during 1936.  The petitioner paid all of the living expenses of the group during 1936 except for any small contribution which may have come from one of the others.  This same condition had existed for a number of years.  The Commissioner, in determining the deficiency, allowed the petitioner a personal exemption of $2,500 as head of a family, and a credit of $400 for a dependent.  OPINION.  MURDOCK: The petitioner realized in 1936 that the value of this property had declined until it was less than the amount of the mortgage.  He knew that the property would not produce enough income to pay the carrying charges.  He concluded*1343  that he had lost forever the amount which he had already invested in the property and he believed that he would probably have additional loss on account of the mortgage notes.  He desired to terminate the transaction in so far as he could do so for income tax purposes, to fix his loss up to that time, and to obtain the benefit of a deduction on his income tax return of the amount of that loss.  He executed the instrument of February 6, 1936, to evidence his abandonment of the property and he now contends that he thereby absolutely and completely abandoned every interest which he had in the property from which he might ever possibly recoup any of his loss as represented by his cash outlay up to that time.  The respondent has not pointed to any flaw in this argument or to any distinction between this case and that of . We hold, following that case, that the petitioner is entitled to a deduction for loss on the property.  Cf. . This is so despite the obvious fact that by reason of the mortgage notes the petitioner still had a liability in connection with this property and could not be unconcerned*1344  as to what happened to it.  This circumstance was present in the case of , and it would also be present in a case where the owner of property *421  on which he had given a mortgage accompanied by his bond sold it at a loss, subject to the mortgage.  Obviously, the seller in the hypothetical case would be entitled to deduct his loss at the time of the sale, even though he might sustain further loss by reason of his personal liability for the debt.  The petitioner contributed $19,400.24 of his money, whereas McCabe contributed only $7,287.91 of his money to the purchase and improvement of the property itself.  However, there was an agreement between McCabe and the petitioner that McCabe would reimburse the petitioner until their investments were equal.  McCabe had reimbursed the petitioner to the extent of $6,100 up to February 6, 1936.  But thereafter he still recognized his obligation to make further payments and actually paid to the petitioner $2,917.21.  The record is not entirely clear as to the purpose of the last payment of $2,417.21, but we must assume that it was like the rest, since the petitioner knew the facts and should have*1345  proved them if they were to his advantage.  . These payments reduced the cash payments by the petitioner to $10,383.03 and his loss must be limited to this amount, since the record does not show that on February 6, 1936, his loss was any greater than his total cash outlay less the amounts which McCabe was to pay back to him.  The petitioner received no consideration for the instrument of February 6, 1936, and the transaction was not a sale or exchange.  ; ; . The Commissioner has raised an affirmative issue and has the burden of proof on that issue.  He says that he erred in allowing the petitioner a personal exemption of $2,500 as head of a family and should have allowed him a personal exemption of only $1,000 as an unmarried person.  The record shows that the petitioner had maintained a home for his father, his brothers, and sisters for a number of years and continued to maintain this home during the taxable year even though his father had died in the preceding year. *1346  Two brothers and two sisters lived with him in that home during the taxable year.  They were all over 18 years of age, the youngest being 23.  They contributed nothing towards the expenses of the family home and the petitioner paid all of those expenses during the taxable year.  The statute does not define the head of a family, but the definition given by the Commissioner in his Regulations 94, article 25-4, is "an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship * * * and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation." These persons were *422  closely connected with the petitioner by blood relationship.  He actually supported and maintained them in one household.  His one brother was crippled, his one sister was in poor health, and we do not know anything about his other sister.  The Commissioner, in determining the deficiency, allowed the petitioner a credit of $400 for one dependent person.  The record as a whole does not justify the conclusion that the petitioner was not the head of a family within*1347  the meaning of the statute during that year.  The determination of the Commissioner on this point will not be disturbed.  Decision will be entered under Rule 50.