Court Opinion

ID: 4621442
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:44:41.048283+00
Date Added: 2024-06-11T07:56:00.405096
License: Public Domain

CLAUDIAN B. NORTHROP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Northrop v. CommissionerDocket No. 20358.United States Board of Tax Appeals17 B.T.A. 950; 1929 BTA LEXIS 2215; October 15, 1929, Promulgated *2215  1.  Motion for judgment by default denied.  2.  Respondent's computation of earned income credit approved.  3.  Deduction for repairs to house used as home but occasionally rented for short periods denied.  Claudian B. Northrop pro se.  A. S. Lisenby, Esq., for the respondent.  VAN FOSSAN *950  This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1924, amounting to $281.80.  The petitioner assigns the following errors: (1) The computation of earned net income under section 209(a)(3) and (b) of the Revenue Act of 1924 by erroneously deducting as credits the personal exemption of a married person living with husband or wife and the amount of the allowance for dependents under section 216(c) and (d).  (2) The refusal of the Commissioner to allow as a deduction from gross income the cost of certain repairs to a house alleged by the petitioner to have been made for the purpose of putting the house "in shape to rent or sell." MOTION FOR JUDGMENT BY DEFAULT.  At the beginning of the hearing the petitioner moved for a judgment by default granting the relief prayed for in his petition.  This motion*2216  was based on the alleged illegality of an extension of the respondent's time to answer.  The petition was filed October 2, 1926.  On November 23, 1926, the respondent filed with the Board a motion for an extension of his time to answer, of which the following is a copy: *951 UNITED STATES BOARD OF TAX APPEALS Appeal of: Claudian B. Northrop Washington, D.C. Docket No. 20358 MOTION Comes now the Commissioner of Internal Revenue, by his attorney, A. W. Gregg, General Counsel, Bureau of Internal Revenue, and requests an extension of time from December 4, 1926 to April 3, 1927, within which to file his answer or to move in respect to the petition of the above-named taxpayer.  (Signed) A. W. GREGG, General Counsel, Bureau of Internal Revenue.On the face of this document is the following endorsement: "GRANTED November 27, 1926, J. G. Korner, Jr., Member, U.S. Board of Tax Appeals." This endorsement, with the exception of the name "J. G. Korner, Jr." was made by a rubber stamp.  The name "J. G. Korner, Jr." is written in the member's handwriting.  The answer was filed February 23, 1927.  The motion for judgment was taken under advisement.  FINDINGS*2217  OF FACT.  The petitioner is a lawyer with an office in the City of Washington.  For about twenty years he was assistant general counsel to the Southern Railway Co.  In 1925, in due course, the petitioner filed a return of his income for the calendar year 1924, reporting a gross earned income from his practice as a lawyer of about $20,500.  From this amount the taxpayer deducted the sum of $457.38 on account of various expenses connected with his practice as a lawyer.  The evidence does not disclose clearly whether or not the petitioner's return for the year 1924 showed any income other than that derived from professional services.  On his return for 1924 the petitioner deducted from gross income the cost of repairing a house "for the purpose of putting it in shape to rent or sell." This deduction amounted to $2,205.11, distributed as follows: Paints and painters$1,128.24Carpenters and flooring786.64Electricians35.30Papering172.03Plumbers and tinners82.902,205.11There is no dispute as to the actual total expenditure or as to the items composing it.  The petitioner's actual earned net income for the year 1924 was considerably in excess of*2218  $10,000.  On his return he credited the tax *952  as computed by him with the sum of $90, said sum being 25 per cent of the amount of tax calculated by him as payable on an earned net income of $10,000.  He arrived at the amount of this credit by the following calculation: Maximum amount of earned income (section 209(a)(3))$10,000Taxable at 2 per cent $4,00080Taxable at 4 per cent 4,000160Taxable at 6 per cent 2,000120$10,000$360The respondent disallowed the deduction made by the petitioner on account of repairs to the house and also reduced the credit of 25 per cent of the tax payable on a maximum earned income of $10,000 to $47.  The respondent calculated the credit of $47 by crediting the maximum earned net income of $10,000 with the sum of $2,500, the personal exemption of a husband living with his wife, and with the further sum of $800 on account of two dependent children, these amounts being credited under provisions of section 216 of the Revenue Act of 1924.  In 1908 the petitioner purchased a house at 13 East Lenox Street, Chevy Chase, Md.  It is the cost of repairs to this house, made in 1924, which is in question.  When the petitioner*2219  purchased this house in 1908 it was occupied by a tenant.  He received from this tenant the sum of $752 as rent for the months of July, August, and September, and for two weeks in October, 1908.  Upon the expiration of the tenacy in 1908 the petitioner and his family moved into the house.  He rented it again for the months of July, August, September, and October of 1909.  In 1910 and 1911 the house was not rented and the petitioner and his family occupied it as a residence except when he and his family were in the mountains of North Carolina, where he also owned a house.  In 1912 the house at 13 East Lenox Street, Chevy Chase, was rented for the months of May, July, August, and September and in 1913 it was rented for the months of June, July, and August.  In 1914 the house was rented for the month of July only.  It was not rented at any time during 1915 or 1916.  In the year 1917 the petitioner had a tenant in the house during the months of June, July, and September.  In the year 1918 he rented it for the months of April, May, June, July, August, and September and received as rent the sum of $375.  The house was not rented in 1920 but in 1921 was rented for the months of July and August. *2220  In 1922 it was rented for some period of time and in 1923 it was rented for the months of July, August, and September.  In 1924, the year in question, the house was not rented for any period of time nor did the petitioner sell it.  The petitioner *953  owned the house at date of the hearing, namely, November 12, 1928, at which time it was occupied by a tenant.  It was not, however, rented during the years 1925 or 1926.  The petitioner's family consisted of his wife and three children, the younger two of whom were in boarding school in 1924.  He traveled a good deal in connection with his law business, but whenever the house at 13 East Lenox Street, Chevy Chase, Md., was not rented, he occupied it as a residence with his family.  For a number of years before the date of the hearing the house at 13 East Lenox Street, Chevy Chase, Md., had been held out by the petitioner as his permanent home and residence.  During the years between the date of the purchase of the property, namely, 1908, up to and including 1924, on such occasions as he had rented the property he had rented it only during the summer months, at which time he and his family were in the mountains of North Carolina*2221  occupying his house there.  The petitioner made efforts to sell the property as well as to rent it but was never successful in his efforts to sell it.  He kept it listed with real estate agents for rent or for sale.  He gives as the reasons for his difficulty in renting or selling the property that since his purchase of the property there had been an increase of building in Chevy Chase and there were many houses which were easier to dispose of than his.  Up to 1924 the petitioner had kept the house in fairly good condition, but in that year the floors were worn out in some of the rooms and the house needed new papering, painting and guttering.  The petitioner, therefore, made the repairs needed but did not make any alterations or additions or lay out any new sidewalks on the premises.  OPINION.  VAN FOSSAN: At the hearing petitioner moved for judgment by default, basing his motion on the alleged error of the Board in granting respondent additional time to answer.  Without pausing to discuss the several arguments advanced by petitioner in support of this motion, we are of the opinion that the motion should be and it hereby is denied.  With respect to the petitioner's first*2222  assignment of error, namely, as to the amount of credit allowed by respondent because of earned net income, we are of the opinion that the respondent's method of calculating the amount to be allowed under the provisions of the Revenue Act of 1924 is correct.  The applicable provisions of the statute are contained in sections 209, 210, and 216 thereof.  Paragraph (2) of section 209(a) provides that the term "earned income *954  deductions" means such deductions as are allowed by section 214 for the purpose of computing net income, and are properly allocable to or chargeable against earned income.  Section 209 further provides, in part, as follows: (a) For the purposes of this section - * * * (3) The term "earned net income" means the excess of the amount of the earned income over the sum of the earned income deductions.  If the taxpayer's net income is not more than $5,000, his entire net income shall be considered to be earned net income, and if his net income is more than $5,000, his earned net income shall not be considered to be less than $5,000.  In no case shall the earned net income be considered to be more than $10,000.  (b) In the case of an individual the tax*2223  shall, in addition to the credits provided in section 222, be credited with 25 per centum of the amount of tax which would be payable if his earned net income constituted his entire net income; but in no case shall the credit allowed under this subdivision exceed 25 per centum of his tax under section 210.  Section 210(a) is as follows: In lieu of the tax imposed by section 210 of the Revenue Act of 1921, there shall be levied, collected and paid for each taxable year upon the net income of every individual (except as provided in subdivision (b) of this section) a normal tax of 6 per centum of the amount of the net income in excess of the credits provided in section 216, except that in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be 2 per centum, and upon the next $4,000 of such excess amount shall be 4 per centum * * *.  Section 216, referred to in section 210(a), provides, among other things, that for the purposes of normal tax only there shall be allowed a credit of $2,500 in the case of the head of a family living with husband or wife and a credit of $400 for each person dependent upon and receiving his*2224  chief support from the taxpayer within the terms of the section.  The petitioner's actual earned net income was considerably in excess of $10,000.  He is therefore entitled to a credit of 25 per cent of the tax on a maximum earned net income of $10,000, pursuant to section 209(a)(3) and (b).  He argues that because paragraph (2) of section 209(a) defines "earned income deductions" as such deductions as are allowed by section 214 for the purpose of computing net income, therefore, in computing the amount of tax on earned net income to be credited under section 209(b), it is improper to deduct from the maximum earned net income of $10,000 the amount of credits provided in section 216(c) and (d).  In our opinion the provisions of the statute do not sustain the petitioner's position.  Section 209(b) provides that an individual's tax shall "be credited with 25 per centum of the amount of tax which would be payable *955  if his earned net income constituted his entire net income." Therefore, in the instant proceeding the credit of 25 per cent of the amount of tax on $10,000 of earned net income is to be computed as if the maximum earned net income of $10,000 constituted the petitioner's*2225  entire net income for the year 1924.  Under section 210(a) the normal tax is to be levied, collected and paid on the amount of net income of each individual "in excess of the credits provided in section 216." We are, therefore, of the opinion that the respondent's method of calculating the credit to be allowed pursuant to the provisions of section 209(a)(3) and (b) is not erroneous.  The petitioner's second assignment of error raises the question whether or not the cost of repairs to his house at 13 East Lenox Street, Chevy Chase, Md., was an ordinary and necessary expense paid or incurred "in carrying on any trade or business." The phrase "trade or business" has been construed by this Board in various decisions involving its interpretation as used in several connections in the revenue acts.  In the case of , we referred with approval to the definition of "trade or business" given in Bouvier's Law Dictionary as "that which occupies the time, attention, and labor of men for the purpose of a livelihood and profit." The Sheridan case involved the interpretation of the term "trade or business" as used in section 214(a)(4) of the*2226  Revenue Act of 1918, but in the case of , we said that Bouvier's definition was equally applicable to that term as used in section 214(a)(1) of the Act of 1918.  It is also applicable to the term "trade or business" as used in section 214(a)(1) of the Revenue Act of 1924.  See, also, . It is apparent from the facts that petitioner occupied his house at 13 East Lenox Street, Chevy Chase, Md., as a residence for himself and his family.  He was not in the business of renting the house.  He lived in it and rented it only occasionally.  This occasional rental was a mere by-product of petitioner's ownership and occupancy.  The mere fact that he wanted to sell the house or rent it, when and if he could, does not make the possible rental or sale of it a trade or business within the contemplation of the statute here involved.  The deduction of the cost of the repairs in question, therefore, is not permissible under the statute.  Reviewed by the Board.  Decision will be entered for the respondent.