Court Opinion

ID: 4624413
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:55:05.89517+00
Date Added: 2024-06-11T07:56:31.489582
License: Public Domain

William M. Calder, Jr., Petitioner, v. Commissioner of Internal Revenue, RespondentCalder v. CommissionerDocket No. 24395United States Tax Court16 T.C. 144; 1951 U.S. Tax Ct. LEXIS 303; January 23, 1951, Promulgated *303 Decision will be entered under Rule 50.  Loss on the sale of stock in limited cooperative apartment development held deductible in part as a long term capital loss, to the extent allocable to business investment. Frederick A. Schutte, Esq., for the petitioner.Frank Cohen, Esq., for the respondent.  LeMire, Judge.  LeMIRE *145  The respondent has determined a deficiency of $ 62.50 in petitioner's income tax for 1944.  The deficiency results from an uncontested adjustment of a deduction claimed for contributions.  In this proceeding, however, petitioner contends that he is entitled to a long term capital loss deduction, not claimed in his return, of $ 21,999, resulting from the sale of shares of stock in a limited cooperative apartment development.  He claims an overpayment of tax for 1944 in the amount of $ 970.43 by reason of his failure to deduct the loss.Some of the facts have been stipulated and are found accordingly.FINDINGS OF FACT.On May 28, 1929, petitioner purchased 215 shares of the capital stock of 35 Park West Corporation, hereinafter referred to as the corporation.  The company had recently been organized to own and operate a limited cooperative*304  apartment house then under construction.  The apartment building was finished about November of that year and soon thereafter petitioner moved into the apartment which his stock ownership gave him the right to occupy.  The agreement with the corporation entitled him to a proprietary 99-year lease on the apartment, commencing October 1, 1929.Under the plan of organization the owner was to sell approximately 11,088 shares of capital stock of the corporation at its par value of $ 100 per share and secure a first mortgage loan of $ 1,500,000, making a total capitalization of $ 2,608,800.  The stock to be sold to tenants was limited to approximately 70 per cent of the total rental value of all of the apartments and the remaining apartments were to be rented to nonstockholder tenants. The owner tenants were to be subject to annual assessments for maintenance charges, not to exceed $ 9.95 per share per annum, for the first 2 years following completion of the building.  It was represented in the brochure put out by the owner that the rentals from the nonstockholders would produce an annual income of $ 97,200; that the maintenance assessments would amount to $ 110,325.60, and that annual*305  disbursements would amount to $ 180,300, leaving $ 27,225.60 available for amortization of the first mortgage.On the basis of an evaluation of all the apartments it was determined that the total of 15,840 shares of common stock were available for sale, although under the organization agreement not more than approximately 70 per cent of such stock could be sold with proprietary lease rights.  Actually, there were 11,160 shares sold to tenant owners, which was all of the stock issued during the period that petitioner held the shares, 1929 to 1944, inclusive, except that in 1940 the capital stock was reclassified and for each share of common, par value $ 100, there were issued one share of common and one share of preferred, both of no par value.*146  The percentage of tenant owned apartments varied from time to time, due to the default of some of the tenants, but at no time during 1929 to 1944, inclusive, were the annual charges to tenant owners more than 69.70 per cent or less than 52.09 per cent of the total gross income received.In November 1934 petitioner moved into a larger apartment and exchanged his 215 shares of stock for 225 shares held by the other lessee.  In 1937 he*306  again moved into a larger apartment, exchanging his 225 shares for the 275 shares held by that tenant and paying $ 500 for the additional 50 shares of stock.Pursuant to a plan of reorganization adopted June 20, 1939, the petitioner in 1940 exchanged his 275 common shares, par value $ 100, for 275 no par value shares of common and 275 no par value shares of preferred stock. In connection with this reorganization petitioner agreed to certain amendments of his proprietary lease agreement, the principal feature of which was that he could terminate the lease on or after October 1, 1947, or at earlier dates upon payment of varying penalties, by turning in his preferred stock to the corporation.  In that event, he was to have the privilege of retaining his common stock and occupying an apartment on rental basis the same as other nonowner tenants.In 1941 petitioner moved out of the apartment building to take up residence in Garden City, Long Island, and subleased his apartment for a period of 3 years at a rental of $ 200 per month.Petitioner's shares of stock in the corporation had a fair market value in 1941 not in excess of $ 1.On May 24, 1944, petitioner sold all of said stock for*307  $ 1 and assigned his lease agreement to the purchaser without any consideration.  He claimed no loss deduction on such sale in his return for 1944.OPINION.Petitioner contends that he purchased the shares of stock in the corporation as a business investment and that he is, therefore, entitled to a long term capital loss deduction of $ 21,999 on the sale of the stock in 1944.  He makes the alternative contention that, in any event, he is entitled to a deduction of such part of the loss as resulted from his investment in the noncooperative portion of the apartment building.We think that petitioner's alternative contention suggests the right answer to our problem.  To be entitled to deduct the loss in its entirety, petitioner must show that he purchased the stock for business, as distinguished from personal, reasons.  That is, he would have to show that his sole, or predominant, motive was to make a profit on his investment rather than to provide a suitable place of residence for himself and his family.*147  The evidence, we think, fails to support that view.  It shows, rather, that petitioner's motives were dual.  His first consideration, we think, was to provide a family residence. *308  He was engaged to be married and wanted to provide a family home.  He thought that the limited cooperative apartment plan whereby the nonowner tenants would carry the burden of amortizing the mortgage on the property offered an investment opportunity that might ultimately result in a gain.  He never expected to receive any dividends on the stock, and in fact did not, but he expected to profit from the reduction of maintenance costs to the owner tenants, and eventually from the disposal of his stock. Petitioner suggests that such an allocation should be made on the basis of the percentage of rental income expected to be derived from the rental of nonowner apartments, amounting to 47 per cent of the total expected income, and that, accordingly, 47 per cent of the loss should be allowed.  We think that a more reasonable allocation as between petitioner's business investment and his personal investment can be made on the basis of the percentages of the rental values of owner and nonowner apartments. Petitioner could not have expected to realize any gain from the apartments leased to other owner tenants, since they occupied the same position that he did with respect to the project, *309  but he did expect to profit from the rentals on the nonowner apartments. Since approximately 70 per cent of the apartments, in rental value, were intended for lease to owner tenants and 30 per cent to nonowner tenants, his investment was 70 per cent personal and 30 per cent business.  He is, therefore, entitled to a long term capital loss deduction of 30 per cent of his $ 21,999 loss.We have not overlooked the fact, which the parties have stipulated, that petitioner's stock in the corporation had only a nominal value of not more than $ 1 in 1941.  However, the respondent did not disallow the loss deduction in 1944 for reason that the stock had become worthless in a prior year, and he does not take that position in this proceeding.  Moreover, there is no evidence before us that the stock did not have value at the beginning of the taxable year 1944.Decision will be entered under Rule 50.