Court Opinion

ID: 4596840
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:17:55.607394+00
Date Added: 2024-06-11T07:51:41.046954
License: Public Domain

W. B. BROOKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Brooks v. CommissionerDocket No. 10991.United States Board of Tax Appeals12 B.T.A. 31; 1928 BTA LEXIS 3615; May 21, 1928, Promulgated *3615  1.  In computing loss from the destruction of a residence by fire the cost thereof should not be reduced by the depreciation sustained in the years during which it was used as a residence.  2.  Property was purchased as a residence in 1896 and so held until 1910 or 1911 from which time it was abandoned as a residence and rented and held for sale until sold in 1919 at a price less than the fair market value in 1910 or 1911 or the fair market value on March 1, 1913.  The fair market value in 1910 of 1911 was not less than the fair market value on March 1, 1913.  Held, that a deductible loss was sustained which is measured by the difference between the fair market value on March 1, 1913, properly depreciated from this date to the date of the sale, and the sales price, no adjustment to the 1910 or 1911 value being required on account of depreciation sustained from 1910 or 1911 to March 1, 1913.  $3.  Dividends credited to petitioner on the books of a corporation of which he was the majority stockholder held to be income to him, the minority stockholders having withdrawn their dividends and there being no evidence that petitioner might not have withdrawn the amount credited to him. *3616 John H. Small, Esq., for the petitioner.  J. F. Greaney, Esq., for the respondent.  LITTLETON*31  The Commissioner determined deficiencies in income tax for the calendar years 1919, 1920, and 1921, in the respective amounts of $10,293.55, $6,329.44, and $1,600.68.  FINDINGS OF FACT.  Petitioner is a resident of Stevenson Station, Md.Petitioner, who is a contractor and builder, built a residence in Green Spring Valley in 1903 and 1904 at a cost of $40,000.  The house was of brick and stucco, about 110 feet long and 40 feet wide, and had fourteen or fifteen rooms.  It had a useful life of fifty years from the date when built.  The fair market value of this residence on March 1, 1913, exclusive of the land, was $45,000.  The residence was destroyed by fire in 1919.  The salvage value did not exceed $5,000.  Petitioner received insurance in the amount of $25,000 by reason of the destruction, this being the full amount of insurance carried.  In computing the deficiency the Commissioner allowed no deduction for any loss by reason of the fire.  In 1896, petitioner paid $19,000 for a house and lot at 28 East Mt. Vernon Place, Baltimore, Md.*3617  Between 1896, the date of purchase, *32  and March 1, 1913, he made additions and betterments to the house costing not less than $6,000.  The house faces on a square and is on the corner of East Mt. Vernon Place and St. Paul Street.  In 1896 it was about three blocks from the business district of Baltimore.  It had high steps of brown stone, a brown stone front and the balance was constructed of brick.  It had three floors, basement and attic.  The lot was 25 1/2 feet front.  Prior to 1896 petitioner lived in Green Spring Valley in a house other than the residence constructed in 1903-4.  After he bought the Mt. Vernon Place dwelling in 1896, he used it as a place of abode during the winter months when his children were in school.  During this period he registered for voting purposes in Green Spring Valley, where he lived except for the winter months.  In 1910 or 1911 he ceased to spend his winters in the city and leased the Mt. Vernon Place house, at which time the property had a fair market value of at least $25,000.  The property was leased on March 1, 1913, on which date it had a fair market value of $25,000.  He kept the property in good repair from 1896 to August 4, 1919, when*3618  he sold it for $14,481.16.  The property had a useful life of 50 years from the date of purchase and of 33 years from March 1, 1913.  Petitioner's purpose in purchasing the house in 1896 was to acquire a city residence.  After he abandoned the use of the house as a residence in 1910 or 1911, he held it for rent and for sale.  The Commissioner determined that petitioner sustained no deductible loss upon the sale of the property.  During the years 1919, 1920, and 1921, petitioner owned more than 1,000 of the 2,000 outstanding shares of stock of the Sanford & Brooks Co.  He was president of the corporation and one of five directors.  There were seven or eight stockholders besides petitioner.  At a meeting of the stockholders March 11, 1919, an 8 per cent dividend was declared on the capital stock and credited to the stockholders.  Twelve thousand eight hundred dollars was accordingly credited to petitioner on the company's books.  It was agreed among the stockholders present that the dividend should not be paid until the corporation was in funds which it could spare for that purpose.  The dividend declared in 1919 was not paid to petitioner, but he drew against his account when*3619  he could get the money.  This dividend was paid in 1919 to all of the other stockholders.  An annual meeting of the stockholders was held on February 25, 1920, and an 8 per cent dividend was declared and credited to the stockholders.  Twelve thousand six hundred and forty dollars was accordingly credited to petitioner's account on the company's books.  It was agreed that this dividend would not be paid until the company was in funds and the directors passed upon the question of whether they were in funds and ordered payment.  All of the minority stockholders *33  were paid their dividends in 1920.  Petitioner was not paid his dividend but he drew against his account when he could get the money.  At the stockholders' meeting March 11, 1921, an 8 per cent dividend was declared and credited to the stockholders.  The stockholders agreed that the dividend should be paid when the company was in funds and that it was payable in funds when available at the discretion of the directors.  Petitioner was credited with $11,040.  He was paid in 1921 only the amount of $4,287.91, which he included in his income-tax return for that year.  He drew against the balance of his account when he*3620  could get the money.  The other stockholders were paid their dividends in 1921.  The Commissioner determined that these dividends were income to petitioner for the years 1919, 1920, and 1921 in the amounts of $12,000, $12,640, and $6,752.09, respectively.  OPINION.  LITTLETON: Petitioner claims that the Commissioner erred (1) in refusing to allow a loss on the destruction of petitioner's Green Spring Valley residence by fire; (2) in refusing to allow a loss on the sale of a residence property in Baltimore; and (3) in determining that certain dividends declared on stock owned by petitioner constituted taxable income to petitioner.  Petitioner's claim for a loss by reason of the fire was based primarily on the March 1, 1913, value of the property destroyed and considerable evidence was introduced in an effort to sustain a valuation of $60,000 for such property as of March 1, 1913.  Witnesses called to testify as to such value expressed the opinion that the residence destroyed had such a value but this opinion does not appear to us to be borne out by their testimony with respect to the only sales of such property known to them.  The testimony of one of such witnesses appears to*3621  be based primarily upon reconstruction cost, although the witness disavowed any intention to testify upon that basis.  We have carefully considered the testimony as a whole and it is our opinion that the value of the residence on March 1, 1913, was $45,000 and we have so found.  However, under the decision of the Supreme Court in , it would appear that the March 1, 1913, valuation, being greater than cost, has no bearing upon the amount of deductible loss sustained by the petitioner, since the deduction can not exceed the actual loss sustained.  We conclude that under that decision the loss from the fire could not exceed $10,000, the difference between the cost of the property and the amount of insurance realized, plus the salvage value of *34  that which remained.  The Board has also held that in computing gain from the sale of a residence, depreciation sustained thereon should not be deducted from the cost or March 1, 1913, value, since such depreciation was not a legal deduction from gross income.  *3622 . We are of the opinion that the same principle would be here applicable in computing the deductible loss from the destruction of a residence by fire.  On the basis of the foregoing, the deductible loss in 1919 would be $10,000, the difference between the cost of the property, $40,000, and the amount of insurance realized, plus the salvage value of that which remained, $30,000.  With respect to the loss claimed on account of the sale of the Baltimore property purchased as a residence in 1896, and so held until 1910 or 1911, from which time it was abandoned as a residence and held for rental purposes and for sale until the date of sale in 1919, the Supreme Court has recently held that a deductible loss may be sustained on account of the sale of such property, . In so deciding, the court held that the basis for computing the amount of the loss would be the difference between the fair market value of the property at the time its status was changed from residence to business property, or the March 1, 1913, value, whichever is lower (where the change*3623  took place prior to March 1, 1913), and the sales price.  Since we have found that the fair market value of the property on March 1, 1913, is not in excess of its fair market value when its status was changed in 1910 or 1911 from residence to business property, the 1910 or 1911 value may be disregarded, unless depreciation sustained from 1910 or 1911 to 1913 must be taken into consideration which would serve to reduce the 1910 or 1911 value below the March 1, 1913, value.  As to this we are of the opinion that the principle enunciated in , is applicable and prohibits the deduction of any amount for depreciation during such period.  The court there said that in determining the gain from a sale of depreciable property, the depreciation which should be deducted from the cost or March 1, 1913, value is the "aggregate amount which the taxpayer was entitled to deduct in the several years." In the case at bar, the petitioner, an individual, was not required to file an income-tax return prior to March 1, 1913, and, consequently, he was not "entitled to deduct" any depreciation that was sustained on property that was owned by him.  This*3624  case is to be distinguished from , wherein the Board held that a corporation having acquired property in 1909 at a cost less than the March 1, 1913, value, should deduct depreciation on such cost for years prior to March 1, 1913, in determining *35  the loss on the disposition thereof, for the reason that corporations were required to file returns prior to March 1, 1913, and, therefore, were entitled to deduct depreciation, whereas the same requirements and rights did not exist with respect to individuals.  While it is true that the tax paid by corporations for years from 1909 to 1913 was an excise tax measured by income, the advantage resulting to the corporation through the depreciation deduction was the same before as after March 1, 1913, and the allowable depreciation deductions by corporations in years prior to March 1, 1913, had the same effect in principle as similar deductions in 1913, and subsequent years when the tax required to be paid was denominated an income tax.  After March 1, 1913, of course, depreciation must be taken into consideration in the instant case, since the petitioner was then required to make a return*3625  of his income and pay a tax thereon and was also entitled to deduct depreciation on the building in question, a depreciable asset which was being used in the production of income.  On the basis of the foregoing principles, the deductible loss in this case is the difference between the fair market value on March 1, 1913, properly depreciated from that date to August 4, 1919, and the sales price.  The evidence shows that of the fair market value on March 1, 1913, of $25,000, the part to be apportioned to the building is $15,000, and that to the lot $10,000, and that the building had a useful life of 33 years from March 1, 1913.  Depreciation should accordingly be computed on the building on the basis of the foregoing value and estimated life, and the amount determined should be used to reduce the fair market value at March 1, 1913.  Petitioner was the owner of a majority of the capital stock of Sanford & Brooks Co.  In each of the years here involved, that company declared dividends of 8 per cent upon its capital stock, which were credited to the accounts of the respective stockholders.  The uncontradicted testimony is that it was understood by the directors that such dividends would*3626  not be paid until the company was in funds and could spare it for that purpose.  All of the stockholders except petitioner were paid their dividends in the year when declared.  While the testimony is that petitioner was not paid his dividend in the years of declaration, except $4,287.91 paid in 1921 from dividends declared in that year, there is a total lack of any evidence to establish that these dividends were not available for payment.  Furthermore, it appears that from time to time other amounts became due to petitioner from the corporation, such as salary, which were credited to his account and withdrawn as he found necessary.  The smaller stockholders drew their dividends.  The agreement with respect to deferred payment was the same as *36  to all of the stockholders.  In the absence of some evidence to the contrary, we must assume that the petitioner left his dividends with the corporation for some other reason than that they could not be withdrawn under the limitation placed upon them at the time of declaration.  The Commissioner having determined that they were available, and there being no question that if available they were income during each of the years involved, *3627  the action of the Commissioner must be approved.  Reviewed by the Board.  Judgment will be entered on 10 days' notice, under Rule 50.TRAMMELL and MURDOCK dissent.  PHILLIPS PHILLIPS, dissenting: So far as the prevailing opinion holds that, in determining the loss sustained on the sale of residence property, the original cost thereof is not to be adjusted for depreciation sustained, I dissent upon the grounds set out in the dissenting opinion in Deposit Trust & Savings Bank, Executor,11 B.T.A. 706. Nor do I concur with the conclusion of the Board that in computing the gain or loss from the sale of the Baltimore residence, which was converted into business property in 1911, no adjustment is to be made for the depreciation which took place between 1911 and 1913.  This Board has decided in , and in succeeding cases that in determining the gain or loss from the sale of property, adjustment was to be made for depreciation.  And this was so whether or not there was an income-tax law in effect during the years when the depreciation took place. *3628  The reasoning of the Board in the Even Realty Co. decision pursued the same line as that used by the Supreme Court in , although in the latter case the court limits the adjustment to the "allowable" depreciation or depletion.  The court there did not consider, nor was it called upon to consider, what would be the proper adjustment to be made for depreciation or depletion in some year when there was no income-tax law.  . In the latter case the Board pointed out the results which would follow if cost were to be adjusted by deducting depreciation allowed, based upon the March 1, 1913, value, and expressed the opinion that "only by taking into consideration depreciation sustained both prior and subsequent to March 1, 1913, on Cost can we obtain a true depreciated cost which we can compare with the depreciated March 1, 1913 value." That case was decided by the Board after the Ludey decision and followed the previous decisions of the Board and the consistent and long established practice of the Treasury Department.  I know of *37  nothing which would require us to*3629  change the decision there reached, nor do I conceive that the principles there enunciated were contrary to the Ludey decision.  I do not understand the Ludey case to hold that the method of computing gain or loss previously used by the Board and by the Treasury Department was incorrect except to the extent that where, during certain years, the amount of deductible depreciation or depletion was fixed by statute it must be assumed that it was the intent of Congress that only the deductible, and not the sustained, depreciation was to be used for those years.  I accordingly dissent from so much of the prevailing opinion as holds that no adjustment is to be made for the depreciation of the Baltimore property which took place between 1911 and 1913.  STERNHAGEN and MORRIS agree with the above dissent.