Court Opinion

ID: 3843323
Source: CourtListenerOpinion
Date Created: 2016-07-06 08:12:10.380728+00
Date Added: 2024-06-11T14:14:27.622774
License: Public Domain

Decision rendered December 3, 1965.
This appeal has come before the court as a result of the commission's disallowance of losses claimed by the taxpayers on their 1961 joint Oregon income tax return.
The losses were claimed in connection with property received from the Estate of Kurt G. Hirsch, deceased, in Grant County, by Mrs. Eunice Merkle, formerly Eunice MacGillivray, as the residuary beneficiary under the will of the decedent. Eunice Merkle, under the will, was entitled to the entire estate, except for minor specific bequests to Walter G. Hirsch, surviving brother of the decedent. The brother contested the will on the grounds of undue influence and lack of testamentary *Page 284 
capacity. The contest in the Grant County Circuit Court, if successful, would have resulted in intestacy. Since Mrs. Merkle was not a relative of the decedent, the decedent's brother, as heir, would have received the entire estate. Mrs. Merkle individually paid the decedent's brother the sum of $8,475.00 in settlement, and the contesting brother thereupon relinquished and waived his claim to the estate. She also paid legal expenses of $2,113.60 to her attorneys, Banta, Silven, Horton  Young, out of her own funds for defending her rights in the will contest. Plaintiffs at the time of the hearing abandoned their claim of deductibility of the legal expense.
The estate paid the estate inheritance tax upon, and Mrs. Merkle ultimately received, the residuary estate assets, excepting only the specific bequests to the surviving brother, without any deduction for the sum paid in settlement of the will contest.
The only issue is whether the settlement payment is an expenditure deductible as a loss on the 1961 joint income tax return by Mrs. Merkle as beneficiary of the estate. In preparing that return, the payment was pro-rated among the assets received by Mrs. Merkle, which consisted of cash, mortgages, notes, and a limited amount of real property. The item disallowed by the Commission is the loss claimed as attributed to cash, mortgages and notes. The problem is finding the specific income tax provisions defining and authorizing deductible losses, and seeking such case law as may assist the Court in applying these provisions to the facts of this case.
The classes of deductible losses are enumerated in ORS316.320(1) (a), (b) and (c), providing as follows:
  "In computing net income there shall be allowed as *Page 285 
deductions, losses sustained during the tax year and not compensated for by insurance or otherwise:
(a) If incurred in trade or business.
  (b) If incurred in any transaction entered into for profit, though not connected with the trade or business.
  (c) Of property not connected with the trade or business, if arising from fire, storm, shipwreck or other casualty, or from theft.
* * * * *"
The plaintiffs in their complaint appear to claim a loss under ORS 316.320(2). Unfortunately, subsection (2) does not add an additional class of deductible losses, but merely describes the method of computing the basis for determining the amount of deductions for losses, if any, sustained under subsection (1) of ORS 316.320. Furthermore, no consideration of ORS 316.266(6) and ORS 316.270(2) is required, unless it is first determined that there exists a deductible loss within the three general classes described in subsection (1) of ORS316.320. No citation has been suggested that the settlement payment falls within the categories described in subsection (1) of ORS 316.320. On the contrary, plaintiffs in their brief stated that "these expenditures are not claimed as a 'loss deduction', but as a capital expenditure to be added to the basis of the property and recovered on its subsequent liquidation." It would seem that the settlement payment lies outside the scope of the authorized deductible losses.
1. It is fundamental that losses are deductible for tax purposes only when authorized by statute. Estate of Eleanor D.Erdman, Deceased, et al v. Commissioner, 37 TC 1119 (1962);Estate of Dietz v. Commissioner, 16 TC Memo, 482 (CCH 1957);Brown v. Commissioner, 19 TC 87 (1952); W. Thomas Menefee and *Page 286 Florence E. Menefee v. Commissioner, 8 TC 309 (1947); Clara A.McKee v. Commissioner, 19 BTA 430 (1930).
Plaintiffs apparently complain of inconsistency between the inheritance and income tax systems. Such inconsistency may exist, but the consequences of the enforcement of the tax statutes in the two fields result from the legislative enactments. The legislature, not the court, is the architect of the statutes, and is solely responsible for the designation and selection of the means and methods of raising revenue and of the persons and subject matter to be affected thereby. Attempting to eliminate possible inconsistencies arising out of the application of the statutes embodied in the two systems is in many cases an irrelevant factor in the judicial consideration of a case and tends merely to obfuscate the judicial task of applying specific provisions of the income tax law. Neither the validity nor the usefulness of such factor in the judicial process has been demonstrated for this case.
The cases and authorities of Lyeth v. Hoey, 305 U.S. 188,59 S Ct. 155, 83 L.Ed. 119, 119 A.L.R. 410 (1938); In re Cook (New York), 79 N.E. 991; Hartung v. Unander, 224 Or. 165, 169-171,355 P.2d 738 (1960); Opinions of the Attorney General, 1946-48, pp. 182-3, No. 26; 28 Am. Jur. Inheritance, Estate and GiftTaxes, §§ 109 and 110, pp. 87-88; discussed by counsel, seem to touch upon factual situations and statutes not involved in this case, and also indicate the improbability of any successful judicial undertaking to achieve consistency.
Statutory differences and separate theories distinguish the systems of inheritance tax and income tax in Oregon. Belton v.Buesing, 240 Or. 399, 629, 402 P.2d 98 (1965). It is futile often to expect to find *Page 287 
referable concepts and consistency in the two systems. These taxation systems have different policy thrusts and apply to their respective subject matters in ways peculiar to their own designs, producing sometimes disparate and irreconcilable consequences.
2. The Court concludes there are no circumstances present to justify extending the categories of deductible losses described in subsection (1) of ORS 316.320 to include the settlement payment. The remedy, if any, probably must be sought from the tax law creator, the legislature.
The Order of the Commission is affirmed.
 ON REHEARING
On motion for rehearing the Oregon Tax Court held that a proportionate part of a settlement payment may be charged to the adjusted basis of the inherited assets for the purpose of computing gain or loss in the year of disposition.
Motion for rehearing allowed.
Deduction — Losses — Capital asset — Sale or disposition
3. Two vital elements must exist in the relationship of taxpayer to his capital asset to authorize deductions for losses resulting from their sale or other disposition and these are a transaction subjecting the capital asset to risk of investment entered into with a profit motive.
Deduction — Losses — Capital asset — Limitation
4. If the property is subjected to the risks inherent in investment is entered into without a profit motive, the asset would not qualify under the loss statute, ORS 316.320(1)(b).
Deduction — Losses — Capital asset — Investment transaction
5. Whether a risk is within the scope of risks inherent in investment is a question of fact to be determined from the circumstances and conditions surrounding the transaction.
Deduction — Losses — Transaction entered into for profit
6. Whether a transaction is entered into for profit depends upon all the circumstances, conditions and terms of the transaction and the relationship of the parties to the asset and to each other. *Page 288 
Deductions — Losses — Sale of personal assets
7. Losses upon the sale of an asset held for personal use never qualify for loss deductions under ORS 316.320(1)(b).
Sale of personal asset — Realized gain
8. Gains from the sale of personal assets are always includible in gross income unless the taxpayer can avail himself of the provisions for non-recognition of gain.
Deduction — Losses — Transaction qualification
9. The mere act of inheriting under a will is not a transaction entered into for profit.
Deduction — Losses — Capital asset — Risk of investment
10. To gain a recognizable capital loss deduction the beneficiary must subject the asset to the risk of investment which transaction is entered into for profit.
Deductions — Losses — Disposition of capital assets
11. The Oregon statute allows deductions for losses sustained during the year upon sale or other disposition of assets possessing the characteristics resulting from commitment of capital asset to investments entered into for profit and not for losses relating to uncommitted capital and to investments not made for profit.
Statutes — Construction — Strict
12. Tax deduction provisions are to be strictly construed in favor of the tax authorities.
Deduction — Losses — When sustained
13. A loss is sustained in the year of sale or other disposition when the transaction is closed.
Deduction — Losses — When taken
14. The loss on the sale or other disposition of assets is taken in the year in which such losses are sustained for the purpose of computing net income.
Basis — Capital account — Payments made to protect the right to inherit
15. Payments made by a taxpayer as principal beneficiary under a will for the purpose of upholding and protecting the right of the beneficiary to inherit under the will are capital expenditures chargeable to the capital account of the assets received under the will.
Basis — Capital account — Payments made to protect the right to inherit
16. If the principal beneficiary makes the settlement payment thereby upholding the will, the settlement payment is chargeable against the capital account of the assets received. *Page 289 
Capital gains and losses — Capital expenditures — Basis of assets — Realized gain
17. On sale or disposition of assets received under the will a proportionate part of the settlement payment is added to the basis for the purpose of establishing the adjusted basis, and the amount of gain or loss will be computed by taking into consideration the adjustment to basis.
Capital gains and losses — Sale or disposition of capital assets
18. Gains on the sale or other disposition of capital assets are included in gross income pursuant to ORS 316.105.