Opinion
Docket No. 34887.
1953-10-30
JULIUS LONG STERN AND (MRS.) ELLEN V. STERN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Edgar J. Goodrich, Esq., and Lipman Redman, Esq., for the petitioners. Edward Pesin, Esq., for the respondent.
Edgar J. Goodrich, Esq., and Lipman Redman, Esq., for the petitioners. Edward Pesin, Esq., for the respondent.
Full ownership interest received as tenant by entirety by petitioner's daughter as co-grantee of petitioner held to require disallowance under section 24(b), Internal Revenue Code, of any loss to petitioner on transfer of property.
The respondent determined a deficiency in the income tax of the petitioners, Julius Long Stern and Ellen V. Stern, in the amount of $26,638 for the taxable year 1948.
Two of the adjustments made by the respondent are uncontested by the petitioners. The issue left for our decision is whether Julius Long Stern sustained a deductible loss upon the sale of his former residence.
FINDINGS OF FACT.
The petitioners reside at West Dallas, Pennsylvania. They filed their Federal income tax return for the year here involved with the collector of internal revenue for the twelfth district of Pennsylvania.
Julius Long Stern (hereinafter referred to as the petitioner) built his former residence at 36 West River Street, Wilkes-Barre, Pennsylvania, in 1925 at an approximate cost of $110,000. His father build the attached adjoining residence at exactly the same time at a cost of approximately $135,000.
The property located at 36 West River Street (hereinafter referred to as the West River Street property), was at the time here in controversy one of the four or five outstanding residences of Wilkes-Barre. The house is 36 feet wide and about 76 feet deep, with poured concrete cellar wall. The basement is partitioned off into various sections, including a boiler room, a laundry, a vegetable cellar, and an area that could be used for recreational purposes. On the first floor is a side entrance that opens into a vestibule, and on the west side of the building is a very large living room, with windows on three sides and a fireplace. Also on the first floor are a beautiful dining room and a very modern kitchen with all facilities, a library with a separate fireplace, a reception hall, a powder room, and some closets.
There is an open stairway leading to the second floor in the front of which are a master bedroom, a large dressing room, and a tile bath. This section can be separated from the rest of the house by a sliding door. Back of that are 4 other rooms and 2 modern tile baths.
On the third floor are 2 or 3 bedrooms, with a moder bath. There are cedar closets and ample space for the storage of clothing, bags, etc.
The house generally is finished in wide oak flooring with dowel pegs. There are bronze casement windows. The walls are canvas covered and decorated in difference ways. The house is heated with vapor heat. It is unusually wired for electricity with all types and kinds of outlets. There is one master control of the entire electrical system whereby one button throws all of the lights in the house on and off at one time.
The exterior of the house above the ground level is stone, antique brick, Hewn timbers in the upper gable section, and stucco. The roof is a very heavy slate roof with lead gutters and conductors. There is a triple snow guard on the roof. In front, there are a paved area and a porch arrangement. On the side is the driveway with flagstone extending from the front to the rear. The lot is 56 feet in front, extends 206 feet in depth, and is attractively planted with shrubs, lawns, etc. In the rear of the property is a 2-car brick garage (built in 1929 at a cost of between $3,000 and $4,000) that has an upper floor for storage, with a panel in the ceiling which can be pulled down and a stairway made to give access to the second floor.
The location of the house was one of the most desirable in Wilkes-Barre situated opposite River Common, which is a city parkway, and the bank of the Susquehanna River and which is considered the finest and best residential section of the city. The house is 6 or 7 minutes walk from the central city area.
The petitioner occupied the West River Street property as his personal residence until May 1947 when he moved to his new home in West Dallas, Pennsylvania, 12 miles from Wilkes-Barre.
Construction on petitioner's new house started in March 1946. At that time the petitioner decided to sell the West River Street property and discussed the matter first in the summer of 1946 with John Howell, and then in September 1946 with Harry Goeringer, both of whom are qualified real estate experts in Wilkes-Barre and who were intimately acquainted with the house at that time. The house was listed for sale first with the office of John Howell and later with Harry Goeringer at a price of $75,000. Later, in January 1947, the house was also listed with other real estate office in Wilkes-Barre. In September 1946 Harry Goeringer appraised the property at a fair market value of $60,000. Intensive efforts to sell the house were carried on by the real estate offices referred to above and the house was advertised for sale and other steps taken to interest prospective purchasers. Several prospects had been shown through the property and in March 1947 Charles S. Popky, through his attorney, submitted an offer to buy the house, including most of the furnishings, for a price of $40,000. The offer was accompanied by a check in the amount of $1,000. The furnishings of the West River Street property had been independently appraised by a qualified expert at a fair market value of $10,000. The Popky offer, which was based solely on Popky's ability to pay, was immediately rejected by the petitioner as being far too low.
The petitioner has been on the board of directors of the Miners National Bank of Wilkes-Barre for the past 25 years. In April 1947 the petitioner applied to the Miners National Bank for a loan on the West River Street property. As a result of the petitioner's application for a loan, Guy W. Moore and Harry Goeringer, both of whom were directors of, and appraisers for, the Miners National Bank, appraised the house for mortgage loan purposes at $50,000 and recommended a loan of 50 per cent thereof to the petitioner. The loan was granted in the amount of $25,000 to the petitioner and a mortgage for that amount was taken by the Miners National Bank on the property.
On June 5, 1947, Harry Goeringer made a third appraisal of the West River Street property for fair market value sales purposes and fixed the value at $60,000.
The years 1946 and 1947 were years of a very active real estate market in Wilkes-Barre, during which years materials for building purposes were scarce.
In the spring of 1947, the petitioner's son-in-law, Dr. Samuel A. Guttman, informed the petitioner that he had decided to move to Wilkes-Barre and open an office for the practice of psychiatry. This decision of Dr. Guttman was based upon his own judgment, after consultation with his wife but without the advice or suggestion of the petitioner. Dr. Guttman was motivated by his desire to practice in a smaller community in which he could combine both his home and his office and in which living conditions would be less difficult than in Philadelphia, where he had been practicing. In addition, he was familiar with the area and knew that there was no other practicing psychiatrist in Wilkes-Barre or in Luzerne or Lackawanna counties.
Dr. Guttman inquired whether the petitioner would rent the West River Street property. The house was expensive for petitioner to maintain and, after consultation with Harry Goeringer, the petitioner decided to rent the house in order to cut down the cost of maintaining two houses. Upon the advice of Goeringer, a rental of $200 a month was set and the petitioner leased the West River Street property for a period of 1 year at a rental of $200 per month beginning on September 1, 1947. This rental was the highest rental for comparable property in Goeringer's experience and was paid by check and reported by the petitioner on his income tax return.
Dr. Guttman, who anticipated a rental for longer than 1 year, made improvements in the West River Street property at a cost of approximately $3,000 in order to make it more readily usable as a combined home and office. The funds for these improvements were derived from Dr. Guttman's professional earnings, which were approximately $20,000 per year for the period 1946 through 1949.
By the summer of 1948, the Popky offer was the only offer received by the petitioner on the West River Street property and at that time he had a further discussion respecting the property with Goeringer. He was informed that the real estate market in Wilkes-Barre had suffered a substantial decline from the beginning of 1948, caused by the fact that building materials had become more plentiful, that there was a new suburban trend and a new trend toward the ranch-type house, which had resulted in reducing the fair market value of the petitioner's West River Street property. The petitioner was further advised by Goeringer that unless he was willing to wait for an indefinite period he would have to take a substantial loss in order to effect a reasonably prompt sale.
Thereupon the petitioner decided to sell the house at the best price he could get, regardless of the property's fair market value. He was motivated in reaching this decision by the fact that the West River Street property in addition to his own residence was expensive to maintain and by the fact that the West River Street property was encumbered by a mortgage, which was undesirable to the petitioner.
When in the late summer of 1948 Dr. Guttman asked the petitioner to renew his lease, he was informed that the house was for sale at the best possible price and that petitioner was asking $30,000 for the property without the furnishings. Dr. Guttman decided to, and did, purchase the house from the petitioner at a price of $30,000. Form his professional earnings he gave the petitioner a check in the amount of $7,500 and he gave a check in the amount of $4,500 to the Miners National Bank, which had supplied the balance of the purchase price, or $18,000, after taking a mortgage on the property in that amount. The petitioner's debt to the Miners National Bank was paid in full and his mortgage was thereupon released.
All negotiations concerning the sale of the West River Street property were conducted between the petitioner, Dr. Guttman, and the Miners National Bank. The petitioner's daughter did not participate in any of these negotiations, nor was she a party to them. On Dr. Guttman's decision, title to the property was taken in the name of Dr. Guttman and his wife as tenants by the entirety in accordance with the usual custom in Pennsylvania and in accordance with the custom of Dr. Guttman and his wife, who had always taken title to all property acquired during their marriage, jointly. All of their bank accounts were held by Dr. Guttman, whose professional earnings supplied the funds, and his wife in their joint names, including his professional or M.D. account. All of the moneys that went into these accounts were from Dr. Guttman's earnings.
At the time of her marriage, Claire Guttman owned in her own name securities worth approximately $15,000, which were drawn upon while Dr. Guttman was pursuing his professional education and experience in his specialty to provide for the support of the family's living expenses. Of these securities, several thousand dollars' worth were still owned by Claire Guttman at the time of the sale. After Dr. Guttman started his medical practice in 1945 his professional income was adequate and sufficient to support his family and himself in all respects. The petitioner was never called upon and never did furnish any of the support of Dr. Guttman or his family, with the exception of an occasional gift of cash to his daughter upon occasions of her birthday, Christmas, etc.
Claire Guttman, as well as Dr. Guttman, signed the mortgage and accompanying bond in connection with the sale of the West River Street property and the simultaneous financing of the transaction by the Miners National Bank.
OPINION.
OPPER, Judge:
The question is whether there was a ‘sale‘ of petitioner's property to a member of his family, that is his daughter, so as to forbid the deduction of any loss under section 24(b), Internal Revenue Code.
It is not sufficient that the property may also have been purchased by petitioner's son-in-law. Walter Simister, Jr., 4 T.C. 470. A tenancy by the entirety confers on each grantee ownership per tout et non per my.
SEC. 24. ITEMS NOT DEDUCTIBLE.(b) LOSSES FROM SALES OR EXCHANGES OF PROPERTY.—(1) LOSSES DISALLOWED.— In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly—(A) Between members of a family, as defined in paragraph (2)(D);(2) STOCK OWNERSHIP, FAMILY, AND PARTNERSHIP RULE.— For the purposes of determining, in applying paragraph (1), the ownership of stock—(D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; * * *
Gallagher's Estate, 352 Pa. 476, 43 A.2d 132; Wakefield, 149 Pa.Super. 9, 25 A.2d 841. When the transfer was completed petitioner's daughter accordingly owned it all. In addition she supplied the purchase price equally with her husband by the use of the joint bank account, see Gallagher's Estate, supra, and by becoming jointly and severally liable on the mortgage which it was necessary to obtain in order to supply the cash payment to petitioner. Under such circumstances we cannot say that the property was not sold to petitioner's daughter within the meaning of the statute. Walter Simister, Jr., supra. And since here the entire property was sold to the daughter the entire loss, rather than a half as in the Simister case, must be disallowed.
‘An estate by the entirety is a form of co-ownership in real and personal property held by a husband and wife with right of survivorship. Its essential characteristic is that each spouse is seized per tout et non per my, i.e., of the whole or the entirety and not of a share, moiety, or divisible part. Gasner v. Price, 286 Pa. 529, 134 A. 494; Porobenski v. American Alliance Ins. Co., 319 Pa. 410, 176 A. 205; Madden v. Gosztony S.& T. Co., supra; C.I.T. Corporation v. Flint, 33 P. 350, 5 A.2d 126, 121 A.L.R. 1022.‘ (Gallagher's Estate, supra, p. 133.)
Such cases as Nordling v. Commissioner, (C.A. 9) 166 F.2d 703, and Charles J. Stamler, 45 B.T.A. 37, are in no respect an impediment to this result. In both, sales to an excluded individual were held to be purely ‘nominal‘ with the reality requiring treatment as an actual sale to a family member so as to cause disallowance of the loss. Such a construction is necessary in order to prevent evasion of the section. It does not necessitate the allowance of the present loss where to do so would likewise frustrate the legislative purpose. Cf. Prentiss D. Moore, 17 T.C. 1030, affd. (C.A. 5) 202 F.2d 45, with W. A. Drake, Inc., 3 T.C. 33, affd. (C.A. 10) 145 F.2d 365.
Whether there was in fact a loss we accordingly find it unnecessary to determine. It seems highly improbable that the value of the property would have decreased by 50 per cent in the single year between the time of its conversion to business use and its sale. If the unfurnished value in 1947 is indicated by the only offer received, it was worth no more when converted to business use than petitioner ultimately received. If on the other hand it was as valuable on the earlier date as contended by petitioner we regard it as highly probable that it was sold for less than fair market value and that any ‘loss‘ was the result of petitioner's own choice and rather illusory than real. See Higgins v. Smith, 308 U.S. 473. The was precisely the sort of situation to which section 24(b) was directed, H. Rept. No. 704, 73d cong., 2d Sess., p. 23; although the very difficulty of ascertaining whether a sale at a loss in bona fide is one of the reasons for the automatic nature of the disallowance.
Hon. Samuel B. Hill (Chairman, Subcommittee of Committee on Ways and Means) stated in discussion of the bill which introduced this section into the tax laws:‘Also, since we have provided in this bill against transactions between members of the same families, whereby a man may transfer to his wife, to his daughter, his son, or father, or any member of his family in direct line of ascent or descent, we have removed the temptation from tax dodgers who transfer securities or other property from one member of a family to another in order to deduct a capital loss against ordinary income.‘ (78 Cong.Rec., 73d Cong., 2d Sess., p. 2662.)
It follows that both the language and purpose of the section require that respondent's action in disallowing any supposed loss on the transaction be approved. See McWilliams v. Commissioner, 331 U.S. 694.
Reviewed by the Court.
Decision will be entered for the respondent.
RAUM, J., concurs in the result.
VAN FOSSAN, J., dissents.
BRUCE, J., concurring:
In my opinion the petitioner has not established that he suffered any loss.
The property involved was converted to business property on September 1, 1947, the date on which it was rented, and the loss, if any, is to be measured by the difference between the fair market value on that date and the sale price less cost of sale. It is to be noted that the petitioner first decided to sell his residence located at 36 West River Street, Wilkes-Barre, Pa., in March 1946. Following discussions with two prominent real estate experts, he listed the property for sale first with one and then with the other, at a price of $75,000. Later, in January 1947, the property was listed with other real estate offices in Wilkes-Barre. Intensive efforts were made to sell the property, including advertising the house for sale and other steps taken to interest prospective purchasers. Although several prospects were shown through the property, but one offer to purchase, that of Charles S. Popky, made in March 1947, was received. This offer was in the amount of $40,000 and was to include the furnishings, which had been appraised at a fair market value of $10,000. The Popky offer was rejected by the petitioner as being too low. Failing a sale of the property, notwithstanding a very active real estate market in Wilkes-Barre during the years 1946 and 1947, petitioner, on September 1, 1947, rented the property to his son-in-law for 1 year. During this period petitioner received a rental of $200 per month, which was considered to be a high rental. This is less than a 10 per cent return on a $30,000 house, the amount for which the property was finally sold to petitioner's son-in-law in the late summer of 1948. Upon all the facts, it is my opinion petitioner has not established that he suffered any loss.
MURDOCK and TURNER, JJ., agree with this concurring opinion.
HILL, J., dissenting:
I must dissent from the majority opinion herein. The provisions of section 24(b)(1)(A) of the Internal Revenue Code are explicit. The provide that losses from ‘sales or exchanges‘ between members of a family shall not be deductible whether accomplished directly or indirectly. ‘Family‘ is defined in equally explicit terms to include an individual's brothers and sisters, his spouse, ancestors, and lineal descendants, and, as we have held, one's son-in-law is not properly includible in the definition set forth. Therefore, it appears that the sine qua non for the disallowance of the loss with which we are presently concerned is a determination of fact that the petitioner entered into a sale or exchange of the West River Street property to his daughter, Claire Guttman. The evidence establishes the contrary.
The majority opinion stresses the point that if a husband and wife take title to property as tenants by the entirety each is the owner of the whole and not merely of a moiety or share. I have no quarrel with that pronouncement. But the majority opinion goes further and holds that the legal status as to such title automatically makes each spouse a vendee of the whole title as well as a grantee thereof. Obviously, the question of whether such grantee is also such vendee is one of fact and not one of law. It is also a truism that law does not and can not create a factual status or the fact or facts forming the basis of such status.
I submit that in this case the evidence establishes this fact: Petitioner's daughter was not a vendee but was merely a grantee by the donative grace of her husband.
An examination of the majority opinion makes it obvious that no sale or exchange to Claire Guttman took place in fact. Instead, the majority relies upon legal fiction in the effort to establish that a sale between the petitioner and his daughter was accomplished as a matter of law. The fiction relied upon belongs to the law of real property. It had its roots in the common law and was born centuries before income taxation was a gleam in the fiscal eye of government. This fiction argues that husband and wife are one. In the enactment and administration of the revenue laws, fact rather than fiction is made to prevail. For example, section 811(e) of the Internal Revenue Code provides that the value of the gross estate of a decedent shall be determined by including the value at the time of his death of all real property as follows:
(e) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money's worth: Provided, That where such property or any part thereof, or part of the consideration with which such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than an excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person: Provided further, That where any property has been acquired by gift, bequest, devise, or inheritance, as a tenancy by the entirety by the decedent and spouse, then to the extent of one-half of the value thereof, or, where so acquired by the decedent and any other person as joint tenants and their interests are not otherwise specified or fixed by law, then to the extent of the value of a fractional part to be determined by dividing the value of the property by the number of joint tenants.
Therefore, in spite of the fiction on which the majority relies, it is obvious that the full value of the West River Street property would be includible in the gross estate of the petitioner's son-in-law for the petitioner's daughter supplied no part of the consideration with which the property was acquired in money or money's worth. In fact she took her interest as a donee, In fact she took her interest as a donee, her husband being the donor. She acquired by gift from her husband. She purchased nothing. She paid for nothing. The majority opinion's holding that she supplied her share of the purchase price equally with her husband by use of their joint bank accounts is without basis in tax law.
In Estate of Fletcher E. Awrey, 5 T.C. 222, reviewed by the Court without dissent, one of the issues to be decided was to what extent, if any, the decedent's wife was the owner of certain property standing in the decedent's and her joint names as tenants by the entirety. See Mich. Stat. Ann. Secs. 26.201, 26.202 (1937). In holding that the entire value of the contested properties was includible in the decedent's gross estate, we said:
It is clear that these jointly owned properties were acquired with funds drawn from or consisting of several savings bank deposits which stood in the joint names of decedent and his wife and which had as their source decedent's share of the partnership distributions. Having held under the first issue that decedent's wife had at the time of his death no interest in his share of the net worth of the partnership, we are of the opinion that the value of the contested items as of the time of decedent's death should properly be included in his gross estate. We, therefore, hold that the Commissioner did not err in including the total value of such property in decedent's gross estate.
The parallel here is inescapable for the facts wet forth show that the consideration paid to the petitioner was wholly earned by his son-in-law, who supplied all of the funds entering into the bank accounts held jointly by him and his wife. Nor is the fact that the petitioner's daughter joined in the mortgage and bond to the Miners National Bank important. That was a separate transaction involving the bank, the petitioner's son-in-law, and the petitioner's daughter. The petitioner was not a party to it, directly or indirectly. Further, even had the property been taken in Dr. Guttman's name alone, it would have been necessary that his wife join in the mortgage and in its accompanying bond. How else could the bank have been protected against her intervening interest, dower or otherwise, in the property? This is a practice essential to the protection of all mortgagees of real property and is not determinative of the issue before us.
In the past we have not been misled by either fiction or form, e.g., Charles J. Stamler, 45 B.T.A. 37; Prentiss D. Moore, 17 T.C. 1030, and W. A. Drake, Inc., 3 T.C. 33. I see no reason to abandon realities here.
The majority's suggestion that its holding is necessary to the preservation of the purpose intended by section 24(b) is without basis. Congressional intent is made explicit by the definition of ‘family‘ found in section 24(b)(2)(D). That definition does not include son-in-law, nor is it within our power to accomplish by judicial edict that which Congress specifically refused to do. The automatic disallowance of losses required by section 24(b) applies only in the circumstances set forth by that section and does not relieve this Court of its duty to make determinations of fact in other instances. Arguments of administrative convenience can not overawe the intent of the statute, particularly here where Congress has by explicit definition preempted such a result.
The result reached by the majority is not necessary to carry out the legislative intent of section 24(b), nor, in my opinion, does the situation with which we presently deal fall within the provisions of that section.
That the petitioner in fact sustained a loss is, to my mind, incontrovertible. The petitioner's evidence, which was strong and convincing to me, established preponderantly that the fair market value on the date the property was converted to income-producing use was $60,000.
In opposition to the petitioner's evidence, the respondent's ‘expert‘ relied upon the assessed value of the property for local tax purposes, the only offer received, the selling price, and the fact that there are more buyers generally for smaller inexpensive homes than for large expensive residences— hardly a sound basis for determining fair market value. The Popky offer on which the respondent's expert relied was made by a man who had no knowledge of real estate and whose only consideration in making the offer was his ability to pay. The worth of such an offer in determining fair market value is nil. Sharp v. United States, 191 U.S. 341. The ultimate sales price was a sacrifice price accepted by the petitioner to accomplish a quick sale. As the petitioner himself put it, ‘I was in a position where I wanted to cut my losses, pay off the mortgage, and get rid of this responsibility, and I made up my mind, when his lease was up, I was going to sell the house for the best price I could get for it.‘ This circumstance does not fix the fair market value of the property at the time that it was converted to income-producing use, nor on the date that it was ultimately sold. Gilbert Creek Land Co., 14 B.T.A. 921, 929, and Thomas Palmer, 23 B.T.A 296.
The evidence concerning the assessed value of the land for local tax purposes was excluded from the record as hearsay and the truism that more small inexpensive homes are sold than large expensive residences may be relevant as to the ability to make a quick sale, but is hardly determinative of the fair market value of the petitioner's property.