Opinion
Docket No. 26684.
1952-04-11
CHARLES S. GUGGENHEIMER AND MINNIE S. GUGGENHEIMER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Edgar J. Goodrich, Esq., and Edward First, Esq., for the petitioners. Robert B. Jacoby, Esq., for the respondent.
1. Where a parcel of real property was not purchased by the petitioner, Charles S. Guggenheimer, and his two associates in their joint business venture in buying and selling real property, was not held by them for sale as part of their ‘stock in trade,‘ and was not the type of property usually handled by the group, but on the contrary was in fact petitioner's parents' residence inherited by him and his brother and sister, managed by the family members as a partnership, and finally disposed of at a loss, held that the loss on such sale in the year 1945 was not attributable to the operation of petitioner's business of buying and selling real property and, accordingly, is subject to the limitations prescribed by section 122(d)(5) of the Internal Revenue Code and is not available as a net operating loss carry-back to the years 1943 and 1944.
2. On the basis of the facts presented, held, that the expenses incurred by the petitioner, Charles S. Guggenheimer, in the years 1942, 1943, and 1944, in entertaining law clients at a certain club of which the petitioner was a member, were ordinary and necessary business expenses deductible under section 23(a) of the Code, and a reasonable estimate of the amount of these expenses is $500 a year for each of these three years. Edgar J. Goodrich, Esq., and Edward First, Esq., for the petitioners. Robert B. Jacoby, Esq., for the respondent.
Respondent determined income tax deficiencies against the petitioners for the taxable years 1943 and 1944 in the amounts of $14,080.90, and $3,145.79, respectively. Certain adjustments made by the respondent in determining the above deficiencies were not contested; however, the following issues were raised in the petition and are presented for our decision:
1. Is the loss which petitioner, Charles S. Guggenheimer, suffered on the sale of real property in the year 1945 attributable to the operation of a trade or business regularly carried on by him, thereby entitling him to the benefit of a net operating loss carry-back for each of the years 1943 and 1944?
2. If the answer to issue No. 1 is in the affirmative, did the respondent err in reducing the amount of the loss by reducing the cost basis of the property by the amount of $8,333.33, representing an amount received in an earlier year upon a purchaser's default on a contract for the sale of the property?
3. Is petitioner, Charles S. Guggenheimer, entitled to annual deductions for entertainment expenses in the amount of $2,500 for each of the years 1942 through 1945? No claim for such deductions was made prior to the filing of the petition.
With respect to the third issue, the claimed deduction for the year 1942 is involved only by virtue of section 6 of the Current Tax Payment Act of 1943, and the year 1945 is involved only by virtue of the claimed net operating loss deductions for the years 1943 and 1944 carried back from the year 1945.
FINDINGS OF FACT.
Part of the facts were stipulated and they are so found.
Petitioners are husband and wife and they reside in New York City. They filed joint income tax returns for the taxable years in question with the collector of internal revenue for the second district of New York. For convenience, Charles S. Guggenheimer will be hereinafter referred to as the petitioner.
Petitioner is an attorney and has been engaged in the active practice of law since 1899. Petitioner has also been actively engaged in the business of buying and selling real estate. Prior to his mother's death in 1927, he was associated with her in the purchase and sale of business buildings, vacant lots, apartment houses and a hotel. Prior to his mother's death he was also engaged in the business of buying and selling real property with two others, William McCarthy and a Mr. Levine. Petitioner was active in the latter enterprise up to about the year 1939. The business of this group consisted of purchasing old apartments, lodging and rooming houses, making such repairs as were necessary and then selling them at a profit.
When petitioner's mother died in 1927 he and his brother and sister each inherited a one-third interest in her property. This property included realty located at 923 Fifth Avenue, which had been petitioner's parents' family home and was the residence of his mother at the time of her death. Petitioner and his brother and sister formed a partnership for the conservation, maintenance, and liquidation of their inherited property, with the petitioner being the active member of this partnership. The partnership was not engaged in the business of buying and selling real estate. In the year 1929 the partnership contracted to sell the Fifth Avenue property and received a payment of $25,000 on the contract. The purchaser defaulted and the $25,000 payment was retained. Petitioner did not report his share of this payment on his Federal income tax return for the year 1929. In 1937 petitioner purchased the Fifth Avenue property from the partnership (apparently the partners had conveyed their interest in this property to the partnership). The purchase price was $225,000 less the outstanding mortgage of $140,000. Petitioner agreed that if he sold the property for more than $200,000, one-third of any amount in excess thereof would be paid to his brother and one-third to his sister. The rent from the property was insufficient to cover the expenses, and at all times since the petitioner acquired his interest in the property in 1927 it was offered for sale. It was finally sold in 1945 for approximately $125,000. This property was neither acquired nor held by the petitioner for sale in the ordinary course of his business of buying and selling real estate. All his dealings with respect to it were separate, apart, and isolated from his business venture with respect to the purchase and sale of real estate.
During each of the years 1942 through 1944 petitioner was a member of a club called the ‘Bankers Club.‘ Since he joined the club in 1918 or 1919, its facilities were used by him almost exclusively for entertaining clients in his law business. A reasonable estimate of the amount of expenses so incurred by the petitioner in entertaining clients at this club was $500 per year for each of the years 1942 through 1944, and such expenditures were ordinary and necessary business expenses of petitioner's law practice.
OPINION.
HILL, Judge:
The first issue concerns the question whether in the computation of a net operating loss under section 122 of the Code the petitioner is entitled to deduct the loss he suffered on the sale of the Fifth Avenue property. The sale and the resulting loss occurred in the year 1945. The issue is material to the petitioner's tax liability for the two years before us (1943 and 1944), however, since petitioner seeks to apply to these taxable years the benefit of the net operating loss carry-back provisions of section 122.
In order for petitioner to prevail the evidence must show that the loss on the sale of the Fifth Avenue property is attributable to the operation of his trade or business
and, since the loss involved was from the sale of real property, the trade or business must be that of buying and selling real estate. Joseph Sic, 10 T.C. 1096, affd. 177 F.2d 469; Hartwig N. Baruch, 11 T.C. 96, affd. 178 F.2d 402; Lazier v. United States, 170 F.2d 521; Foreman v. Harrison, 79 F.Supp. 987; cf. Walter G. Morley, 8 T.C. 904. Far from sustaining petitioner's position, the evidence indicates that, while the petitioner was engaged in the business of buying and selling real property, the Fifth Avenue property was not acquired, held or sold by him in the course of such business.
SEC. 122. NET OPERATING LOSS DEDUCTION.(a) DEFINITION OF NET OPERATING LOSS.— As used in this section, the term ‘net operating loss‘ means the excess of the deductions allowed by this chapter over the gross income, with the exceptions, additions, and limitations provided in subsection (d).(d) EXCEPTIONS, ADDITIONS, AND LIMITATIONS.— The exceptions, additions, and limitations referred to in subsections (a), (b), and (c) shall be as follows:(5) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall (in the case of a taxpayer other than a corporation) be allowed only to the extent of the amount of the gross income not derived from such trade or business. For the purposes of this paragraphdeductions and gross income shall be computed with the exceptions, additions, and limitations specified in paragraphs (1) to (4) of this subsection. * * *
Sometime before his mother's death in 1927 and until the year 1939, petitioner was actively engaged in the business of buying and selling real estate in a joint venture with two others, William McCarthy and a Mr. Levine. (Their business will be hereinafter referred to for convenience as the association.) There is no evidence that petitioner was ever otherwise engaged in the business of buying and selling real estate after his mother's death in 1927.
The petitioner and his brother and sister inherited from their mother equal shares in the Fifth Avenue property, which had been petitioner's mother's residence up until the date of her death. It was not purchased or ever managed by the association. Petitioner and his brother and sister formed a partnership for the conservation, maintenance and liquidation of the property inherited from their mother, which included the Fifth Avenue property. This partnership was not engaged in the business of buying and selling real estate. The Fifth Avenue property was a large opulent residence and was not of the type of property in which the association was interested. The petitioner, as the active member of the partnership, experienced considerable difficulty in his attempt to sell the Fifth Avenue property. He spent considerable sums on its upkeep and maintenance and was very desirous of selling the property. However, there appears to have been some dispute between him and his brother and sister as to the price which they should obtain for it. Accordingly, in 1937 petitioner purchased the property from the partnership, paying therefor $225,000 less the mortgage of $140,000. He agreed to share equally with his brother and sister any amount which he might obtain for the property over and above $200,000. He obtained what rents he could from the property, although they were insufficient to meet expenses, and finally sold it in 1945 at a price of only $125,000.
From the foregoing we believe that all of petitioner's dealings with respect to the Fifth Avenue property were separate and apart from his buying and selling operations with the association, so that the loss suffered on the sale of the property was not attributable to the operation of his business of buying and selling real property. Accordingly, the loss comes within the limitations of section 122(d)(5) of the Code and, since the other 1945 losses did not exceed gross income, there could be no section 122 net operating loss in 1945 and no net operating loss carry-back from that year available for the years 1943 and 1944, and we so hold.
The second issue concerns the proper basis of the Fifth Avenue property in the determination of the amount of the loss suffered on the sale. This issue need not be considered since we have already decided that there is no net operating loss carry-back to the years 1943 and 1944 resulting from the sale, and the year 1945 is not before the Court.
The third issue concerns the petitioner's claimed deductions for traveling and entertainment expenses incurred with respect to his law business. The amount claimed was $2,500 for each of the years 1942 through 1945. By virtue of the fact that we have determined there is no net operating loss carry-back, we need not consider the deduction for the year 1945. However, the deduction claimed for the year 1942 is involved because of the tax forgiveness feature of the Current Tax Payment Act of 1943.
While in the petition there was a claim for both traveling and entertainment expenses, no evidence was introduced with respect to any traveling expenses. With respect to the entertainment expenses, the petitioner testified that one of the clubs to which he belonged, the ‘Bankers Club,‘ was used almost exclusively by him for entertaining his clients in his law business. He testified that the dues of this club were either $100 or $150 per year and that his monthly bills there ranged between $30 and $40 a month. On the basis of the evidence presented, we have found that the expenses incurred by the petitioner in entertaining clients at this club were ordinary and necessary business expenses and that an estimate of the reasonable amount thereof is $500 a year for each of the years 1942, 1943, and 1944. Cohan v. Commissioner, 39 F.2d 540. With respect to the other claimed expenditures for entertainment, petitioner's evidence was indefinite, vague and confusing, consisting mainly of his own estimates, and was insufficient to support a finding that any additional expenditures were made for entertainment in these years. Accordingly, we hold that the petitioner has failed to meet his burden of proof with respect to any claimed expenditures for entertainment other than those incurred at the ‘Bankers Club.‘
Decision will be entered under Rule 50.