1. Under the Revenue Act of 1918, § 215(a)5, the devotion of a
house theretofore purchased and used as the taxpayer's residence,
exclusively to the production of taxable income in the form of
rentals, is a "transaction entered into for profit" as of the date
when the change was made, and when such change occurred before
March 1, 1913, and the new use continued until the property was
sold at a loss after the date of the Act, the amount of loss
deductible in computing net income is the difference between the
sale price and the value of the property on the date of the change,
or, if that value be larger than the March 1, 1913, value, then the
difference between the sale price and the value on March 1, 1913.
P.
276 U. S.
585.
Page 276 U. S. 583
2. Article 141 of Treasury Regulations 45 refers to property
used by the taxpayer as a residence up to the time of sale. P.
276 U. S.
586.
18 F.2d 452 reversed.
Certiorari, 275 U.S. 514, to a judgment of the circuit court of
appeals which reversed a judgment for the Collector in an action to
recover money paid as income taxes.
MR. JUSTICE STONE delivered the opinion of the Court.
Before 1892, the late Philander C. Knox built a dwelling house
in Pittsburgh at a total cost for land and buildings of $172,000.
He occupied the house as a residence until 1901, when,
circumstances requiring his residence elsewhere, he leased the
property at a stipulated rental. He continued so to lease it from
October 1st in that year until 1920, when it was sold for $73,000.
The fair market value of the property on March 1, 1913, was
$120,000. Its value in 1901 does not appear. In his income tax
return for 1920, he deducted from gross income the difference
between the selling price of the property and its March 1, 1913,
value, less depreciation from that date to the date of sale. The
Commissioner disallowed the deduction and assessed a
correspondingly increased tax, which was paid under protest. The
present suit was brought in the District Court for Western
Pennsylvania to recover the additional tax assessed. The trial was
to the court, a jury having been waived by written stipulation.
Judgment was given for the collector (
Tindle v. Heiner, 17
F.2d 522), which was reversed by the Circuit Court of Appeals for
the Third Circuit (
Tindle v. Heiner, 18 F.2d 452).
Page 276 U. S. 584
The tax was assessed under the Revenue Act of 1918, c. 18, 40
Stat. 1057. Section 214 specifies deductions which may be made from
gross income in computing the tax, and subsection (a)5 permits the
deduction of
"losses sustained during the taxable year and not compensated
for by insurance or otherwise, if incurred in any transaction
entered into for profit, though not connected with the trade or
business."
Section 215 provides that: "In computing net income, no
deduction shall in any case be allowed in respect of (a) personal,
living, or family expenses." Treasury Regulations 45, promulgated
April 17, 1919, and in force during 1920, provide: "Art. 141. . . .
A loss in the sale of an individual's residence is not
deductible."
This was amended on January 28, 1921, to read:
". . . A loss in the sale of residential property is not
deductible unless the property was purchased or constructed by the
taxpayer with a view to its subsequent sale for pecuniary
profit."
This regulation has remained unchanged under the Revenue Acts of
1921, 1924 and 1926.
See Art. 141 of Regulations 62,
Regulations 65, and Regulations 69.
That the exchange value of a dwelling house may increase or
diminish is a consideration not usually overlooked by one who
purchases it for residential purposes, but the quoted regulations
appear to assume that the acquisition of such property cannot be a
transaction for profit within the meaning of subsection (a) 5 of §
214 if the dominating purpose of it is the use of the property for
a home. The correctness of that view is not before us, for there is
no finding that the taxpayer built his dwelling with any hope or
expectation of profit.
See Appeal of D'Oench, 3 B.T.A.
24.
But the findings amply support the view of the court of appeals
that the purpose to use the property as a residence of the taxpayer
came to an end when it was leased
Page 276 U. S. 585
in 1901, and that from that date until it was sold 19 years
later it was devoted exclusively to the production of a profit in
the form of net rentals. It is not questioned that if, in 1901, the
property had been purchased for that use or inherited and so used
the loss might have been deducted, but it is said, as the district
court held, that the only transaction entered into with respect to
the property was the purchase of the land and the erection of the
house, regardless of the use which might afterwards be made of it,
and that these acts did not appear to be a transaction entered into
for profit.
But the words "any transaction" as used in subsection (a)5, are
not a technical phrase, or one of art. They must therefore be taken
in their usual sense, and, so taken, they are, we think, broad
enough to embrace at least any action or business operation, such
as that with which we are now concerned, by which property
previously acquired is devoted exclusively to the production of
taxable income. We can perceive no reason why they should not be so
taken, unless that construction is inconsistent with the purpose or
with particular provisions of the act. Section 214, read as a
whole, discloses plainly a general purpose to permit deductions of
capital losses wherever the capital investment is used to produce
taxable income, and the inclusion of the present deduction in those
described in subsection (a)5 would seem to be entirely harmonious
with that purpose.
But it is pointed out that § 202 of the Revenue Act of 1918,
prescribing the method of computing gain or loss upon the sale of
property, makes value as of March 1, 1913, or cost if acquired
later, the basis of the computation. It is said that this is
inconsistent with the use of the market value of the property at
the date of rental as the basis of the computation, which would be
necessary if the construction contended for were given to
subsection
Page 276 U. S. 586
(a)5, and that, in any case, a computation on that basis would
involve administrative difficulties in determining the value, which
should lead to a different interpretation.
But it is obvious that § 202 is not all-inclusive. The same and
no greater inconsistency and difficulty arise in the case of
property acquired by gift, bequest, or devise when market value at
the time of acquisition by the donee and not cost is necessarily
the basis of computing the tax. That, in such cases, the difference
between the sale price and market value at the date of acquisition,
if after March 1, 1913, is deductible under subsection (a) 5, is
not questioned. The ascertainment of market value of the property
at that date would not seem to involve any greater administrative
difficulty than the ascertainment of market value on March 1, 1913.
Section 202 itself provides that, in the case of exchange, the
property shall be taken at this fair market value, and, under the
Act of 1918, this was likewise provided for in the case of property
acquired by gift, devise, or bequest by Regulations 45, Art. 1562,
which was incorporated in the later acts. Revenue Act of 1921, c.
136, 42 Stat. 227, § 202(a)2; Revenue Act of 1924, c. 234, 43 Stat.
253, § 204(a)2; Revenue Act of 1926, c. 27, 44 Stat. 9, §
204(a)2.
For the purpose of computing the loss resulting from this
particular transaction we think it must stand on the same footing
as losses resulting from a similar use of property acquired by gift
or devise and that, whenever needful the fair value of the property
at the time when the transaction for profit was entered into may be
taken as the basis for computing the loss.
Article 141 of the Regulations presents no necessary
inconsistency with the construction of § 214(a)5, contended for by
the respondent. The article, both in its original and in its
amended form, obviously refers to the
Page 276 U. S. 587
sale of residential property of the taxpayer, that is to say,
property used by him as a residence up to the time of the sale.
Only if that is its meaning can it be reconciled with the Treasury
rulings that losses on the sale of residential property acquired by
gift, devise, or bequest and devoted to rental purposes may be
deducted. The loss here has resulted from the sale of property not
used for residential purposes by the taxpayer, and the transaction
entered into for profit and resulting in the loss was not the
purchase of the property, but its appropriation to rental purposes.
The article of the regulations, by its terms, has no application to
a loss so incurred.
The findings show that the property was sold for less than its
cost, and the loss deducted was the difference between its March 1,
1913, value and the sale price. The only loss deductible here under
subsection (a)5 is one incurred in a transaction entered into for
profit, later than the date of purchase. For all that appears from
the findings, the loss which had occurred between the date of
purchase and March 1, 1913, may have occurred before the property
was devoted to rental purposes. For that reason, the findings do
not support the judgment. The cause should be remanded for a new
trial so that the value of the property as of October 1, 1901, when
rented, may be found. If that value is larger than the value of
March 1, 1913, the deduction made below should be allowed; if less,
only the difference, if any, between its then value and the sale
price should be allowed.
See United States v. Flannery,
268 U. S. 98;
McCaughn v. Ludington, 268 U. S. 106.
Reversed.