5 T.C. 173 (1945)

The deductibility of a loss on the sale of inherited property depends on whether the property was acquired and held in a transaction entered into for profit, as determined by the taxpayer’s intent and actions.

Summary

Estelle Marx inherited a yacht from her husband and promptly listed it for sale. She never used the yacht for personal purposes. When she sold the yacht at a loss, she sought to deduct the loss from her income taxes. The Commissioner of Internal Revenue denied the deduction, arguing that inheriting property does not automatically constitute a transaction entered into for profit. The Tax Court ruled in favor of Marx, holding that her consistent efforts to sell the yacht indicated a profit-seeking motive, making the loss deductible. This case clarifies that inherited property can be the subject of a transaction entered into for profit if the taxpayer demonstrates an intent to sell it for financial gain.

Facts

Lawrence Marx bequeathed a yacht to his wife, Estelle Marx, in his will after his death on May 2, 1938. Prior to his death, Lawrence had already listed the yacht for sale. Estelle, along with the other executors of the estate, inherited the yacht on July 13, 1938. The yacht remained in storage from the time of Lawrence’s death until it was sold on April 17, 1939. Estelle continued to list and advertise the yacht for sale throughout her period of ownership. Estelle never used the yacht for personal purposes and never intended to do so.

Procedural History

Estelle Marx filed her 1939 income tax return, deducting a loss from the sale of the yacht. The Commissioner of Internal Revenue disallowed the deduction, resulting in a tax deficiency assessment. Marx then petitioned the Tax Court for a redetermination of the deficiency.

Issue(s)

Whether the loss sustained on the sale of an inherited yacht is deductible as a loss incurred in a transaction entered into for profit, under Section 23(e) of the Internal Revenue Code.

Holding

Yes, because the taxpayer demonstrated a consistent intent to sell the inherited yacht for profit, never using it for personal purposes, thus establishing that the transaction was entered into for profit.

Court’s Reasoning

The Tax Court focused on the taxpayer’s intent and actions in determining whether the transaction was entered into for profit. The court emphasized that inheriting property, by itself, is a neutral event. It neither automatically qualifies nor disqualifies a subsequent sale as a transaction for profit. The critical factor is the taxpayer’s purpose or state of mind. The court distinguished this case from those where the taxpayer had previously used the property for personal purposes. Here, Estelle Marx never used the yacht personally and consistently sought to sell it. The court noted, “Here petitioner engaged in no previous conduct inconsistent with an intention to realize as soon as possible and to the greatest extent possible the pecuniary value of the yacht…The record contains nothing to counteract or negative the uniform, continuous, and apparently bona fide efforts of petitioner to turn the property to a profit which would justify any conclusion but that this was at all times her exclusive purpose.” Because Marx demonstrated a clear intention to sell the yacht for profit, the loss was deductible.

Practical Implications

This case provides guidance on determining whether a loss on the sale of inherited property is deductible. It clarifies that inheriting property does not automatically qualify or disqualify a transaction as one entered into for profit. Attorneys should advise clients that the key is to document the taxpayer’s intent and actions regarding the property. Consistent efforts to sell the property, without any personal use, strongly support the argument that the property was held for profit. Taxpayers should maintain records of advertising, listings, and other efforts to sell the property. This ruling has been applied in subsequent cases to differentiate between personal use assets and those held for investment or profit-seeking purposes. It serves as a reminder that the taxpayer’s behavior is paramount in determining tax consequences related to inherited assets.