SCOTUS Reports

Tag: Tenancy by the Entireties

  • White v. Commissioner, 18 T.C. 385 (1952): Determining Tax Deductions for Losses on Entireties Property

    18 T.C. 385 (1952)

    When property is held by a married couple as tenants by the entireties, any net operating loss from that property is deductible one-half by each spouse, regardless of which spouse paid the expenses.

    Summary

    Oren White and his wife owned a farm in Michigan as tenants by the entireties. White paid all farm-related expenses, resulting in a net operating loss. He claimed the entire loss on his individual tax return. The Commissioner of Internal Revenue determined that only one-half of the loss was deductible by White, with the other half deductible by his wife. The Tax Court upheld the Commissioner’s determination, reasoning that income and deductions from entireties property must be treated consistently, with each spouse entitled to one-half.

    Facts

    Oren C. White and his wife owned a farm in Michigan as tenants by the entireties. White conducted general farming operations on the property. White paid all farm-related expenses from his separate funds. No written or oral agreement existed between White and his wife regarding the division of profits, losses, or expenses related to the farm. A net operating loss resulted from the farming operations.

    Procedural History

    White claimed the entire farm net operating loss on his individual income tax return. The Commissioner of Internal Revenue determined a deficiency, allocating half of the loss to White and half to his wife. White petitioned the Tax Court, contesting the Commissioner’s determination.

    Issue(s)

    Whether a net operating loss from a farm owned by a husband and wife as tenants by the entireties is deductible entirely by the husband who paid all the expenses, or whether the loss must be divided equally between the spouses.

    Holding

    No, because when property is owned by a husband and wife as tenants by the entireties, both the income and the losses are divided equally between the two for federal income tax purposes, regardless of which spouse paid the expenses.

    Court’s Reasoning

    The court reasoned that under Michigan law, income from property held as tenants by the entireties is taxable one-half to each spouse. The court relied on analogies to community property law, where income and deductions are generally divided equally between spouses. The court cited Pierce v. Commissioner, stating that community income should be divided between husband and wife for federal income tax purposes. The court stated, “We fail to see any reason why a net profit should be taxable one-half to each of the parties but a net loss should be deductible entirely by one of the spouses. The treatment should be consistent in both situations.” The court distinguished cases like Nicodemus v. Commissioner, which allowed one spouse to deduct taxes and interest paid on entireties property, noting that the record in this case did not show what amounts, if any, White had paid for such items.

    Practical Implications

    This decision reinforces the principle that income and deductions from entireties property are generally treated as belonging equally to both spouses for tax purposes. Attorneys advising clients on tax matters involving entireties property should ensure that both income and expenses are properly allocated to each spouse’s individual tax return. This case demonstrates the importance of consistent tax treatment, and the need to allocate deductions proportionally to each spouse’s share of the income. While specific expenses like taxes and interest might, under different factual circumstances, be deductible by the paying spouse, clear evidence of such payments is required.

  • Farwell v. Commissioner, 1944 Tax Ct. Memo LEXIS 112 (1944): Determining ‘Trade or Business’ Status for Real Estate Sales

    1944 Tax Ct. Memo LEXIS 112

    A taxpayer’s activities can constitute a ‘trade or business’ even if those activities are curtailed due to economic circumstances, and property acquired with the intent to resell at a profit can be considered held primarily for sale to customers in the ordinary course of that trade or business, despite a period of inactivity.

    Summary

    Farwell sought to deduct losses from real estate sales as ordinary losses, arguing he was in the trade or business of selling real estate. The Tax Court agreed that despite a period of inactivity due to the Great Depression, Farwell’s intent to resell properties for profit, combined with his prior history of real estate dealings, established that he was in the trade or business of selling real estate, and the properties were held primarily for sale to customers. Thus, the losses were ordinary losses, not capital losses, and were fully deductible. The Court further held that only one-half of the loss from the sale of property held as tenants by the entireties could be deducted.

    Facts

    • Farwell acquired several properties, including 2930 West Grand Boulevard, Pallister & Churchill Streets property, and an 80-acre tract of land, with the intent to resell them at a profit.
    • He actively engaged in real estate operations for years prior to 1931, realizing substantial profits.
    • After 1931, his real estate sales activity virtually ceased due to the economic depression.
    • In 1940 and 1941, Farwell sustained losses on the disposal of the West Grand Boulevard and Pallister & Churchill Streets properties.
    • He also disposed of the 80-acre tract of land in 1941, sustaining a loss. This property was held with his wife as tenants by the entireties.

    Procedural History

    The Commissioner determined that the losses were capital losses, subject to limitations. Farwell petitioned the Tax Court for a redetermination, arguing the losses were ordinary losses because he was in the trade or business of selling real estate and the properties were held primarily for sale to customers.

    Issue(s)

    1. Whether, during 1940 and 1941, Farwell was engaged in the trade or business of selling real estate, and whether the properties in question were held primarily for sale to customers in the ordinary course of that business.
    2. Whether Farwell could deduct the full loss sustained on the disposal of the 80 acres of land in 1941, or only one-half, since the property was held as tenants by the entireties.

    Holding

    1. Yes, Farwell was engaged in the trade or business of selling real estate, and the properties were held primarily for sale to customers because he acquired the properties with the intention of selling them at a profit, and his prior activities demonstrated a pattern of real estate sales, even though his activity was curtailed due to economic circumstances.
    2. No, Farwell could only deduct one-half of the loss because under Michigan law, property held as tenants by the entireties is considered owned one-half by each tenant.

    Court’s Reasoning

    The court reasoned that Farwell’s intent to resell the properties at a profit, coupled with his historical real estate activities, established that he was in the trade or business of selling real estate. The court acknowledged the decline in activity after 1931 but attributed it to the economic depression, not an abandonment of the business. The court emphasized that the properties were acquired for resale, not for rental income or investment. The court quoted Julius Goodman, 40 B. T. A. 22 stating that none of these transactions was “an isolated holding dissimilar from any other transaction and unrelated to the history of petitioner’s activities.” Regarding the tenancy by the entireties, the court followed Michigan law, citing Commissioner v. Hart, 76 Fed. (2d) 864, which dictates that each tenant owns one-half of the property, thus each can only deduct one-half of the loss.

    Practical Implications

    This case clarifies that a temporary reduction in business activity due to external economic factors does not necessarily negate a taxpayer’s status as being engaged in a trade or business. It reinforces the importance of considering the taxpayer’s intent at the time of acquisition and the history of their business activities. The case also serves as a reminder that state property laws, such as those governing tenancies by the entireties, can significantly impact federal tax treatment, particularly in the context of gains and losses. Later cases will need to determine if the inactivity is due to external forces or a true change in business strategy. The case provides a framework for analyzing whether real estate holdings should be treated as ordinary assets or capital assets, influencing the tax consequences of their sale.