SCOTUS Reports

Tag: Transaction for Profit

  • Estate of Frances B. Watkins v. Commissioner, 1953 Tax Ct. Memo LEXIS 95 (1953): Loss Deduction for Transactions Entered Into for Profit

    1953 Tax Ct. Memo LEXIS 95

    A loss is deductible under Section 23(e)(2) of the Internal Revenue Code only if the transaction was entered into for profit; the taxpayer’s motive in acquiring the asset is crucial to determining whether the transaction meets this requirement.

    Summary

    Frances B. Watkins sought to deduct as a loss the amount she spent acquiring her son’s remainder interests in two trusts. Watkins was the life beneficiary of the trusts, and her son’s interest would only vest if he outlived her. He did not. The Tax Court denied the deduction, finding that Watkins’s primary motive for acquiring the remainder interests was to ensure they passed to her grandchildren, not to generate a profit. The court emphasized that while Watkins might have been able to sell the interests, her intent was never to do so.

    Facts

    Frances B. Watkins was the life beneficiary of two trusts. Her son held a remainder interest in these trusts, contingent on him surviving her. If he predeceased her, the remainder would go to his issue (Watkins’s grandchildren).
    Watkins purchased her son’s remainder interests. Her son died before Watkins, meaning his remainder interest never vested.
    Watkins claimed a loss deduction on her tax return for the amount she spent acquiring the remainder interests.

    Procedural History

    Watkins claimed a deduction on her federal income tax return. The Commissioner of Internal Revenue disallowed the deduction. Watkins petitioned the Tax Court for a redetermination of the deficiency.

    Issue(s)

    Whether Watkins is entitled to a loss deduction under Section 23(e)(2) of the Internal Revenue Code for the amount she spent to acquire her son’s remainder interests, given that the son predeceased her and the interests never vested in her estate; specifically, whether the purchase of the remainder interest was a “transaction entered into for profit”.
    Whether the death of the petitioner’s son constitutes a casualty loss within the meaning of Section 23(e)(3) of the Internal Revenue Code.

    Holding

    No, because Watkins’s primary motive in acquiring the remainder interests was not to generate a profit but to ensure the assets passed to her grandchildren.
    No, because the death of a son is not an event similar in character to a fire, storm, or shipwreck, which are the types of events contemplated by Section 23(e)(3).

    Court’s Reasoning

    The court focused on Watkins’s intent when she acquired the remainder interests. It found that she intended to keep the interests within her family and pass them on to her grandchildren, not to sell them for a profit. The court stated, “Although she no doubt could have sold these interests, we are satisfied that she never intended to do so, and that her only intention was to prevent them from being sold or otherwise dissipated and to make them part of her estate so that she could transfer them to her grandchildren at her death.”
    Even though the transactions were “arm’s length,” the court emphasized that this didn’t automatically make them “for profit.” Buying a house for personal use is an arm’s length transaction, but it’s not for profit. The court distinguished the case from situations where a speculative profit motive exists, stating, “Petitioner’s contention that these remainder interests had a speculative value from which she might have derived a profit is wholly irrelevant on the facts of this case. The point is that such speculative possibility played no part whatever in her motive in acquiring these interests.”
    The court also dismissed the argument that her son’s death was a casualty, stating that “The term ‘other casualty’ has been consistently treated as referring to an event similar in character to a fire, storm, or shipwreck.”

    Practical Implications

    This case illustrates the importance of taxpayer intent when determining whether a transaction qualifies as one “entered into for profit” for loss deduction purposes. It clarifies that even an arm’s-length transaction can be considered personal if the primary motive is non-economic, such as preserving assets for family.
    Attorneys should advise clients to document their intent and purpose when entering into transactions that could potentially generate a loss, particularly when dealing with family members or assets with sentimental value.
    This case serves as a reminder that the “other casualty” provision under Section 23(e)(3) is narrowly construed to include events similar in nature to those specifically listed (fire, storm, shipwreck), and does not extend to events like death, even if it results in a financial loss.

  • Grammer v. Commissioner, 12 T.C. 34 (1949): Deductibility of Loss on Sale of Former Residence

    12 T.C. 34 (1949)

    Merely listing a former residence with a real estate broker, even exclusively, for rent, does not constitute appropriating the property to business use, and thus does not justify a deduction for any loss on a subsequent sale as a “transaction entered into for profit” under Internal Revenue Code, section 23(e)(2).

    Summary

    Allen and Malvina Grammer sought to deduct a loss on the sale of their former residence after moving to a new home and listing the old property for rent with real estate brokers. The Tax Court denied the deduction, holding that merely listing the property for rent, even exclusively, did not constitute an appropriation to business use or a transaction entered into for profit. The court emphasized that the taxpayers did not actually rent the property or otherwise use it for income-producing purposes before selling it. This case highlights the importance of demonstrating a clear intent to convert personal property into income-producing property to claim a loss deduction.

    Facts

    In 1930, Allen Grammer purchased land and constructed a residence in Meadowbrook, Pennsylvania, using it as his family’s home until May 1942. In April 1938, Grammer began working in New York City, leading the family to purchase a new residence in Montclair, New Jersey, in the fall of 1941 and move there in May 1942. Upon moving, they took all their possessions and had no intention of returning to the Meadowbrook property. Grammer consulted with his lawyer, who advised listing the Meadowbrook property solely for rental to establish a business purpose. In June 1942, Grammer listed the property exclusively for rent with a real estate broker for six months, and later with another broker, but was unsuccessful in finding a tenant. In December 1943, Grammer engaged real estate agents for the sale of the property. The property was eventually sold in July 1944 for $40,000.

    Procedural History

    The Commissioner of Internal Revenue disallowed the loss deduction claimed by the Grammers on their 1944 income tax return related to the sale of the Meadowbrook property. The Grammers petitioned the Tax Court for a redetermination of the deficiency, arguing that the loss should be considered an ordinary loss because the property was converted to income-producing use before the sale.

    Issue(s)

    Whether the petitioners are entitled to a loss deduction on the sale of property which had previously been occupied by them as their residence and which had been offered for rental.

    Holding

    No, because merely listing a former residence with a real estate broker for rent, even exclusively, does not constitute an appropriation to business use to justify a deduction for any loss on a subsequent sale as a “transaction entered into for profit” under Internal Revenue Code, section 23(e)(2).

    Court’s Reasoning

    The Tax Court reasoned that to deduct a loss on the sale of property originally acquired as a residence, the loss must be suffered in a “transaction entered into for profit.” The court stated that a mere listing with a broker, even exclusively, does not satisfy the statutory requirement or constitute an appropriation to income-producing purposes. The court cited relevant regulations and case law emphasizing that if the property has not been actually rented, its appropriation to income-producing purposes must be accompanied by a “use” for such purposes up to the time of its sale. The court determined that Grammer’s actions did not constitute an irrevocable position to an extent that he could not resume occupancy or sell the property. The court emphasized that all Grammer accomplished by the “exclusive” listing was to undertake that the property if rented would be rented through that broker or at least his commission would be paid, but there was no agreement as to the rental to be sought. Ultimately, the court concluded that Grammer’s actions fell short of constituting such a “transaction entered into for profit” as to place it out of his power to resume occupancy of the premises or to sell them.

    Practical Implications

    This case clarifies the requirements for converting personal property, such as a residence, into income-producing property for tax purposes. Taxpayers seeking to deduct a loss on the sale of a former residence must demonstrate more than merely listing the property for rent. Actual rental or other demonstrable use for income production is necessary to establish a “transaction entered into for profit.” Legal practitioners should advise clients to take concrete steps to convert property to business use, such as actively seeking tenants, making substantial improvements for rental purposes, and documenting these efforts, to support a potential loss deduction. This case is often cited in similar circumstances to deny loss deductions where taxpayers fail to demonstrate sufficient business use of a former residence before its sale. Subsequent cases have further refined the criteria for demonstrating conversion to income-producing use.

  • Campbell v. Commissioner, 5 T.C. 272 (1945): Deductibility of Loss on Inherited Property

    5 T.C. 272 (1945)

    A loss incurred from the sale of property inherited and immediately listed for sale or rent is deductible as a loss in a transaction entered into for profit, and the portion of the loss attributable to the sale of the building is considered an ordinary loss, not a capital loss, if the property was never used in the taxpayer’s trade or business.

    Summary

    N. Stuart Campbell inherited a one-half interest in a house and land from his father. Campbell never resided in the inherited property and immediately listed it for sale or rent. When the property was eventually sold at a loss, Campbell sought to deduct the loss. The Commissioner of Internal Revenue disallowed the deduction, arguing it was not a transaction entered into for profit and should be treated as a capital loss. The Tax Court held that the loss was deductible as it was a transaction entered into for profit, and the portion of the loss from the sale of the building was an ordinary loss.

    Facts

    N. Stuart Campbell inherited a one-half interest in a house and land in Providence, Rhode Island, from his father in 1934. The father had used the property as his personal residence. Campbell, who resided in Massachusetts, never intended to use the inherited property as his residence. Immediately after inheriting the property, Campbell listed it for sale or rent with real estate agents. Campbell and his sister (who inherited the other half) considered remodeling the property into apartments but were prevented by zoning laws. The property was finally sold in 1941, resulting in a loss.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Campbell’s income tax for 1941, disallowing a net long-term loss and an ordinary loss from the sale of the inherited property. Campbell petitioned the Tax Court for a redetermination of the deficiency.

    Issue(s)

    1. Whether the loss suffered by the taxpayer upon the sale of the house and land which he inherited from his father is deductible under Section 23(e) of the Internal Revenue Code as a loss incurred in a transaction entered into for profit.

    2. Whether the loss suffered by the taxpayer upon the sale of the house, as distinguished from the land, is an ordinary loss deductible in full, or a capital loss subject to limitations under Section 117 of the Internal Revenue Code.

    Holding

    1. Yes, because the taxpayer immediately listed the inherited property for sale or rent, demonstrating an intent to enter into a transaction for profit.

    2. The loss attributable to the sale of the house is an ordinary loss deductible in full, because the house was not used in the taxpayer’s trade or business.

    Court’s Reasoning

    The court distinguished cases where taxpayers converted their personal residences into properties for sale or rent. In those cases, merely listing the property was insufficient to demonstrate a transaction entered into for profit. Here, Campbell never used the property as a personal residence and immediately sought to sell or rent it. The court stated, “The fact that property is acquired by inheritance is, by itself, neutral.” The critical inquiry is how the property was used after inheritance. Because Campbell immediately listed the property, he demonstrated an intent to derive a profit. Regarding the characterization of the loss on the house, the court relied on 26 U.S.C. § 117(a)(1), which excludes depreciable property used in a trade or business from the definition of a capital asset. The court reasoned that because Campbell never used the house in his trade or business, the loss from its sale was an ordinary loss, citing George S. Jephson, 37 B.T.A. 1117, and John D. Fackler, 45 B.T.A. 708.

    Practical Implications

    This case clarifies the tax treatment of losses incurred on inherited property. It establishes that inheriting property previously used as a personal residence does not automatically preclude a loss on its sale from being treated as a deductible loss incurred in a transaction for profit. The taxpayer’s intent and actions following the inheritance are critical. Immediate efforts to sell or rent the property are strong evidence of intent to generate a profit. Furthermore, the case reinforces that losses on depreciable property are considered ordinary losses if the property was not used in the taxpayer’s trade or business. This distinction is essential for determining the extent to which a loss can be deducted in a given tax year. Later cases would distinguish the facts where the taxpayer had lived in the property for some time before listing it for sale.

  • Marx v. Commissioner, 5 T.C. 173 (1945): Deductibility of Loss on Inherited Property Sold for Profit

    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.

  • Parker v. Commissioner, 1 T.C. 709 (1943): Deductibility of Losses Incurred During Mining Venture Investigation

    1 T.C. 709 (1943)

    Expenditures made during an actual business operation, even if preliminary to a larger undertaking, qualify as a transaction entered into for profit, allowing for loss deductions upon abandonment under Section 23(e)(2) of the Internal Revenue Code.

    Summary

    Charles T. Parker claimed a deduction for a loss incurred while investigating a mining project. Parker contributed $1,000 to a joint venture to test the viability of placer mining operations on Burnt River, Oregon. After unfavorable test runs revealed a lower-than-expected gold recovery rate, the venture was abandoned. Parker sought to deduct his $1,000 loss under Section 23(e)(2) of the Internal Revenue Code, which allows deductions for losses incurred in transactions entered into for profit. The Tax Court held that Parker was entitled to the deduction because the test runs constituted an actual business operation, not just a preliminary investigation.

    Facts

    Parker, a partner in a general contracting business, was approached with a potential investment in placer mining operations on Burnt River, Oregon. Prior operations at the site had been profitable. Parker engaged a contractor, Anderson, to evaluate the property. Following a favorable report from Anderson, Parker, Anderson, and others each contributed $1,000 to conduct test runs of the mining operation. The $4,000 was used to repair equipment, employ workers, and conduct mining operations for approximately 30 days. The test runs yielded disappointing results, leading to the abandonment of the venture.

    Procedural History

    Parker claimed a deduction on his 1940 income tax return for the $1,000 loss. The Commissioner of Internal Revenue denied the deduction, resulting in a deficiency assessment. Parker petitioned the Tax Court for a redetermination of the deficiency.

    Issue(s)

    Whether the expenditure of $1,000 by the petitioner for test runs of placer mining operations constitutes a transaction entered into for profit, such that the loss incurred upon abandonment is deductible under Section 23(e)(2) of the Internal Revenue Code.

    Holding

    Yes, because the activities undertaken by the petitioner and others constituted actual mining operations, not merely a preliminary investigation, thereby qualifying as a transaction entered into for profit under the statute.

    Court’s Reasoning

    The Tax Court distinguished this case from Robert Lyons Hague, 24 B.T.A. 288, where the taxpayer only sought advice about a potential investment. Here, Parker went beyond a preliminary investigation by contributing funds and participating in actual mining operations. The court emphasized that the venture involved “actual operations” including repairing equipment, hiring workers, and conducting test runs over a 30-day period. These activities demonstrated an intent to generate profit. The court stated, “All that was done involve the elements of entering into a transaction for profit within the meaning of the statute…But they were actual operations and the fact that they did not result in a permanent undertaking does not take the transaction outside the statutory provision.” The court found that Parker sustained a loss when the venture was abandoned, entitling him to a deduction under Section 23(e)(2) of the Internal Revenue Code.

    Practical Implications

    This case clarifies the distinction between preliminary investigations and actual business operations for tax deduction purposes. It suggests that taxpayers can deduct losses incurred in ventures that involve tangible activities aimed at generating profit, even if those ventures ultimately fail to become permanent businesses. Attorneys advising clients on tax matters should consider the extent of operational activity undertaken in a venture when evaluating the deductibility of losses. The Parker decision provides a basis for arguing that losses incurred during active exploration and testing phases of a potential business are deductible if the activities demonstrate a genuine intent to generate profit, differentiating it from mere preparatory or advisory expenditures. Later cases may distinguish Parker if the activities are deemed too preliminary or exploratory in nature.