Horrmann v. Commissioner
1951 U.S. Tax Ct. LEXIS 23, 17 T.C. 903 (1951)
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Rule of Law:
Abandoning a personal residence and listing it for sale or rent is sufficient to convert the property to be 'held for the production of income,' allowing deductions for depreciation and maintenance, but is insufficient to convert it into a 'transaction entered into for profit,' which is required to deduct a capital loss from its sale.
Facts:
- In February 1940, the petitioner inherited a residence and garage at 189 Howard Avenue from his mother.
- The petitioner spent approximately $9,000 redecorating the house and moved into it around October 1940, selling his previous residence shortly thereafter.
- He used the Howard Avenue property as his personal residence for approximately two years.
- In October 1942, petitioner abandoned the house as his residence, finding it too large and expensive, and planned never to use it personally again.
- He considered converting the building into apartments but found this impractical.
- From October 1942 until its sale, the petitioner made numerous but unsuccessful efforts to rent and sell the property.
- The property was sold in June 1945 for a net amount of $20,800, which was substantially less than its value when he inherited it or abandoned it.
Procedural Posture:
- The Commissioner of Internal Revenue determined deficiencies in the petitioner's income tax for the years 1943, 1944, and 1945.
- The petitioner challenged the Commissioner's determination by filing a petition in the Tax Court of the United States.
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Issue:
Does abandoning a personal residence and making unsuccessful efforts to rent or sell it convert the property into a 'transaction entered into for profit' under § 23(e)(2) of the Internal Revenue Code, thereby allowing the owner to deduct a capital loss upon its eventual sale?
Opinions:
Majority - Judge Black
No. Merely abandoning a personal residence and listing it for sale or rent does not convert it into a 'transaction entered into for profit' sufficient to allow the deduction of a capital loss upon its sale. The court distinguished between the legal standards for different types of deductions. For depreciation and maintenance expenses, the statute requires the property to be 'held for the production of income.' The court found that the petitioner's abandonment of personal use and his continuous efforts to rent the property satisfied this standard, even though no income was actually received. However, for deducting a loss from a sale, the statute requires the loss to be incurred in a 'transaction entered into for profit.' The court held this is a higher standard that requires more than merely listing the property. Citing precedent like Rumsey v. Commissioner, the court reasoned that to convert a former personal residence into a profit-seeking transaction, the owner must take an affirmative step that is more decisive than simply listing it, such as actually renting it out or remodeling it for business purposes. The petitioner's decisive actions in making the property his personal residence for two years fixed its character, and his subsequent actions were insufficient to demonstrate a conversion for profit-seeking purposes.
Analysis:
This decision establishes a critical distinction between the tax treatment of ongoing expenses and capital losses for a former personal residence. By creating a higher bar for deducting capital losses ('transaction entered into for profit') than for deducting maintenance and depreciation ('held for the production of income'), the court narrows the ability of taxpayers to claim losses on the sale of former homes. The ruling solidifies the principle that a property's character is initially fixed by its use, and a significant, concrete action—beyond mere intent or listing—is required to convert it from personal to profit-seeking for the purpose of deducting a sales loss. This precedent requires future courts to scrutinize the taxpayer's actions for an irrevocable commitment to a business purpose, such as an actual lease, rather than just attempts to find a tenant.
