Lowry v. United States
384 F.Supp. 257, 1974 U.S. Dist. LEXIS 5996, 34 A.F.T.R.2d (RIA) 6206 (1974)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A former personal residence is converted into 'property held for the production of income' under § 212 of the Internal Revenue Code when the taxpayer abandons personal use and holds the property with a genuine expectation of profiting from post-abandonment appreciation in value, even if the property is never offered for rent.
Facts:
- Edward G. Lowry, Jr. acquired his family's summer home on Martha's Vineyard in 1942, which was part of a cooperative community known as Seven Gates Farm Corporation.
- Any sale or lease of the property required prior consent from a supermajority (75%) of the other stockholder-lessees.
- In 1967, after purchasing a new home in New Hampshire that fulfilled his recreational needs, Lowry ceased using the Vineyard property as a residence and decided to sell it.
- He listed the property for sale at $150,000 but made no attempt to rent it, citing practical difficulties, restrictive corporate bylaws, and the low potential rental income relative to the property's value.
- From 1967 until the property was sold, Lowry did not use it personally, except for brief stays to perform maintenance for the sale, and he refused a request from his daughter to use the home, stating it was a 'business proposition'.
- Based on his extensive financial experience, Lowry believed that land values were entering an inflationary period and held the property with the expectation that it would appreciate to his asking price.
- An offer to buy the property for $150,000 in 1968 failed to close because Lowry could not obtain the necessary stockholder approval.
- The property was ultimately sold for the asking price of $150,000 in 1973, resulting in a net long-term capital gain of $100,536.50.
Procedural Posture:
- Edward G. Lowry, Jr. and his wife (plaintiffs) deducted maintenance expenses for their former summer home on their 1970 federal income tax return.
- The Internal Revenue Service (IRS) disallowed the deduction, finding the expenses to be personal.
- On November 27, 1971, the plaintiffs paid the assessed tax deficiency of $1,072 under protest.
- Plaintiffs then filed an action in the U.S. District Court against the United States (defendant) to recover the taxes paid, alleging they were erroneously assessed and collected.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a taxpayer convert a former personal residence into 'property held for the production of income' by ceasing all personal use and immediately offering it for sale, without attempting to rent it, with the intention of realizing post-abandonment appreciation in value?
Opinions:
Majority - Bownes, District Judge
Yes. A taxpayer converts a former residence into property held for the production of income when, based on all the facts and circumstances, their purpose is to hold the property to realize a profit from post-abandonment appreciation. The court rejected the Internal Revenue Service's position that a bona fide offer to rent is a prerequisite for such a conversion. Instead, the court adopted the multi-factor 'all facts and circumstances' approach from Frank A. Newcombe, emphasizing that the taxpayer's purpose and intention are the key inquiry. The court noted that 'income' under § 212 is not limited to recurring rental payments but also includes gains from the disposition of property, as stated in Treasury Regulation § 1.212-1(b). Applying this standard, the court found that Lowry had a clear 'expectation of profit.' His financial acumen, awareness of rising real estate values, and decision to wait for the market to meet his price demonstrated an intent to capitalize on post-abandonment appreciation. The fact that he immediately listed the property for sale was not seen as negating this intent, but rather as making it a 'visible commodity' while he waited for market forces to drive its value up.
Analysis:
This decision is significant for rejecting a rigid, bright-line rule that required an offer to rent to convert a personal residence into income-producing property. It endorses a more flexible, fact-intensive 'all facts and circumstances' test that focuses on the taxpayer's profit-seeking intent. By explicitly recognizing that holding property for post-conversion appreciation qualifies as holding it for the 'production of income,' the case provides a crucial precedent for taxpayers seeking to deduct maintenance expenses on former residences they are trying to sell. This shifts the legal analysis from the method of income generation (rent vs. sale) to the underlying profit motive, opening the door for deductions in situations where renting is impractical or undesirable.
