Docket No. 9123.

9 T.C. 219 (1947)


United States Tax Court.

Promulgated August 20, 1947.

Attorney(s) appearing for the Case

Frank A. McCleneghan, Esq., for the petitioner.

E. M. Woolf, Esq., for the respondent.

The Commissioner determined deficiencies in petitioner's declared-value excess profits taxes and excess profits taxes for the taxable year 1943 in the amounts of $66.63 and $3,162.17, respectively. Certain adjustments made by respondent are not contested by petitioner. The amount of the deficiencies in controversy arises from respondent's determination that real estate sold by petitioner in 1943 was a capital asset.


A partial stipulation of facts was filed, and we find them to be as stipulated. They are included herein, together with other facts, contained in the oral evidence, to the extent necessary to an understanding of the issue.

Petitioner is a corporation, having its office and principal place of business in Charlotte, North Carolina. It filed its tax return for 1943 with the collector at Greensboro, North Carolina.

Petitioner is engaged in the business of distributing tobacco products in North Carolina and South Carolina on a wholesale basis. It was incorporated in 1917, its two principal stockholders being L. J. Carter and W. E. Colton, both of whom were active in the management of petitioner's affairs. At that time, it occupied uptown leased store and warehouse quarters in Charlotte, where it kept its inventory stock of tobacco products, from which deliveries to the trade were made.

In February of 1926 petitioner purchased a vacant lot, without improvements, on West Morehead Street in Charlotte with the intention and for the purpose of having erected thereon a warehouse and store building, which was to be occupied by petitioner as its principal place of business. In the years immediately following the purchase of the lot petitioner had plans and specifications prepared for the erection of the building, but construction was not actually begun on account of the economic dislocation in connection with the depression which occurred about that time. In 1934 Carter died as the result of an accident and Colton was thereafter in responsible charge of petitioner's affairs. He decided to abandon the idea of building and to continue the business in its established location.

In 1935 the unimproved lot was offered for sale and in the years following it was placed in the hands of various real estate agencies for sale. It was finally sold in 1943.

During the years 1937 through 1943 petitioner rented billboard advertising space rights, for which it received the following rentals:

1937 and 1938 ----------------------------------   $25 per year
1939 through 1941 ------------------------------    15 per year
1942 and 1943 ----------------------------------    10 per year

A part of the 1943 rental was refunded to the lessee because of the sale of the property before the expiration of the year.

In September of 1943 petitioner received its first and only offer to buy the property, and the sale above referred to was arranged, for $4,000. The sale resulted in a loss to petitioner in the amount of $3,068.67. Petitioner claimed a deduction for the loss in that amount as an ordinary loss. Petitioner realized no gain in 1943 from the sale of any capital asset.


KERN, Judge:

The single question for decision here is whether the loss sustained by petitioner from the sale in 1943 of the vacant lot was an ordinary or a capital loss.

It is petitioner's position that the lot was not a capital asset by reason of the 1942 amendment to section 117 (a) (1) of the Internal Revenue Code, which excluded from the definition of capital assets "real property used in the trade or business of the taxpayer."

Respondent, on the other hand, contends that the real estate involved here was a capital asset, since it was never actually used in petitioner's trade or business, although he does not question the fact that it was bought for the purpose of being so used.

The facts are simple and undisputed; the legal question is novel, but not, we think, too difficult.

It is our view that the real property involved here was "used in the trade or business" of the petitioner, within the meaning of the statute, when it was purchased for the business purpose of causing a building to be constructed thereon to be occupied by the petitioner corporation and steps were taken looking toward the consummation of that plan, to the extent of causing plans to be drawn and specifications to be prepared for use in building on that particular lot. It seems to us that at that time some use, normal for that state of proceedings, had begun to be made of the lot for the petitioner's business purposes. Full or maximum use, of course, had not yet been made, and was finally prevented by later-developing circumstances over which petitioner had no control.

A similar question, arising under this relatively new amendment to the code, has recently been considered by this Court. Solomon Wright, Jr., 9 T.C. 173. In that case the real estate involved had ceased to be actively used in the taxpayer's business, since his business had ceased, yet we held it nevertheless not to be a capital asset.

Where the statute allows deductions for depreciation of property "used in the trade or business," it has been held that "used in the trade or business" means "devoted to the trade or business," and includes all such property, whether actually in use during the taxable year or not. Kittredge v. Commissioner, 88 Fed. (2d) 632; Yellow Cab Co. of Pittsburgh v. Driscoll, 24 Fed. Supp. 993; P. Dougherty Co., 5 T.C. 791, 795. The acquisition of real estate for use at its principal place of business by a corporation is a proper business purpose and function, and the real estate so purchased, in our opinion, is devoted to and "used in" the business of the corporation during the planning and building stages preparatory to actual occupancy. Its character as "real property used in * * * trade or business" continues even after the planned use becomes impossible. Solomon Wright, supra.

The fact that petitioner received some slight income from the property by leasing it for advertising space after petitioner had listed it for sale and pending its sale, does not seem to us to be particularly pertinent to the question before us. Such use of the property was in no way connected with petitioner's business, but was more in the nature of an incidental attempt to keep the property from being a total loss during the period when attempts were being made to dispose of it.

Upon the issue presented, we decide in favor of petitioner.

Decision will be entered under Rule 50.


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