T.C. Memo. 1997-444
UNITED STATES TAX COURT
SOOREN HOVHANNISSIAN AND ESTATE
OF MARY HOVHANNISSIAN, DECEASED, SOOREN
HOVHANNISSIAN, EXECUTOR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6556-95. Filed September 29, 1997.
Stephen G. Utz and Ann McClure, for petitioners.
Elise F. Alair and Bradford A. Johnson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
BEGHE, Judge: Respondent determined the following
deficiencies, addition to tax, and penalties:
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Addition to tax Penalty
Year Petitioner(s)1 Deficiency Sec. 6651(a) Sec. 6662
1989 SH $7,963 $1,472 $1,593
1989 MH 16,656 --- 3,331
1990 SH & MH 129,181 --- 25,836
1
Petitioners are: (1) SH--Sooren Hovhannissian; (2) MH--
Estate of Mary Hovhannissian, Deceased, Sooren Hovhannissian,
Executor; and (3) SH & MH--Sooren Hovhannissian and Estate of
Mary Hovhannissian, Deceased, Sooren Hovhannissian, Executor.
After concessions by both parties,1 we first address whether
petitioner Sooren Hovhannissian (petitioner) is required to
include in his 1990 gross income, as gain under section 1038(b),2
$383,288, the portion of the cash he received on an installment
sale of real property in 1988 that he had not previously reported
as gain. We hold that section 1038 governs petitioner’s
reacquisition in 1990 of the property upon the buyer’s default on
the installment note secured by the property; petitioner must
include $383,288 as gain in his 1990 gross income. We also hold
that petitioner is not entitled to claim a section 165 loss in
1990 on his reacquisition of the property. As a result,
1
Petitioner conceded the addition to tax, and respondent
conceded the penalties. Petitioners argued on brief that they
have conceded only $3,120 of their claim for car and truck
expenses for taxable year 1990. However, the parties’
stipulation clearly states that petitioners conceded $4,449 of
those claimed deductions.
2
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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petitioners are not entitled to any loss carrybacks from 1990 to
1989.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by reference. Petitioners resided in
Trumbull, Connecticut, when they filed their petition.
Mrs. Hovhannissian thereafter died, and her estate was
substituted as a party to this proceeding.
Beginning in 1953, petitioner acquired several contiguous
parcels of land in Bridgeport, Connecticut (hereinafter 225-235
Boston Avenue property and 245 Boston Avenue property), upon
which he built several structures. Petitioner operated a retail
carpet and furniture business on the premises from the time of
their construction until he sold the 225-235 Boston Avenue
property in 1988. Petitioner continued to operate a carpet
business at the 245 Boston Avenue property through at least 1990.
In 1972, petitioner began to build a combination parking
garage and warehouse on the rear portion of the 225-235 Boston
Avenue property. Petitioner encountered various difficulties in
building this structure, which was never completed or put into
service. Petitioner estimated that he spent $400,000 in
constructing this structure, but lost his records of the
construction costs. Petitioner submitted an expert report that
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estimated the likely construction costs of the structure at
$253,000 at the time of construction in the early 1970's.
Thereafter, petitioner let the structure stand idle and
unfinished, fenced off to prevent vandalism. One of the walls
of the structure collapsed prior to the 1988 sale and was never
repaired.
On February 8, 1988, petitioner sold the 225-235 Boston
Avenue property, which then consisted of the furniture store
building (the front property) and the unfinished garage/warehouse
structure (the rear property), to the Bridgeport Mini Limited
Partnership (the partnership) for the stated consideration of
$2,710,000. Petitioner received $719,480 in cash and a
nonrecourse purchase money mortgage note in the face amount of
$2,030,400.3 Under the terms of the note, petitioner was to
receive quarterly payments of interest for 3 years, at which time
the principal amount of $2,030,400 and all accrued or unpaid
interest would become due. As part of the sale, petitioner
obtained an engineering report showing that the garage structure
was suitable for conversion into a self-storage facility. He
also obtained the permits necessary for conversion of both the
front and rear properties into self-storage facilities.
3
As part of the $719,480, petitioner received from the
partnership approximately $39,880 above and beyond the sale
price, which was properly reported by petitioner as part of the
payments from the sale that were received during 1988.
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For taxable year 1988, petitioner and Mrs. Hovhannissian
filed a joint income tax return. Of the $719,480 in cash
received upon the sale of the 225-235 Boston Avenue property,
petitioners reported $336,192 as gain and $383,288 as a recovery
of basis from an installment sale. Petitioners also received and
reported $176,228 in interest payments from the partnership.
Petitioner and Mrs. Hovhannissian filed separate returns for
taxable year 1989. They each reported $60,000 of the $120,000 of
interest payments received from the partnership during that year.
In 1990, petitioner and Mrs. Hovhannissian received no interest
payments from the partnership.
Following the sale in 1988, the partnership began converting
the 225-235 Boston Avenue property into a self-storage rental
facility. In 1989, the partnership filed for bankruptcy, leaving
the conversion incomplete and defaulting on its obligations to
pay interest and principal on the mortgage note. The main
building on the front property, which had formerly served as
petitioner’s furniture store, had been stripped to a bare shell
to house the self-storage facility. The main building contained
449 mini storage bins installed on all three floors. The doors
from all of the bins were missing. The partnership had also
removed the roof of the unfinished garage structure and several
important structural members.
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On or about June 1, 1990, the Federal bankruptcy court
supervising the partnership bankruptcy permitted petitioner to
reacquire the 225-235 Boston Avenue property. The parties have
stipulated that the fair market value of the 225-235 Boston
Avenue property on the reacquisition date was $465,000. Pursuant
to a claim petitioner made in November 1990, he received an
insurance recovery of $4,000 in a later year for damage resulting
from alterations made to the 225-235 Boston Avenue property by
the partnership. Petitioner also filed suit against the attorney
who represented him on the sale of the property, alleging that
the partnership’s purchase money mortgage note should have been
recourse and not nonrecourse. Petitioner recovered no damages.
For taxable year 1990, petitioner and Mrs. Hovhannissian
filed a joint income tax return, reporting a loss of $99,797.
Upon the advice of their then income tax return preparer, they
did not report any gain or loss on the reacquisition. Petitioner
and Mrs. Hovhannissian filed separate Forms 1045, Application for
Tentative Refund, claiming net operating loss carrybacks of
$48,898 and $48,899, respectively, from 1990 to taxable year
1989.
In January to February 1995, respondent issued separate
notices of deficiency to petitioner and Mrs. Hovhannissian for
taxable year 1989 and a joint notice of deficiency for taxable
year 1990. Petitioners filed a timely petition with this Court.
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OPINION
1. Application of Section 1038
The primary issue for decision is whether section 1038
governs petitioner’s reacquisition of the 225-235 Boston Avenue
property, requiring petitioners to report $383,288 as hitherto
unrecognized gain in taxable year 1990 under section 1038(b).
Congress added section 1038 to the Code to ensure that
certain reacquisitions of real property sold in installment sales
would not be treated as taxable exchanges by simple reference to
the fair market value of the reacquired property. Act of
September 2, 1964, Pub. L. 88-570, 78 Stat. 854. Section 1038(a)
provides that a reacquisition of real property governed by
section 1038 is one in which a sale of real property gave rise to
indebtedness in favor of the seller, the indebtedness was secured
by the real property sold, and the seller reacquired the real
property in full or partial satisfaction of the indebtedness;
except as provided in section 1038(b), no gain or loss results
from the reacquisition and no debt can be treated as having
become worthless or partially worthless for any such
reacquisition.4
4
Sec. 1038(a) provides:
If--
(1) a sale of real property gives rise to
indebtedness to the seller which is secured by the real
property sold, and
(continued...)
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For reacquisitions governed by section 1038(a), section
1038(b)(1) requires the seller to recognize gain to the extent
that money and the fair market value of other property received
from the sale prior to reacquisition exceed the amount of gain
recognized in previous periods.5 Section 1038(b)(2) limits the
amount of gain to be recognized to the amount by which the
original sale price exceeded the sum of: (1) The adjusted basis
of the property, (2) gain previously recognized on the sale, and
4
(...continued)
(2) the seller of such property reacquires such
property in partial or full satisfaction of such
indebtedness,
then except as provided in subsections (b) and (d), no
gain or loss shall result to the seller from such
reacquisition, and no debt shall become worthless or
partially worthless as a result of such reacquisition.
5
Sec. 1038(b)(1) provides:
In the case of a reacquisition of real property to
which subsection (a) applies, gain shall result from
such reacquisition to the extent that--
(A) the amount of money and the fair market
value of other property (other than obligations
of the purchaser) received, prior to such
reacquisition, with respect to the sale of such
property, exceeds
(B) the amount of the gain on the sale of
such property returned as income for periods prior
to such reacquisition.
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(3) any money paid or other property (measured by its fair market
value) transferred in connection with the reacquisition.6
Section 1038 governs the Federal income tax treatment of all
reacquisitions described therein, even where “the mandatory
language of section 1038(b) works a hardship on a taxpayer”.
Greene v. Commissioner, 76 T.C. 1018, 1026 (1981) (relief
available to such taxpayers through increases to basis under
section 1038(c) that offset gain reported upon reacquisition);
sec. 1.1038-1(a), Income Tax Regs. Section 1038 applies to such
reacquisitions even when substantial improvements have been made
6
Sec. 1038(b)(2) provides:
Limitation.--The amount of gain determined under
paragraph (1) resulting from a reacquisition during any
taxable year beginning after the date of the
enactment of this section shall not exceed the amount
by which the price at which the real property was sold
exceeded its adjusted basis, reduced by the sum of--
(A) the amount of the gain on the sale of
such property returned as income for periods prior
to the reacquisition of such property, and
(B) the amount of money and the fair market
value of other property (other than obligations of
the purchaser received with respect to the sale of
such property) paid or transferred by the seller
in connection with the reacquisition of such
property.
For purposes of this paragraph, the price at which real
property is sold is the gross sales price reduced by
the selling commissions, legal fees, and other expenses
incident to the sale of such property which are
properly taken into account in determining gain or loss
on such sale.
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that substantially change the property. Conners v. Commissioner,
88 T.C. 541 (1987).
In Conners v. Commissioner, supra, we held that section 1038
does not require a taxpayer who reacquires land improved by the
buyer to recognize gain on the reacquisition with respect to the
improvements. In Conners, the taxpayers sold land for $10,000
cash and a $720,000 promissory note to a developer who
constructed a 48-unit town house project. The developer/buyer
defaulted on his note to the taxpayers when he could not sell all
the units. The taxpayers ultimately agreed to take title to six
units, the land underlying those units, and six forty-eighths of
the common land in lieu of exercising their right to foreclose.
The taxpayers did not report any gain upon the reacquisition.
Id. at 542-543.
In Conners, the Commissioner argued that the taxpayers were
required to recognize gain from the improvements because the
property was “substantially different from that which they sold”,
id. at 544, contending that section 1038 did not apply because,
contrary to congressional intent, the taxpayers “were in a better
position following the reacquisition”, id. at 545. However, we
found that the taxpayers were not in a better position, and that
to tax them on the improvements at that point would be to
“require the recognition of gain not yet realized, out of funds
not yet received.” Id. We held that “repossession of improved
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property in satisfaction of an obligation resulting from the sale
of the same property prior to improvements is entitled to
nonrecognition treatment under section 1038.” Id. at 546.
To aid in determining the applicability of section 1038 to
the facts in Conners, we used four factors enumerated in the
legislative history, indicating
that Congress felt it was inappropriate to measure gain
upon repossession of the property by reference to the
fair market value at the time of the repossession
because (1) the taxpayer was actually in no better
position than he was before he made the sale; (2)
valuation at the time of repossession was difficult;
(3) to tax the initial seller on gain at the time of
repossession was to tax him on gain not yet realized;
and (4) because the taxpayer had not received a
monetary return with respect to the property, funds to
pay the taxes may be unavailable. [Id. at 544-545
(citing S. Rept. 1361, 88th Cong., 2d Sess. (1964),
1964-2 C.B. 828, 831).]
Petitioners argue that the 225-235 Boston Avenue property
was so changed by reason of the partnership’s failure to complete
the conversion to the self-storage facility that section 1038
should not apply to the entire property, but only to the front
property, the former furniture store and the land on which it
stands. Petitioners argue that section 1038 should not apply to
the rear property because the buyer so irreparably damaged the
parking structure that petitioners “cannot be taxed as though the
building still existed and could therefore be said to have been
recovered as well.” Petitioners argue alternatively that, even
if section 1038 does apply to the entire property, petitioner is
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entitled to a section 165 loss upon the reacquisition of the rear
property in its damaged condition. Respondent, citing Conners v.
Commissioner, supra, argues that section 1038 applies to real
property that has been reacquired, even if it has been
substantially changed.
Before considering the four factors described in the
legislative history and quoted in Conners v. Commissioner, supra
at 544, we address petitioner’s argument that the property should
be bifurcated so as to apply section 1038 only to the front
property. Petitioner sold the 225-235 Boston Avenue property as
a single piece of property and reacquired it as a single piece of
property. The warranty deed by which petitioner conveyed the
property to the partnership in 1988 also identifies the property
as a single parcel. Cf. Goudas v. Commissioner, T.C. Memo. 1996-
555. There is nothing in the facts of this case to support a
finding that the 225-235 Boston Avenue property is divisible in
any meaningful way that would be supported by language of the
statute, the regulations, or the legislative history. On this
ground alone, we could hold that section 1038 applies to the
reacquisition of the entire 225-235 Boston Avenue property
because petitioners have conceded the applicability of section
1038 to the front property. However, we go on to consider the
four factors referred to in the legislative history.
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We cannot determine from the record whether petitioner was
in a better or worse position at the time of reacquisition than
he was at the time of the original sale. Upon the reacquisition,
petitioner had the property, plus $719,480 in cash he had
received at the time of sale, and $296,228 in interest payments.
The parties have stipulated that the fair market value of the
225-235 Boston Avenue property was $465,000 at the time of
reacquisition. Under the terms of the mortgage note, petitioner
had no further recourse against the partnership or its general
partners upon reacquisition of the property. Despite his
subsequent expressions of discontent with the terms of the
transaction, petitioner willingly sold the property on those
terms in 1988 and received $719,480 at the closing and interest
payments pursuant to the mortgage note in 1988 and 1989. Only
when petitioner resells the property will he be able to ascertain
whether the changes by the partnership and the then-current
market conditions will result in a loss. Congress enacted
section 1038 to provide mandatory, uniform income tax treatment
in precisely this kind of case, deferring recognition of either
gain or loss until the seller once again sells the reacquired
property and the amount of the gain or loss can be objectively
measured. S. Rept. 1361, supra, 1964-2 C.B. at 831; see also
Greene v. Commissioner, 76 T.C. at 1025-1026.
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The difficulty in determining a fair market value by which
to ascertain an amount realized in the absence of a realization
event was another major reason why Congress enacted section 1038.
S. Rept. 1361, supra, 1964-2 C.B. at 831. That valuation
difficulty is present in this case: Although the parties have
stipulated, based on petitioner’s expert’s opinion, a fair market
value of $465,000 at reacquisition, the record also contains a
1989 appraisal of the same property in the same condition for
$2,300,000.
We discuss the third and fourth factors in light of
petitioner’s further argument that applying section 1038 to this
case would be unconstitutional because petitioner did not realize
any gain in connection with the sale and subsequent reacquisition
of the 225-235 Boston Avenue property and should therefore not be
taxed on any gain nor denied a claim for a loss at the time of
reacquisition. To support his argument, petitioner also claims
that the fair market value of the property at the time of
reacquisition governs whether any gain was realized on the
transactions at issue.7
7
Petitioner argues that he should not be taxed if the value
of the property he received back and the amount of cash and other
property he received in connection with the initial sale are less
than his presale basis in the property. The amount that
petitioner received ($719,480) plus the fair market value of the
property at acquisition ($465,000) is slightly less ($1,184,480)
than the adjusted presale basis in the property ($1,187,465)
claimed on his 1988 income tax return for the year of the sale.
(continued...)
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Petitioner’s arguments misconstrue both the intent and
operation of section 1038. As discussed supra, Congress enacted
section 1038 to obviate the difficulties, in the absence of an
identifiable sale or other exchange at the time of reacquisition,
of ascertaining the fair market value of the property and
objectively determining whether gain or loss was actually
realized. See S. Rept. 1361, supra, 1964-2 C.B. at 831.
To that end, section 1038(a) expressly disallows any
recognition of gain or loss in connection with the reacquisition
itself. Section 1038(b) requires only that the seller recognize
and report as gain that amount of any cash or other property that
was received by the seller on the original sale and whose
recognition was deferred under section 453. Such recognition
rectifies the imbalance created by the section 453 deferral,
which Congress allowed in order to sidestep “the seemingly
elementary issue of when the ‘amount realized’ by the seller
includes the value of the buyer’s obligations to make the future
payments”. Bittker & McMahon, Federal Income Taxation of
7
(...continued)
For at least two reasons, this argument cannot prevail.
First, the relevant realization event for measuring gain is the
initial sale, not the subsequent reacquisition. Second, both the
legislative history and the regulations specifically state that
the fair market value of the property at the time of
reacquisition is immaterial. See S. Rept. 1361, 88th Cong., 2d
Sess. (1964), 1964-2 C.B. 828, 831; sec. 1.1038-1(a), Income Tax
Regs. Moreover, we are not satisfied that petitioner has proved
the presale basis claimed on the 1988 return.
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Individuals, sec. 29.12, at 29-34 (2d ed. 1995 & Supp. 1997). As
section 1.1038-1(a)(1), Income Tax Regs., explains:
It is immaterial, for purposes of applying * * *
[section 1038], whether the seller realized a gain or
sustained a loss on the sale of the real property, or
whether it can be ascertained at the time of the sale
whether gain or loss occurs as a result of the sale.
It is also immaterial what method of accounting the
seller used in reporting gain or loss from the sale of
the real property or whether at the time of
reacquisition such property has depreciated or
appreciated in value since the time of the original
sale. * * *
Petitioner also argues that the $719,480 he received in
connection with the original sale was not income, but only a
“receipt”. We may dismiss this argument by noting that it has
been long settled that all amounts received in connection with a
realization event, which in this case was the original sale, must
be included in income under sections 1001 and 61(a).
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).
Petitioner had “complete dominion” over the cash in that he had
no expectation that he would ever have to return it to the buyer,
Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203, 210
(1990); Herbel v. Commissioner, 106 T.C. 392, 413 (1996).8
8
We note in passing that we could alternatively view the
1988 sale not as a sale of the property as such, but as the sale
to the partnership for $719,480 of an option to purchase the
property for the face amount of the note, $2,030,400, especially
if the nonrecourse note were seen as invalid under the analysis
in Estate of Franklin v. Commissioner, 64 T.C. 752, 762-763
(1975), affd. on other grounds 544 F.2d 1045 (9th Cir. 1976),
because the face amount of the note so greatly exceeded the fair
(continued...)
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The operation of section 1038(b) and (c) illustrates why it
is appropriate that petitioner should be liable for income tax on
hitherto untaxed amounts received prior to the reacquisition. In
1988, petitioner recognized $336,192 of the $719,480 received as
part of the consideration for the sale of the 225-235 Boston
Avenue property and deferred the balance under section 453(c).
Section 1038(b)(1) requires the recognition of that balance,
$383,288, up to the limit imposed by section 1038(b)(2) of the
original sale price less petitioner’s claimed presale basis, or
$1,186,343.9 Section 1038(b) ensures that all receipts of cash
and other property by the seller prior to reacquisition are taxed
as income to return the seller to as close to status quo ante
8
(...continued)
market value of the property. If the 1988 sale were analyzed as
the sale of an option to buy the 225-235 Boston Avenue property,
the overall Federal tax consequences would be similar to the
operation of sec. 1038, although the timing of recognition and
adjustment to basis would differ. Only when an option lapses
does the grantor of an option include in gross income the amount
received for the option, id. at 763, Koch v. Commissioner, 67
T.C. 71, 82 (1976); see also Rev. Rul. 78-182, 1978-1 C.B. 265,
267; Rev. Rul. 58-234, 1958-1 C.B. 279, 283, as short-term
capital gain, sec. 1234(b)(1). The option grantor retains his
property with its basis unchanged. The more favorable treatment
of a seller who reacquires real property under sec. 1038 in terms
of allowed adjustments to basis belies petitioner’s argument that
sec. 1038 is unconstitutional in its application to the facts of
his case. See also Greene v. Commissioner, 76 T.C. 1018 (1981).
9
Sec. 1038(b)(2) limits the amount required to be
recognized under sec. 1038(b)(1) to the amount by which the sale
price exceeds the sum of: (1) presale basis; (2) amounts
previously recognized; and, (3) amounts paid in connection with
the reacquisition (in this case, nothing) ($2,710,000 -
(1,187,465 + 336,192 + 0) = 1,186,343).
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with respect to the reacquired property as circumstances will
permit. Section 1038(c)10 recalculates petitioner’s basis in the
reacquired property to account for the original, presale basis
that the seller had in the property, plus other adjustments such
as sales costs, as reflected in the seller’s basis in the debt
instrument under section 453, see sec. 1.453-9(b)(2), Income Tax
Regs., plus the gain reported under section 1038(b), sec.
1038(c)(1), gain reported in prior taxable years, sec.
1038(c)(2), and any amounts paid in connection with the
reacquisition, sec. 1.1038-1(g)(1)(iii), Income Tax Regs. The
operation of these two subsections leaves the seller having paid
all Federal taxes due on cash and other property received prior
to reacquisition, and in possession of his original property with
an increased basis.
In light of the foregoing, we hold that section 1038 governs
petitioner’s reacquisition of the real property at 225-235 Boston
Avenue in satisfaction of the indebtedness arising from its sale,
sec. 1.1038-1(a), Income Tax Regs. Section 1038 governs the
entire reacquisition even though the property has been
substantially changed through incomplete modifications to both
the erstwhile furniture store and the structure on the rear
10
There is conflicting evidence in the record with respect
to petitioner’s basis in the parking structure at the time of the
1988 sale, which will have a direct bearing on the calculation of
petitioner’s post-reacquisition basis in the property under sec.
1038(c).
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property. See Conners v. Commissioner, supra at 546-547
(reacquisition of real property governed by sec. 1038 even though
substantial improvements made). Under section 1038(b)(1),
petitioner must recognize and include in gross income the
previously excluded balance of the initial cash payment,
$383,288.
2. Disallowance of Loss Related to Reacquisition Governed
by Section 1038
Petitioner argues in the alternative that, as a matter of
law, he is entitled, under section 165, to claim a loss on the
reacquisition. Section 1038(a) forestalls a seller, incident to
a section 1038 reacquisition of real property, from claiming a
bad debt deduction under section 166 for the default in payment
of the purchase money mortgage debt secured by that property.
Rose v. Commissioner, T.C. Memo. 1987-19, affd. 855 F.2d 65 (2d
Cir. 1988). The language of section 1038(a), which states that
“no gain or loss shall result to the seller from such
reacquisition”, see also sec. 1.1038-1(a)(1), Income Tax Regs.,
also disallows other kinds of losses, including those that might
be claimed under section 165. Disallowing any loss claimed under
section 165 is consistent with the broader congressional intent
in enacting section 1038:
Your committee also believes that it is desirable to
have a uniform rule applicable in case of repossession
of real property, whether the initial sale was at a
gain or loss * * * it is desirable to have the same
rule applicable whether the value of the property after
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the initial sale has gone up or down. * * * [S. Rept.
1361, supra, 1964-2 C.B. at 831].
Applying the plain meaning of the language of the statute, United
States v. Ron Pair Enters., 489 U.S. 235, 242 (1989); National
Life Ins. Co. & Subs. v. Commissioner, 103 F.3d 5, 8 (2d Cir.
1996), affg. 103 T.C. 615 (1994); Belloff v. Commissioner, 996
F.2d 607, 616 (2d Cir. 1993), affg. T.C. Memo. 1991-350, the
legislative history, see S. Rept. 1361, supra, 1964-2 C.B. at
831, and the associated regulations, see sec. 1.1038-1(a), Income
Tax Regs., we hold that petitioner, as a matter of law, is not
entitled to recognize any loss on the reacquisition of the 225-
235 Boston Avenue property.
Even if section 1038 did not forestall a claim to a
concurrent loss under section 165--a claim we reject--petitioner
has not shown that he has satisfied the conditions for allowance
of a loss under section 165.11 We cannot easily identify from
the record what--if any--loss petitioner incurred as a result of
the closed and completed transaction, CRST, Inc. v. Commissioner,
92 T.C. 1249, 1260 (1989), affd. 909 F.2d 1146 (8th Cir. 1990),
attributable to the 1988 sale and 1990 reacquisition that
resulted in petitioner’s receipt and retention of more than $1
million in cash, plus the reacquisition of his property. We
11
Sec. 165(c), which limits the types of losses that
individuals may claim, does not appear to forestall petitioner
from claiming a loss because he is claiming it incident to a
transaction entered into for profit. Sec. 165(c)(2).
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cannot identify the specific amount that petitioner spent in
constructing the structure. Although petitioner claims $400,000,
the record, including the report submitted by petitioner’s
expert, indicates that petitioner spent, or should have spent, no
more than $253,000. After having spent this money constructing
the structure, petitioner let the structure stand unused for
nearly 15 years, doing nothing with it except closing it off to
prevent vandalism. Petitioner then received $719,480 in cash
(and substantial interest payments thereafter) and a note for
$2,030,400 for the sale of the entire 225-235 Boston Avenue
property, at a time when the record, including petitioner’s own
testimony that one of the walls collapsed prior to the 1988 sale,
strongly supports the inference that the garage structure was
virtually worthless prior to the sale.12 These difficulties in
identifying the amount and time of petitioner’s loss suffice to
preclude petitioner’s claim of a casualty loss under section
165(c)(3) and (h). There are other hurdles to allowance of a
casualty loss that petitioner has not surmounted. A casualty
12
Even if petitioner were entitled to a casualty loss, he
would be restricted to the lesser of adjusted basis or value
prior to the casualty--the garage was not part of a trade or
business because it had never been placed in service. Helvering
v. Owens, 305 U.S. 468 (1939); sec. 1.165-7(b)(1)(ii), Income Tax
Regs. The evidence in the record that the garage structure was
virtually worthless when the 225-235 Boston Avenue property was
sold, which is even less than the $253,500 cost of construction
figure imputed by petitioner’s expert, would leave petitioner
short of his goal of proving entitlement to a casualty loss.
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loss must be “sudden”, “unexpected”, or “unusual”. Maher v.
Commissioner, 680 F.2d 91, 92 (11th Cir. 1982), affg. 76 T.C. 593
(1981); Matheson v. Commissioner, 54 F.2d 537, 539 (2d Cir.
1931), affg. 18 B.T.A. 674 (1930). As noted supra, the garage
was probably already worthless prior to the 1988 sale before the
occurrence of any of the events that--petitioner claims--
destroyed the value of the garage. The dismantling of the garage
by the partnership was neither sudden nor unexpected. Both
petitioner and the partnership contemplated that the partnership
would convert the structure into a self-storage facility, as
evidenced by the permits and engineering reports that petitioner
obtained prior to the closing of the sale.
Finally, we note that the circumstances in cases allowing
casualty losses under section 165(c)(3) have been very different
from the facts of this case. This Court and other courts have
disallowed casualty losses where human hands intervene in
circumstances not constituting “fire, storm, shipwreck, or * * *
theft”, sec. 165(c)(3); see e.g., Maher v. Commissioner, 680 F.2d
at 93-94 (citing numerous cases allowing and disallowing casualty
losses); Powers v. Commissioner, 36 T.C. 1191, 1192 (1961)
(confiscation of automobile by “officials in East Germany acting
under color of legal authority, arbitrary and despotic as it may
- 23 -
have been, could not have been a ‘theft’ for tax deduction
purposes”).13
Neither section 1038 nor section 165 allows petitioners’
claim to a loss upon petitioner’s reacquisition of the 225-235
Boston Avenue property in 1990.
To reflect the foregoing and the parties’ concessions,
Decision will be entered
under Rule 155.
13
Sec. 280B expressly restricts the deduction of losses
resulting from demolition of buildings.