*1463 Held, on the facts, that the petitioner has not shown error in determination of deficiency on the theory of capital loss limited under section 117, Revenue Act of 1936.
*707 This proceeding involves income tax for the calendar year 1936. The respondent asserted a deficiency of $7,077.13. The petition set up a right to a refund of an overpayment of $955.30. Form evidence adduced we make the following findings of fact.
FINDINGS OF FACT.
1. Petitioner is an individual, residing at Pittsburgh, Pennsylvania. He filed his income tax return for the year 1936 with the collector of internal revenue at Pittsburgh, Pennsylvania.
2. In 1929 Richard Victor, Sr., and his son, Richard Victor, Jr., owned real estate near Ellwood City, Pennsylvania, which was being operated by Richard Victor, Jr., as a summer camp for boys. On December 11, 1929, the two Victors mortgaged the real estate to the Reliance Life Insurance Co. as security for a loan of $50,000, payable in semiannual installments of $2,500 each until January 1, 1940, when the balance of*1464 principal became due with interest. The Victors also executed a bond in the sum of $100,000 for the performance of the covenants of the mortgage. The petitioner, by instrument in writing dated December 12, 1929, guaranteed and became surety to the Reliance Life Insurance Co. upon the mortgage and bond.
3. As of September 1, 1929, the property covered by the mortgage and bond had a "cost new" value of $90,333.25 and a sound value of $75,209.01; and before the petitioner executed the guarantee he had been furnished with an appraisal in those amounts, made by an appraisement bureau of standing in the city of Pittsburgh.
4. There was erected upon the mortgaged property a camp for boys with a capacity of 200 beds. The camp was operated by a corporation, known as "Dick Victor, Incorporated", until the end of the season of 1933, at which time Dick Victor, Inc., went into bankruptcy. The petitioner had no claim against Dick Victor, Inc.
5. The Victors paid the installment of $2,500 due under the mortgage on July 1, 1931, but defaulted in all subsequent payments.
6. During the month of July 1933 the Reliance Life Insurance Co. three times notified Richard Victor, Sr., with*1465 copies sent to the petitioner, in effect that unless the default in the payment of principal, interest, and taxes required by the mortgage and bond was remedied, the mortgagee would, before the end of July 1933, take steps to foreclose. One of the letters was also sent to Richard Victor, Jr.
7. As a result of these letters the petitioner took from the two Victors a deed in the name of a nominee, I. A. Simon, covering the real estate, the deed being dated August 28, 1933. He also took a quitclaim deed from Dick Victor, Inc., to I. A. Simon as his nominee. At about the same time that the title was conveyed the petitioner *708 made payments totaling $17,876.76, including $10,000 paid upon the principal of the mortgage and $4,171.89 paid upon the interest, taxes of $1,574.57, fire insurance of $705.19 on the mortgaged property, and the following items:
| Trinity Court Studio, Victor's bill | $121.50 |
| Bell Telephone Co. (3 items) | 7.40 |
| Title Guaranty Co | 57.00 |
| I. A. Simon - expense to Ellwood City | 20.00 |
| Penn'a. Power Co | 6.24 |
| Harry Cohn - old bill | 75.00 |
| R. E. Stark (4 items) | 951.72 |
| John McQuiston - caretaker at Ellwood | 156.25 |
| Harvey S. Morse | 30.00 |
| Total | 1,425.11 |
*1466 R. E. Stark was an employee of the petitioner, watching and trying to sell the camp. Trinity Court Studio took photographs of the camp for the Victors prior to the acquisition of the property by petitioner, and the bill was paid by the petitioner with the possibility that the photographs would help sell the camp. The other items last above listed are unexplained.
8. The Victors surrendered their connections with the boys' camp at the time the property was transferred to I. A. Simon as nominee for petitioner.
9. Petitioner never recovered any part of the $17,876.76 from the Victors or either of them. Richard Victor, Jr., died suddenly in May 1934. Neither Richard Victor, Sr., nor Richard Victor, Jr., had any financial responsibility after the bankruptcy of Dick Victor, Inc., in 1933.
10. After the petitioner acquired title to the camp property, he made various efforts to sell it, offering it to six corporations in the hope of selling it to the employees who have vacation camps.
11. While attempts were being made to make a sale of the property and after the end of the camp season in 1933 until January 1936, the property was operated as a boys; camp under the name*1467 of "Camp Ellwood." Neither the petitioner nor I. A. Simon, who carried on the operations for him, had ever had any experience in operating boys' camps, and the operation thereof was entirely foreign to any business which had been carried on either by petitioner or his nominee, Simon. The petitioner had already retired from business in 1929, and was a man of 74 years of age at the time of the hearing. The camp would have deteriorated rapidly if it had remained closed during the seasons of 1934 and 1935, and only on the basis of a going camp was there a possibility of selling it.
12. All efforts to sell were without success and in January 1936 petitioner sold the property to his nominee Simon for $1,000, plus *709 the assumption of the mortgage in the remaining principal sum of $37,500. Since the property already stood in the name of I. A. Simon, the transfer of title to him was confirmed by letter dated January 6, 1936. The petitioner had not been able to obtain any better price than the price at which he sold the property to I. A. Simon.
13. For the year 1934 petitioner sustained a net loss of $17,735.11 from the operation of the camp and that amount was allowed*1468 as a deduction in the determination of his income tax liability for that year. Included in that amount was an item of $7,561, depreciation on the property, not claimed by the taxpayer but allowed by the Commissioner.
14. For the year 1935 petitioner sustained, and the Commissioner allowed, a net loss of $14,291.43. This amount included a deduction of $8,116.62 as depreciation on the property.
15. Subsequent to the acquisition of title by the petitioner, improvements on the property were made by him as follows: In 1933, $5,391.41; in 1934, $6,680.42, together with $748.75 equipment; in 1935, $1,113.71.
16. Subsequent to his purchase of the property from the petitioner in January 1936, I. A. Simon has paid to the Reliance Life Insurance Co. the entire balance of $37,500 due on the mortgage.
17. The petitioner did not pay out any money in 1936 on account of the guaranty of the mortgage.
18. In his income tax return for 1936 the petitioner deducted from his gross income the sum of $17,876.76 as "Other Deductions," being the total of the amounts above set forth paid by him at or about the time he took title to the property in his nominee's name in August 1933. The*1469 respondent in the deficiency notice disallowed the "Other Deductions" in that amount claimed as "Loss sustained as guarantor of bond and mortgage of Richard Victor to Reliance Life Insurance Company," and held that the disposition of the real estate in 1936 constituted a sale of a capital asset and that the loss thereon was subject to the limitation contained in section 117(d) of the Revenue Act of 1936. He allowed a capital loss to the extent of $3,838.79, being equal to the amount of capital gain reported on the return plus the $2,000 limitation contained in section 117(d).
OPINION.
DISNEY: The principal question here presented to us is whether the petitioner suffered capital loss or ordinary loss. The deficiency was asserted on the former theory. The petitioner contends for the latter, on the ground that he made no capital investment, but merely took over property to save himself loss as guarantor of the mortgage and bond upon such property; and in the alternative he argues that *710 he is subrogated to the rights of the mortgagee and bondholder, to the extent he paid thereon, and therefore this loss was ordinary and not capital. The respondent points out that the*1470 petitioner had treated the property as a capital investment in previous tax years, and that if the loss was ordinary, it occurred only in 1933 when the guaranty was paid and the property was taken over.
Upon review of the facts here involved, we are impressed with the way the petitioner has throughout treated this matter; and we come to the conclusion that it is consistent only with the theory of capital investment on his part. Had he merely paid up the obligations accrued to 1933 by the Victors, he might well be truly in the position of being subrogated to the rights of the mortgagee and bondholder. But he went further, and took over the property, taking deeds reciting valuable consideration from both of the Victors and the corporation. It is true that he was not experienced in running a boys' camp, and that the property would have deteriorated if not operated. Yet, the petitioner had been placed in a position to profit by any increase in value of the property. For income tax purposes it was treated as his, for depreciation was allowed thereon. True, the record shows that as to the year 1934 he was allowed such depreciation without claim, but the same does not appear as to*1471 1935, and petitioner appears in the position of having the benefit of a capital investment. Moreover, the figure $17,876.76 which the petitioner claims as a loss includes $1,425.11 which constituted no part of the obligation to the mortgagee and appears to be properly includable in loss only on the theory of investment in property. For the years 1934 and 1935 large net losses upon the operation of the property were allowed as deductions in the determination of petitioner's income tax. During the period of about two and one-half years after acquisition of the property petitioner made improvements to the property, including equipment in the sum of $13,934.29. This amount, in comparison with the obligation as guarantor, seems to be large and to indicate investment rather than mere desire to escape loss. Upon review of all of the facts we conclude that the petitioner was in the position of an investor in the property involved.
Petitioner argues, however, that he in effect abandoned the property in 1936, and that therefore the provisions of section 117, limiting loss, do not apply. This view can not be sustained, in our opinion, for the reason that the property was not abandoned, *1472 but sold, for a very substantial consideration - $1,000 plus the assumption of $37,500 liability, which was paid by the grantee. We find it impossible to call such a sale an abandonment of title.
We conclude and hold that the petitioner has not shown error in the deficiency as determined by the respondent.
Decision will be entered for the respondent.