*1370 The petitioner exchanged investment property and cash for investment property. Held, the payment of the cash did not take the transaction out of the provisions of section 112(b)(1) of the Revenue Act of 1928, and no gain or loss can be recognized.
*160 The respondent has determined a deficiency in income tax against the petitioner for the year 1929 in the amount of $7,243.43. The only question for decision is whether the petitioner is entitled to deduct as a capital loss the sum of $57,952 on exchange of certain property and cash for other property. The facts were stipulated, and from such stipulation we make the following findings of fact.
FINDINGS OF FACT.
Petitioner purchased lots 31 and 68, in square 153, in the District of Columbia, and in 1912 and 1913 erected a house thereon, known as premises 1726 New Hampshire Avenue, Northwest. The cost of the land and improvements amounted to $91,320.24. From the time of the completion of this house until the spring of 1922 petitioner occupied it*1371 as his home. In the spring of 1922 petitioner moved out of this house to another residence property which he owned in Montgomery County, Maryland, thereafter occupying the latter property as his home. At the time petitioner moved out of the property known as 1726 New Hampshire Avenue, Northwest, he placed it in the hands of real estate agents for sale. At that time, namely, in the spring of 1922, the fair market value of the property known as 1726 New Hampshire Avenue, Northwest, was $115,000. Active effort was made to sell this property, and later to lease it, and from March 1, 1923, to August 31, 1925, it was occupied by a tenant. Efforts to sell the property were continued during all of this period, but no sale was effected until February 28, 1929.
On February 28, 1929, petitioner disposed of said real estate known as 1726 New Hampshire Avenue, Northwest. He conveyed the property to the purchaser and, in addition, he paid to the purchaser $13,800 in cash and assumed a $35,000 mortgage on real estate received by him in the transaction. Such real estate received by him consisted of 42 acres of unimproved land known as the Dove Farm, located on the Rockville Pike in Montgomery*1372 County, Maryland, *161 and having a fair market value as of that date of $103,800. The figure of $55,000 which petitioner claimed in his income tax return as the value allowed on his residence in the exchange was arrived at by subtracting from the price fixed on the 42 acres the amount of the mortgage of $35,000 thereon plus the cash paid by petitioner amounting to $13,800.
In his income tax return for the year 1929 petitioner deducted a total of $57,952 claimed by him as a capital net loss and arrived at by him as follows:
| Col. 8, Schedule D. | ||
| Lots 31 and 68, Square 153, premises 1726 N.H. Avenue, N.W., Washington, D.C. | ||
| House built in 1912-13 and used as a residence up to and including the spring of 1922, at which time taxpayer moved out of the house, and it was actively placed in the hands of real estate agents for sale. | ||
| At that time the price placed on the property by taxpayer was $125,000. | ||
| Fair value as of 1922 | $115,000.00 | |
| Value allowed in exchange for unimproved real estate in Montgomery County, Maryland, February 28, 1929 | $55,000.00 | |
| Depreciation taken in income tax returns by taxpayer after leaving house: | ||
| 1924 Assessed value of improvements $51,200.00 at 2% | $1,024.00 | |
| 1925 Same as in 1924 | 1,024.00 | |
| $57,048.00 | $57,048.00 | |
| 12 1/2% = $6,244.00 [sic] Loss | $57,952.00 |
*1373 The petitioner's residence at 1726 New Hampshire Avenue, Northwest, has always been zoned as residential property and has not been used for any other purpose.
In each of the years 1924 and 1925 petitioner claimed a deduction for depreciation in his income tax returns for those years on said house of $1,024, or a total depreciation of $2,048, and these amounts represent a fair depreciation on the property.
The Commissioner disallowed the amount of $57,952 claimed by petitioner as capital net loss.
OPINION.
MARQUETTE: The petitioner contends, first, that, when the New Hampshire Avenue property was abandoned as a residence and was placed in the hands of real estate agents for sale, at that time it became a transaction entered into for profit, and he cites , in support of his position. We disagree. *162 Under the decision of the Supreme Court in , the use of property to produce revenue is characterized as a transaction entered into for profit, and until there is an appropriation of the property to rental purposes it retains its character as a residence. *1374 Such appropriation did not take place until March 1, 1923, when the property was leased. . The basis, therefore, in the computation of gain or loss would be the value of the property on March 1, 1923, with proper allowance for allowable depreciation to the date of disposition. . We do not have these factors before us, and even if the petitioner were right in his next contention, we could not afford him the relief he seeks.
The petitioner next argues that since the New Hampshire Avenue property and money were exchanged for the Dove Farm, the transaction does not come within the exchange provisions of the statute, 1 and that the general rule of section 111 in applicable. We must again disagree. ; ; ; ; . In the last cited case the identical argument now made by the petitioner to take the case out of the exchange*1375 provisions of the statute was made by the Commissioner. The court there stated:
* * * But the taxpayer calls attention to Sec. 203(b)(2) of the Act of 1924 which provides that:
(2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
It argues that the foregoing clause applies to the present case and nullifies the calculation of a gain based upon the difference between the value of the stock when issued and the amount realized when it was sold. The government, however, seeks to avoid the application of the clause. It says that the stock of the old company was not exchanged "solely for stock or securities" of the new company but that the old stock and cash, upon payment of which the taxpayer was permitted to participate in the reorganization, were so exchanged. get the payment of cash did not take the transaction out of Sec. 203(b)(2), for the word "solely" is aimed at what is received in exchange and not at what is handed over in order to secure participation*1376 in a reorganization. * * *
*163 While it is true that the court had before it in that case an exchange of stock and money for stock in a corporation, a party to a reorganization under the Revenue Act of 1924, we think the reasoning therein equally applicable in the interpretation of section 112(b)(1) of the Revenue Act of 1928. Here, the taxpayer exchanged investment property for "like" property, and paid cash or "boot" in addition. We do not think the payment of cash takes the case out of the provisions of the above section, but that it is a purchase of the excess value received*1377 in the form of "like" property. The transaction therefore comes within the quoted provisions of the Revenue Act of 1928, and no gain or loss is recognized. See Klein on Federal Income Taxation, p. 913, par. 27:26. The respondent's determination is approved.
Judgment will be entered for the respondent.
Footnotes
1. [Sec. 112, Revenue Act of 1928.] * * * (b) Exchanges solely in kind. -
(1) PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT. - No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, ponds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment. ↩