*165 Decision will entered under Rule 50.
1. Petitioner purchased real property which was used as a family residence and later converted to rental property. Held, that since petitioner has failed to prove the market value of the property on the date of conversion she has failed to show error in the determination of the Commissioner as to basis.
2. On the basis of the facts presented, held, petitioner has not proved as claimed that she suffered a loss in the taxable year as the result of a transaction entered into for profit.
3. The distribution to the petitioner in the taxable year by the estate of her deceased mother of income which had accrued prior to the death of her mother in 1937 does not constitute taxable income to the petitioner.
*530 The respondent determined a deficiency in income tax against the petitioner for the calendar year 1944 in the amount of $ 5,522.03. Of the adjustments made by the respondent in determining this deficiency petitioner alleges that he erred (1) in reducing the basis of a certain parcel of real property which petitioner sold in the taxable year which adjustment resulted in a gain rather than a loss as reported, *167 and (2) in disallowing in full an amount which petitioner claimed was a loss incurred in the taxable year resulting from a transaction entered into for profit.
*531 In what was presented in the form of a third assignment of error, the petitioner claimed an overpayment of tax in that she erroneously included on her return as income an item of $ 600 received from the estate of her deceased mother.
FINDINGS OF FACT.
Part of the facts were stipulated and they are so found.
Petitioner resides in New York City. She filed her income tax return for the year 1944 with the collector of internal revenue for the third district of New York.
On October 11, 1926, petitioner purchased certain real property in Natick, Massachusetts, which consisted of land, a dwelling, and a chicken house. The purchase price was $ 22,000 and the funds were provided by petitioner's father. A garage was built on the property in the year 1927 at a cost of $ 3,500. This property was purchased for the specific purpose of providing a suburban residence for petitioner's brother because the petitioner's family wanted him to live outside the city for reasons of his health. Petitioner never occupied the property as*168 her residence but from the date of its purchase in 1926 until his death in December 1929 petitioner's brother occupied it as his residence, rent free. Thereafter the property stood vacant for a short period and was then rented. On January 20, 1944, petitioner sold this property for $ 10,710. Brokerage and legal expenses incident to this sale amounted to $ 530.
On September 14, 1937, petitioner's mother died. She left a will in which she named the petitioner as executrix. The will was duly admitted to probate and the petitioner duly qualified as executrix and has been acting as such ever since.
Included in decedent's property was a parcel of real property situated at Belle Terre, Port Jefferson, Long Island, New York, which property had been the family summer residence. Decedent devised the Belle Terre property to the executrix to be sold and the proceeds to be paid in equal shares to her three daughters, petitioner and her two sisters, in accordance with paragraph Sixth of the will, which paragraph reads as follows:
SIXTH: I give, devise and bequeath to my Executrix or Executor all my real property situate at Belle Terre, Port Jefferson, Long Island, N. Y., including the residence*169 and other buildings thereon and the appurtenances thereto, and I direct said Executrix or Executor to sell the same as soon as practicable after my death, but without the sacrifice ordinarily incident to a forced sale. The determination of my said Executrix or Executor as to the price, terms and conditions of such sale shall be conclusive and binding upon all parties interested in the proceeds thereof. I give and bequeath the net proceeds of such sale in equal shares to my daughters MAE, GRACE and ANNA, or to the survivors or survivor of them. I further direct that until the sale of said property my *532 daughter MAE shall be permitted to occupy the same, if she shall desire to do so, free from any rent. Until said property shall be sold, I direct my Executrix or Executor to maintain the same in the same manner that I shall have maintained it prior to the date of my death, and that said Executrix or Executor shall pay all taxes, assessments, water charges, insurance and similar charges incident to such maintenance out of the principal of my residuary estate.
I give and bequeath all of the furniture, furnishings, rugs, books, paintings, pictures, bric-a-brac and*170 other household effects which may be located in my said homestead at Belle Terre and which I may not have given to my daughter MAE prior to the time of my death, in equal shares, to my daughters MAE, GRACE and ANNA, or to the survivors or survivor of them.
After several specific legacies the will provided that the residue of the estate was to be held in trust during the lives of the three daughters for their benefit in accordance with paragraph Twelfth of the will, which reads in part as follows:
TWELFTH: All the rest, residue and remainder of my estate, real and personal, of whatsoever kind and nature and wheresoever situate, of which I may die seized or possessed, including any and all lapsed legacies and any and all property over which I may now or hereafter have power of appointment, I give, devise and bequeath as follows:
(a) Four-tenths thereof to my Trustees hereinafter named, in trust, nevertheless, for the following uses and purposes, that is to say:
To receive, hold, invest and reinvest the same, and to collect and receive the rents, issues, income and profits thereof, and after paying the proper expenses in connection with the administration of this trust, *171 to pay over the net income to my daughter MAE in as near as may be equal quarterly instalments in each year during her life. Upon her death, I direct that the principal of said trust fund shall be transferred and paid over to such person or persons and in such shares as my said daughter MAE by her Last Will and Testament shall appoint, * * *.
(b) Three-tenths thereof to my Trustees hereinafter named, in trust, nevertheless, for the following uses and purposes, that is to say:
To receive, hold, invest and reinvest the same, and to collect and receive the rents, issues, income and profits thereof, and after paying the proper expenses in connection with the administration of this trust, to pay over the net income to my daughter GRACE in as near as may be equal quarterly instalments in each year during her life. Upon her death, I direct that the principal of said trust fund shall be transferred and paid over to such person or persons and in such shares as my said daughter GRACE by her Last Will and Testament shall appoint, * * *.
(c) Three-tenths thereof to my Trustees hereinafter named, in trust, nevertheless, for the following uses and purposes, that is to say:
To receive, hold, invest*172 and reinvest the same, and to collect and receive the rents, issues, income and profits thereof, and after paying the proper expenses in connection with the administration of this trust, to pay over the net income to my daughter ANNA in as near as may be equal quarterly instalments in each year during her life. Upon her death, I direct that the principal of said trust fund shall be transferred and paid over to such person or persons and in such shares as my said daughter ANNA by her Last Will and Testament shall appoint, * * *.
On or about November 1, 1938, petitioner, individually, and her two sisters executed and served on the petitioner, as executrix of the estate *533 of her mother, a notice in which it was provided that inasmuch as the legatees were desirous of renouncing the bequest made to them under paragraph Sixth of the will without affecting, disturbing or lessening to any extent the sole and exclusive power and right of the executrix to sell the property, they renounced their legacy shares in and to the property mentioned in paragraph Sixth of the will. Service of this notice was accepted by the petitioner, as executrix, on December 5, 1938. On or about February*173 25, 1939, petitioner and her two sisters executed an agreement with the petitioner, as executrix, of her deceased mother's estate, wherein the petitioner, as an individual, and her two sisters are referred to as "proposers." This agreement provided in part as follows:
II. Said proposers hereby irrevocably offer and propose to said fiduciary to purchase from said Estate all net proceeds of the sale of the Belle Terre property (being all those certain lands with the buildings and improvements thereon bounded and described as detailed in a certain "Schedule of Real Estate owned by the decedent in the State of New York" filed by said fiduciary in Estate Tax Proceedings for the determination of the tax to be paid upon the assets of said estate of Margaret C. Meurer, deceased), its furniture and furnishings, or at the option of the fiduciary, all the right, title and interest of said estate in and to said property, furniture and furnishings; the price under this proposal shall be Forty-eight thousand dollars ($ 48,000.), plus such additional sum as represents the entire costs of use, occupancy and maintenance of said Belle Terre property, its furniture and furnishings from and after the*174 day of date hereof to the date of title closing hereunder.
III. (a) The proposals set forth in paragraphs hereof numbered I and II shall be respectively open and binding upon the proposers for three years from the date hereof and continue thereafter so open and binding until the lapse of thirty days after written, signed notice of limitation of time within which to accept or reject such proposals, or either of them, shall have been personally served by any one or more of said three proposers upon the remaining proposers and said fiduciary.
(b) Within the time so limited, or at any time or times prior to service of such notice of limitation, said fiduciary may accept said proposals, or either of them, by written notice, or notices, of acceptance mailed to each of the proposers at their last known place of residence, fixing a date within 45 days thereafter and a time and place for closing title thereunder.
(c) The proposal hereof numbered I or II, as the case may be, which is not so accepted within the period during which the same shall be open or binding as hereinabove set forth, shall thereupon lapse and be deemed terminated and of no further force or effect.
* * * *
(e) If proposal*175 numbered II shall lapse as hereinabove provided, without being accepted, the fiduciary shall, within 30 days after said lapse and termination, repay to said proposers, their legal representatives or assigns, out of said aggregate deposits, or residue thereof remaining in their hands, the sum of Forty-eight thousand dollars ($ 48,000.) in equal shares and such deposits shall be deemed reduced accordingly.
IV. (a) Said proposers agree to defray the entire costs of use, occupancy and maintenance of said Belle Terre property, its furniture and furnishings from *534 and after the day of the date hereof to the date of closing of title to said property hereunder, or lapse by limitation of proposal II relating thereto, as the case may be, and to assure performance hereof, such proposers hereby authorize and empower said fiduciary, from time to time in her discretion, to deduct one-third of such "entire costs" from the net income earned by or for the account of each of the three trusts created by paragraph "TWELFTH" of the will of said decedent.
(b) None of the proposers shall have any right to recoup or recover from said fiduciary any part of the monies so paid or set aside for said *176 "entire costs" which, in the event of rejection or lapse by limitation of proposal II shall be deemed to have been the consideration for the continuance thereof open and in good standing until that date, otherwise to be deemed to be part of the purchase price as hereinabove provided.
V. Notwithstanding the proposals hereinabove contained, there is reserved to the fiduciary full liberty of dealing from time to time with, contracting to sell, and assigning, transferring and conveying to outside persons (i. e. those other than the proposers), all or part or parts of the property involved in said proposals, or either of them, at such price or prices, and upon such terms and conditions as she, in her sole, uncontrolled discretion, may deem proper or sufficient, it being the intention to have the proposals relate to the monies, mortgage liens and/or other properties received in exchange or payment for the property or properties which, prior to acceptance of said proposals, said fiduciary may sell or agree to sell.* * * *
[VI] (b) In the event of acceptance by fiduciary of proposal II, she shall, at the date, time and place so fixed for closing, pay to said proposers in equal shares all *177 sums of money realized and received by said fiduciary from and after the date hereof from, or from disposition of, any part or parts of said Belle Terre property, its furniture and furnishings, less all costs of the fiduciary incident thereto, and deliver to said proposers duly executed and acknowledged instruments of assignment, transfer and/or conveyance of all remaining then unliquidated title of the Estate of Margaret C. Meurer in and to said Belle Terre property, its furniture and furnishings, and at the same time assign, transfer and deliver to said proposers good and sufficient instruments of assignment, transfer and/or conveyance of any and all mortgage liens, and/or property, real or personal received in exchange or payment for so much of said Belle Terre property as may have been disposed of by said fiduciary to outside persons prior to said closing.
(c) In the event of acceptance by fiduciary of said proposals, or either of them, she shall at closing utilize and apply the deposits, or remaining deposit as the case may be, as far as may be necessary to pay the Estate of Margaret C. Meurer the stated purchase price for the property to which the accepted proposal or proposals*178 relate.
On November 22, 1944, the executrix not having acted in accordance with the option granted her by the agreement, one of petitioner's sisters gave the 30-day notice required by the agreement to terminate the time to accept or reject the proposal with respect to the Belle Terre property.
From February 25, 1939, to December 26, 1944, the date of termination of the above agreement, the estate made certain expenditures in maintaining the Belle Terre property. One-third of such expenditures *535 which were required to be borne by the petitioner under the agreement were as follows:
| Repairs and | |||||
| Belle Terre | Caretaker's | Fire | |||
| Year | land taxes | wages | insurance | other maintenance | Total |
| charges | |||||
| 1939 | $ 303.31 | $ 250 | $ 52.06 | $ 344.84 | $ 950.21 |
| 1940 | 557.69 | 300 | 52.06 | 378.99 | 1,288.74 |
| 1941 | 460.16 | 300 | 52.06 | 54.90 | 867.12 |
| 1942 | 480.75 | 300 | 52.01 | 158.62 | 991.38 |
| 1943 | 476.24 | 320 | 52.01 | 5.00 | 853.25 |
| 1944 | 488.44 | 340 | 52.01 | 92.52 | 972.97 |
| Total | $ 2,766.59 | $ 1,810 | $ 312.21 | $ 1,034.87 | $ 5,923.67 |
As of October 1950 the Belle Terre property had not been sold. After petitioner's mother died up to and including the summer of 1950, petitioner*179 has continued to occupy the Belle Terre property as her summer residence.
On her income tax returns for the taxable years 1939 to 1943, inclusive, petitioner reported as income from the estate of her mother, amounts corresponding with sums reported by the estate in its fiduciary returns as distributed or distributable to the petitioner during those years. To the extent of sums corresponding with the petitioner's one-third, as above mentioned, of the Belle Terre maintenance costs for the respective years 1939 to 1943, inclusive, under the agreement of February 25, 1939, such distribution of income occurred, during each of the years 1939 to 1943, inclusive, by the estate taking credit for the petitioner's one-third part of such maintenance costs for the respective years.
During each of the taxable years from 1939 to 1943, inclusive, petitioner deducted in her income tax return, an amount representing her one-third part of the costs of maintaining the Belle Terre property paid by the executrix out of funds from the estate of her deceased mother, but offset by the fiduciary for the estate against amounts of income distributed or distributable to the petitioner for the respective years. *180 Upon audit of the petitioner's returns for the years 1939 to 1943, inclusive, deductions for such proportionate part of the Belle Terre maintenance costs were disallowed by the respondent.
On her return for the year 1944 petitioner claimed a deduction for a loss on the transaction on the property in the amount of $ 9,371.67, representing the amounts which she had expended during the period the option agreement was in effect from February 25, 1939, to December 26, 1944, for the maintenance of the Belle Terre property.
Of the amount of $ 5,638.37 reported by the petitioner as received as income from the estate in 1944, $ 600 thereof represented the payment to her from the estate of four-tenths of $ 1,500 interest received by the estate upon First Series G 5 per cent bonds of the Missouri Pacific *536 Railroad Company. Such interest was the total amount of interest which had become due on May 1, 1935, November 1, 1935, May 1, 1936, and November 1, 1936, on certain bonds of the Missouri Pacific Railroad Company. The decedent, petitioner's mother, reported her income on the cash basis and the $ 1,500 interest accrued but had not yet been received by her at the time of her death. *181 This interest was not reported as income by the decedent prior to her death and was not reported as income in the decedent's final tax period. Petitioner, as fiduciary, reported the payment of $ 600 (40 per cent of $ 1,500) as an income distribution to the petitioner in her individual capacity for the year 1944.
OPINION.
The first issue concerns the question of basis (unadjusted) to be employed in the determination of gain or loss resulting from the petitioner's sale of a parcel of real property located in Natick, Massachusetts, during the taxable year 1944. Petitioner maintains that she purchased this property for rental purposes so that its proper basis (unadjusted) is its cost.
We believe the evidence presented does not support petitioner's position. On the contrary, it indicates that the property was acquired as a personal residence. The facts surrounding the purchase of the property may best be summed up by several statements made by the petitioner when she was testifying at the hearing of this case. At one time she stated: "As I told you, my brother was not well and I being the oldest of the family, they thought I should be the one to buy the house and look after him. *182 He had to live out of town and I used to go to see him every week." Another time she stated: "The property was bought and put in my name so that I could look after my brother." She also testified that the sum she paid for the house, $ 22,000, was given to her by her father. From the date it was purchased until the date of his death in December 1929, the petitioner's brother occupied this property as his residence, rent free.
We believe the evidence indicates that the purchase of the property in question was a family affair, that the main purpose for its purchase was to provide a member of the family with a residence outside the city and that ownership of the property was acquired in the name of the petitioner in order to effectuate this purpose. The property was purchased as a personal family residence and not as rental property.
Petitioner argues in the alternative, however, that even if the property was originally purchased for residential property it was converted to rental property upon the death of her brother. We believe that the property was in fact converted to rental property. After petitioner's brother died it was never occupied by the petitioner or any of her family. *183 It was held out for rental and after a short time *537 was rented and at all times thereafter it was rented or held out for rental until it was sold in the taxable year 1944. Wherever any such conversion of property purchased by the taxpayer takes place, the proper basis (unadjusted) is cost or market value on the date of conversion, whichever is the lesser, 1 and the burden of proving basis is on the taxpayer. H. W. Wahlert, 17 T.C. 655">17 T. C. 655. While petitioner introduced evidence that the property was in good condition when it was converted, no evidence was introduced as to its market value. Accordingly, for failure of proof in this respect, we hold that petitioner has not established that the respondent erred in reducing the basis of this property.
*184 The second issue concerns petitioner's right to a deduction in the year 1944 for an alleged loss resulting from a transaction entered into for profit. The facts with respect to this issue are somewhat involved. The transaction concerns a piece of property which had been owned by petitioner's mother and consisted of a large summer home on Long Island known as Belle Terre. In her last will and testament petitioner's mother provided that title in this property was to pass to her executrix, the petitioner, who was to sell the property and distribute the proceeds equally to herself, as an individual, and her two sisters. The will also provided (1) that until such time as the property was sold petitioner was entitled to use it as a summer residence, and (2) that the estate should have some discretion with respect to the time and manner of selling the property so that the beneficiaries should not have to suffer the rigors of a forced sale. The petitioner, as executrix, did not sell the property and distribute the proceeds as the will directed. Instead the three sisters in December 1938 renounced their right, title, and interest to the specific bequest of the proceeds of the sale of*185 the property. The property then fell into the residuary estate. 2 However, the will provided that the residue of the estate was to be divided into three parts; four-tenths to constitute the corpus of a trust of which petitioner was to be the income beneficiary for life with power of appointment and the remaining six-tenths of the residue of the estate to be divided equally as the corpora of the two trusts of which the other *538 two sisters were the beneficiaries. Accordingly, by virtue of their renunciation, the three sisters' interests in the property were not surrendered but rather converted.
Several months after they had renounced their interests in the above-mentioned legacy the three sisters, on February 25, 1939, entered into what was termed a "memorandum agreement" between the three sisters individually on the one hand and the petitioner, as executrix, on the other hand. This instrument contained several material provisions. The three*186 sisters offered to purchase from the estate either "the proceeds of the sale of the Belle Terre property" or the property itself for a consideration of $ 48,000. This offer was to remain open for a period of at least 3 years and was to continue thereafter until the termination by any of the parties upon 30-days' notice. During the period it was to remain open petitioner, as executrix, was free to accept or reject this offer. The three sisters also undertook to relieve the estate of the obligation to maintain the property during such period.
The parties permitted this offer to remain open until November 22, 1944, when it was terminated. During the period it remained open considerable expenses were incurred in maintaining the property. The petitioner paid these expenses out of the estate funds and she then deducted such amounts from the yearly income to which the three sisters were otherwise entitled under the provisions of the will so that they, in fact, bore the burden of such expenses.
It is the petitioner's position that she has suffered a loss in the year 1944 on a transaction entered into for profit and that the loss is deductible under section 23 (e) of the Internal Revenue*187 Code. 3 She maintains that she was a party to a type of "option agreement" to purchase the property and that since this option was not taken up but was terminated in 1944 her share of the maintenance expenses incurred in the interim, the period 1939-1944, constituted a loss incurred during the taxable year 1944.
Prior to the renunciation under the provisions of paragraph Sixth of the will petitioner was entitled to one-third of the amount realizable on the sale of the Belle Terre property. After the renunciation petitioner was entitled to such additional income from the testamentary trust as would be realized by the increase of the corpus of the trust by four-tenths*188 of the amount realizable on the sale of this property. At the close of the taxable year 1944 petitioner still held *539 this same interest, the value of which may have increased, decreased, or remained the same depending upon what would then be realized on the sale of the property. We can find no loss here. Petitioner, however, would have us look only at her option agreement and maintains that the only transaction involved was an option to purchase property and that the transaction became a closed one when the option was terminated in 1944. We believe her position in this respect is unrealistic. This was not an arm's length transaction where one party bound himself by an option to purchase the property of another party. On the contrary, we view the option as part of a special arrangement between the trustee and the beneficiaries with respect to property in which the beneficiaries already held interests. Viewing the entire transaction, we have been unable to find that a loss was in fact incurred. Furthermore, we are not convinced that the parties themselves gave full effect to the two written instruments. The property has never been sold. There is no indication in the*189 record that any attempt was ever made to sell the property or that any attempt was ever made to rent it. On the contrary, petitioner has continued to use it as a personal summer residence and so used it up to and including the summer of 1950. It appears that she has, in fact, appropriated this property to her personal use. Expenses with respect to property so appropriated are personal expenses which are not deductible.
In conclusion we hold that respondent did not err in denying petitioner's claimed loss on the transaction in respect to the Belle Terre property.
The third issue presented concerns the question of whether petitioner realized taxable income by virtue of the receipt in 1944 of the sum of $ 600 as her share of $ 1,500 interest, which had accrued prior to the death of petitioner's mother, on certain bonds.
Since decedent died in 1937 and since the interest in question on the bonds had accrued prior to her death, such interest was properly includible in her final return in accordance with section 42, Internal Revenue Code, (prior to amendment by the 1942 Revenue Act) which reads as follows:
Sec. 42. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED.
(a) General Rule. *190 -- The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.
That the estate failed to include this income in the decedent's final return is not a proper basis for the determination that any part of *540 such interest is income to the beneficiary when received. Cf. Thomas J. Brant, 13 T.C. 712">13 T. C. 712, 722. No question is presented as to transferee liability. We hold that the amount of $ 600 received as petitioner's share of such interest in 1944 does not constitute taxable income.
Decision will entered under Rule 50.
Footnotes
1. REGULATIONS 111.
Sec. 29.23 (e)-1. Losses By Individuals. -- * * *
A loss on the sale of residential property purchased or constructed by the taxpayer for use as his personal residence and so used by him up to the time of the sale is not deductible. If, however, property so purchased or constructed is prior to its sale rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale, a loss from the sale of the property, computed as provided in section 111, is, subject to the limitations provided in section 117, an allowable deduction in an amount not to exceed the excess of the value of the property at the time it was appropriated to income-producing purposes (with proper adjustment for depreciation) over the amount realized from the sale.
Cf. Heiner v. Tindle, 276 U.S. 582">276 U.S. 582↩.
2. See, Page on Wills, Lifetime Ed., vol. 4, sec. 1412 at p. 156.↩
3. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
* * * *
(e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise --
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or ↩