*294 Decision will be entered for the respondent.
"Exclusive" listing of petitioner's former residence with real estate broker for rent, held not such appropriation to business use as to justify deduction for any loss on subsequent sale as the result of a "transaction entered into for profit," under Internal Revenue Code, section 23 (e) (2).
*35 By this proceeding petitioners seek a redetermination of a deficiency of $ 2,099.34 in their 1944 income tax.
The primary question involved is whether petitioners are entitled to a loss deduction on the sale of property which had previously been occupied by them as their residence and which had been offered for rental.
Petitioners claim an *295 overpayment by reason of their failure to regard any of the loss as an ordinary loss in their income tax return.
FINDINGS OF FACT.
Petitioners, husband and wife, reside at 62 Undercliff Road, Montclair, Essex County, New Jersey. They filed their Federal income tax return for 1944 with the collector of internal revenue at Newark, New Jersey. For convenience, Allen L. Grammer will be hereinafter referred to as petitioner.
In 1930 petitioner purchased approximately six acres of land at Meadowbrook, outside of Philadelphia, Pennsylvania, for $ 40,000. By May of 1931, he had had a residence constructed on the land, which brought the aggregate cost of the property to approximately $ 118,000.
The property was used by petitioner and his family as a residence from May 1931 until May 1942.
Petitioner became employed in New York City by Street & Smith Publications, Inc., in April 1938. Between that date and May 1942 he traveled back and forth between New York and Philadelphia. Such an arrangement proved onerous to petitioner and his family, and they decided to acquire a home closer to New York City. In the fall of 1941 petitioner purchased residence property in Montclair, New Jersey, to*296 which he and his family moved in May 1942.
When petitioner and his family moved from Meadowbrook to Montclair, they took with them all of their possessions. They had no intention of ever returning to the Meadowbrook property to live. They have never done so.
Petitioner consulted his lawyer concerning the tax aspects of the handling of the Meadowbrook property. The lawyer, by letter dated April 8, 1941, advised with reference to whether a loss on the sale of an individual's residence is deductible, as follows:
The law is that if the property was rented or otherwise appropriated to income producing purposes, the loss may be deducted, but the amount may not exceed the difference between the value at the time of the appropriation and the sales price.
A taxpayer desiring to convert a residential property into an income producing asset, would be well advised to procure a real estate appraisal as of the date of the execution of a lease.
In a recent case it has been held that the owner's instructions to his agent to sell or rent, did not constitute an appropriation to a business purpose. In view *36 of this decision, it would be advisable when making arrangements with a real estate*297 broker, to list the property solely for rental, and not for rental or sale.
In June 1942 petitioner consulted with real estate men in the vicinity of the Meadowbrook property, particularly with Wayne Herkness, who had had over forty years' experience in the real estate business. He informed petitioner that at the market then existing, a sale of the property "would bring about $ 50,000" -- greatly less than the cost to him. Herkness advised petitioner that between the fall of 1941 and June 1942 three similar properties in the neighborhood had been rented by their owners, and that he believed petitioner's property was rentable. Petitioner decided to attempt to rent the property.
When petitioner purchased the Meadowbrook property in 1930 and moved his family there, he owned another residence property at Glenside, Pennsylvania, which they had used as their residence. On moving to Meadowbrook petitioner rented the Glenside property for a long period of years before it was sold. Prior to living in Glenside petitioner and his family resided in a residence he owned on Sydenham Street, which was also rented when they moved to Glenside.
Acting on the advice given him by his lawyer, petitioner*298 sought from T. W. Montague, a real estate broker, an appraisal of the property. Petitioner received an "Appraisal" which was dated June 1, 1942, minutely described the property, and expressed the opinion that its "present market value" was as follows:
| Land | $ 18,540 |
| Building | 35,000 |
| Total | 53,540 |
In June 1942 petitioner entered into an oral agreement with Wayne Herkness that his office should have the exclusive agency to rent the property for six months and thereafter on a month-to-month basis. Herkness endeavored to rent the property. Gas rationing was in effect. He showed the property, but was not able to rent it.
In May 1943 petitioner made a similar arrangement for three months with T. W. Montague. He had no success in renting the property.
Nothing was said in the agreement between petitioner and Herkness which would have prevented petitioner and his family from occupying the Meadowbrook property at any time while he was trying to rent it.
By written contract, dated December 27, 1943, petitioner engaged Herkness and Sheble, Dager, Inc., as the sole and exclusive agents for the sale of the property. The authority could be revoked by petitioner upon thirty days' *299 written notice.
On July 15, 1944, petitioner sold the property through Montague, *37 who had also had it for rent. The sale price was $ 40,000 net to petitioner.
In his return for the taxable year petitioner reported a long term capital loss from sale of Meadowbrook, as follows:
| Gross sales | Cost | Expense | Depreciation | Loss | 50% of loss |
| of sale | |||||
| $ 40,000.00 | $ 53,540.00 | $ 1.50 | $ 1,575.00 | $ 11,966.50 | $ 5,983.25 |
Respondent, in the notice of deficiency, "determined that you are not entitled to deduct an item of $ 5,983.25 from gross income for the taxable year 1944 in connection with the sale of realty located in Meadowbrook, Pennsylvania."
The petition claims an overpayment on the ground that the loss was erroneously reported as a loss from sale of a capital asset, whereas "upon such sale of said property, said petitioner sustained an ordinary loss representing the difference between the value of said property on the date of said conversion, and the sales price thereof."
OPINION.
Petitioner's effort to deduct a loss on the sale of property which he originally acquired as a residence can not succeed unless it was suffered in a "transaction entered into *300 for profit." The original acquisition was clearly a personal one, unconnected with a profit purpose, and, unless there has been a subsequent "transaction" which was "profit-inspired," the loss would not be deductible. .
It is recognized by the parties that a mere listing with a broker for sale or rent, ; certiorari denied, ; ; certiorari denied, ; ; or even for rent, , does not constitute such a "transaction" as satisfies the statutory requirement, or, in the words of the regulation, 1 that the property has not thereby been "otherwise appropriated to income-producing purposes."
*301 The narrow question here is whether petitioner's "exclusive" listings with designated brokers for specified periods are sufficient to warrant our reaching the opposite conclusion. It would be dispositive of the entire question to follow the explicit language of the regulation effective for so long as to have virtual statutory sanction, *38 see , that if property has not actually been rented, its appropriation to income-producing purposes must be accompanied by a "use" for such purposes up to the time of its sale. 2
*302 In addition, however, petitioner's reasoning would require an espousal of the ultimate view that his conduct had "put an end to the owner's possible use of it for a residence or his presently selling it." , or has rendered it "impossible for the owner to resume his original occupation," , or "has likewise made it impossible to resume residential uses by a mere change of mind."
We need not here concern ourselves with all possible arrangements, short of an actual rental of the property, that might be made with real estate brokers, and their effect upon an appropriation to business use for purposes of a loss deduction. Parenthetically, however, it may be observed that the statutory prerequisite is a loss in a "transaction entered into for profit," and it may be difficult to demonstrate that, even if the employment of a broker is a "transaction," any loss could be attributable to it. But, in any event, it seems clear that what petitioner did in this situation could not be construed as an *303 irrevocable position on his part to any extent.
All that he accomplished by his "exclusive" listing was to undertake that the property if rented would be rented through that broker or at least his commission would be paid. There was no agreement as to the rental to be sought and the possibility of the broker's producing a tenant ready and willing to trade on petitioner's terms was consequently absent. Cf. ; . It follows that petitioner may have disabled himself from a rental of the property through another broker, or possibly on his own account, cf. Slattery v. Cothran, 210 Ap. Div. 581; , as he would thereby have demonstrated the terms upon which he was prepared to deal. Cf. . But neither his resumption of occupancy of the premises nor his sale of them would disable him from insisting on a higher rental than anything the broker could produce. And, since the contract specified no rental figure, *304 the broker could not rely upon it to compel petitioner to accept a tenant. "In the absence of a special agreement making his commission contingent on something else, the right of a broker to a commission, where the deal which he is authorized to negotiate is not consummated, depends *39 on his production of a customer who is able, ready, and willing to buy, sell or lease the property in question * * * as the case may be, on terms which have been prescribed by, or are satisfactory to the principal." 12 C. J. S. 187. "* * * where no price or terms are fixed, it is necessary to secure an offer which is acceptable to the employer." 12 C. J. S. 182, citing ; .
We say that the contracts contained no rental figure for three reasons: First, none is shown by the evidence, and the burden of proof was upon petitioner; second, oral testimony purported to set forth the entire agreement and no mention of any figure was included; finally, the preponderance of the evidence itself supports this inference. Petitioner subsequently employed the same broker to sell the property in language*305 incorporated in a writing which is in evidence. It is characterized by petitioner similarly to the rental arrangement as "employing the latter [the broker] exclusively and irrevocably." Yet no sale price is mentioned, and the extent of petitioner's commitment in that agreement is "to pay to the said agents a commission of five per cent (5%) on the gross consideration upon the sale or exchange, by whomsoever the same may be made or effected * * *." We think the balance of probability is that a similar employment between the same parties was similar in effect and that petitioner's sole obligation under the listing for rent was likewise to pay a commission to the broker if the property were rented, no matter by whom.
The effect of what petitioner did accordingly fell short of constituting such a "transaction entered into for profit" as to place it out of his power at any time to resume occupancy of the premises or to sell them. Under the principle of the cases cited, this is not such an appropriation to income-producing purposes as entitles him to a deduction for the loss on the sale of the property.
The controversy as to the fair market value of the property at the time of its conversion*306 to business use of course disappears upon our conclusion that the appropriation did not occur prior to sale. It may be added, however, that "A decline in value during a period while the owner is merely trying to enter into a profit-inspired transaction with the property is regarded as a part of the loss incidental to the personal use, without which the loss would not have occurred. ." . (Emphasis added.) Petitioner's efforts to rent the property can not even be characterized as "the inception" of such a transaction, , and the loss, if any, occurring while they were in process would hence be attributable to the prior personal use and not to the ultimate disposition.
Decision will be entered for the respondent.
Footnotes
1. Footnote 2, infra↩.
2. Regulations 111, section 29.23 (e)-1:
"* * * 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 * * * is * * * 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 * * *."↩