*59 Decision will be entered under Rule 50.
Petitioner acquired two tracts of land, one of which he held for more than 6 months, the other of which he held less than 6 months. He purchased one of the tracts knowing he would be forced to sell at a loss, but that the purchase of that tract was necessary in order to make a profitable sale of the other much larger tract. Petitioner took a short-term capital loss on the latter acquired land. Respondent contends that both parcels of land were sold as a unit, an unallocated sales price being received by petitioner therefor. Respondent contends that petitioner received an amount equal to his cost basis on sale of the latter acquired property and, therefore, suffered no loss. Held, petitioner is entitled to a short-term capital loss with respect to the parcel held for less than 6 months.
*1075 The Commissioner has determined a deficiency in income tax of the petitioner for the taxable year 1945 in the amount of $ 2,535.18. The *1076 question presented is whether the respondent has erred in disallowing a short-term capital loss on the sale by petitioner of a 20-acre tract of land sold in conjunction with 915 acres of other land contiguous thereto.
FINDINGS OF FACT.
A portion of the facts has been stipulated by the parties. Such facts are accordingly found.
The petitioner, Harlow N. Davock, is an individual residing in Pontiac, Michigan. He filed his income tax return for the taxable year 1945 with the collector for the district of Michigan at Detroit.
On July 26, 1938, petitioner acquired title to 915 acres of real property located in Oakland County, Michigan, *61 said parcel of land hereinafter for convenience being referred to as Parcel B. Title to Parcel B was obtained from a group of persons hereinafter referred to as the Syndicate. The Syndicate at the time of the transfer to petitioner of title to Parcel B had and retained title to 20 acres of land which was contiguous to said Parcel B. The 20-acre tract is hereinafter referred to as Parcel A. At the time Parcel B was acquired by petitioner he believed the entire shoreline of each of three small lakes was encompassed within the boundaries of that parcel. Shortly thereafter he learned that approximately 200 feet of the shoreline of one of the lakes was within the boundaries of Parcel A. Petitioner had acquired Parcel B not for his own personal use but as an investment. Through repeated unsuccessful attempts to sell Parcel B he became convinced that in order to consummate a sale thereof he would be forced to acquire title to Parcel A, for the reason that prospective purchasers insisted upon ownership of the entire shoreline of all three lakes referred to. To that end he approached the Syndicate with a purchase offer. At that time the Syndicate refused to sell Parcel A. Thereupon*62 petitioner in 1939 lowered the level of the lake abutting on Parcel A by means of destroying the dam at its outlet. The lowered surface of the lake caused recession of the shoreline of Parcel A so that the entire area of the lake was within Parcel B. Upon learning of this action on the part of petitioner the Syndicate threatened litigation for restoration of the lake level. As a result of petitioner's aforesaid action and the Syndicate's threat of litigation a meeting was held between the two parties in an effort to resolve their differences. At the meeting the Syndicate agreed to give petitioner an option to purchase Parcel A for $ 5,000. A written agreement to that effect was executed October 11, 1940. It was therein provided that in order to avail himself of the $ 5,000 purchase price petitioner must exercise his option on or before July 1, 1941. The option provided, inter alia, that the term thereof would be extended at the same sale price to September 1, 1945, provided, however, that if petitioner within 1 year after exercising *1077 the option sold both Parcels A and B at a price in excess of $ 37,500 he must pay the Syndicate an additional one-seventh of the*63 net sale price after deducting therefrom interest, taxes, costs of improvement, and expenses of development, promotion, and sale. Petitioner knew that he could not recover a purchase price of $ 5,000 by sale of Parcel A.
After his execution of the option agreement petitioner again unsuccessfully attempted to sell Parcel B. Prospective purchasers of property of this type still insisted on the complete privacy of the lakes which could be afforded only by acquisition of both parcels of land.
Beginning in 1944 the Michigan Department of Conservation commenced the assemblage of more than 15,000 acres of land in Oakland County to be used as a public recreational area. Parcels A and B were within the projected recreational area. The Conservation Department employed an agent for the purpose of purchasing the land involved in the project. The agent was a real estate broker of long experience and was a capable and experienced appraiser. He was well acquainted with all land values within the projected recreational area, including Parcels A and B. He was aware that petitioner was the owner of Parcel B and had the option to purchase Parcel A and therefore determined to deal only with petitioner*64 in the state's acquisition of both tracts. Petitioner attempted to sell Parcel B alone to the state, but his offer was refused and he, therefore, prior to September 19, 1944, offered to sell both parcels for a total price of $ 70,050. The agent thereupon made a detailed appraisal of the land and improvements involved. The improvements involved were all located on Parcel B; no improvements existed as to Parcel A. He determined the total value of both parcels to be $ 75,185. Of the appraised valuation the agent testified that $ 1,500 represented the fair market value of Parcel A. His basis for so valuing Parcel A was as follows:
| Land class | Acres | Unit price | Value |
| 3rd Grade cropland | 4 | $ 90 | $ 360 |
| 2nd Grade idle and waste land | 7 1/2 | 65 | 500 |
| 4th Grade forest land | 7 1/2 | 25 | 200 |
| Subtotal | 19 * | $ 1,060 | |
| 300 feet Dixie Highway frontage | 300 | ||
| 200 feet lake frontage | 140 | ||
| $ 1,500 |
The same unit prices were used as to Parcel A as were used as to Parcel B.
The state accepted petitioner's*65 offer to sell and on October 12, 1944, entered into a contract of purchase with him. On December 27, 1944, the Syndicate conveyed title to Parcel A to petitioner. On the following *1078 day, December 28, 1944, petitioner and his wife conveyed title to both parcels to the State of Michigan. On or about March 12, 1945, the state issued its single check to petitioner in the amount of his offer to sell, $ 70,050. On or about March 26, 1945, petitioner paid the Syndicate $ 9,115.56, which was the purchase price of Parcel A computed under the formula set forth in the option agreement.
In his income tax return for the taxable year 1945 as to Parcel A, petitioner reported a cost basis of $ 9,115.56 and a sale price of $ 1,500. He treated the difference, $ 7,615.56, as a short-term capital loss. Respondent has disallowed the short-term capital loss and increased petitioner's gross income in like amount.
The fair market value of Parcel A at the date of its acquisition by petitioner was $ 1,500.
OPINION.
Did petitioner sustain a short-term capital loss in 1945 in the amount of $ 7,615.56 by virtue of the sale of Parcel A during that year?
There is no dispute between the parties that*66 petitioner paid $ 9,115.56 for Parcel A. The controversy arises over the amount received by him on sale of that parcel to the State of Michigan. Petitioner maintains he received but $ 1,500, the amount fixed by the state's appraiser as the fair market value. Respondent insists that petitioner received $ 9,115.56 and, therefore, suffered no capital loss in the transaction. Respondent's contention is based on the premise that petitioner actually sold the two parcels, A and B, as a single unit and received a single purchase price therefor; that he therefore has no basis for an allocation of a portion of the amount so received to Parcel A; that he has no legal authority for so doing; and, finally, that in any event petitioner having purchased Parcel A knowing that he could not recover his cost his loss thereby sustained is not deductible because it could not be said to have been "incurred in any transaction entered into for profit." Section 23 (e) (2), 1 Internal Revenue Code.
*67 Petitioner was justified in treating the purchase and sale of Parcel A as a separate and distinct transaction even though it was sold together with Parcel B as a unit for which a single purchase price was paid. Lakeside Irrigation Co. v. Commissioner, (C. A. 5) 128 F. 2d 418, *1079 affirming 41 B. T. A. 892, certiorari denied 317 U.S. 666">317 U.S. 666, where the court stated as follows:
We are of opinion that in ascertaining gain and loss by sales or exchanges of property previously purchased, in general each purchase is a separate unit as to which cost and sale price are to be compared. If less than all of a purchase is sold, either a credit on the cost of all is to be entered, or a proportion of the cost is to be attributed to what is sold, as Regulations may have prescribed. If several things separately bought are welded into some physical or business unit, as where bricks, lumber and hardware are made into a house, or machines and buildings are made into a plant, and then sold together, the cost is the aggregate costs of the ingredients, and the sale price is that of the whole, for separation*68 would be impracticable and unreasonable. But where, as here, four unrelated lots of stock were separately acquired and might readily have been separately sold, the fact that after ascertaining the value of each lot all were transferred together for a lump price will not require or authorize a merger of costs. [Emphasis supplied.]
The general rule referred to by the court in Lakeside was discussed by us in William F. Krahl, 9 T.C. 862">9 T. C. 862. We there said:
Petitioner argues that * * * the properties supplemented each other and must be considered as an economic unit. * * * We are not satisfied that petitioner actually welded the two properties into a single unit or that any other sufficiently significant correlating factor exists to justify a merging of cost bases. * * *
To constitute an exception to the general rule that each purchase is a separate unit, we consider it sound to insist on such a sufficiently thoroughgoing unification of separately purchased properties as naturally recommends a consolidation of their bases. * * * [Emphasis supplied.]
The rule has been followed in Morris Investment Corporation, 5 T. C. 583;*69 affd. (C. A. 3) 156 F. 2d 748, certiorari denied 329 U.S. 788">329 U.S. 788, and in B. O. Mahaffey, 1 T. C. 176, reversed on another point, 140 F.2d 879">140 F. 2d 879. It is true that in all these cases the law involved was section 24, but the principle of separateness of assets there involved is identical with that with which we are here concerned.
if the total consideration is paid for a mixed aggregate of assets, its allocation among the several properties acquired should be based upon the relative value of each item to the value of the whole. [C. D. Johnson Lumber Corporation, 12 T.C. 348">12 T. C. 348.]
See also Nathan Blum, 5 T. C. 702; Clifford Hemphill, 25 B. T. A. 1351; and William F. Krahl, supra.Petitioner's offer to sell both parcels, A and B, was at a price of substantially $ 75 per acre. On that basis the 20 acres of Parcel A would be priced by him at $ 1,500. The state purchased both parcels (935 acres) for $ 70,050 even though it had appraised the entire tract at $ *70 75,185. Based upon those figures the allocation of a purchase price to Parcel A on a relative value basis may be determined as follows:
$ 1,500/$ 75,185 X $ 70,050=$ 1,397.50
*1080 Petitioner has indicated on brief that regardless of the above computation he finds no fault with a valuation of $ 1,500 for Parcel A. We have found as a fact that such was its fair market value on the date of its acquisition. Its value did not change in the short period between its acquisition and sale.
There remains for consideration respondent's contention that regardless of how petitioner is permitted to treat the Parcel A transaction that transaction was not entered into for profit and, therefore, any loss thereby sustained is not deductible. The language of section 23 (e) (2) upon which respondent relies does not refer to a single transaction where that transaction is but one of several involved in a unit sale of an aggregate of properties. The transaction there referred to relates to the entire transaction involving all properties of which the aggregate is comprised. In Fred E. Owen v. United States, 99 F. Supp. 855">99 F. Supp. 855, appeal dismissed 196 F. 2d 501,*71 the Federal District Court considered an analogous situation where the taxpayer, in order to gain control of a corporation of which he was a stockholder, purchased all of the stockholdings of one Molthop and in order to pay for the same immediately sold them to several individuals, together with a portion of the taxpayer's stockholdings, at a loss. The court in deciding that the taxpayer's loss thus suffered was deductible as a short-term capital loss said:
The loss mentioned above was sustained in a transaction entered into for profit. * * * The taxpayer's primary motive for executing this scheme, whereby he gained control of the Paxton & Vierling Iron Works, was to profit and therefore the transaction of August 31, 1943, was one entered into by the taxpayer for profit within the meaning of Section 23 (e) (2) of the Internal Revenue Code. * * * It is true that Owen might have known that he would have to sell some of the shares purchased from Molthop at a loss, but the sale of this stock was an integral component of the entire indivisible transaction and it is the general rule that if the original transaction, consisting of several integral components, was entered into for *72 profit, all the components making up the one indivisible transaction are part of a profit transaction. * * * [Emphasis supplied.]
To hold that petitioner knowingly purchased Parcel A at a $ 7,615.56 loss without having a profit motive would be an exceedingly narrow and strained construction of the facts. Indeed, it is amply apparent that his only reason for so doing was his immediate prospect of realizing an overall profit on the unit sale of both parcels. We, therefore, hold that petitioner correctly fixed the fair market value of Parcel A at $ 1,500, that his cost basis was $ 9,115.56, and that he is entitled to a short-term capital loss in the amount of $ 7,615.56.
Decision will be entered under Rule 50.
Footnotes
*. The agent treated Parcel A as consisting of 19 acres. There is some doubt as to the exact acreage and the parties have stipulated that it may be treated as 20 acres.↩
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise --
* * * *
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or↩