Decisions will be entered under Rule 50.
1. Petitioners in 1940 abandoned their residence (Plot "A") and offered the same for sale or rent. The main house was never rented, but the petitioners received rental income from certain minor portions of the premises from the time of abandonment until its sale in 1945. Held, petitioners sustained no deductible loss within the purview of section 23 (e), I. R. C., on the sale of such former residence in the taxable year 1945.
2. Petitioner, E. R. Fenimore Johnson, individually owned unimproved real estate (Plot "B") adjoining Plot "A" and which he sold as a unit with Plot "A" in 1945. Held, Plot "B" was a capital asset when originally acquired and retained such character until its sale. On its sale in the taxable year 1945 petitioner, E. R. Fenimore Johnson, sustained a long term capital loss, deductible to the extent provided in section 117, I. R. C.
*94 These consolidated proceedings involve the determination of deficiencies in income taxes of the respective petitioners for *64 the calendar year 1945 in the following amounts:
| Petitioner | Amount |
| E. R. Fenimore Johnson | $ 17,804.72 |
| Janet Darby Johnson | 3,584.22 |
Petitioner, E. R. Fenimore Johnson, claims an overpayment in the amount of $ 6,553.07 and petitioner, Janet Darby Johnson, claims an overpayment in the amount of $ 1,439.28.
The issues presented are (1) whether the petitioners sustained a deductible loss under section 23 (e) upon the sale of July 12, 1945, of certain improved real property situate on Bridgeboro Road, Moorestown, New Jersey, referred to as Plot "A," and, if so, the amount of such loss; and (2) whether petitioner, E. R. Fenimore Johnson, sustained a deductible loss under section 23 (e) of certain unimproved real property adjoining Plot "A" and referred to as Plot "B."
Certain facts have been stipulated and are found accordingly. Facts which were not stipulated are found from the evidence.
FINDINGS OF FACT.
Petitioners are husband and wife, residing in Gladwyne, Montgomery County, Pennsylvania. Their separate income tax returns were filed with the collector of internal revenue for the first district of Pennsylvania at Philadelphia. Petitioners kept their books and filed their income tax returns on *65 a cash basis.
In 1921 E. R. Fenimore Johnson purchased approximately 15.023 acres of unimproved real property situate on Bridgeboro Road, Moorestown, New Jersey, for $ 12,178. He improved the property with a large residence and other buildings, including the erection of a brick wall around the entire outer boundary, at a total cost of $ 220,038.36. The improvements on Plot "A" consisted of a three-story tapestry brick building; a garage of five-car capacity with two apartments on *95 the second floor, each containing three rooms and bath; a heating plant and a complete plant in the cellar of the garage for supplying water to the property; a tenant house with garage; a playhouse; a gymnasium with a squash court; and a barn.
On March 9, 1923, E. R. Fenimore Johnson conveyed Plot "A" to his wife, Janet Darby Johnson. On July 14, 1937, Janet Darby Johnson transferred title to Plot "A" to herself and her husband as tenants by the entirety.
Plot "A" was occupied by the petitioners and their family as a residence until September 9, 1940, when they moved to a new home in Gladwyne, Pennsylvania. Plot "A" was never again occupied by the petitioners or members of their family.
In June 1930, E. R. *66 Fenimore Johnson purchased a tract of unimproved land comprising 3.646 acres situate on Bridgeboro Road, Moorestown, New Jersey, for $ 8,303.33. The said tract was acquired for speculation and was never used as a part of petitioners' residence. On March 27, 1940, E. R. Fenimore Johnson exchanged the said 3.646 acres, plus additional cash consideration of $ 936.50, for a tract of unimproved land comprising 15.022 acres adjoining Plot "A" and referred to as Plot "B." Petitioner acquired Plot "B" to enhance the salability of Plot "A."
In September 1940, after petitioners moved from their residence (Plot "A") to their new home, Plots "A" and "B" were listed with various real estate brokers for sale or rent as a unit for $ 50,000, and a "For Sale or For Rent" sign was erected on the property.
Rental income was received from Plot "A" for the tenant house and garage from October 1, 1940, to date of its sale, for the barn which was leased to a manufacturer of leather from snakeskins for ladies' shoes from 1944 to date of sale, and from Plot "B" from 1943 to date of sale. The character and duration of the tenancies were not disclosed. The gross rentals received by the petitioners from Plots *67 "A" and "B" prior to their sale were as follows:
| Plot "A" | |||
| Year | tenant house | Plot "B" | Total |
| and barn | |||
| Sept. 9, 1940 to Dec. 31, 1940 | $ 105.00 | $ 105.00 | |
| 1941 | 350.00 | 350.00 | |
| 1942 | 330.00 | 330.00 | |
| 1943 | 380.00 | $ 22.50 | 402.50 |
| 1944 | 455.00 | 22.50 | 477.50 |
| Jan. 1, 1945 to July 12, 1945 | 302.00 | 22.50 | 324.50 |
Depreciation on the improvements on Plot "A" was claimed by petitioners on their individual income tax returns from September 9, 1940, to date of sale, July 12, 1945, and allowed by the respondent as follows: *96
| E. R. Fenimore Johnson | ||
| Year | Depreciation | Depreciation |
| claimed on | allowed by | |
| return | respondent | |
| Sept. 9, 1940 to Dec. 31, 1940 | $ 14.68 | $ 147.69 |
| 1941 | 58.75 | 617.30 |
| 1942 | 58.75 | 483.33 |
| 1943 | 685.89 | 483.33 |
| 1944 | 685.89 | 453.75 |
| Jan. 1, 1945 to July 12, 1945 | 1 342.95 | 342.95 |
| Janet Darby Johnson | ||
| Year | Depreciation | Depreciation |
| claimed on | allowed by | |
| return | respondent | |
| Sept. 9, 1940 to Dec. 31, 1940 | $ 14.68 | $ 14.68 |
| 1941 | 58.75 | 58.75 |
| 1942 | 58.75 | 483.33 |
| 1943 | 685.89 | 483.33 |
| 1944 | 685.89 | 483.33 |
| Jan. 1, 1945 to July 12, 1945 | 342.95 | 342.95 |
On July 12, 1945, petitioners sold Plots "A" and "B" together with the improvements thereon as a unit for $ 26,000, plus the assumption by the purchaser *68 of the unpaid balance of 1945 real estate taxes of $ 928.56, and less broker's commission of $ 1,300, or a net selling price of $ 25,628.56, of which $ 14,293.73 was petitioner's share for his interest in Plots "A" and "B," and the balance of $ 11,334.83 was the share of petitioner's wife for her interest in Plot "A."
Petitioners on their 1945 income tax returns claimed a deduction, which was disallowed by respondent, for the loss sustained by them on the sale of Plots "A" and "B" in the amounts of $ 15,264.77 for E. R. Fenimore Johnson, and $ 8,983.84 for Janet Darby Johnson, computed as follows:
| E. R. Fenimore Johnson | Janet Darby Johnson | |||
| Cost or other basis: | ||||
| Plot "A" -- land | 1 $ 3,000.00 | 1 $ 3,000.00 | ||
| Improvements | 1 20,576.65 | 1 20,576.65 | ||
| Plot "B" -- land | 9,239.83 | |||
| $ 32,816.48 | $ 23,576.65 | |||
| Less: Depreciation | 3,257.98 | 3,257.98 | ||
| Adjusted basis | 29,558.50 | 20,318.67 | ||
| Net proceeds of sale | 14,293.73 | 11,334.83 | ||
| Net loss | $ 15,264.77 | $ 8,983.84 |
The loss sustained by the petitioners on the sale of their former residence, Plot "A," in the taxable year 1945, was not one incurred in the trade or business of the petitioners nor in a transaction entered into *69 for profit.
Plot "B," which was individually owned by the petitioner, E. R. Fenimore Johnson, was unimproved real property acquired in a nontaxable exchange in 1940 for unimproved real property originally acquired in a transaction entered into for profit and was a capital asset.
On the sale of Plot "B" the petitioner, E. R. Fenimore Johnson, sustained a long term capital loss, computed as follows: *97
| Cost basis | $ 9,239.83 |
| Net selling price allocable to Plot "B" | 2,958.90 |
| Loss | $ 6,280.93 |
OPINION.
The primary question is whether the petitioners sustained a deductible loss under section 23 (e) of the Internal Revenue Code on the sale in the taxable year 1945 of their former residence situate in Moorestown, New Jersey.
The petitioners contend that their former residence was abandoned about September 9, 1940, and thereafter, until the date of sale, a portion of the premises was continuously rented, constituting an appropriation of the property to business uses and entitling them to deduct the net loss in full under 23 (e) (1) of the Code. The respondent contends that as petitioners were unsuccessful in renting the main residential building, and have not shown the fair market value of the portions actually *70 rented at the time they were leased, the petitioners have not established they sustained any deductible loss.
The petitioners recognize the established principle that a mere listing of abandoned residential property for rent or sale does not constitute an appropriation of the premises to a business use. Morgan v. Commissioner, 76 F.2d 390">76 F. 2d 390, certiorari denied 296 U.S. 601">296 U.S. 601; Rumsey v. Commissioner, 82 F. 2d 158, certiorari denied 299 U.S. 552">299 U.S. 552; Schmidlapp v. Commissioner, 96 F.2d 680">96 F. 2d 680.
The petitioners argue, however, that where the portions of the premises actually rented destroy the ability of the owner to reoccupy the premises as a residence there has been a conversion of residential property to a business use. Heiner v. Tindle, 276 U.S. 582">276 U.S. 582.
The record establishes that the petitioners were not successful in renting the main residential building. However, rental income was received from the tenant house and garage from October 1, 1940, and from the barn from 1944 until the date of sale in 1945. The largest amount of rental income was received in 1944 when the total annual rental income was $ 455. The evidence does not disclose the character or duration of the tenancies. In the absence *71 of such a showing, we may not assume that the portions of the premises rented destroyed the ability of the petitioners to reoccupy the premises as a residence. In the Tindle case, supra, relied upon by the petitioners, the premises were leased for long periods, putting an end to the owner's possible use as a residence. So far as revealed by this record, the petitioners could have returned any day and reoccupied the premises. The rental income received from the portion of the premises was too trivial to show a real intention on the part of the petitioners to devote the premises to income producing property. We think the facts in the instant case are *98 not clearly distinguishable from those involved in the Morgan case, supra, and the principle therein stated will be followed.
The fact that the petitioners have been allowed to deduct depreciation on the premises since 1940 is of no significance. Depreciation is properly allowable where property is merely held for the production of income even though in the taxable year it has produced no income and is held for sale. Mary Laughlin Robinson, 2 T.C. 305">2 T. C. 305; William C. Horrmann, 17 T.C. 903">17 T. C. 903.
The receipt of a small amount of rental income *72 from certain portions of the residential property prior to sale was insufficient to constitute a transaction appropriating the premises to property used in a trade or business or to constitute a transaction entered into for profit within the purview of section 23 (e) of the Internal Revenue Code. The respondent's determination that the petitioners sustained no deductible loss on the sale in 1945 of their former residence, Plot "A," is sustained.
There remains for consideration whether the petitioner, E. R. Fenimore Johnson, sustained a fully deductible loss on the sale of Plot "B" sold as a unit with Plot "A." Plot "B" was owned individually by E. R. Fenimore Johnson and was never used as a part of the residential property. It was unimproved real property acquired in 1940 in a nontaxable exchange for unimproved real property originally acquired in 1930 for purposes of speculation, a capital asset as defined in section 117 (a) of the Code. We think it retained its character as a capital asset until sold, unless its rental in the years 1943, 1944, and 1945 at the nominal rental of $ 22.50 annually created a transaction converting it to business uses.
The rental income received from Plot *73 "B" was so trivial and inconsequential, in our opinion, as to preclude a finding that such renting created a transaction converting Plot "B" to business use. Morgan v. Commissioner, supra. The fact that no evidence of the fair market value of Plot "B" at the time of the first receipt of income in 1943 was presented, and the further fact that the petitioner claims a loss based on its original cost less the net unit sale price allocable to Plot "B," confirm the fact that he did not regard the receipt of such nominal income as constituting a conversion of Plot "B" from a capital asset to property used in his trade or business. We hold that the petitioner, E. R. Fenimore Johnson, on the sale of Plot "B" in 1945 sustained a long term capital loss of $ 6,280.93, which amount constitutes a proper deduction to the extent provided in section 117 of the Internal Revenue Code.
Decisions will be entered under Rule 50.