21 T.C. 857">*858 Respondent determined deficiencies in income tax against petitioner for the calendar years 1944, 1945, and 1947 in the respective amounts of $ 5,479.86, $ 3,616.54, and $ 7,942.28. Petitioner also claims overpayments in income tax for the years 1944 and 1945 in the respective amounts of $ 477.57 and $ 1,277.97, by virtue of an alleged operating loss carry-back from the year 1946.

The questions are (1) whether the respondent erred in determining that losses sustained by petitioner from the sale of certain real estate in and near Lake Wales, Florida, were capital losses, and not ordinary losses; (2) whether he erred in disallowing in 1954 U.S. Tax Ct. LEXIS 273">*276 part the deduction claimed by petitioner as the loss sustained by him on the sale of a residence which had been converted into rental property; (3) whether the petitioner is entitled to a net operating loss carry-over and carry-back from the year 1946; and (4) whether the loss sustained by him in 1947 on the sale of certain lots in Tampa, Florida, was an ordinary or a capital loss.

FINDINGS OF FACT.

Some of the facts have been stipulated. ¹

The petitioner is an individual, who resides1954 U.S. Tax Ct. LEXIS 273">*277 during the greater part of the year in Evanston, Illinois. He rather regularly spends a part of the year at the Walesbilt Hotel in Lake Wales, Florida. 21 T.C. 857">*859 He filed his income tax returns for the taxable years involved with the collector of internal revenue for the district of Florida.

In 1944, petitioner sold 40 acres of land located near Lake Wales in Polk County, Florida. He had purchased the land in 1924, for either of two purposes. "If the development of the town moved that way, it might be used for subdivision purposes. Otherwise it might be used for grove purposes." Thereafter, petitioner concluded that the residential district would not develop there, and had the land cleared, fenced, and prepared for setting it in citrus. It was not so set because the nursery with which petitioner had a contract was unable to supply the stock. On his income tax return for 1944, he reported the sale as the sale of "Property Other Than Capital Assets," showing a loss of $ 16,004.95. Similarly, he reported the sale of a building shown as having been purchased on November 1, 1942, at a gain of $ 1,789.36. The total net loss of $ 14,215.59 reported for the two properties was deducted1954 U.S. Tax Ct. LEXIS 273">*278 in full in arriving at taxable net income. In his determination of the deficiency for 1944, the respondent determined that the loss on the sale of the 40 acres was a capital loss and that the gain from the sale of the building was to be treated as a capital gain under section 117 (j) of the Internal Revenue Code, and adjusted net income accordingly. ²

In 1945, the petitioner sold a residence located in Highland Park, near Lake Wales, including two lots1954 U.S. Tax Ct. LEXIS 273">*279 on which it stood. He had purchased the lots in 1924 and had built the residence for his personal occupancy. On his income tax return for 1945, he reported the sale as the sale of "Property Other Than Capital Assets" and a loss on the sale of $ 11,230.35, which amount was deducted in full in arriving at taxable net income. The cost or other basis was shown as $ 35,750, the selling price as $ 16,000, expenses of sale as $ 536.60, and $ 9,056.25 as "depreciation allowed (or allowable)." The house was reported as having been converted into rental property in 1940. The respondent, in his determination of the deficiency, used a basis of $ 1,500 for the land and $ 27,000 ³ for the house and determined "depreciation 21 T.C. 857">*860 allowed (or allowable)" as $ 9,675. He disallowed $ 8,367.25 of the $ 11,230.35 loss deduction claimed.

1954 U.S. Tax Ct. LEXIS 273">*280 In 1947, the petitioner sold certain lots in Tampa for $ 1,260. He had acquired the lots in 1926, at a cost of $ 25,000, intending to exchange them for stock of a corporation to be organized for the purpose of conducting a baking business. Although some formal steps were taken in setting up the corporation, its organization was never completed and the lots continued to belong to petitioner. On his 1947 income tax return, petitioner reported his loss on the sale of the lots as a loss sustained on "Property Other Than Capital Assets." The loss so reported, plus $ 67.60 as expenses of sale, or a total of $ 23,807.60, was deducted in full in arriving at taxable net income. In his determination of deficiency for 1947, the respondent determined that the loss was a loss from the sale of capital assets and adjusted net income accordingly.

Prior to 1925 and for a period of approximately 25 years, the petitioner had been engaged in the baking business in Omaha and Chicago. In 1924, he was chairman of the board of Standard Bakeries Corporation, Chicago. On January 2, 1925, the Continental Baking Company bought Standard Bakeries Corporation and petitioner retired from the business. About1954 U.S. Tax Ct. LEXIS 273">*281 the middle of January, he went to Lake Wales, Florida. He had first visited Florida in 1921, and had been spending vacations of 1 to 3 months in Lake Wales.

During 1923 and 1924, the petitioner had purchased 2 lots in Highland Park, about 3 1/2 miles south of Lake Wales, for the building of a residence, 20 acres for the planting of a citrus grove, a 10-acre grove of citrus to the north of Lake Wales, some acreage adjoining the Highland Park Club, which he thought the club might later need for expanding its golf course, and other acreage, including the 40 acres sold in 1944.

In 1925, the petitioner purchased property in the principal business block of Stewart Avenue, which was Lake Wales' main business street. The property had a frontage on Stewart Avenue of 270 feet. On the property were a 3-story building, with a frontage of 60 feet, and a 2-story building, with a frontage of 102 feet. The rest of the property was vacant. At some later date not shown, petitioner erected a 1-story building on a portion of the vacant property and immediately adjoining the 2-story building. These buildings were business buildings and the space therein was rented to tenants.

In April of 1925, petitioner1954 U.S. Tax Ct. LEXIS 273">*282 took a trip abroad. Before leaving, he gave a power of attorney to his son Jay Burns, Jr., and established a credit "of some $ 25,000 for his operations." He returned to America in September and came to Florida for a short visit in October. 21 T.C. 857">*861 Early in the winter he came back to Lake Wales and established a residence there.

Jay Burns, Jr., had gone to Lake Wales after his graduation from college in 1922 and had become associated with Tolbury Brothers, an organization which took care of citrus groves for absentee owners. Tolbury Brothers was incorporated in 1923, and petitioner acquired some of the stock. In 1925 the common stock was sold to Hunt Brothers, and thereafter the petitioner and Jay Burns, Jr., had no connection with the business, except the stock owned in it. Tolbury Brothers, Inc., for a period or periods not shown, acted as caretaker for one or more of petitioner's citrus groves. It had been intended that the grove on the 40 acres subsequently sold in 1944 would have been so managed if it had been developed.

During the petitioner's absence abroad in 1925, Jay Burns, Jr., acquired a number of properties on petitioner's behalf. These properties included a 1954 U.S. Tax Ct. LEXIS 273">*283 brick garage building at the corner of Stewart Avenue and Scenic Highway, and 160 acres of land northeast of Lake Wales.

Upon his return from abroad, petitioner was much concerned as to whether he had been "over extended" by the purchases of property which had been made in his behalf by Jay, Jr. After quite a discussion and an examination of the "great demand" for office space for which "there were no facilities to satisfy in Lake Wales," petitioner decided to construct an office building on the corner of Stewart Avenue and Scenic Highway. He felt that such a course "would create a revenue producing building which would make it readily resalable." His intention as to the sale of the property was to sell when he could sell at a profit. When the building was completed in 1926, petitioner found no market for it and thereafter, until its sale in 1946, operated it as an office building, renting space therein to tenants. The building became known as the Real Estate Exchange Building.

Upon its completion, petitioner and his son established an office in the building. They continued such an office until the building was sold in 1946. The inscription on the door was "Jay Burns, Jay Burns, 1954 U.S. Tax Ct. LEXIS 273">*284 Jr., Real Estate." It was from this office that petitioner's operations were conducted and his properties were managed. Jay, Jr., looked after the rental properties. He rented the space, saw that the properties were repaired and maintained, and collected the rents. In addition to his work in his father's business, Jay, Jr., also entered into numerous real estate transactions on his own account.

Over the years, petitioner received some offers for the Real Estate Exchange Building, all of which he rejected. One of these was an offer to lease the property at an annual rental of $ 18,000. The character 21 T.C. 857">*862 and terms of the other offers, in respect of which figures of $ 10,000 and $ 25,000 were mentioned, are not shown. At one time the petitioner attempted to interest the Federal Government in the purchase of the building for use as a post office, but without success.

The 160-acre tract which had been purchased for petitioner by Jay, Jr., in 1925 was given the name "Fair Acres." It was platted, roads were laid out, and one paved road was built through it. The development was not completed, however, and no lots were ever sold as such. The property was sold as a whole to Mountain1954 U.S. Tax Ct. LEXIS 273">*285 Lake Corporation, possibly in 1934.

In addition to the properties already mentioned, the petitioner, by the end of 1926, had acquired 35 or 40 lots in or near Lake Wales, and an additional 10 acres of land. Most of these properties were conveyed to petitioner by Jay, Jr., by deed dated November 13, 1926. ⁴ Some, if not most, of the lots were unimproved. One property, however, is referred to as Larratt House, and after acquisition, petitioner built a garage on 2 of the lots in Hecksher's Second Subdivision.

1954 U.S. Tax Ct. LEXIS 273">*286 In 1927, the petitioner, by 5 deeds, received title to 10 additional lots in Lake Wales and vicinity. Four of these lots were in Pinehurst Subdivision, and when purchased, petitioner had in mind building small houses on them and offering them for sale. Activity in the real estate market lessened to such an extent, however, that he abandoned the idea. The only deed of record for 1928 showing petitioner as grantee covered 20 acres of land from Jay, Jr. The reason and occasion therefor are not shown, since he had conveyed the same land to petitioner in 1926. Petitioner was grantee in 3 deeds in 1929. As in the case of the 20 acres just mentioned, petitioner had already received deeds for 2 of these properties in 1926 from Jay, Jr. The third parcel covered a 10-acre orange grove, shown on the sales record as "Old Nanny Grove." Similarly, most titles subsequently received by petitioner up through 1947 were deeds, quitclaim or otherwise, to properties title to which had been conveyed to him on prior dates. Two such deeds were from the City of Lake Wales in 1946, and could have been tax deeds. 21 T.C. 857">*863 On some date not shown, except "that it was after the collapse of the Insull1954 U.S. Tax Ct. LEXIS 273">*287 Enterprise in Chicago," he acquired a 40-acre grove from one of the Insull officials. This may have been the 40 acres deeded to petitioner June 15, 1932, by Wm. V. and Nellie B. Griffin and possibly sold in 1938. ⁵

Insofar as county records show, petitioner made 1 conveyance of property in 1925; 2 in 1926; 6 in 1927; 5 in 1928; none in 1929; and 2 in 1930. The conveyances in 1925 and 1926, as was true of some of the other conveyances, did not indicate disposition of the properties covered. The conveyance in 1925 was to Mountain Lake Corporation and covered 10 acres, the acquisition date of which is not shown. This same property was again deeded to Mountain Lake Corporation in 1934, along with the 160 acres known as Fair Acres. The 2 conveyances in 1926 appear to have been the lots on1954 U.S. Tax Ct. LEXIS 273">*288 which the Real Estate Exchange Building was located, and which petitioner continued to own until 1946. One was to Jay Burns, Jr., and in the other the grantee was shown as John H. Lee. The purposes of the conveyances are not shown. The 6 conveyances in 1927 covered 7 lots, 5 of which had been deeded to petitioner in 1926 by Jay Burns, Jr. Of the 5 transactions in 1928, 1 was a lease, 1 an option, 2 covered property received from Jay, Jr., and 1 covered acreage acquired in 1924. The nature and reasons for the 2 conveyances in 1930 are not apparent. One covered the lots on which the petitioner's residence stood, and both were matched by deeds on the next succeeding day from the grantee, one to Annie P. and Jay Burns, and the other to Anne P. Burns. ⁶

Through the 1930's and 1940's, petitioner gradually disposed of various1954 U.S. Tax Ct. LEXIS 273">*289 of the pieces of property he had acquired in Polk County. ⁷ At the end of 1947, he still owned the 2-story building on Stewart Avenue, purchased in 1925, the 1-story building he had erected, and the adjoining vacant lots. He still had 2 lots on Central Avenue, 3 lots in Hecksher's Second Subdivision, and 9 lots in West Lake Wales.

The real estate market in the Lake Wales area was "extremely active" in 1925, and until the fall of 1926. For several years thereafter, most of the trading had to do with property in "distress." During the very active period in 1925 and 1926 much trading was done in 21 T.C. 857">*864 options or contracts. Options sometimes changed hands numerous times and a sale of the property1954 U.S. Tax Ct. LEXIS 273">*290 itself did not necessarily ever occur. Petitioner did some option trading, but "would not attempt to say how" much.

Subsequent to the sale of the Standard Bakeries Corporation, in 1925, some of petitioner's associates who desired to continue in the bakery business, had organized the Midland Baking Company. Petitioner was a stockholder and director, but had not otherwise been active in its operations. In 1934 the company experienced financial difficulties, and petitioner returned to Chicago to assist in working them out. He expected to complete this work in 2 or 3 years and then return to his home in Florida, but the business prevented him from doing so.

In 1940, petitioner developed a process for milling wheat germ flour, to be used by bakers in producing enriched bread. He organized the Bryo Company to further develop the process. It was first organized as a corporation and petitioner was its president. The corporation was later dissolved and the business was operated as a partnership. In 1940 petitioner brought Jay Burns, Jr., to Chicago, to work with the Bryo Company and make him a partner in the business. During the taxable years petitioner devoted the bulk of his time1954 U.S. Tax Ct. LEXIS 273">*291 and attention to the Bryo Company and it was the source of the major portion of his income.

Although living in Chicago from 1940 until his death in 1948, Jay, Jr., continued to keep the books and records relating to the properties of petitioner, rental, operating, and otherwise, in Florida, and petitioner paid him a small salary for his services. The collection of rents and maintenance of the buildings were entrusted to a man named Seldon from 1940 until 1946. After 1946, they were in the care of a man named Shrigley. Jay, Jr., would make occasional trips to Lake Wales in connection with the properties.

From 1926, when it was completed, until it was sold in 1946, the Real Estate Exchange Building was property used in petitioner's business of owning office and business property and renting the space therein to tenants, and was property of a character which is subject to the allowance for depreciation in section 23 (l) of the Internal Revenue Code, which allowance was claimed by petitioner on his income tax returns and allowed by the respondent. It was not held primarily for sale to customers in the ordinary course of petitioner's trade or business.

In addition to the business of1954 U.S. Tax Ct. LEXIS 273">*292 owning and renting of office and business properties, the petitioner over the years owned and operated the citrus groves which he had acquired or developed. One or more of 21 T.C. 857">*865 them had been managed for him by Tolbury Brothers, Inc. Whether or not the arrangement continued after the sale of the Tolbury stock to Hunt Brothers is not shown. The groves were income producing properties and were operated for that purpose.

The petitioner was also in the business of buying and selling real estate in Polk County, Florida, and various lots and parcels of unimproved land were acquired and held by him primarily for sale in the ordinary course of such trade or business. The 40-acre tract sold by petitioner in 1944 was so held by him at and prior to its sale.

The Highland Park area is variously referred to as Highland Park, Highland Park Club, and Highland Park Village. Presumably ownership of residential property in the area carried with it membership in the club. The idea was that winter visitors to that part of Florida would acquire property in the area, build homes, join the club, and become permanent residents of the Highland Park colony. Petitioner built a home in Highland Park1954 U.S. Tax Ct. LEXIS 273">*293 in 1926 and, except that he spent parts of his summers at his old home in Evanston, Illinois, which he had retained, lived there until 1934. Highland Park Village was organized in 1926, and petitioner was elected chairman of the village board, which position he continued to hold until 1939.

Members of the Highland Park Club would entertain prospective members for brief periods, to acquaint them with the purposes of the club. In the fall of 1934, the petitioner, at the request of a club member, rented his home to a prospective member for the first 3 months of 1935, and during the following winter the same party occupied the house under the same arrangement. In 1936, petitioner and his wife were in Florida for a part of the winter and found the condition of the house to be such that they refused thereafter to rent it to prospective members. They occupied the home each winter from 2 to 4 weeks. They had left personal effects, including linens, dishes, silverware, and draperies, in the home when they went to Chicago in 1934. During most of the period from 1934 to 1940, the residence was occupied by a caretaker who paid no rent. Petitioner reported the rentals received in 1935 and1954 U.S. Tax Ct. LEXIS 273">*294 1936 in his income for those years, but claimed no deductions for depreciation.

In 1940, due to the attention required by the business of the Bryo Company, petitioner decided to discontinue his residence in Highland Park as his home. He and his wife went to Lake Wales, packed their personal effects and choice pieces of furniture, some books, and other things and shipped them to Chicago. He had the house, the furnishings, and the land appraised, and a valuation was arrived at, taking into account the estimated life of the depreciable property. 21 T.C. 857">*866 The property was then listed with real estate agents for sale or rental. Prior to that time, it had not been so listed. In 1940, petitioner's intention to use the property as his residence ceased and the property became rental property.

When petitioner moved to Florida in 1925, he began investigating the possibilities of establishing and operating a wholesale bakery in Tampa. He employed his son Guy Burns, who was experienced in the bakery business, to make a detailed survey of the markets in Tampa, St. Petersburg, and the surrounding country. As a result of the survey, petitioner, in 1926, decided to reenter the baking business1954 U.S. Tax Ct. LEXIS 273">*295 and purchased some lots in a new industrial section of Tampa for $ 25,000, on which he planned to erect a baking plant. He employed the W. E. Long Company to prepare plans and specifications for the plant and a Tampa attorney to charter a corporation to operate the plant. A corporate charter was acquired in the name of the Florida Bread Company, and petitioner executed a conveyance of the above lots naming the Florida Bread Company as grantee.

Petitioner had planned to furnish all of the capital necessary to operate the business, but decided that it would be wise to interest Tampa residents in the enterprise, and, for that reason, solicited some stock subscriptions. In the meantime, however, the Southern Baking Company, now known as the Colonial Baking Company, which owned and operated a chain of bakeries through the South, acquired a site in Tampa and began the erection of a plant. Petitioner felt that if he built his proposed plant the customer market in the Tampa-St. Petersburg area would be overbuilt. He thereupon abandoned his project.

No formal action was taken to liquidate or terminate the corporation. No stock had been issued and all advanced payments on stock subscriptions1954 U.S. Tax Ct. LEXIS 273">*296 were refunded by petitioner personally. A deed of the lots naming petitioner as grantee was executed in the name of the Florida Bread Company. No consideration passed in connection with either conveyance. No meeting had been held by the subscribers, stockholders, or directors. No officers had been selected. No books of record had been set up for the corporation, nor had any bank account been opened in its name.

Due to the collapse of the Florida land boom, the development of the new industrial area in Tampa ceased, and petitioner found it difficult to sell his property. He listed the lots with real estate agents in Tampa for sale at a price of $ 5,000. From 1927 through 1946, no offers to purchase were received. "For sale" signs had been maintained on the property during most of that period. In 1947, petitioner received an offer to buy the property for $ 1,250, which offer 21 T.C. 857">*867 was rejected. The offer had been made by the owner of corresponding lots across the avenue from petitioner's property and when petitioner rejected the offer, the prospective buyer offered to sell his property to petitioner for the same price. The petitioner then sold his property, receiving 1954 U.S. Tax Ct. LEXIS 273">*297 approximately $ 1,200 net after the expenses of sale. The sale was made in 1947.

The Tampa lots were acquired by petitioner in a transaction entered into for profit. They were not held by petitioner primarily for sale to customers in the ordinary course of his trade or business.

OPINION.

This is another of those cases involving the sale of real estate by an individual where the question is whether the parcels sold were or were not capital assets, and in which the positions of the parties as to whether the real estate sold was held primarily for sale to customers in the ordinary course of the taxpayer's trade or business shift according to the gain or loss results of the sales.

It is the claim of the petitioner that beginning in 1925, up to and including the taxable years, he was engaged in the business of buying and selling Florida real estate; that all of the items of such property acquired by him, except the lots, in Highland Park, on which he built his home and 20 acres acquired at or about the same time for development into a citrus grove, were acquired for resale and were thereafter held by him primarily for sale to customers in the course of his real estate business, and as1954 U.S. Tax Ct. LEXIS 273">*298 a consequence were not capital assets within the meaning of section 117 (a) of the Internal Revenue Code. ⁸ It is on that basis that he contends that losses sustained on the sale of the 40 acres of land in 1944, the sale of the Real Estate Exchange Building in 1946, and the sale of the Tampa lots in 1947, were not capital losses but ordinary losses, deductible in full in arriving at his net income for those years, and that the net loss arrived at in 1946, through the deduction in full of a loss on the sale of the Real Estate Exchange Building, was an operating net loss, subject to the carry-over and carry-back provisions of section 122 of the Internal Revenue Code.

1954 U.S. Tax Ct. LEXIS 273">*299 21 T.C. 857">*868 With respect to the 40 acres sold in 1944 and the Tampa lots sold in 1947, the respondent takes the position that they were not held by petitioner primarily for sale to customers in the course of his business and that the losses sustained were capital losses, subject to the limitation provisions of section 117 thereon. With respect to the Real Estate Exchange Building, it is his position that that property was used by petitioner in his business of owning and renting office and business property, and the loss ⁹ sustained upon its sale, even though not a capital loss but deductible in full in the year sustained, was not an operating loss which comes under the carry-over and carry-back provisions of the Code.

1954 U.S. Tax Ct. LEXIS 273">*300 Whether or not the properties sold by petitioner in the taxable years were held by him "primarily for sale to customers in the ordinary course of his trade or business" so as to prevent application of the limitations of section 117 of the Code on the deduction of capital losses, as he contends, is essentially a question of fact, ¹⁰ and it is his burden to prove and establish that the properties were in fact so held. The record from which that factual determination must be made is not at all satisfactory. In the main, petitioner's proof consists of his own general statements and conclusions and a statement of comparable conclusions by three witnesses called by him. We do have a statement of his recollections as to some items or parcels of property and the transactions with respect thereto. In that connection, however, he volunteered that his son was his "agent and conducted many properties," so that he himself might not be able to testify about specific details of "those negotiations." He offered none of the books and records which recorded his transactions and operations as they occurred, nor any information or data therefrom, and, as a consequence, we have no way of knowing 1954 U.S. Tax Ct. LEXIS 273">*301 whether they would tend to sustain or refute his claims made and conclusions stated. Whether the books and records are still in existence, or whether they have been lost or destroyed, we do not know. Just why his proof was so limited is not explained. As to specific conveyances in which the petitioner 21 T.C. 857">*869 was the grantee or grantor, we are largely left to depend upon schedules, stipulated at the instance of the respondent, from the deed record books of Polk County and it is not possible to trace petitioner's transactions definitely or accurately from those schedules. They contain patent errors and there are instances of conveyances involving the same pieces of property, without explanation therefor, and at times it is practically impossible to identify the parcels in conveyances in which petitioner was grantor with those in which he was grantee. Petitioner did testify generally that in 1925 and 1926 he indulged in some option trading, which would not appear on the county records, but what they were and the extent thereof, we are not advised. His explanation was that he would not attempt to say how much of such trading he did. In any event, that type of trading was limited, 1954 U.S. Tax Ct. LEXIS 273">*302 according to our understanding of his testimony, to the years 1925 and 1926, and did not, so far as appears, involve any of the properties here or those covered in the schedules of recorded conveyances.

On such state of the record, we have done the best we could to find and determine the facts, and as to the Real Estate Exchange Building and the Tampa lots, we are fully satisfied that the facts as found represent the true situation. The Tampa lots, although acquired in a transaction entered into for profit, within the meaning of section 23 (e) (2) of the Code, were not acquired and were never held primarily for sale to a customer or customers in the course of any trade or business carried on by petitioner, even though his operations in Polk County were such as to constitute a business conducted by him of buying and selling real estate. The Tampa lots were in no way connected with the transactions occurring or1954 U.S. Tax Ct. LEXIS 273">*303 with the operations which petitioner had in Lake Wales and vicinity. Those lots in his hands were capital assets and the loss sustained upon their sale was a capital loss. The respondent's treatment of that loss is sustained.

We are also of the opinion that the respondent's position with respect to such loss as was sustained on the Real Estate Exchange Building is also sound. In his efforts to substantiate his claim that the property was held primarily for sale to customers in the course of his trade or business, the petitioner testified broadly that all of his properties, except his residence and original citrus grove property, were bought with a view to their resale and that they were for sale at all times. His counsel also elicited answers from his witnesses, a lawyer, a real estate operator, and an accountant, that it was their understanding that petitioner's properties were for sale at all times. Other answers, however, and petitioner's actual course of conduct with respect to the Real Estate Exchange Building give a clearer and more revealing view of the situation. Explaining his decision to convert 21 T.C. 857">*870 the garage property into an office building, petitioner stated1954 U.S. Tax Ct. LEXIS 273">*304 that, due to the "great demand" for office space for which there were no facilities in Lake Wales, he would, by such conversion, have a revenue producing building which would be readily resalable. More important, however, than the purpose of acquisition "is the activity of the seller or those acting for him with reference to the property while held." Dunlap v. Oldham Lumber Co., 178 F.2d 781. And on cross-examination, petitioner's responses indicated that, as in the case of other rental properties he had acquired or constructed, the building would not be for sale when converted into rental property, unless or until he could sell it at a profit. In other words, he was, so to speak, providing a second string for his bow which could be availed of if his first failed him. When the Real Estate Exchange Building was completed, it would not be sold at a profit, and the petitioner added it to the other business buildings which had been bought or erected by him and made up the operating properties in his business of owning and renting business and office space to tenants. In short, it became one of the operating assets used in his rental business and1954 U.S. Tax Ct. LEXIS 273">*305 was used and availed of for the production of rental income. See and compare John D. Fackler, 45 B. T. A. 708. In fact, petitioner rejected the offers of any and all potential customers for a period of 20 years and until its sale in 1946 in favor of its continued operation as a rental property. In reporting the rents received in the taxable years on the building, petitioner claimed and was allowed depreciation thereon, and there is no indication or suggestion that depreciation allowances were not similarly claimed and allowed for all prior years. We are not advised as to the offer or offers received in 1946, when the building was sold, nor as to petitioner's reasons for terminating the office renting operation by sale of the building even though it be sold at a loss.

The Real Estate Exchange Building, being a property used by petitioner in his rental business and of a character which is subject to the allowance for depreciation provided in section 23 (l), the treatment of the loss sustained from its disposition is governed by the provisions of section 117 (j) of the Code, and since the gain on such property in that year did not exceed the losses thereon, 1954 U.S. Tax Ct. LEXIS 273">*306 the loss was deductible in full, for the purpose of determining petitioner's taxable net income for 1946. That does not, however, make it a loss which may be carried over or carried back to subsequent or preceding years, under the provisions of section 122 of the Code. To qualify for a carry-back or carry-over, not only must the petitioner have had a net loss for 1946, but the net loss must have been a net operating loss, and in determining 21 T.C. 857">*871 a net operating loss, it is provided in section 122 (d) (5)¹¹ that deductions otherwise allowable which are not attributable to the operation of the trade or business, are allowable only to the extent of the amount of the gross income not derived from such trade or business. The loss here was not a loss attributable to the operation of the business, but to the sale of one of the operating assets used in the conduct of the business. Such a loss is not an operating loss, and cannot be, or make up, any part of a net operating loss. Joseph Sic, 10 T.C. 1096, affd. 177 F.2d 469; Lazier v. United States, 170 F.2d 521; Smith v. United States, 180 F.2d 357;1954 U.S. Tax Ct. LEXIS 273">*307 Joseph L. Merrill, 9 T.C. 291, affd. 173 F.2d 310; Joe B. Luton, 18 T.C. 1153. The respondent's treatment of the loss is accordingly sustained.

Citing and relying1954 U.S. Tax Ct. LEXIS 273">*308 on Walter G. Morley, 8 T.C. 904, the petitioner takes the position that the loss sustained by him in 1946, on the sale of the Real Estate Exchange Building, was not within the provisions of section 122 (d) (5) and was accordingly an operating loss. The evidence here shows, and we have found, as already noted, that from 1926 until it was sold the Real Estate Exchange Building was one of the operating properties used by petitioner in his business of renting office and business space to tenants, and in Charles Weill, 17 T.C. 318, we had occasion to consider the scope of the holding in the Morley case and there held that it did not apply where the loss sustained resulted from the sale of property used in a rental business. The facts being as they are, the same distinction applies in the instant case, and what we said in Walter G. Morley, supra, does not apply here.

The facts as to the 40 acres of land sold in 1944 are not so clear. As shown by our findings, petitioner had two thoughts in mind when he purchased the property in 1924. If the development of the residential district of Lake1954 U.S. Tax Ct. LEXIS 273">*309 Wales moved in that direction, he would use the property for subdivision purposes, and if not, he would plant it and develop it into a grove property. He concluded that the residential district would not move in that direction and cleared and fenced the land for setting it in citrus fruit. If he had carried out that purpose, we would then have had a situation comparable to that of the Real Estate Exchange Building, since the facts show that beginning 21 T.C. 857">*872 with the first orange grove, the 10 acres to the north of Lake Wales, he was in the business of owning and operating citrus groves for the production of income, until the business was liquidated by the sale of the groves, his operating properties, in the late 1930's and 1940's. The instant property was never set in citrus, however, due to the inability to get the stock therefor. Presumably such scarcity of stock was in the land boom period of 1925 and 1926, and petitioner has offered no explanation why it was not so set in later years, when stock did become available. Be that as it may, the land remained and continued to be unimproved acreage down the years, until it was sold in 1944. There is justification therefore for1954 U.S. Tax Ct. LEXIS 273">*310 concluding that it was held for the same purpose as his other bare land and unimproved lots, excluding, of course, those pieces of property heretofore shown as having been improved by him and converted into rental or other operating properties.

Placing the instant property in the unimproved or idle land category, we are again confronted, in the main, with generalizations and conclusions as to the primary purpose for which they were held. Petitioner claims that these properties were held primarily for sale to customers at all times and that the only reason they were not sold in normal course was that after the land boom collapsed, in the latter part of 1926, there were no customers and therefore no sales. It is to be noted, however, that his proof does not even show that he actually made sales in 1925 and 1926, when, according to his own testimony, the real estate market in the Lake Wales area was "extremely active." He did state that he did do some option trading in that period, but his testimony falls far short of indicating such trading in any quantities. And besides, the trading here involved was not such trading. It is possible, however, in the light of the testimony that 1954 U.S. Tax Ct. LEXIS 273">*311 deeds usually followed sales by a considerable lapse of time, that those sales which were covered by the nine deeds executed by petitioner in 1927 and 1928 and apparently did cover vacant and unimproved property, were sales in the period of great real estate activity, and that, as claimed, other sales did not follow because of the almost nonexistence of customers.

In spite of the thinness of petitioner's proof and the fact that he had the burden of proving that the acreage sold in 1944 was held primarily for sale to customers in the ordinary course of his trade or business, we are persuaded that as to some of his purchases and sales, he was making a business of it, and as to the unimproved properties purchased by him, excluding those which he himself improved and developed and devoted to other operations, the holding of them was primarily for sale to customers. We accordingly think that the proof does preponderate, even though slightly, in his favor and that 21 T.C. 857">*873 the 40 acres held in the unimproved land category were so held after his failure to get it set in citrus and up to the time of its sale in 1944. In our Findings of Fact we have so found. As to that sale, the petitioner1954 U.S. Tax Ct. LEXIS 273">*312 is sustained.

As to the building sold in 1944 and on which he reported a gain of $ 1,789.36, petitioner offered no proof and made no argument on brief. We assume that he has abandoned his claim of error on the part of the respondent with respect thereto.

As to the residence in Highland Park, the parties apparently are in agreement that at the time the property was sold it was rental property and for 1945 the loss sustained was deductible in full. They are not in agreement as to the amount of the loss. The petitioner claimed a deductible loss of $ 11,230.35 on his return, of which the respondent disallowed $ 8,367.25 in his determination. The only error alleged by petitioner is that the respondent determined that the residence became rental property in 1935, instead of 1940, as reported and claimed by him. As to that claim, we think the evidence supports the petitioner, and we have so found. It is true that the petitioner did rent the property for periods of 3 months in both 1935 and 1936, receiving rent, which he reported in his income for those years. But, rather obviously, he had no thought or idea of changing the controlling and dominating purpose of holding the property1954 U.S. Tax Ct. LEXIS 273">*313 from personal to business use. The renting of the residence for the short periods in the years mentioned was as a favor to the Highland Park Club, and more particularly to one of its members, and when petitioner and his wife saw the results of the occupancy, they refused similar requests in the years which followed. Such limited renting of the property in 1935 and 1936 was not, for the purposes here, an appropriation thereof to rental purposes. Lloyd Jones, 39 B. T. A. 531; W. H. Moses, 21 B. T. A. 226; Claudian B. Northrop, 17 B. T. A. 950.

On the record here, however, the above conclusion does not require or permit a decision that the respondent was in error in his disallowance of a portion of the loss deduction claimed. Petitioner's concern seems to be over the amount by which his cost or other basis is to be reduced by the depreciation "allowed (or allowable)," which would only date from the appropriation of the property from personal to rental use. If the property had been so converted in 1935, there would have been 10 years of depreciation "allowed (or allowable)," whereas conversion1954 U.S. Tax Ct. LEXIS 273">*314 in 1940 would have allowed a reduction of basis by only 5 years of depreciation, and yet, the respondent only reduced the cost or other basis of the residence by depreciation allowances totaling $ 9,675, as against a reduction therefor of $ 9,056.25 by petitioner.

Actually the difference between the parties as to the amount of the loss sustained seems to be in the starting basis for the property. On his return, petitioner used $ 35,750 as his cost or other basis for the 21 T.C. 857">*874 property in 1940, presumably both land and building, whereas the respondent, in his determination, used a basis of $ 27,000 for the building and $ 1,500 for the land at January 1, 1935. It has long been settled that in the case of a residence converted to business use, its basis, for income tax purposes, is its value at the time it was appropriated for incoming producing purposes. Sec. 29.23 (e)-1 of Regs. 111. ¹² See Heiner v. Tindle, 276 U.S. 582">276 U.S. 582. Both petitioner and his accountant testified that the property had been appraised in 1940 for that purpose, although no proof was offered as to what the appraised value was. By reason of petitioner's computation of his 1954 U.S. Tax Ct. LEXIS 273">*315 loss, as shown on his 1945 return, we might assume that the appraised value was $ 35,750 but for the fact that in the depreciation schedule on the same return, as well as in his 1944 return, the cost or other basis for the house at 1940 was shown at $ 27,000, which was the same amount used by the respondent as the basis of the house 5 years earlier. And yet, as noted, the amount by which the petitioner would reduce the basis for depreciation for the 5-year period, 1940 to 1945, was $ 9,056.25, as compared with $ 9,675, the amount by which the respondent would reduce the basis for the 10-year period, 1935 to 1945. Whatever the explanation, it is hardly likely that the value of the house at both 1935 and 1940 would have been appraised at the same figure -- $ 27,000. But if that could be possible, it would be equally difficult to explain the closeness of the depreciation figures, the one being for 5 years and the other for 10. In the respondent's determination, there is matter indicating that the major difference in the loss claimed and the loss allowed had to do with the furniture sold with the house, but, as heretofore noted, the results of the sale of the furniture have not been1954 U.S. Tax Ct. LEXIS 273">*316 put in issue.

Decision will be entered under Rule 50.