1962 U.S. Tax Ct. LEXIS 93">*93
Loss deduction claimed on the sale of real estate which petitioner acquired under the will of her deceased husband representing the difference between the sales price and the value at which the property was reported in the deceased husband's estate for estate tax purposes
38 T.C. 673">*673 This proceeding involves an income tax deficiency for 1955 in the amount of $ 25,885.64. The only question in issue is whether petitioner is entitled to a loss deduction of $ 43,917.08 claimed on the sale of a tract of real estate which she inherited from her deceased husband. The property in question was valued for estate tax purposes in her husband's estate tax return at $ 200,000, and was sold approximately 6 months later with certain restrictive covenants for $ 157,880.
Respondent determined in his notice of deficiency that the difference between the estate tax value and the sales price, after adjustments for depreciation1962 U.S. Tax Ct. LEXIS 93">*94 and costs of sale amounting to $ 43,917.08, was attributable to the restrictive covenants which benefited petitioner in that amount, and that no loss occurred on the sale. He makes the alternative contention, and has amended his answer accordingly, that the fair market value of the property at the date of death of petitioner's husband was not $ 200,000, as reported in his estate tax return, but was $ 157,880, the price at which it was sold a few months later.
Some of the facts have been stipulated.
FINDINGS OF FACT.
The stipulated facts are found as set out in the written stipulation.
Nancy B. Black, herein referred to as petitioner, is the widow of J. W. Y. Martin, who died June 25, 1954. She is now married to petitioner Gary Black. On the date of his death Martin owned in fee 38 T.C. 673">*674 simple a tract of land consisting of approximately 1,017.45 acres on the north and south sides of Tufton Avenue, west of Mantua Mill Road in the fourth election district of Baltimore County, Maryland. The portion of the tract situated north of Tufton Avenue was known as Snow Hill Farm. It comprised approximately 250 acres. The portion south of Tufton Avenue, consisting of approximately 766 acres, 1962 U.S. Tax Ct. LEXIS 93">*95 was known as Worthington Farm.
For several years prior to Martin's death the Worthington Farm was operated by a partnership composed of himself, Daniel B. Brewster, and Donald M. Culver, and known as "Tufton's Folly." The partnership reported losses in its income tax returns for the fiscal years ended June 30, 1952 and 1953, and a profit of $ 419.72 for the period July 1 to December 31, 1954. On the death of her husband petitioner became a member of the partnership. Culver sold his interest in the partnership to the other partners on June 30, 1954.
Martin left a will in which he devised to petitioner all of the approximately 1,017-acre tract of land described above. After his death Brewster approached petitioner about purchasing a portion, approximately 395 acres, of the Worthington Farm land. He represented to petitioner that he wanted the property for residential and farm purposes only and had no intention of ever using it for other purposes. He was aware that petitioner was desirous of maintaining the "country estate" character of the area. A formal offer was made to petitioner by letter dated October 7, 1954, addressed to petitioner's attorney, Edwin F. A. Morgan. The letter1962 U.S. Tax Ct. LEXIS 93">*96 is, in part, as follows:
Enclosed herein is a plat of Worthington Farms, prepared by Dollenberg Brothers. A line lettered "AB" has been drawn on the plat by the firm of Thompson, Grace and Mays. You will note that this line runs generally north and south and consequently divides the farm into an eastern and western half. Point "B" is situate on Tufton Avenue at the junction of the
The entire western section of the property as divided by line "AB" contains 351.2 acres more or less. As I remember this was the approximate acreage that Nannie hoped to sell. I am, however, perfectly willing to make any reasonable changes in this division in order to more specifically conform to Nannie's wishes.
At Brewster's suggestion, Morgan employed two well-known real estate appraisers of the Baltimore area -- Walter C. Pinkard and James Piper, Jr. -- to appraise the property which Brewster proposed to purchase, to ascertain if the price offered by him was a fair one. They determined that it was, and on November 30, 1954, a written agreement of sale1962 U.S. Tax Ct. LEXIS 93">*97 was executed whereby petitioner agreed to sell to Brewster and his wife approximately 395 acres of the western and southern portions of the Worthington Farm land with the improvements thereon for $ 157,880. At the bottom of the agreement of sale there was a notation by Pinkard:
38 T.C. 673">*675 In my opinion the price of $ 157,880 is a full one for the aforesaid property, taking into consideration the restrictive covenants, which restrictive covenants are, in my opinion, adequate.
Piper, likewise, expressed his approval of the sales price in letters to petitioner and to Morgan. In his letter to petitioner he stated:
I have carefully read a copy of the Agreement of Sale between you and Mr. and Mrs. Brewster and have given particular attention to the various restrictive covenants which are to be contained in the Deed you will give to them.
It is my opinion that the sales price of $ 157,880.00 is a very full price when the aforementioned restrictive covenants are taken into consideration.
Pursuant to the agreement of sale petitioner deeded the property to Brewster and his wife February 7, 1955. The deed provided that the property would not --
1. Be used for commercial or industrial purposes, 1962 U.S. Tax Ct. LEXIS 93">*98 but shall be used only for residential and/or farming purposes, such as, but not by way of limitation, the breeding, raising, boarding, training, selling and showing of horses, cattle or other livestock. The Grantees further covenant for themselves, their heirs and assigns, that they will not apply for any change in the present zoning status of said property in order to have it rezoned or reclassified for another or different use other than its present use.
2. Be sold, transferred or conveyed (or otherwise subdivided) in parcels of land containing less than fifty (50) acres of land per parcel.
3. Be sold, transferred or conveyed, even in parcels containing fifty (50) acres or more of land per parcel to anyone other than a limited class of persons hereinafter referred to, without first notifying the Grantor in writing, or if the Grantor be then deceased, her then surviving children, of such proposed sale; and the Grantor, or if she be then deceased, then any one of her then surviving children shall have the right within sixty (60) days of the giving of such notice to purchase such parcel so proposed to be sold, at the same price and upon the same terms and conditions as contained 1962 U.S. Tax Ct. LEXIS 93">*99 in said proposed sale. In the event that a minor child of the Grantor shall have the right to purchase, as set forth above, the legal guardian of such child shall be required to exercise the right to purchase on behalf of such minor child within said sixty (60) day period, and upon the failure of said guardian to so exercise said right within said sixty (60) day period, then and in that event the right of such minor to so purchase shall thereupon expire and cease to exist. The Grantees specifically reserve the right to sell, transfer or convey absolutely or upon such terms and conditions as the Grantees deem proper, but always subject to the covenants and restrictions in this deed contained, one or more parcels of land containing not less than fifty (50) acres or more of land per parcel, to a limited class of persons, namely, the Grantee's parents, children, stepchildren, and not more than two other persons who are either brothers and/or sisters of either of the Grantees without first offering said parcel to the Grantor, or if she be then deceased, to her then surviving children, as in this deed provided.
The above restrictive provisions were not to apply to certain portions of the1962 U.S. Tax Ct. LEXIS 93">*100 property conveyed and were reciprocal in that they were to become inoperative (1) if the grantor should convey to others than her descendants the remainder of the Worthington Farm and the Snow Hill Farm lands, or (2) should sell or utilize any of such lands for commercial or industrial purposes, or (3) should sell any of such 38 T.C. 673">*676 lands in parcels of less than 50 acres. The restrictive provisions were to run with the land for a period of 30 years from the date of the sale.
Two real estate appraisers were employed by the executors to appraise the real estate left in the estate of petitioner's deceased husband. In their reports one of them valued the properties conveyed to Brewster at the date of Martin's death at $ 161,790, while the other (who had been employed by petitioner to appraise the property sold to Brewster) valued them at $ 200,000. The executors who prepared the estate tax return used the higher value of $ 200,000 for the reason that it would give petitioner a higher base for the property which she retained. The use of the higher value did not result in any increase in the amount of the estate tax. These appraisals of the property were made after the execution1962 U.S. Tax Ct. LEXIS 93">*101 of the agreement of sale with Brewster.
Nothing occurred in any way affecting the value of the property in question during the interval between Martin's death and petitioner's sale of the property to Brewster.
The restrictions placed on the property in the deed to Brewster did not have any effect on the price which he was willing to pay for it, since they did not limit the uses for which he acquired the property.
In their joint income tax return for 1955 petitioners claim an ordinary loss deduction of $ 43,917.08 on the sale of the real estate to Brewster, this amount being the difference between the amount at which the property was valued in Martin's estate tax return and the price at which it was sold to Brewster, with adjustments for depreciation and costs of the sale. In respondent's determination of the deficiency herein the claimed loss was disallowed for reasons stated as follows:
The loss on the sale of "Worthington Farm" in the amount of $ 43,917.08 has been disallowed since the difference between the basis of the property of $ 200,000.00, established on the estate tax return of J. B. [
In the alternative, it is held that such loss is not allowable because it is in the nature of a capital expenditure to protect and enhance the value of adjacent real property owned by you.
OPINION.
The ownership of property is said to consist of a "bundle of rights" including its free use and enjoyment, the control over it, and the right to dispose of it in any manner not contrary to existing regulatory laws. Restrictive covenants, as applied to the use of land, are said to constitute an interest in the land in the nature of a negative easement. See 26 C.J.S., sec. 162(2).
38 T.C. 673">*677 At the time of petitioner's sale of the property in question it was free of any restrictions. In her sale of the property to Brewster petitioner did not convey to him all of her rights therein but excluded from the sale the right to use the property for commercial or industrial purposes, the right to sell it in lots of less than 50 acres each, 1962 U.S. Tax Ct. LEXIS 93">*103 and the right to sell it to the public before first offering it to the grantor or her surviving children.
While the evidence does not establish that the restrictions had any ascertainable value to petitioner, it does show that they did seriously affect the sale value of the property. The testimony of one of petitioner's own expert witnesses was that the restrictions accounted for the full amount of the difference between the $ 200,000 at which the property was valued for estate tax purposes and the $ 157,880 for which it was sold to Brewster. The evidence is clear that the property itself suffered no loss of value during this period.
Thus it seems inescapable that what petitioner is claiming here is a loss on the sale of property rights which she did not in fact sell. She retained and still retains a limited interest in the property through these restrictive covenants. That interest, supposedly, is subject to further barter and sale between her and the grantee.
Accordingly, the loss deduction claimed by petitioner is disallowed.
