Before MARIS, KALODNER and HASTIE, Circuit Judges.
This petition to review a decision of the Tax Court presents the question whether the loss, if any, which the taxpayer sustained upon the sale of his former residence in 1948 was non-deductible for income tax purposes under section 24(b) (1) (A) of the Internal Revenue Code, 26 U.S.C.A. § 24(b) (1) (A). The facts in the case as found by the Tax Court are these:
The taxpayer,*fn1 Julius Long Stern, built a residence for himself at 36 West River Street, Wilkes-Barre, Pennsylvania, in 1925, at an approximate cost of $110,000. It is one of the four or five outstanding residences of Wilkes-Barre and is located in the most desirable residential section of the city. The taxpayer occupied the West River Street property as his personal residence until May 1947 when he moved to his new home in West Dallas, Pennsylvania. Construction on the taxpayer's new house had started in March 1946. At that time he decided to sell the West River Street property and discussed the matter first in the summer of 1946 with John Howell, and then in September 1946 with Harry Goeringer, both of whom are qualified real estate experts in Wilkes-Barre and who were intimately acquainted with the house at that time. The house was listed for sale first with the office of John Howell and later with Harry Goeringer at a price of $75,000. Later in January 1947, the house was also listed with other real estate offices in Wilkes-Barre. In September 1946 Harry Goeringer appraised the property at a fair market value of $60,000. Intensive efforts to sell the house were carried on by the real estate offices referred to above and the house was advertised for sale and other steps taken to interest prospective purchasers. Several prospects had been shown through the property and in March 1947 Charles S. Popky, through his attorney, submitted an offer to buy the house, including most of the furnishings, for a price of $40,000. The offer was accompanied by a check for $1,000. The furnishings of the West River Street property had been independently appraised by a qualified expert at a fair market value of $10,000.The Popky offer, which was based solely on Popky's ability to pay, was immediately rejected by the taxpayer as being far too low.
The taxpayer had been on the board of directors of the Miners National Bank of Wilkes-Barre for 25 years. In April 1947 he applied to the Miners National Bank for a loan on the West River Street property. As a result of the application Guy W. Moore and Harry Goeringer, both of whom were directors of, and appraisers for, the Miners National Bank, appraised the house for mortgage loan purposes at $50,000 and recommended a loan of 50% thereof to the taxpayer. The loan was granted in the amount of $25,000 and a mortgage for that amount was taken by the Miners National Bank on the property.
On June 5, 1947, Harry Goeringer made a third appraisal of the West River Street property for fair market value sales purposes and fixed the value at $60,000.The years 1946 and 1947 were years of a very active real estate market in Wilkes-Barre, during which years materials for building purposes were scarce.
In the Spring of 1947, the taxpayer's son-in-law, Dr. Samuel A. Guttman, informed the taxpayer that he had decided to move to Wilkes-Barre and open an office for the practice of psychiatry. This decision of Dr. Guttman was based upon his own judgment, after consultation with his wife but without the advice or suggestion of the taxpayer. Dr. Guttman was motivated by his desire to practice in a smaller community in which he could combine both his home and his office and in which living conditions would be less difficult than in Philadelphia, where he had been practicing. In addition, he was familiar with the area and knew that there was no other practicing psychiatrist in Wilkes-Barre or in Luzerne or Lackawanna counties.
Dr. Guttman inquired whether the taxpayer would rent the West River Street property. The house was expensive for the taxpayer to maintain and, after consultation with Harry Goeringer, the taxpayer decided to rent the house in order to cut down the cost of maintaining two houses. Upon the advice of Goeringer, a rental of $200 a month was set and the taxpayer leased the property at that rental for the period of one year beginning September 1, 1947. This rental was the highest rental for comparable property in Goeringer's experience and was paid from Dr. Guttman's professional earnings. The rental was paid by check and reported by the taxpayer on his income tax return.
Dr. Guttman, who anticipated a rental for longer than one year, made improvements in the West River Street property at a cost of approximately $3,000 in order to make it more readily usable as a combined home and office. The funds for these improvements were derived from Dr. Guttman's professional earnings, which were approximately $20,000 per year for the period 1946 through 1949.
By the summer of 1948, the Popky offer was the only offer received by the taxpayer on the West River Street property and at that time he had a further discussion respecting the property with Goeringer. He was informed that the real estate market in Wilkes-Barre had suffered a substantial decline from the beginning of 1948, caused by the fact that building materials had become more plentiful, that there was a new suburban trend and a new trend toward the ranch-type house, which had resulted in reducing the fair market value of the taxpayer's West River Street property. The taxpayer was further advised by Goeringer that unless he was willing to wait for an indefinite period he would have to take a substantial loss in order to effect a reasonably prompt sale.
Thereupon the taxpayer decided to sell the house at the best price he could get, regardless of the property's fair market value. He was motivated in reaching this decision by the fact that the West River Street property in addition to his own residence was expensive to maintain and by the fact that the West River Street property was encumbered by a mortgage, which was undesirable to the taxpayer. When in the late summer of 1948 Dr. Guttman asked the taxpayer to renew his lease, he was informed that the house was for sale at the best possible price and that the taxpayer was asking $30,000 for the property without the furnishings. Dr. Guttman decided to, and did, purchase the house from the taxpayer at a price of $30,000.From his professional earnings he gave the taxpayer a check in the amount of $7,500 and he gave a check in the amount of $4,500 to the Miners National Bank, which had supplied the balance of the purchase price or $18,000, after taking a mortgage on the property in that amount. The taxpayer's debt to the Miners National Bank was paid in full and his mortgage was thereupon released. All negotiations concerning the sale of the West River Street property were conducted between the taxpayer, Dr. Guttman and the Miners National Bank. The taxpayer's daughter, Claire Guttman, did not participate in any of these negotiations, nor was she a party to them. On Dr. Guttman's decision, title to the property was taken in the name of Dr. Guttman and Claire Guttman, his wife, as tenants by the entirety in accordance with the usual custom in Pennsylvania and in accordance with the custom of Dr. Guttman and his wife, who had taken title to all property acquired during their marriage, jointly. All of their bank accounts were held by Dr. Guttman, whose professional earnings supplied the funds, and his wife in their joint names, including his professional account. All of the moneys that went into these accounts were from Dr. Guttman's earnings.
At the time of her marriage to Dr. Guttman, Claire Guttman owned in her own name securities worth approximately $15,000, which were drawn upon while Dr. Guttman was pursuing his professional education and experience in his specialty to provide for the support of the family's living expenses. Of these securities, several thousand dollars worth were still owned by Claire Guttman at the time of the sale. After Dr. Guttman started his medical practice in 1945 his professional income was adequate and sufficient to support his family and himself in all respects. The taxpayer was never called upon and never did furnish any of the support of Guttman or his family, with the exception of an occasional gift of cash to his daughter upon occasions of her birthday, Christmas, etc.
Claire Guttman, as well as Dr. Guttman, signed the mortgage and accompanying bond in connection with the sale of the West River Street property and the simultaneous financing of the transaction by the Miners National Bank.
The case was originally tried by Judge Hill and was reviewed by the Tax Court in banc. Although the record is far from clear it appears that a majority of the judges of the court joined in a decision upholding the deficiency in the tax asserted by the respondent as a result of the disallowance of the alleged loss on the sale. Judge Opper, in an opinion concurred in by an undisclosed number of his colleagues, held the loss non-deductible under section 24(b) (1) (A) of the Code based upon his conclusion that the sale of the entire property must be regarded as having been made to the taxpayer's daughter. Judge Bruce, in an opinion joined in by Judges Murdock and Turner, concurred in the disallowance of the loss on the ground that the evidence did not establish that the taxpayer had actually suffered a loss. Judge Raum concurred in the result without opinion. Judge Hill, who saw and heard the witnesses, filed a dissenting opinion, joined in by Judges Arundell, Black, LeMire, Johnson and Tietjens, in which he ...