Wasnok v. Commissioner

Brief Fact Summary. Petitioners bought a house in Ohio and subsequently moved to California. Unable to sell the Ohio house, they rented in out for a number of years. Eventually they were unable to continue to make the mortgage payments and were forced to deed the property back to the bank.

Synopsis of Rule of Law. A capital asset does not include property used in a trade or business, including real property.

Facts. Petitioners’, Stephen and Mary Wasnok, are married and resided in Fullerton, California. In 1960 Petitioners bought a home in Cincinnati, Ohio where they were living at the time. After moving to California they attempted to sell the property unsuccessfully. In 1961 Petitioners leased the property for $225 a month. In 1965 Petitioner became unable to make the payments on the mortgage and deeded the property back to the bank in satisfaction of their note in the amount of $24,421.04. They filed income tax returns for the years 1961 through 1964 and claimed total depreciation of $4,697. Petitioners did not file returns in 1965 and 1966. In 1967 they claimed a capital loss carry-forward deduction in the amount of $1,000. In 1968 they claimed another capital loss carry-forward of $389. The Commissioner of Internal Revenue did not allow the capital loss carry-forward deductions arguing that it was an ordinary loss sustained in 1965 and fully deductible in 1965.

Issue. Does Petitioners’ disposition of the real property at a loss constitute an ordinary loss fully deductible in the year sustained, or a capital loss as a loss carryover?

Held. Commissioner Sacks issued the opinion for the Tax Court of the United States in affirming the Commissioner and holding that the loss was not a capital loss but an ordinary one deductible in the year sustained.

Discussion. The Tax Court found that the evidence proved that the property was used in a trade or business and was not a capital asset. Petitioners rented out the property for four years, at a substantial rent, and deducted expenses related to the rental activity.