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CHICAGO TITLE & TRUST CO. v. UNITED STATES

March 25, 1953

CHICAGO TITLE & TRUST CO.
v.
UNITED STATES.



The opinion of the court was delivered by: Perry, District Judge.

This a suit by the executors of the Last Will of Leon Sigman, deceased, for the recovery of alleged overpayment of income tax during his lifetime. The sum of $26,184.81 is claimed as a refund for income tax paid by the taxpayer during the year 1943 and the sum of $27,894.13 for the year 1946, together with interest from the time the respective amounts were paid toward payment of income tax. For the year 1943 taxpayer, Leon Sigman, paid to the Collector of Internal Revenue of the United States a total income tax in the amount of $27,333.02 for which he seeks a refund in the amount of $26,184.81. For the year 1946, he paid a total income tax in the amount of $36,225.26, for which he seeks a refund of $27,894.33.

For the purpose of convenience, Leon Sigman, is hereinafter referred to as the taxpayer. The facts are very simple. The taxpayer was a man of considerable means, whose principal business was that of President and Executive Officer of the Scotch Woolen Mills in Chicago, Illinois, from whom he received a salary of $43,500 for the years involved herein and a similarly substantial salary for many years prior thereto. In 1942 his gross rentals amounted to $188,387.41; in 1943 to $189,593.28; in 1944 to $207,517.13; in 1945 to $197,263.18 and in 1946 to $207,566.59. He hired professional real estate firms to service and manage his properties. While it is true that no sale was made without his approval, it is perfectly apparent from the evidence that selling was an inconsequential part of his work for the reason that over a period of many years only three of the properties that brought rental value were sold and they were not properties which brought in the major part of the income for rental. The rental received from the three buildings involved together was less than one-half of the rental from the Scotch Woolen Mills Building and less than one-fourth of the income from the Bay State Building, which were the two buildings which taxpayer continued to hold until his death.

From 1927 to 1946 the taxpayer made no purchase of real estate. During that period of time he sold four parcels, three of which created the losses that brought about this controversy. The fourth one was an apartment house in Miami Beach, Florida, containing six apartments, two of which taxpayer and his family occupied and four of which were rented. That property was sold for $16,414.17 less than adjusted cost. The evidence does not reveal whether there was a loss. Since part of the premises was used as residence, the element of depreciation was apparently a factor. Anyway, no loss is claimed so far as the record reveals. That sale occurred back in 1930. The record reveals that the taxpayer had a joint interest in some Florida lands which was disposed of but no mention of any price is made.

Taxpayer owned only three other properties and he retained ownership in them until his death. One property seemed to be of little value, namely, some Wisconsin lands in which he invested the amount of $4,584.32. The other two properties were rental properties from which he continued to draw very substantial rentals to the date of his death. They were the Bay State Building at Randolph Street and State Street in Chicago and the Scotch Woolen Mills property at Halsted and Adams, which he rented to the Scotch Woolen Mills Company, of which company, he was President and from whom he received an annual salary of $43,500 for the period in question.

These are five separate and distinct properties. When taxpayer sold each of these properties he sold a separate asset and terminated business so far as that particular piece of property was concerned. Since he had held these properties for many years, he was entitled to treat each of them as a "capital loss." In 1944 the taxpayer sold the property described in evidence before the Court as "Cascade Building" and sustained a "capital loss" of $77,499.29. The taxpayer recognized that to be the fact and so treated it when he filed his 1944 income tax return and paid accordingly, as hereinabove set forth.

In 1945 taxpayer sold two parcels of real estate which are referred to in the evidence before the Court as the "Wilson Avenue Property" and the "Roosevelt Road Property". The taxpayer sustained a loss of $238,973.43 on the "Wilson Avenue Property" and a loss of $95,241.93 on the "Roosevelt Road Property" making a grand total of $334,315.36 for the year 1944.

Meanwhile he has filed a claim for refund and amended his income tax return for the year 1944. In this claim and amended tax return he treated the loss of $77,499.29 on the sale of the Cascade Building as a "net operating loss" on the theory that the facts presented in the claim showed taxpayer Leon Sigman to be regularly engaged in the real estate business and that the loss occurred from the sale of assets consisting of the Cascade Building was therefore a "net operating loss" for the purpose of his income tax return for the year 1944.

It appears from the evidence that in 1943 the taxpayer had a long term capital gain in the amount of $26,487.14 from the sale of securities in the amount of $190,879.56. In 1944 there was only a total of $4,207.56 received in interest and dividends and $1,253.14 in interest on bonds or bank deposits. In 1946 the total dividends listed $910 and total interest $9,674.41.

In arriving at the 1945 income tax net income for the figure of $83,425.31, taxpayer credited himself with a loss of $238,973.43 as a loss from the sale of the Wilson Avenue property and a loss of $95,241.93 on the sale of the Roosevelt Road property or a total loss of $334,315.36, all of which was treated as "net operating loss." By adding these figures they were taken as operating loss to the income tax net income of the taxpayer for the year 1945, the total would be $417,740.67. In that year the record reveals a salary of $43,500 from the Scotch Woolen Mills, $125 from Directors Meeting and $154,130.78 from interest and dividends. The source of this income does not appear from the evidence. In addition taxpayer's return for 1945 shows $195,263.18 income from rentals. By treating $334,315.36 as a net operating loss the taxpayer arrived at a loss for the year 1945 in the amount of $281,181.09 and therefore paid no income tax for that year.

The taxpayer was granted a refund in the sum of $26,705.05 that he paid on his 1944 income tax on account of a claim wherein the taxpayer maintained that the loss from the sale of the "Cascade Building" was a loss upon the sale of property used in the trade or business of renting property. The Commissioner allowed that claim and made the refund on that theory. However, it is interesting to note that the greater part of the loss was sustained from the decrease in the value of the land itself rather than the building. This was not taken into consideration by the taxpayer or the Commissioner.

A table showing income tax net income of taxpayer and taxes paid from 1942 to 1946 inclusive is as follows:

                      Income Tax              Income Tax
  Year                Net Income                 Paid
  1942                $77,723.86             $6,230.25
  1943                $100,271.21             $27,333.02
  1944                $89,571.69             None
  1945                $83,425.31             $9,569.10
  1946                $115,869.16             $35,347.49
                      ___________             __________
                      $466,861.22             $78,479.86

At this point it is important to consider whether taxpayer was really buying the buildings for investment purposes or had in mind buying property and holding it for the increased value. In the case of the Cascade Building which was bought in 1927 for $146,584.55 and sold in 1944 for $30,000. The depreciation allowed on the building during that time was $39,085.26. The record does not reveal a division in the values between land and building, but it is clear that it was the land value which the taxpayer had in mind. That is further supported by the comparatively low income from the building.

The Roosevelt Road property was revalued by the Internal Revenue Department in 1939 and the sum of $134,486.08 was fixed as the value for tax purposes. That was divided as to value as follows:

Land Value        Building Value          Total
$89,657.39          $44,828.69         $134,486.08

Depreciation after 1939 and before sale was $12,801.43, deducted from $44,828.69 leaves the value of the building at ...


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