Hastings, Senior Circuit Judge and Kiley and Pell, Circuit Judges. Pell, Circuit Judge, dissenting.
HASTINGS, Senior Circuit Judge.
Plaintiff John R. Thompson Co. is a corporate restauranteur. The present appeal involves its 1959 federal income tax liability, but plaintiff's dispute with the United States centers on events which occurred in 1962. As well as owning other restaurants and restaurant chains, plaintiff owned and operated Henrici's Restaurant on West Randolph Street in Chicago's Loop area. A salient feature of this restaurant's Victorian decor and flavor was the presence on its walls of 42 oil paintings, engravings and prints, most of which dated from the nineteenth century. Plaintiff purchased these works of art in 1929 as part of the transaction by which it acquired the restaurant. The paintings had been collected by the restaurant's previous owners for over twenty years prior to the transaction, and they were used continuously after their initial acquisition to decorate the restaurant's walls.
The City of Chicago condemned plaintiff's leasehold interest in the restaurant premises in 1962, preparatory to erecting the Chicago Civic Center on the site, and plaintiff was forced to close the restaurant. It is plaintiff's contention that the condemnation and resultant forced closing of the restaurant in 1962 caused it to suffer a loss because of the decline in value of the collection of paintings occasioned thereby. Plaintiff alleges that, since the paintings had been utilized in the operation of its trade or business, the loss could be taken under one or the other of §§ 165(a) and 167 of the Internal Revenue Code of 1954. Of necessity, plaintiff's contention must be regarded as being in the alternative because § 165(a), nondepreciable property, and § 167, depreciable property, are mutually exclusive.
Plaintiff's 1962 income tax return showed a consolidated net operating loss, which plaintiff used as a net operating loss carryback to 1959, pursuant to § 172 of the Code. Part of the 1962 net operating loss was the loss plaintiff claimed on the paintings. On plaintiff's application under § 6411 of the Code, the Commissioner of Internal Revenue allowed a tentative carryback adjustment and made a 1959 income tax refund to plaintiff. Thereafter, following an audit of plaintiff's 1962 return, the Commissioner disallowed the loss for the paintings, adjusted the 1962 net operating loss accordingly and asserted a deficiency for 1959. Plaintiff paid the deficiency assessment and then filed a claim for refund with the District Director of Internal Revenue in Chicago, pursuant to Treas. Reg. § 301.6402-2(a) (2). The claim was disallowed.*fn1 Plaintiff brought this action against the United States to enforce its claim for refund and, ultimately to vindicate its alleged right to take a 1962 loss deduction on the paintings. The district court, which had jurisdiction of the action under 28 U. S. C. A. § 1346(a) (1), held that plaintiff did not experience a loss in 1962 under either of the claimed sections of the Code. The court entered judgment for the United States, 338 F. Supp. 770 (1971), and we affirm.
Section 165(a) of the Code provides a deduction from income for "any loss sustained during the taxable year and not compensated for by insurance or otherwise." It has been stipulated that plaintiff was not insured against its "loss" on the paintings and that it made no claim for compensation for such a loss as part of the condemnation award. A Treasury regulation defines the nature of the loss allowable under § 165(a):
"To be allowable as a deduction under section 165(a), a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and * * * actually sustained during the taxable year. Only a bona fide loss is allowable. Substance and not mere form shall govern in determining a deductible loss." Treas. Reg. § 1.165-1(b).
Plaintiff contends that its alleged loss is further governed by Treas. Reg. § 1.165-2(a):
"A loss incurred in a business or in a transaction entered into for profit and arising from the sudden termination of the usefulness in such business or transaction of any nondepreciable property, in a case where such business or transaction is discontinued or where such property is permanently discarded from use therein, shall be allowed as a deduction under section 165(a) for the taxable year in which the loss is actually sustained. For this purpose, the taxable year in which the loss is sustained is not necessarily the taxable year in which the overt act of abandonment, or the loss of title to the property occurs."
The record in this case consists solely of the pleadings, a stipulation by the parties with attached exhibits and the depositions of two of plaintiff's former employees. "Since the evidence in this case is all either documentary or in the form of physical exhibits, we are in as good a position as the trial court to examine it and determine for ourselves" the facts of this case. "Under these circumstances 'the findings of the District Court are deprived of the degree of finality which would otherwise attach under Rule 52.'" Kiwi Coders Corp. v. Acro Tool & Die Works, 7 Cir., 250 F.2d 562, 568 (1957), quoting (in part) Steiner v. Mitchell, 6 Cir., 215 F.2d 171, 175 (1954), aff'd, 350 U.S. 247, 76 S. Ct. 330, 100 L. Ed. 267 (1956). Our independent examination of the record leads us to two basic conclusions. (1) As a matter of law, plaintiff's alleged loss in 1962 could not have been as great as it claims; the measure of loss for which it contends is wholly unsupportable. (2) As to that part of the alleged loss which plaintiff may, in fact, have sustained in 1962, there has been a failure of proof. Since the burden is on the taxpayer to prove the deductibility of the loss it claims,*fn2 plaintiff cannot prevail.
In 1929, plaintiff paid $184,699 for the paintings in issue. In 1962, their value in the art market was appraised at $44,150. Plaintiff would deduct the entire $140,549 difference between these two sums as a 1962 loss. Under no tenable theory was this entire amount a "loss incurred in a business," as required by Treas. Reg. § 1.165-2(a), supra. Some part of the difference between 1929 purchase price and 1962 appraisal value may be attributable to a decline in the popularity of these paintings among the art-buying public. Plaintiff would have suffered this portion of the loss regardless of whether the paintings were hanging in the restaurant, in an art gallery or elsewhere. The mere fact that an art owner chooses to display his collection in his place of business, for whatever reason, does not transform a loss incurred in the art market into a loss incurred in the business. Cf. A. R. R. 4530, II-2 Cum. Bull. 145 (1923), superseded by Rev. Rul. 68-232, 1968-1 Cum. Bull. 79. The phrase "incurred in a business" in the regulation cited above describes the manner of incurrence, not the place of incurrence. Furthermore, plaintiff has presented no evidence that the portion of the loss attributable to the decline in art market value was "actually sustained during the taxable year" 1962, as required by Treas. Reg. § 1.165-1(b), supra. Since the value of the paintings in the art market may have continued to fluctuate during 1962, 1963 and 1964, while plaintiff held the paintings, no reason is apparent why this case should not come under the general rule*fn3 that fluctuations in the value of property are not recognized as gains or losses until "closed and completed transactions, fixed by identifiable events," occur. Treas. Reg. § 1.165-1(b), supra. In this case, we find no transaction prior to the 1964 sale of the paintings which caused plaintiff to realize a loss on the art market value of the paintings.
Over and above their value in the art market, the paintings had an additional (and not inconsequential) value because of their use in plaintiff's restaurant. This is clear from the 1971 deposition testimony of plaintiff's former president and of the restaurant's former manager. It is also clear that this additional value was a factor in the price plaintiff paid for the paintings in 1929. As such, its "basis" is ascertainable by subtracting the 1929 art market value of the paintings from the $184,699 purchase price. Unlike the loss in art market value for which plaintiff claimed a 1962 deduction, which we have held was barred as a matter of law, it is entirely possible that plaintiff suffered a 1962 loss on this additional value. Such a loss, if it occurred, would have been incurred by plaintiff "in a business," for reasons having no connection with the art market, but dependent wholly upon the fortunes of plaintiff's business.
Whatever the possibilities, we must agree with the district court that plaintiff failed to prove such loss in additional value. Plaintiff's most telling failure was in not proving that a "closed and completed transaction" occurred in 1962, "fixed by [an] identifiable event." Although the condemnation forced plaintiff to close the restaurant on August 15 of that year, a strong inference remains in the record that the usefulness of the paintings in plaintiff's business did not terminate on that date and that the paintings were not "permanently discarded from use" at that time. On the contrary, plaintiff considered reestablishing the restaurant, with the identical decor, at some other location in the Loop. As an alternative, it also considered trying to recreate the restaurant's atmosphere, by means including the use of the paintings, at one of the twelve other restaurants it owned and operated under the Henrici's name. Thus, in response to the question why plaintiff did not eventually move the restaurant to another location within the Loop, plaintiff's former president answered:
"Well, frankly, because we couldn't find a location we liked and, particularly, the size of the room was very very important. To get that size room, the rent would have been almost prohibitive. So, after spending quite a little time looking over the ...