Heiner v. Tindle

Background

The case involves Philander C. Knox, who built and lived in a Pittsburgh house before 1892. He leased the house starting October 1, 1901, and rented it until selling it in 1920 for $73,000. The property’s fair market value on March 1, 1913, was $120,000. In his 1920 tax return he claimed a deduction for the loss measured from the 1913 value to the 1920 sale price, but the tax collector disallowed the deduction and assessed more tax, which Knox paid under protest and then sued to recover.

Reasoning

The Court addressed whether a loss on sale could be deducted under the tax law’s provision allowing losses from transactions entered into for profit. The Court found that when Knox converted the house to rental use in 1901, the property was thereafter devoted to producing taxable income. The Treasury rule saying losses on a residence sale are not deductible applies to homes used as residences up to sale, not to property converted to rental use. The Court therefore held that only losses incurred after the property was put to profit-producing use are deductible and that the correct basis may be the property’s value when it became a rental.

Real world impact

The Court reversed the court of appeals and sent the case back for a new trial to find the property’s value on October 1, 1901, when rental use began. If that 1901 value exceeds the 1913 value, the previously claimed deduction should stand; if it is lower, only the difference between the 1901 value and the sale price may be deducted. This decision focuses tax relief on losses tied to income-producing use.