Wasnok v. Commissioner

In 1960, Stephen P. Wasnok and his wife, Mary Alice Wasnok (plaintiffs), purchased a home in Ohio. To make the purchase, they obtained a loan secured by a mortgage on the home from Spring Grove Avenue Loan and Deposit Company (Spring Grove). In 1961, the Wasnoks moved to California. They unsuccessfully attempted on several occasions to sell the Ohio home. Being unable to sell, the Wasnoks rented the home from 1961–65 for $200 per month. On their tax returns, the Wasnoks reported the rental income and took depreciation deductions on the home. Eventually, the Wasnoks became unable to pay the monthly mortgage payments to Spring Grove and, in 1965, the Wasnoks deeded the home to Spring Grove in satisfaction of their remaining balance of $24,421.04. The Wasnoks’ cost basis in the home was $32,729.70. By 1965, they had taken $4,697.42 in depreciation deductions, resulting in an adjusted basis of $28,032.28. After deeding the home back to Spring Grove for $24,421.04, the Wasnoks sustained a $3,611.24 loss on their home. Thereafter, the Wasnoks had gross income of $5,603.21 and $3,180.00 in 1965 and 1966 respectively. They did not file income tax returns for those years because they did not owe any taxes. In 1967, the Wasnoks claimed a capital loss carry-forward deduction of $2,000.00 based on the loss on the home sustained in 1965. In 1968, they claimed another capital loss carry-forward deduction of $389.00. The Commissioner (defendant) disallowed the capital loss carry-over deductions. Rather, the Commissioner characterized the loss as an ordinary loss that was entirely deductible in 1965.