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Donald LaBarre, Jr., Robert Margolis, Margolis, LaBarre & Kucy, for plaintiff. M. Carr Ferguson, Assistant Attorney General, Patricia B. Tucker, Theodore D. Peyser, Department of Justice, Washington, D. C. 20530, for defendant.

Before Davis and Kashiwa, Judges./*/

The plaintiff, W. L. Schautz Company, is a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania, with its office located at 150 East Grove Street, Dunmore, Pennsylvania. Its business is yarn brokerage and yarn processing. During the period in issue, taxpayer was wholly owned by Walter L. Schautz, Sr., and members of his family.

In 1958, plaintiff purchased from an unrelated party a two-story, four-bedroom house located in a residential neighborhood of Palm Beach, Florida, about one block from the water. Plaintiff did not hold the property for use in its trade or business in any way. The property was held for the personal use of Walter L. Schautz, Sr., and his family, who used it as a winter vacation home.

From the time of the purchase in March 1958 until Mr. Schautz, Sr.'s death on January 1, 1961, the Schautz family used the property each year from the middle of October to the middle of April as a personal residence. After the death of Mr. Schautz, Sr., the property was vacant except for occasional use by his family. In some years the family paid rent for the use of the property. In fiscal 1959, no rent was paid. In fiscal 1960 and 1961, $3,600 in rent per year was paid. In fiscal 1962 and 1963, $7,200 per year in rent was paid. In fiscal 1964, no rent was paid and in fiscal 1965, $553.60 was paid.

In August 1965, the property was sold to an unrelated party at a loss. Plaintiff claimed a deduction for the loss on its federal income tax return for the taxable year ending January 31, 1966. The loss deduction was disallowed on audit and taxpayer paid the additional tax which resulted. Appropriate claims for refund were filed by taxpayer and disallowed by the Internal Revenue Service. Plaintiff subsequently filed suit here seeking the refund.

The question for decision is whether Internal Revenue Code/1/ Section 274 bars a corporation from deducting a loss incurred in the sale of property used solely as a winter vacation residence by the corporation's shareholders.

Plaintiff contends that it is entitled to deduct the loss under I. R. C. Section 165(a) which states, "There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise." This is so regardless of whether the property was used in the taxpayer's trade or business. International Trading Co. v. Commissioner, 484 F. 2d 707 (7th Cir. 1973).

Plaintiff is correct that I. R. C. Section 165(a) allows the taking of a deduction for a loss such as it incurred on the sale of the Florida property. It is also correct that the Seventh Circuit held that this was so regardless of whether the property was held for use in the corporation's trade or business.

However, there is a distinguishable difference between the facts involved in International Trading Co., Supra, and this case. That difference is the taxable year in dispute. In International Trading Co., the taxable year in dispute was 1957. The taxable year in dispute here is fiscal year 1966./2/ This distinction's importance is due to the passage of I. R. C. Section 274 by Congress in 1962, with an effective date of January 1, 1963. Sections 4(a)(1) and (c), Revenue Act of 1962, P. L. 87-834, 76 Stat. 960. The Seventh Circuit acknowledged the potential impact of the enactment of section 274 on its conclusion that the loss was deductible and expressly qualified its decision in the following manner:

     * * * We reach no decision as to whether a loss of the type

Section 274 provides, in pertinent part, as follows:

     (a) Entertainment, Amusement or Recreation.-

Plaintiff has advanced several reasons why the disallowance provisions of section 274(a) should not be applied in this case. First, plaintiff claims it fits within an exception to section 274(a). I. R. C. Section 274(f) states:

(f) Interest, Taxes, Casualty Losses, etc. - This

Next plaintiff contends that section 274 was intended to disallow deductions for expenses but not losses. We do not agree. Section 274(a)(1) states that "no deduction otherwise allowable * * * shall be allowed * * *." It does not state no deduction for expenses otherwise allowable shall be allowed. The absence of the word "expenses" from section 274(a) is significant. Congress has demonstrated that it can limit disallowance provisions to expenses when it so intends. See, e.g., I. R. C. Sections 262, 267(a)(2)./5/ It is also clear from the legislative history of the Revenue Act of 1962 that Congress intended section 274 apply to losses. Both the House Ways and Means Committee Report and the Senate Finance Committee report state:

     In addition to items commonly regarded as expenses "with

The taxpayer does not raise the issue of whether the property was held in a rental trade or business after 1961. Therefore, we do not consider it.

¹ Hereinafter all Internal Revenue Code sections will be cited I. R. C. and will be to the 1954 code as amended, unless otherwise stated.

² Plaintiff reported its taxable income on a February 1-January 31 fiscal year basis. The taxable year in dispute is the February 1, 1965, through January 31, 1966, fiscal year.

³ I. R. C. Section 165:

"(c) Limitation on losses of individuals.-In the case of an individual, the deduction under subsection (a) shall be limited to-

"(1) losses incurred in a trade or business;

"(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business: and

"(3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. A loss described in this paragraph shall be allowed only to the extent that the amount of loss to such individual arising from each casualty, or from each theft, exceeds $100. For purposes of the $100 limitation of the preceding sentence, a husband and wife making a joint return under section 6013 for the taxable year in which the loss is allowed as a deduction shall be treated as one individual. No loss described in this paragraph shall be allowed if, at the time of filing the return, such loss has been claimed for estate tax purposes in the estate tax return."

⁴ One instance when I. R. C. Section 274(f) would help a corporate taxpayer, like plaintiff, deduct an otherwise disallowed loss is in the case of a casualty loss. Treas. Reg. Section 1.274-6 (1963).

⁵ Other courts have recognized and relied upon the presence or absence of the word "expenses" in a disallowance provision. International Trading Co. v. Commissioner, 484 F. 2d 707, 712 (7th Cir. 1973).

⁶ Since we hold that I. R. C. Section 274(a) applies to loss deductions, we reject plaintiff's argument that only I. R. C. Section 274(g) applies to loss deductions.