Gutwirth, Charles, et al. v. Comm.

Decisions will be entered under Rule 50.

Maurice Austin, Leo A. Diamond, and Alex J. Soled, for the petitioners.

Stephen M. Miller and Warren S. Shine, for the respondent.

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The Commissioner determined deficiencies in income tax in the amounts of 61,393.19, 38,863.49, and 13,579.02 against Isidore Lipschutz, Charles Gutwirth, and Albert Gutwirth, respectively, for the year 1946. The matters presently in controversy are: (1) Whether an ordinary deductible loss in the amount of 125,700.67 was sustained by petitioners' partnership in its fiscal year ending January 31, 1946, by reason of enemy bomb damage or otherwise in respect of certain

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factory property in Belgium; and (2) whether petitioner Lipschutz sustained a deductible loss in the amount of 11,185.68 in 1946 arising out of alleged vandalism to or thefts from a residence in Belgium. FINDINGS OF FACT

Some of the facts and exhibits have been stipulated and are incorporated herein by this reference.

The petitioners, residents of New York City, timely filed their individual income tax returns for the calendar year 1946 with the then collector of internal revenue for the third district of New York. Petitioner Lipschutz is the brother-in-law of Charles Gutwirth, hereinafter sometimes referred to as Gutwirth; Albert Gutwirth is Charles Gutwirth's son and Isidore Lipschutz's nephew.

At all times prior to 1939, Lipschutz and Gutwirth were nonresident aliens, not engaged in trade or business in the United States. Neither filed a U.S. income tax return for any year prior to 1939. Avenue du Margrave Property

Since about 1910, with some interruption during World War I, Lipschutz and Gutwirth were engaged as equal partners in the business of cutting, polishing, and selling diamonds. After World War I they carried on that business in Antwerp, Belgium, under the firm name of "Lipschutz & Gutwirth," hereinafter called the "Antwerp firm." At first they operated in a rented factory. On December 29, 1922, they purchased real property at 43-45 Avenue du Margrave in Antwerp, hereinafter sometimes referred to as the Avenue du Margrave property, for the purpose of constructing a diamond cutting and polishing factory in which to carry on their business. The property covered an area of 1,003 square meters, or approximately 10,800 square feet; the purchase price was 98,000 Belgian francs, equivalent to about 6,600 at the then existing rate of exchange.

In 1923 Lipschutz and Gutwirth had a modern factory constructed on the property; it consisted of two large rooms and several smaller rooms for the various manufacturing processes, a garage, a strong room vault, several executive offices, a dining room and kitchen for the workers, and living accommodations or apartments for the foremen. The principal portion of the factory was one-story high, but the portion containing the apartments was three stories and the portion which housed the executive offices consisted of two stories. The cost of the factory was 48,000. Machinery and equipment were installed in the factory in 1923 at a total cost of 30,000. During the period from 1923 to 1930 a number of capital additions and improvements were made to the property, including the construction or installation of a raised platform, a central heating system, a central air-conditioning

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system, a chemical cleaning facility, a new vault, and various improvements to the executive offices, such as new parquet floors, crystal chandeliers, and marble fireplaces. The total cost of such capital additions and improvements was 32,000.

During the period from 1923 to approximately 1930, there were substantial additions of machinery and equipment, apart from replacements, as follows: 104 polishing machines, 200 sawing machines, and 6 girdling machines -- all with appurtenant equipment. The total cost of such additions was 40,000. Also, during the same period, original paintings and oriental rugs were purchased and installed in the executive offices at a total cost of 20,000.

The machinery and equipment were periodically inspected as to age, condition, and operating effectiveness, and replacements were regularly made when needed. The expected useful life of the building was 40 years. When improvements, additions, and replacements were made, with respect both to the building and to machinery and equipment, the amounts paid were charged as current expenses and not capitalized either on the books of Lipschutz and Gutwirth individually, or on the books of the Antwerp firm.

With the threat of war imminent, Lipschutz and Gutwirth, who were both Jewish, decided in 1938 to come to the United States and to reestablish their business there. Many of the Antwerp firm's customers were located in the United States. Prior to leaving Belgium, Lipschutz and Gutwirth engaged in serious negotiations concerning the sale of their factory property in Belgium; however, the negotiations fell through. When they left Belgium they intended to resume manufacturing operations at the factory upon the cessation of the war.

Lipschutz immigrated to the United States under a permanent immigration visa in 1938. During the same year he went back to Belgium, but returned to the United States in April 1939. Thereafter he resided continuously in the United States and became a citizen of the United States in or about 1947; he did not visit Belgium again until 1951. Gutwirth visited the United States for a few weeks in 1938. He came to the United States on a temporary visitor's visa in the summer of 1939 and remained in the United States throughout the war. He was admitted to the United States as an immigrant under a permanent immigration visa in 1942, and subsequently became a U.S. citizen. He did not visit Belgium until 1949 or 1950. Full production of the Antwerp firm ceased during the latter half of 1938; however, some production did continue until Gutwirth's departure from Belgium in 1939, when the Antwerp firm's manufacturing operations ceased. The factory was operated after Lipschutz and Gutwirth left Antwerp; but it was not being operated for either of them individually, or for the Antwerp firm.

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Antwerp was occupied by the Germans in May 1940. On June 14, 1941, a decree was passed by the German occupying authorities in Belgium, which created a diamond bureau for the purpose of controlling the manufacture and sale of diamonds.

Georges Brunschot, a Catholic, was a foreman in the factory, and lived in one of the apartments on the premises. He had been a trusted employee of the Antwerp firm for many years. During the war he was engaged in the Resistance; he died in 1946 or 1947. Prior to departing from Antwerp in 1939, Lipschutz, in behalf of the Antwerp firm, appointed Brunschot as the Antwerp firm's agent and custodian of the factory property during the absence of Lipschutz and Gutwirth. Brunschot was given full powers as agent and custodian, including the power to do anything necessary to preserve and protect the property, to make all expenditures necessary in order to keep the factory in good condition, and to rent out part of the factory if he deemed it in the best interest of the firm. Brunschot was also instructed to put the more valuable items, such as the original paintings and oriental rugs, in a secret hiding place behind the office walls if the Germans invaded Belgium. Lipschutz gave Brunschot 250,000 Belgium francs, equivalent to approximately 8,400, subject to an accounting after the war; from this sum he was to draw his compensation and pay for expenses incurred in maintaining the factory property. He was also to have the occupancy of his apartment at the factory rent-free and the right to retain, subject to an accounting after the war, any rentals he might receive for renting out any part of the factory property.

Mozes Van Weezel was an independent electrical mechanic or engineer who had originally designed the factory and supervised the installation of the machinery and equipment. He was thereafter in charge of maintenance and repairs. At about the same time that Lipschutz appointed Brunschot as the firm's agent and custodian during the partners' absence from Belgium, he also instructed Van Weezel to continue to inspect the machinery from time to time and to take care of any necessary repairs. Van Weezel visited the factory about once a month until the spring or summer of 1942, when he went into hiding in Ghent because of repressive measures of the Germans. He remained in Ghent until the fall of 1944 when the Germans were driven out of Antwerp by the British. During that period of hiding in Ghent he made two or three surreptitious trips to Antwerp and visited the factory on each such occasion. Upon returning to Antwerp in September 1944 he continued to visit the factory about once a month for several months when he again fled to Ghent because the Germans began their attack upon Antwerp with V-bombs. In Van Weezel's absence his associate or partner, who remained behind, continued to visit the factory. During all of Van Weezel's visits to the

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factory Brunschot was always present and everything was "normal." He never found any Germans in the factory. At the time of Lipschutz's departure from Antwerp in 1939, none of the machinery and equipment had been removed from the factory property and no instructions for such removal were given then or at any other time, and the furniture, furnishings, and paintings were allowed to remain in the private offices.

When Lipschutz and Gutwirth left Antwerp in 1939 they sent all or the bulk of the Antwerp firm's diamond inventory to New York. It was agreed that Lipshutz would carry on the diamond business in the United States for both of them through a corporation to be formed. Such a corporation was formed under the name of Isidore Lipshutz, Inc., which actively carried on the diamond business for both of them until the formation in 1942 of the New York partnership or firm, referred to below. The formation of the New York firm was thus delayed because Gutwirth did not receive his permanent immigration visa until 1942.

As of February 1, 1942, the three petitioners entered into a partnership in New York under the name of Lipshutz & Gutwirth, hereinafter referred to as the New York firm, which thereafter and continuously at all times up to and for some time after January 31, 1946, carried on the business of buying, cutting, polishing, and selling diamonds. The petitioners' respective distributive shares in the profits and losses of the New York firm were at all times material hereto:

                     Percent

On January 1, 1943, the assets of the Antwerp firm were transferred by Lipschutz and Gutwirth to the New York firm. Included among such assets were the Avenue du Margrave factory land, building, machinery, and equipment, title to which had previously been held by them individually for the Antwerp firm. The New York firm was considered by Lipshutz and Gutwirth as a continuation of the Antwerp firm, with the addition of Gutwirth's son as a third partner and presumptive eventual inheritor of the business.

The office manager and bookkeeper of the Antwerp firm, Celine Cassutto, had immigrated to the United States in October 1939, and she opened a set of books in New York for the Antwerp firm as of January 1, 1939. Such books were opened and maintained in Dutch

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florins, the currency in which the Antwerp firm's books had previously been kept. Among the accounts in the New York books for the Antwerp firm was an account for the Avenue du Margrave property as follows:

                             Florins

When the assets of the Antwerp firm were transferred to the New York firm, as of January 1, 1943, the Avenue du Margrave property was recorded upon the books of the latter as follows:

 Factory, building [including land]     $ 87,414.96

Belgium was invaded by the Germans on May 10, 1940. The Germans occupied Antwerp on May 18, 1940. On September 4, 1944, the British entered and occupied Antwerp. The German armed forces did not reenter Antwerp at any time thereafter.

By September 5, 1944, the legal authority of the Belgian Government and of its agencies was fully restored in the Province and city of Antwerp. On and after that date, owners of property in Antwerp were in a position to exercise their property rights under Belgian law through the executive, administrative, and judicial organs of the Belgian Government. As a matter of Belgian law, on and after that date, such property owners, without any affirmative action on their part, were in full possession of the complete exercise and enforcement of their property rights in the manner just described to the same extent as prior to the German invasion in May 1940.

The legal title to the factory land and building at 43-45 Avenue du Margrave, Antwerp, as shown by the public property records of

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Antwerp, remained unchanged in the name of Isidore Lipschutz and Charles Gutwirth between September 1939 and January 31, 1946.

During the latter part of 1944 and at least during the early part of 1945, Brunschot resided at the Avenue du Margrave factory premises. Subsequent to the liberation of Belgium in 1944 and at least during January 1945, the factory buildings, apartments, and offices were in good condition; the machinery, equipment, office furniture, furnishings, and paintings were also intact and in good condition.

On October 26, 1944, the Germans commenced bombarding Antwerp with V-1 and V-2 bombs and continued their bombardment until some time in 1945. At some time between January 1945 and the beginning of March 1945, the Avenue du Margrave property was severely damaged by a German V-bomb; the factory, machinery and equipment, and office furnishings were a "heap of ruins." The factory could not have been rehabilitated without a complete replacement and renovation.

On either January 26 or January 31, 1946, the New York firm sold and conveyed the Avenue du Margrave land, building, machinery, equipment, furniture, and other contents to Baumgold Bros., Inc., a domestic corporation engaged in the diamond cutting business, for 16,000. The deed of conveyance provided for the filing of claims for reparation for war damages to said property and the division of any proceeds of such claims 75 percent to the sellers and 25 percent to the buyer.

In 1947 Lipschutz and Gutwirth filed a claim for war damages to the Avenue du Margrave factory property; the claim was for 3 million Belgian francs, equivalent to approximately 68,500, based upon the average rate of exchange during 1945-47, and 100,500 based upon the average rate of exchange in 1939. No indemnity for war damages with respect to the Avenue du Margrave property was ever received either as the result of this claim or otherwise, nor were any insurance proceeds in respect of the factory ever received.

The New York firm elected, pursuant to section 127(c)(5) of the Internal Revenue Code of 1939, to have the provisions of section 127(c)(3) apply to a recovery of the Avenue du Margrave property and elected, pursuant to section 127(c)(3)(A), to have the fair market value of the property considered, for the purpose of section 127(c)(3)(A), to be an amount equal to the adjusted basis (for determining loss) of such property in the hands of the taxpayer on the date such property was considered under section 127(a) as destroyed or seized.

In its Federal income tax return for the period ended January 31, 1946, the New York firm claimed a deduction for a loss in respect

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of the Avenue du Margrave factory land, building, machinery, and equipment in the amount of 125,700.67, representing the difference between the amount of 141,700.67 at which the property was recorded on the books and the amount of 16,000, the amount at which the property was sold to Baumgold Bros., Inc., in January 1946. No deduction for any loss with respect to said property was claimed or allowed for any prior taxable year.

The adjusted basis of the Avenue du Margrave property at the time it sustained the bomb damage referred to above and at the time it was considered destroyed under section 127(a) was 90,000, of which 6,600 was applicable to land and 83,400 was applicable to the building and the contents thereof. The fair market value of the property in the early part of 1939 was substantially in excess of those figures. As a result of the foregoing bomb damage to the property the New York firm sustained a deductible loss in the amount of 74,000 during its fiscal year ending January 31, 1946. Lipschutz Residence on Avenue de Belgique

On June 13, 1923, Lipschutz and his wife bought real property at 23 Avenue de Belgique in Antwerp for the purpose of building a residence thereon. The existing structures were demolished or razed and a residence was built on the land in 1924. The cost of the land was 235,000 Belgian francs, then equivalent to approximately 10,500.

The cost of construction of the residence, when completed in 1924, was approximately 800,000 Belgian francs, equivalent at that time to approximately 40,000. In 1924 the house was insured for 700,000 Belgian francs.

The legal title to the residence, as shown by the public property records of Antwerp, remained unchanged in the name of Lipschutz and his wife between September 1939 and December 31, 1946. The residence was occupied by British troops from September 16, 1944, to June 1946, and was officially released from such occupation on June 19, 1946.

Simon J. Nusbaum is an attorney who had practiced law in Belgium. He came to the United States in 1941, studied law here, was admitted to the bar, and has practiced law in New York. In December 1945 or January 1946, Lipschutz instructed Nusbaum, who was then going to Belgium on professional matters, to obtain all available information about the status and condition of the Avenue de Belgique residence, and to take any steps necessary to take care of and maintain the property. Nusbaum, arriving in Antwerp in January 1946, found the house occupied by the British. He introduced himself to the officer in charge as the owner's attorney and was shown the premises. He found the house in good condition and well maintained;

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the furniture, fixtures, and draperies were still there in a number of the rooms. He ascertained that the British were paying rental to the city of Antwerp for occupying the premises and he retained a correspondent attorney in Antwerp to make inquiries as to what was happening to the rentals. During 1947 the correspondent attorney received for Lipschutz's account the rentals for the British occupation of the house in the amount of approximately 40,000 Belgian francs, equivalent to approximately 800. Nusbaum reported all of his findings and actions to Lipschutz.

Nusbaum went to Antwerp again in June 1946. Lipschutz had instructed him to look after the property, report the condition of the house, and try to find a buyer. Nusbaum visited the property in June 1946 and found that the British troops had left, the house was vacant, the door open and without a lock, and the house was in very bad condition. Furniture, draperies, and chandeliers were missing, and the house had experienced extensive damage such as broken windows, badly damaged floors, and destroyed wall panels.

Considerable damage to the house had been caused by vandalism and, or, theft, in 1946 during, or following, the end of the occupation of the house by the British troops.

Nusbaum had a new lock placed on the door, made inquiries as to the source of the damage, and reported his findings to Lipschutz. He also communicated with a notary in Belgium and gave him instructions to try to find a purchaser for the house.

In 1939, prior to Lipschutz's departure from Belgium, the house was left in the care of a couple; correspondence was maintained with them until Belgium was invaded in 1940. Subsequent to the invasion the couple was not heard from any more. Prior to the occupation of the house by the British it had been occupied by the Germans.

In January 1947, Lipschutz filed with an agency of the Belgium Government a claim for indemnity for war damages to the house in the amount of 1,500,000 Belgian francs, equivalent, at the current rate of 0.0228 per Belgian franc, to 34,200. Nothing was ever received in respect of this claim.

In May 1947, Lipschutz filed a claim with the Belgian Ministry of War Damages, Service of Reconciliation, for damages to the property during the occupation thereof by British troops. The claim was in the amount of 139,843.05 Belgian francs, equivalent to approximately 3,200 at the 1947 rate of exchange and to approximately 4,700 at the 1939 rate of exchange. According to the application, claims of this kind could relate only to damages suffered prior to November 8, 1945; claims for damages after that date were required to be made to other agencies. On June 3, 1953, an indemnity award was made to Lipschutz in the amount of 130,414 Belgian francs, equivalent to approximately 2,600 at that time. No insurance was

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ever collected with respect to the damages to the house. On October 3, 1947, Lipschutz sold his house for 800,000 Belgian francs, then equivalent to 18,240.

Lipschutz elected, pursuant to section 127(c)(5), to have the provisions of section 127(c)(3) apply to a recovery of his house, and elected, pursuant to section 127(c)(3)(A), to have the fair market value of the house considered, for purposes of section 127(c)(3)(A), to be an amount equal to the adjusted basis (for determining loss) of such property in the hands of the taxpayer on the date such property was considered, under section 127(a), as destroyed or seized.

In his Federal income tax return for the calendar year 1946, Lipschutz claimed a deduction for a loss with respect to his former house in the amount of 11,185.68. No Federal income tax deduction for any loss with respect to the said property was claimed or allowed for any prior taxable year. He sustained deductible losses in 1946 in the aggregate amount of 7,000 by reason of acts of vandalism or theft or both in respect of the Avenue de Belgique residence in 1946. OPINION

1. The Avenue du Margrave property. -- Petitioners' principal contention is that a war loss occurred under section 127 (a)(1) of the 1939 Code ² with respect to the Avenue du Margrave property in February or March 1945 by reason of enemy bombs, that such loss was within the partnership's fiscal year ending January 31, 1946, and was therefore deductible by petitioners on their 1946 calendar year returns. The amount of the alleged loss is also sharply in dispute.

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In setting the stage for their principal contention petitioners argue first that the property was lost in 1941 under section 127(a)(2) when the United States declared war upon Germany, that it was recovered when the Germans were driven out of Antwerp in September 1944, and that the claimed loss occurred some 6 months thereafter. Cf. Andrew P. Solt, 19 T.C. 183. A vigorous controversy has developed between the parties as to whether the first step in this chain of reasoning can be established, the Government contending that the property was lost initially prior to the declaration of war in 1941. Cf. Ernest Adler, 8 T.C. 726; Rozenfeld v. Commissioner, 181 F. 2d 388 (C.A. 2); Wyman v. United States, 166 F. Supp. 766 (Ct. Cl.). Although the matter is by no means clear, we think that the facts in this case are more in line with Abraham Albert Andriesse, 12 T.C. 907, and Benjamin Abraham, 9 T.C. 222 (first issue), and if this were a dispositive issue we would be inclined to conclude upon this record that the initial loss had not occurred prior to the 1941 declaration of war so as to make section 127(a)(2) inapplicable. But this is not a dispositive issue, since petitioners argue in the alternative, and we agree,

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that regardless of when the original loss occurred, if there was a recovery of the property in 1944 the loss occurring thereafter would be deductible. William E. Reisner, 34 T.C. 1122, so holds, and we follow it here.

The critical question in this regard is whether there was a recovery in 1944. The mere expulsion of the enemy from occupied territory ordinarily is not enough to establish a recovery. Cf. Kenmore v. Commissioner, 205 F. 2d 90 (C.A. 2), affirming 18 T.C. 754. But we have something more than that here. Not only do we have a finding as to Belgian law, made upon the basis of expert testimony, that on and after September 5, 1944, a property owner without any affirmative action on his part was regarded as being in full possession of his property rights to the same extent as prior to the German invasion in 1940, but also the evidence shows that petitioners' agent Brunschot had been in continuous possession of the property from 1939 until at least into the early part of 1945, looking after and protecting the interests of the true owners. This latter distinction was explicitly noted in Kenmore v. Commissioner, supra at 92.

We hold that there was a recovery in 1944, and we pass to consider two contentions made by the Government, first as to the time that the bomb damage occurred and second as to the amount deductible in respect thereof.

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If the damage occurred prior to February 1, 1945, then it would of course fall within the partnership's fiscal year ending January 31, 1945, and would not be deductible on petitioners' 1946 returns. The evidence in this respect is not fully satisfactory, but we are reasonably satisfied on the record that the damage occurred after January 31, 1945, and our findings are in accord with that conclusion. ³

The controversy in respect of the amount of the damage that is deductible revolves largely around the adjusted basis of the property. That there was in fact substantial physical damage is not in dispute. However, the amount of the original investment in 1922 and 1923, the amount of subsequent capital additions, the question whether the expenditures for such additions may be added to basis in this case, and whether there should be adjustments to basis for depreciation are all in dispute.

We have found as facts that the original investments in land, factory, and equipment in 1922 and 1923 were 6,600, 48,000, and 32,000, respectively; that subsequent capital additions and improvements to the property amounted to 32,000; that additional machinery and equipment were acquired at a cost of 40,000; and that paintings and oriental rugs were purchased for the executive offices at a cost of 20,000. The evidence consisted largely of estimates, and the findings reflect our best judgment in the circumstances, taking into account the applicable rates of exchange in effect at the various times the expenditures were made. Since petitioners could hardly be charged with fault in the circumstances of this case for the absence of pertinent records, we did not consider it appropriate to "bear heavily" against them for that reason in making our findings (cf. Cohan v. Commissioner, 39 F. 2d 540, 544 (C.A. 2)), but we have endeavored to make as realistic findings as possible on this record, bearing in mind that petitioners' evidence from time to time appeared to be shaded in their favor.

The Government has argued that there should not be any upward revisions to the original basis on account of subsequent capital additions, since these additions were treated as expenses in Belgium. We cannot accept that position. Regardless of how these additions were treated in Belgium years ago, they in fact represented capital expenditures, and the basis of the property must be adjusted to reflect such capital items.

On the other hand, we reject the petitioners' contention that there should be no downward adjustments to basis in respect of depreciation.

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We have always required that basis be adjusted to reflect depreciation in circumstances such as these. See, e.g., Benjamin Abraham, 9 T.C. 222, 227. The contrary view would discriminate in favor of nonresident aliens owning property abroad as against resident taxpayers in identical situations. In the absence of a clear statutory command to that effect, we cannot assume that Congress intended any such discrimination.

The amount of depreciation has been difficult to determine on this record. Although we have made a finding that the expectable useful life of the building was 40 years, considerable difficulties have arisen in connection with other items, such as machinery. Not only was there no precision in fixing the dates of acquisition of much of the machinery, but there was substantial doubt as to its expectable useful life, and the extent to which it has from time to time been replaced as well as the dates of any such replacements. In these circumstances we could do little but assume on this record that there had been very substantial depreciation in respect thereof. On the other hand, it seems reasonable to conclude that there was only a comparatively small amount of depreciation in respect of the paintings and oriental rugs in the executive offices. We have endeavored to resolve these various matters by our finding that the adjusted basis of the entire factory, including its contents but exclusive of the land, had an adjusted basis of 83,400 in respect of which the bomb damage deduction must be determined. And after taking into account the fact that the entire Avenue du Margrave property, including land, was sold for 16,000, we have concluded that the partnership sustained a deductible loss in the amount of 74,000 during its fiscal year ending January 31, 1946.

2. Lipschutz residence on Avenue de Belgique. -- Unlike the factory property, where Brunschot was in continuous possession, Lipschutz has failed to show that the residence had not been seized by the Germans prior to our declaration of war against Germany in December 1941. The couple in charge of the house had not been heard from after May 1940, and the record is silent as to what happened after that time. Cf. Eric H. Heckett, 8 T.C. 841, 845-846. However, as in the case of the factory property, the fact that petitioner may or may not have established a 1941 loss under section 127(a)(2) will not deprive him of a deduction in a later year in respect of a different and subsequent loss if he recovered the property prior to the second loss. William E. Reisner, 34 T.C. 1122. Was there such a recovery here?

The matter is not entirely free from doubt, but taking into account Belgian law, Nusbaum's visit to the property in January 1946, the fact that he presented himself to the British officer in charge as the representative of the owner and was shown about the premises presumably

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in that capacity, the fact that the British were paying rent that was ultimately turned over to Lipschutz -- we think that on the whole these circumstances establish a recovery in 1946. Accordingly, Lipschutz is entitled to a deduction for any loss occurring thereafter that is allowable under the Code.

The deduction sought in respect of the residence is not a war loss. It is an ordinary casualty loss, based upon theft or vandalism (cf. Burrell E. Davis, 34 T.C. 586) or both in respect of the property occurring after January 1946. We are satisfied on this record that such losses did occur in 1946. We have no doubt, based upon Nusbaum's testimony which in general we found credible and upon inferences that may fairly be drawn therefrom, that the property had been looted and damaged during the period between his two visits in 1946. On the other hand, we are not satisfied that the entire loss in question occurred in 1946. It must be remembered that the Germans had been in possession of the property prior to the British, and we cannot realistically assume that it had been treated gently during the military occupation of both the Germans and the British prior to 1946. True, the building and much of its contents appeared to be in order as a functioning unit when Nusbaum saw it in January 1946, but we cannot find that all the components of the claimed loss were due to events occurring in 1946. Doing the best we can with the materials at hand we have found that petitioner Lipschutz sustained deductible losses in 1946 in respect of the Avenue de Belgique residence in the aggregate amount of 7,000 by reason of acts of theft or vandalism or both occurring in that year.

Decisions will be entered under Rule 50.

¹ Proceedings of the following petitioners are consolidated herewith: Isidore Lipschutz, Docket No. 77884; and Albert Gutwirth, Docket No. 77952.

² SEC. 127. WAR LOSSES.

(a) Cases in Which Loss Deemed Sustained, and Time Deemed Sustained. -- For the purposes of this chapter --

(1) Property not in enemy countries. -- Property destroyed or seized on or after December 7, 1941, in the course of military or naval operations by the United States or any other country engaged in the present war shall be deemed to have been destroyed or seized on a date chosen by the taxpayer in the manner provided in paragraph (4), which falls between --

(A) the latest date, as established to the satisfaction of the Commissioner, on which such property may be considered as not destroyed or seized, and

(B) the earliest date, as established to the satisfaction of the Commissioner, on which such property may be considered as having already been destroyed or seized. * * * *

(2) Property in enemy countries. -- Property within any country at war with the United States, or within an area under the control of any such country on the date war with such country was declared by the United States, shall be deemed to have been destroyed or seized on the date war with such country was declared by the United States. * * * * (c) Recoveries. --

(1) General rule. -- Upon the recovery in the taxable year of any money or property in respect of property considered under subsection (a) as destroyed or seized in any prior taxable year, the amount of such recovery shall be included in gross income to the extent provided in paragraph (2), unless the provisions of paragraph (3) are applicable to the taxable year pursuant to an election made by the taxpayer under the provisions of paragraph (5). (2) Inclusion in gross income. --

(A) Amount of Recovery. -- The amount of the recovery of any money or property in respect of property considered under subsection (a) as destroyed or seized in any prior taxable year shall be an amount equal to the aggregate of such money and the fair market value of such property, determined as of the date of recovery.

(B) Amount of Gain Includible. -- To the extent that the amount of the recovery plus the aggregate of the amounts of previous such recoveries do not exceed that part of the aggregate of the allowable deductions in prior taxable years on account of the destruction or seizure of property described in subsection (a) which did not result in a reduction of any tax of the taxpayer under this chapter or chapter 2, such amount shall not be includible in gross income and shall not be deemed gain upon the involuntary conversion of property as a result of its destruction or seizure. To the extent that such amount plus the aggregate of the amounts of previous such recoveries exceed that part of the aggregate of such deductions, which did not result in a reduction of any tax of the taxpayer under this chapter or chapter 2 and do not exceed that part of the aggregate of such deductions which did result in a reduction of any tax of the taxpayer under this chapter or chapter 2, such amount shall be included in gross income but shall not be deemed a gain upon the involuntary conversion of property as a result of its destruction or seizure. * * * For the purposes of this paragraph an allowable deduction for any taxable year on account of the destruction or seizure of property described in subsection (a) shall, to the extent not allowed in computing the tax of the taxpayer for such taxable year, be considered an allowable deduction which did not result in a reduction of any tax for the taxpayer under this chapter or chapter 2.

(3) Tax adjustment measured by prior benefits. -- If the provisions of this paragraph are applicable to the taxable year pursuant to an election made by the taxpayer under the provisions of paragraph (5) --

(A) Amount of Recovery. -- The amount of the recovery in the taxable year of any money or property in respect of property considered under subsection (a) as destroyed or seized in any prior taxable year shall be an amount equal to the aggregate of such money and the fair market value of such property, determined as of the date of the recovery. For the purpose of this paragraph, in the case of the recovery of the same property or interest considered under subsection (a) as destroyed or seized, the fair market value of such property or interest shall, at the option of the taxpayer, be considered an amount equal to the adjusted basis (for determining loss) of such property or interest in the hands of the taxpayer on the date such property or interest was considered under subsection (a) as destroyed or seized. * * *

(B) Adjustment for Prior Tax Benefits. -- That part of the amount of the recovery, in respect of any property considered under subsection (a) as destroyed or seized, which is not in excess of the allowable deductions in prior taxable years on account of such destruction or seizure of the property (the amount of such allowable deductions being first reduced by the aggregate amount of any prior recoveries in respect of the same property) shall be excluded from gross income for the taxable year of the recovery for the purpose of computing the tax under this chapter and chapter 2; but there shall be added to, and assessed and collected as a part of, the tax under this chapter for the taxable year of the recovery the total increase in the tax under this chapter and chapter 2 for all taxable years which would result by decreasing, in an amount equal to such part of the recovery so excluded, such deductions allowable in the prior taxable years with respect to the destruction or seizure of the property. Such increase in the tax for each such year so resulting shall be computed in accordance with regulations prescribed by the Secretary. * * * * * * *

(5) Election by taxpayer for application of paragraph (3). -- If the taxpayer elects to have the provisions of paragraph (3) applicable to any taxable year in which he recovered any money or property in respect of property considered under subsection (a) as destroyed or seized, the provisions of paragraph (3) shall be applicable to all taxable years of the taxpayer beginning after December 31, 1941, and such election, once made, shall be irrevocable. * * * * * * * (d) Basis of Recovered Property. -- * * * *

(2) Property recovered in taxable year to which subsection (c)(3) is applicable. -- In the case of a taxpayer who has made an election under the provisions of subsection (c)(5), the basis of property recovered shall be an amount equal to the value at which such property is included in the amount of the recovery under subsection (c)(3)(A) * * *

³ In any event, section 127(a)(1)(A) and (B) provides a certain amount of flexibility in fixing the date, and these provisions would justify treating the loss as having occurred after Jan. 31 1945, on the basis of the evidence before us in relation to the election given the taxpayer to select a date falling between the earliest and latest possible dates under the statute.