Lorenzo Alvary, Plaintiff-appellant, v. United
States of America, Defendant-appellee, 302 F.2d 790 (2d Cir.
Annotate this Case
US Court of Appeals
for the Second Circuit - 302 F.2d 790 (2d Cir. 1962)
Argued December 14, 1961
Decided May 18, 1962
COPYRIGHT MATERIAL OMITTED Nicholas R. Doman, New York City (Doman
& Ablondi, New York City, on the brief), for plaintiff-appellant.
Robert Arum, Asst. U. S. Atty., Southern District of New York,
New York City (Robert M. Morgenthau, U. S. Atty., and David Klingsberg,
Asst. U. S. Atty., on the brief), for defendant-appellee.
Before LUMBARD, Chief Judge, and MOORE and HAYS, Circuit Judges.
LUMBARD, Chief Judge.
The plaintiff-taxpayer, Lorenzo Alvary, appeals
from the dismissal of his suit for a refund of federal income taxes paid
for the calendar years 1951 and 1955. He claims that he is entitled to a
deduction in those years for a net operating loss carry-back to 1951 and
carry-forward to 1955 from the tax year 1952 when, he alleges, two pieces
of real property located in Budapest, Hungary, which he owned for rental
purposes were nationalized by the Hungarian Communist government. Internal
Revenue Code of 1939, §§ 23(s), 122, 26 U.S.C.A. §§ 23(s),
122. The taxpayer received the properties
as a gift in 1947 and 1948. In the District Court for the Southern District
of New York, Judge Holland, sitting without a jury, denied the refund on
the ground that the properties had no fair market value at the time of the
gift and thus no tax basis to the taxpayer. We reverse and remand.
The taxpayer, a naturalized citizen of the United
States, is an opera singer and a member of the Metropolitan
and San Francisco Opera Companies. About March 1, 1947, his aunt,
Mrs. Alfred Dietrich Ilona Beke, signed and executed a written
document making a gift of her interests in two pieces of real estate
located in Budapest, Hungary, to the taxpayer. She gave him a brick
and stone house at Istenhegyi ut 84, called the Uptown Property,
located in the fashionable residential area on the right bank of
the Danube. This building contained three apartments, of which two were
rented and the third was occupied by the superintendent. She also
gave the taxpayer her 50% interest in a three-story apartment house
at Nagymezo utca 28, called the Downtown Property, located in downtown
Budapest in the center of the city's theater and night club section.
This building has six street-level stores and approximately 37 apartments,
each with bathrooms and modern conveniences.
Mrs. Beke reserved for herself a "usufruct" in the
Downtown Property, the right to receive its net income for her
lifetime. She released the usufruct in mid-1948, and the gift
of both properties was then recorded. Alvary, who resided in New
York City, took possession by an agent who used the rental income
for necessary repairs and for the payment of taxes.
On February 17, 1952 the Hungarian Communist government
by formal Decree No. 4 nationalized a great deal of real property.
Although no copy of the Decree was introduced in evidence, the
testimony indicates that the Decree apparently covered all rental
property and all houses owned by "former capitalists and enemies
of the present regime." See Elek v. Commissioner, 30 T.C. 731, 732 (1958);
Daniel v. Commissioner, 19 T.C. M. 1960-274 (1960), for translations
of the 1952 nationalization decree. Under the Hungarian system of recording
land titles, the history of each parcel of land appears on a separate
page of the record book. The certified extract from the title pages for
the Downtown Property shows that the title was taken by the Hungarian
State under Decree No. 4 of 1952.
All the Uptown Property was also nationalized. It
had recently been broken into two separate sections for recording
purposes. One section of 800 square ols or fathoms shows the
Hungarian State as owner under Decree No. 4. The extract from the
other section, which is described as a house with court, garden,
and forest, consisting of 833 square ols or fathoms, shows Lorenzo
Alvary of New York as owner. Mr. Alvary testified that the whole
Uptown Property had been expropriated. Furthermore, Decree No. 4
would apply to the Uptown Property for two separate reasons: it was
used for rental and was owned by Mr. Alvary, a capitalist. It is possible
that the extract from the land record did not reflect all the entries
actually on the land record, or that the Hungarian Government failed
to record their title. But the government's expert on Hungarian law
testified that recordation is not a necessary prerequisite to the
acquisition of title.
The taxpayer claimed a deduction on his federal
income tax returns for the loss of these properties for which he received
no compensation from the Hungarian Government. If property held for the
production of income or in connection with a trade or business is confiscated
without compensation, the owner is entitled to deduct the amount of his
adjusted tax basis in the property. Internal Revenue Code of 1939, §
23(i). In determining the amount of a loss, a donee's unadjusted tax basis
is the lower of the donor's basis or the fair market value at the time of
the gift. Internal Revenue Code of 1939, § 113(a) (2). It is conceded
here that the fair market value of these properties in 1947 and 1948 was
less than the donor's basis. Therefore, in order to ascertain the deduction,
if any, to which this taxpayer is entitled, it was necessary for the taxpayer
to establish the fair market value of the Uptown and Downtown Properties
in 1947 and 1948 when the gifts were made.
The taxpayer deducted the claimed loss from his
1952 federal income tax return, which deduction wiped out his 1952 taxes.
The Commissioner did not dispute this deduction. Taxpayer sought to carry
the unused portion of his loss back to 1951 and forward to 1953, 1954 and
1955, Internal Revenue Code of 1939, § 122, and the Commissioner denied
the deductions. This suit is for a refund of $1,196.90 on account of 1951
income taxes and $1,455.68 (including $89.69 interest paid) on account of
1955 income taxes. Claims for 1953 and 1954 are pending in the Tax Court.
Although there was expert testimony on both sides
that the confiscated buildings had some market value at the
time of the gifts to the taxpayer, and no evidence that the properties
were valueless, Judge Holland, giving credence to materials in
the New York Public Library not cited by the parties, held "that
the infiltration of communist ideology had so taken hold of the
economy in Budapest, Hungary, both in 1947 and 1948 that there was
no market value of the two properties in question." It was error for
the trial judge to take judicial notice of text books that were not
a part of the record. Although it is proper, and all too frequently
necessary, for a judge to do independent research on questions of
law, the value of these two pieces of real property and the status of
Hungarian free trade in 1947-48 are questions of fact. On fact questions
the court should not use the doctrine of judicial notice to go outside
the record unless the facts are matters of common knowledge or are capable
of certain verification. See, e. g., Brown v. Piper, 91 U.S. 37,
42, 23 L. Ed. 200 (1875); McCormick on Evidence, chapter 37 (1954).
Fair market value is defined by the regulations
as "the price at which * * * property would change hands between a willing
buyer and a willing seller, neither being under any compulsion to buy or
to sell." Treasury Regs. 108, § 86.19(a); now Treas. Reg. § 25.2512-1.
During an abnormal period, such as depression, war, or political turmoil,
when there are few or no willing buyers, fair market value is, at best,
an elusive concept. But the small number of willing buyers does not preclude
a finding that property has some fair market value. There is a difference
between value and liquidity; that no buyers are presently accessible does
not make the fair market value zero. See Groff v. Smith, 34 F. Supp.
319 (D. Conn. 1940); First Seattle Dexter Horton National Bank v.
Commissioner, 27 B.T.A. 1242, 1247 (1933), aff'd 77 F.2d 45 (9 Cir.
1935). In a time of emergency the value of property must be viewed in
light of the existing situation. One can analogize the taxpayer's Hungarian
building in 1947-48 to a structure which is located in the path of a
fire. If no one knows of the danger, then the building will sell for a
fair price. If people generally know of it, the price will decline as
the blaze comes nearer and nearer because the chance that the building
will escape damage decreases. There was expert testimony that the sweep
of Communism in Hungary in 1947-48 had not yet materially reduced the
value of real estate. Judge Holland disregarded this testimony and decided
that by 1947-48 free trading had ended and there was no fair market
value. A trial judge cannot arbitrarily disregard all the expert testimony
in the record and rely upon his unsubstantiated personal beliefs instead
of upon evidence. Cullers v. Commissioner, 237 F.2d 611 (8 Cir. 1956);
Nachod & United States Signal Co. v. Helvering, 74 F.2d 164 (6 Cir.
1934); Pittsburgh Hotels Co. v. Commissioner, 43 F.2d 345 (3 Cir. 1930).
The finding that the two parcels of real property here in question
had no fair market value in 1947 and 1948 was clearly erroneous.
All the experts testified that subsequent to 1938
the Hungarian real estate market was in a state of constant
flux, first because of the war and then because of the threat
of Communist takeover. Therefore, they valued the property as
of 1938 and then estimated the change in value from 1938 to 1947-48.
In Lajtha v. Commissioner, 20 T.C.M. 1961-273 (1961), the Tax Court
used 1938 values in valuing Hungarian realty in 1944 at the height
of the Second World War. See also Daniel v. Commissioner, 19 T.C.M.
1960-274 (1960). Leslie E. Acsay, the taxpayer's expert, testified
that although the volume of the real estate market after World War
II was very small, the prices were firm for the good properties and
it was a fair market. He further testified that in 1947 there was
no political turmoil. He valued the Downtown Property at $120,000 during
1947 and the Uptown Property at $18,000 to $20,000 during 1947 and 1948.
The government's expert, Laszlo Miskolczy, agreed
with Mr. Acsay that they were indeed valuable properties. Except
for estimating that the Downtown Property was worth slightly less,
Mr. Miskolczy also agreed with Mr. Acsay's valuations of the properties
as of 1938. Although he did not make any attempt to value the two
properties in 1947-48, he testified that in 1947 there was a good
market in smaller properties like the Uptown Property and that he
was not an expert in large properties like the Downtown Property. But
Mr. Miskolczy then testified that because of the political situation,
"in many cases" the 1946-48 selling price was not a true representation
of the 1938 values, and that "only in exceptional cases, if an honest
buyer would pay the honest price" could a seller get the 1938 value
in 1947-48. He explained that the richer people who wanted to leave
Hungary would sell their property to get some money for the trip "and
sometimes they would not get the real value of the property." However,
he explained that the expropriation of all industrial plants with more
than 100 employees in March 1948 "was the first sign that here the Communists
decided to take over the country." After that, he testified, people
became "a little bit" fearful of buying and selling property, and this
fear increased as 1952 approached. At the time of this initial expropriation
the taxpayer had already received the gift of both properties and
shortly after the expropriation his aunt's usufruct was released. Therefore,
the fear generated by nationalization of the large industries could
have had little effect on the value of the properties at the time of
their receipt by the taxpayer.
The taxpayer's second expert, George S. Pinter,
testified that the Hungarian real estate market did not begin to deteriorate
until August 1948, although there had been fewer buyers between 1946 and
1948 than during the late 1930's. He estimated the value of the Downtown
Property in 1947 at $130,000.
David Tobler, an international economist and analyst
for the Chase Manhattan Bank, who testified for the government
placed the Communist takeover of Hungary in May of 1947. Mr. Tobler's
testimony must be viewed in light of the fact that he has been
in the United States since 1921 and has not made a survey of economic
conditions in Hungary since 1925. Moreover, he admitted that the
United States had economic, political and diplomatic relations with
Hungary during 1947 and 1948.
From all this expert testimony it is clear that
in 1947-48 real estate values in Hungary had not yet begun to tumble in
anticipation of Communist expropriation. Although in the Tax Court a taxpayer
need only prove that a deficiency is erroneous, in a suit for a refund in
the district court he must prove the amount of the error by showing what
the value was. See, e. g., Burnet v. Houston, 283 U.S. 223, 51
S. Ct. 413, 75 L. Ed. 991 (1931); United States v. Anderson, 269 U.S.
422, 443, 46 S. Ct. 131, 70 L. Ed. 347 (1926); Taylor
v. Commissioner, 70 F.2d 619, 620-621 (2 Cir. 1934), aff'd sub nom.
Helvering v. Taylor, 293 U.S. 507, 55 S. Ct. 287, 79 L. Ed. 623
(1926); 10 Mertens, Federal Income Taxation § 58 A. 35. However,
since fair market value is not susceptible to exact proof, "it is not
necessary that the value arrived at by the trial court be a figure as
to which there is specific testimony, if it is within the range of figures
that may properly be deduced from the evidence." Anderson v. Commissioner,
250 F.2d 242, 249 (5 Cir. 1957), cert. denied, 356 U.S. 950, 78 S.
Ct. 915, 2 L. Ed. 2d 844 (1958). Taxpayer's expert testimony on the properties'
fair market value is as precise as one can expect in light of the inherent
inexactness of the concept of fair market value and the remoteness of
both the location of the property and the relevant date. In response,
the government, conceding that the properties had some value, challenged
the accuracy of the taxpayer's estimates, but did not offer any estimates
of its own. Even were the court to accept the government's position that
the value of the properties had declined, there is no evidence in the record
on which to reach a specific lesser figure. If the government fails to
offer its estimate of value in a situation in which it is able to do so
and no other substantial evidence on which to base a lower valuation exists,
the court may accept the taxpayer's figures.
The taxpayer in his brief offers to accept the lowest
values testified to by the experts rather than submitting to
the expense and vexation of another battle of experts. See Galt
v. Commissioner, 216 F.2d 41, 51 (7 Cir. 1954), cert. denied, 348
U.S. 951, 75 S. Ct. 438, 99 L. Ed. 743 (1955); Kweskin v. Finkelstein,
223 F.2d 677, 679 (7 Cir. 1955). This court has the power under 28
U.S.C. § 2106 to affirm, modify, vacate, set aside, or reverse
the judgment. See Kweskin v. Finkelstein, supra; Galt v. Commissioner,
supra. Having rejected as clearly incredible in light of all the testimony
the few suggestions that property in Hungary had no market value in
1947-48, we accept the lowest valuation testified to at the trial.
Mr. Miskolczy, the government's witness, gave the lowest valuation of
the Downtown Property, $106,500. The
taxpayer's one-half interest amounts to $53,250. The lowest valuation
of the Uptown Property, $18,000, was offered by the taxpayer's expert,
A necessary prerequisite to carrying this loss back
to 1951 and forward to 1955 is that it be "attributable to the
operation of a trade or business regularly carried on by the
taxpayer." Internal Revenue Code of 1939, § 122(d) (5). For several years prior to World War II,
the taxpayer himself managed the Downtown Property for his aunt
and her co-owner. When his aunt gave him her interests in the Downtown
and Uptown Properties, Mr. Alvary took possession of them by his agent
in Budapest, who thereafter collected the rents and used the income
to pay taxes and make repairs, until the two properties were nationalized.
In addition to these rental activities in Hungary, the taxpayer was
a member of a partnership that owned for rental purposes three pieces
of real property located in the United States.
The rental of real estate is a trade or business
if the taxpayer-lessor engages in regular and continuous activity
in relation to the property, Pinchot v. Commissioner, 113 F.2d
718, 719 (2 Cir. 1940); Gilford v. Commissioner, 201 F.2d 735, 736
(2 Cir. 1953); Grier v. United States, 120 F. Supp. 395
(D. Conn. 1954), aff'd per curiam, 218 F.2d 603 (2 Cir. 1955), even
if the taxpayer rents only a single piece of real estate. Lagreide
v. Commissioner, 23 T.C. 508, 512 (1954); Reiner v. United States,
222 F.2d 770 (7 Cir. 1955); Elek v. Commissioner, 30 T.C. 731 (1958);
Schwarcz v. Commissioner, 24 T.C. 733, 739 (1955). Of course the owner
may carry on these activities through an agent as well as personally.
Pinchot v. Commissioner, supra; Gilford v. Commissioner, supra; Elek
v. Commissioner, supra; Schwarcz v. Commissioner, supra, at 739; Lajtha
v. Commissioner, 20 T.C.M. 1961-273 (1961); 5 Mertens, Federal Income
Taxation, 1961 Cum.Supp. § 29.06, at 112-13. If the taxpayer, personally
or through his agent, continuously operates the rental property without
deviation from the planned use, the trade or business is sufficiently
regular to satisfy the § 122(d) (5) requirement that it be "regularly
carried on by the taxpayer." Lagreide v. Commissioner, supra, 23 T.C.
at 512; Elek v. Commissioner, supra; Schwarcz v. Commissioner, supra,
24 T.C. at 739-740; Daniel v. Commissioner, 19 T.C.M. 1960-274 (1960).
The taxpayer's rental activities in this case clearly satisfy these requirements.
Reversed and remanded with directions to deduct
depreciation allocable to the period between taxpayer's acquisition of the
property and its confiscation and to compute the amount of the refund in
accordance with this opinion.
HAYS, Circuit Judge (concurring in the result).
I concur in the result on the ground that the lower
court was required under the circumstances to accept the evidence
submitted by the taxpayer.