Lorenzo Alvary, Plaintiff-appellant, v. United
States of America, Defendant-appellee, 302 F.2d 790 (2d Cir. 1962)
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
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, Mr.
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
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.