Redwood Empire Savings & Loan Association v. Commissioner of Internal Revenue

Taxpayer Redwood Empire Savings & Loan Association (Redwood) appeals from several adverse rulings of the United States Tax Court. Redwood contends that the Tax Court erred in upholding the conclusion of the Commissioner of Internal Revenue (Commissioner) that Redwood could not deduct from its taxes certain losses and payments as ordinary business expenses under the Internal Revenue Code. We affirm.

This case arises from Redwood’s purchase and sale of property known as the Malibu Springs Ranch (Malibu Springs). Redwood purchased Malibu Springs in 1967 for $750,-000 and sold it in 1972 for $277,539. From 1970 to 1972, Redwood also paid legal fees to defend a lawsuit involving Malibu Springs, as well as $300,000 in 1972 to settle the suit. Redwood treated its loss on the sale of Malibu Springs and its expenses in defending and settling the lawsuit as deductible ordinary business expenses. The Commissioner disallowed these deductions. The Tax Court affirmed the Commissioner’s action. 68 T.C. 960 (1977).

I

The first issue is whether the Tax Court correctly determined that Malibu Springs was a capital asset, thus precluding Redwood from declaring an ordinary loss on its sale. Redwood…