Stephen P. Wasnok v. Commissioner

Stephen and Mary Alice Wasnok (plaintiffs) bought a home in Ohio in 1960, moved to California in 1961, and, unable to sell it, rented it out from 1961 to 1965, reporting rental income and taking depreciation deductions each year. In 1965, unable to keep up mortgage payments, they deeded the home back to their lender, Spring Grove, in satisfaction of the remaining $24,421.04 balance, resulting in a $3,611.24 loss against their adjusted basis. The Wasnoks had enough ordinary income in 1965 to absorb the full loss but instead claimed capital loss carry-forward deductions in 1967 and 1968. The Commissioner (defendant) disallowed those carry-forward deductions, characterizing the loss as fully deductible ordinary loss in 1965 instead.