Lamberth v. Comm'r of Internal Revenue (In re Estate of Lamberth)
| Decision Date | 31 October 1958 |
| Docket Number | Docket Nos. 57436,57437,57438. |
| Citation | 31 T.C. 302 |
| Parties | ESTATE OF E. P. LAMBERTH, DECEASED, MARY R. LAMBERTH, EXECUTRIX, ET AL., 1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Richard L. Mackay, Esq., and Rudolph Johnson, Esq., for the petitioners.
Roy E. Graham, Esq., for the respondent.
1. The petitioners' partnership, in 1951, entered into contracts for the sale of 26 mortgaged duplexes. Payments were to be made by the purchasers for a number of years, after which time titles were to be conveyed subject to the balances then due on the mortgage debts. The purchasers were generally war workers having limited assets. The partnership reported these sales on the installment basis in 1951. Sec. 44, I.R.C. 1939. (a) Held, petitioners are bound by their election to report the sales on the installment basis and may not now change to a deferred payment recovery-of-cost basis. (b) Held, in determining the amount of gain reportable under the installment method in the year 1951 the respondent, to arrive at ‘total contract price,‘ should have reduced ‘total selling price’ only by the amounts of the mortgage debts which would be outstanding at the time payments to the partnership would cease and title would be conveyed.
2. Held, further, certain automobiles owned by the petitioners were used by them in the partnership business in 1950 and 1951. Deduction allowed on Court's determination of reasonable allowance for depreciation. (Cohan v. Commissioner, 39 F.2d 540.)
3. Held, further, that the house at 314 Gilpin Street was used by the partnership for storage purposes in 1950 and 1951. The house was not bought with an intent to demolish it, as claimed by the Commissioner. Deduction allowed on Court's determination of reasonable allowance for depreciation. (Cohan v. Commissioner, supra.)
4. Held, further, that the partnership is entitled to entertainment expenses for 1950 and 1951 on the Court's determination of reasonable amounts therefor.
Respondent determined deficiencies in the income taxes of the petitioners as follows:
+--------------------------------+
¦Docket No. ¦Year ¦Deficiency ¦
+------------+------+------------¦
¦ ¦(1950 ¦$561.94 ¦
+------------+------+------------¦
¦57436 ¦(1951 ¦3,477.24 ¦
+------------+------+------------¦
¦ ¦(1950 ¦572.29 ¦
+------------+------+------------¦
¦57437 ¦(1951 ¦5,865.25 ¦
+------------+------+------------¦
¦ ¦(1950 ¦561.94 ¦
+------------+------+------------¦
¦57438 ¦(1951 ¦3,480.63 ¦
+--------------------------------+
The issues to be decided are:
(1) Whether the sales of 26 duplexes, sold subject to existing mortgages of record by the partnership of Lewis and Lamberth in 1951, were properly reported on the installment basis, or should be determined to be reportable only on a deferred payment recovery-of-cost basis.
(2) If properly reported on the installment sales basis, in determining the amount of gain realized in 1951 on such sales, should the amounts by which each mortgage exceeded the partnership's basis in each respective duplex be included in the ‘initial payments' received and the ‘total contract prices' at which the duplexes were sold.
(3) Whether certain automobiles were used by E. P. Lamberth and H. D. Lewis in 1950 and 1951 in their trade or business, and if so, whether the depreciation claimed has been adequately proved.
(4) Whether the partnership can deduct depreciation for 1950 and 1951 on a house in Dallas, Texas, which was used by the partnership for storage purposes in those years.
(5) Whether the partnership is entitled to deduct in entertainment expenses for 1950 and 1951 greater amounts than those allowed by the respondent in his deficiency notices.
Certain other issues have been resolved by agreement of the parties and such adjustments will be given effect under the Rule 50 computation.
Some of the facts are stipulated and are hereby found as stipulated.
E. P. Lamberth, deceased, and Mary R. Lamberth, petitioner, were husband and wife during the years involved, and filed separate income tax returns for the calendar years 1950 and 1951. Petitioners H. D. and Mabel Lewis were husband and wife during the years involved, and filed joint returns for the calendar years 1950 and 1951. The petitioners and E. P. Lamberth resided in Dallas, Texas, in 1950 and 1951. E. P. Lamberth and Mary R. Lamberth filed amended separate returns and H. D. and Mabel Lewis filed an amended joint return for the year 1951.
A partnership, which was the source of income for the petitioners herein, was owned jointly in undivided equal interests by E. P. Lamberth, deceased, sometimes hereinafter referred to as Lamberth, and H. D. Lewis, sometimes hereinafter referred to as Lewis. On the partnership's income tax returns filed for the calendar years 1950 and 1951, it was stated that the returns were prepared on the accrual rather than on the cash basis.
All returns herein referred to were filed with the collector of internal revenue for the second district of Texas in Dallas, Texas.
The partnership was formed in 1945 for the purpose of constructing houses, developing land for subdivision use, and for building investment properties, such as shopping centers, duplexes, and apartment houses, in the vicinity of Dallas, Texas. During the time the partnership operated, from 1945 through the years here involved, the partnership built several thousand single residences and 200 duplexes. It constructed a number of duplexes in 1947 and 1948 which were held as rental properties.
During the year 1951, the partnership entered into contracts of sale for 26 of the duplexes. Substantially all of these duplexes had been rented by the partnership from the time of completion of construction until the dates of sale. The duplexes had been built to accommodate war and defense plant workers who were having difficulty finding adequate housing, and were intended to be an investment of the partnership. The partnership paid the cost of the duplexes partly in cash and partly by long-term financing. It obtained loans from the General American Life Insurance Company, secured by Federal Housing Authority guaranteed mortgages on the duplexes, such mortgages being evidenced by an appropriate deed of trust, which was filed for record in the deed of trust records in Dallas County, Texas. The mortgages were placed on the properties at the time of construction, and at that time and when sold, the mortgage on such duplex exceeded the cost of that particular duplex.
The sales of the 26 duplexes were handled by a real estate broker who was paid a commission of $50 to $75 for each duplex she sold. The individual duplexes were sold at sales prices ranging from approximately $15,500 to $16,900. Prospective buyers were attracted by newspaper advertisements.
Prior to the time the partnership sold the first of the 26 duplexes, it had a Dallas attorney prepare a sales contract which it could use for sale of the duplexes. These contracts were mimeographed, and all of them contained the same terms, except for slight variations in prices. A typical contract read, in pertinent part, as follows:
WITNESSETH:
Seller contracts and agrees to sell to purchaser, and Purchaser agrees and contracts to purchase at the price and upon the terms hereinafter set out, the following described tract of land, together with all improvements situated thereon, situated in Dallas County, Texas and being described as follows:
Lot 24 Block 4178 City of Dallas
That said property is sold and will be conveyed subject to any and all restrictions of record affecting the title to said above described property.
Purchaser agrees to pay for the above described property, together with the improvements thereon situated, the sum of 15,495.43 DOLLARS, which shall be payable as follows:
The sum of 400.00 Dollars cash, the receipt of which is hereby acknowledged, and the sum of 5,700.00 Dollars payable to H. D. Lewis and E. P. Lamberth, as follows: 50.00 Dollars on the 1st day of May 1951 to be applied against principal only, the balance in monthly installments of $47.26 Dollars each, which includes interest at the rate of 6% per annum, applied first to the interest and the balance to be applied on principal, the first payment being due on or before the first day of June 1951 and continuing on the first day of each month thereafter until fully paid.
And subject to the unpaid balance due on that certain F.H.A. Promissory note for $10,400.00, dated . . . , executed by H. D. Lewis and E. P. Lamberth, payable to the order of General American Life Insurance Co., * * * said note being payable in monthly installments of $54.91 each including interest and principal, and in addition Purchaser agrees to pay monthly 1/12 of the annual F.H.A. mortgage insurance according to the amortization schedule and 1/12 of the estimated annual taxes and hazard insurance, which monthly payments will be well and truly made by the Purchaser on the 1st day of each month, the first payment being due and payable on the 1st day of June 1951, and a payment being due and payable on the 1st day of each succeeding month thereafter until the said note is paid in full. Privilege of prepayment of said note is to be made according to the F.H.A. prepayment plan set out in the above mentioned deed of trust.
The total amount of the payments above mentioned on this contract shall be made to Seller until the Warranty Deed is delivered, as hereinafter set out, except that on 1st day of May, 1951, Purchaser shall pay 23.59 DOLLARS to apply against principal of aforementioned F.H.A. note.
When the Purchaser herein shall have paid in full the said sum of 4,700.00 to H. D. Lewis and E. P. Lamberth, together with all interest due thereon, then upon payment by the Purchaser to the Seller of all monies on...
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