APPEAL OF MANOMET CRANBERRY COMPANY
| Citation | 1 BTA 706 |
| Decision Date | 28 February 1925 |
| Docket Number | Docket No. 341. |
| Parties | Appeal of MANOMET CRANBERRY COMPANY. |
| Court | U.S. Board of Tax Appeals |
Henry Herrick Bond, Esq., for the taxpayer.
A. Calder Mackay, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner.
Before IVINS, KORNER, and MARQUETTE.
FINDINGS OF FACT.
The taxpayer was an association organized in 1896 and incorporated in 1920 under the laws of Massachusetts. It was the owner of a cranberry bog on Cape Cod. In 1916 it sold its property to one Edward P. Washburn for an agreed price of $150,000, of which $10,000 was paid in cash at that time. Thereafter, by agreement of the parties, the sale price was reduced to $139,500. In 1917, $29,500 in cash was paid and a mortgage for $100,000 given for the balance of the sale price. During 1917 and 1918, the taxpayer received interest upon the mortgage note and a payment on account of principal of $5,600. The record does not show the amounts of interest paid in the respective years. Default having been made under the mortgage, it was foreclosed, and, on January 28, 1919, the taxpayer purchased it at a sheriff's sale for the unpaid principal ($94,400) and interest (amount not appearing) secured by the mortgage plus the expenses of foreclosure (amount not appearing), applying its lien in payment.
Evidence was offered by the taxpayer of the value of the property at the time of its reacquisition by the taxpayer, but for reasons which appear in the opinion it is unnecessary for us to make any findings with respect to this value.
In connection with the reacquisition of the property, the taxpayer paid legal expenses amounting to $1,155.95. During the years 1917 and 1918, while the property was held by Washburn, municipal taxes accrued amounting to $4,013.56, which were unpaid and were a charge against the property on January 28, 1919.
A revenue agent examining the taxpayer's books added to net income reported, among other items, one of taxable gain on reacquirement of assets, amounting to $38,303.13, on the theory that the reacquisition of the property by the taxpayer came within the provisions of article 46 of Regulations 45. With certain adjustments this report was adopted by the Commissioner, who determined a deficiency in income and profits taxes for 1919 of $14,611.89, from which determination this appeal was taken.
DECISION.
The deficiency should be recomputed in accordance with the following opinion. Final determination will be settled on fifteen days' notice in accordance with Rule 50.
The only question at issue in this appeal is whether the taxpayer should be regarded as having received taxable income as the result of the reacquisition of the property mentioned in the findings at the foreclosure sale in 1919.
The dispute arises out of the application by the Commissioner of article 46 of Regulations 45 to a case in which we do not consider it applicable. The article deals with sales of real estate in which there is a substantial initial payment, deferred payments being secured by mortgage, the obligations for deferred payments being regarded as equivalent to cash. The article provides:
Deferred payment sales of real estate not on installment plan. — In class (2) in article 44 the obligations assumed by the buyer are much better secured because of the margin afforded by the substantial first payment, and experience shows that the greater number of such sales are eventually carried out according to their terms. These obligations for deferred payments are therefore to be regarded as equivalent to cash, and the profit indicated by the entire consideration is taxable income for the year in which the initial payment was made and the obligations assumed. If the buyer defaults and the seller regains title to the land by agreement or process of law, retaining payments previously made, he may deduct from his gross income as a loss in the year of repossession any excess of the amount previously reported as income over the amount actually received, and must include such real estate in his inventory at its original cost to himself (less any depreciation as defined in articles 161 and 162). See article 153.
The latter part of the article dealing with the recovery of the property upon default of payment is a liberal construction of the statute calculated to relieve the taxpayer in cases where he has reported as income a part of his profit not represented by cash receipts, and is later compelled to repossess the property sold without having received cash for all the profit upon which he has paid the tax.
The taxpayer was possessed of property claimed to have been worth $139,500 on March 1, 1913. In 1916 it sold this...
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