Batcheller v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 33112.
| Decision Date | 23 May 1930 |
| Docket Number | Docket No. 33112. |
| Parties | W. H. BATCHELLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Jesse I. Miller, Esq., for the petitioner.
J. E. Marshall, Esq., and C. A. Ray, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income tax for the year 1924 in the amount of $934.09.
The petitioner alleges errors in the respondent's refusal to compute the profit derived upon the sale of certain real property upon the installment basis, and in the disallowance of a deduction in the amount of $592 alleged to represent a business expense. The respondent's answer concedes error in disallowance of the deduction claimed as a business expense.
FINDINGS OF FACT.
The petitioner is now, and was during 1924, a resident of Forest Hills, Long Island, N. Y.
In 1922 the petitioner purchased from J. C. Lett, a real estate dealer of Miami, Fla., certain unimproved lots in a subdivision called Magnolia Court, located on the Old Dixie Highway, in Buena Vista, Fla., about two miles north of Miami. The consideration involved in the purchase was $18,000. The petitioner paid approximately $3,500 at the time of the purchase and gave notes running over a period of four years for the balance, the notes being secured by a mortgage to Lett.
In 1924 the petitioner had paid a total of $9,800 on the purchase price of the lots above mentioned. Notes representing the balance of the purchase price then amounted to $8,200 and interest due thereon to $246.50. In that year he sold the lots back to Lett for a consideration described as follows: four notes in the amounts of $3,000, $5,000, $8,000, and $7,953.50—at total of $23,953.50 in notes, and cancellation of the petitioner's note or notes in the amount of $8,200, representing the balance of his purchase price of the property, plus cancellation of the interest debt in the amount of $246.50. The total consideration for this sale, all in notes received from or canceled by Lett, plus the cancellation of the interest debt was, therefore, $32,400. During 1924 the petitioner received no cash from the above detailed transaction with Lett.
As security for payment of the notes he received from Lett in 1924, the petitioner took a first mortgage on the property involved. In 1925 Lett paid the petitioner $6,000 in reduction of his notes secured by the said mortgage and the petitioner thereupon released one or two of the lots involved from the mortgage.
In 1926 the petitioner sold two of the notes mentioned above, amounting to $12,000, to the First National Bank of Miami, at a discount of 5 per cent. The notes so sold bore the petitioner's personal indorsement. Previous to the sale of these two notes the petitioner had secured a loan upon two or three of them.
In 1928 the petitioner received from the First Trust & Savings Bank, Miami, Fla., a letter dated November 16, 1928, from which we quote as follows:
We have a mortgage on Lots 1 and 2, Block 3, MAGNOLIA COURT, situated on N. E. 2nd Avenue and 38th Street.
This mortgage was originally made by J. C. Lett and was assumed by the Rottmore Holding Company. The notes bear your endorsement. The Rottmore Holding Company have failed to make the principal payment in the amount of $12,000 which is now due, and it will be necessary for us to place this mortgage in the hands of an attorney.
However, we did not want to sue on these notes without first giving you an opportunity to protect this mortgage.
Kindly advise us your disposition in this matter, and we shall be glad to cooperate with you.
This letter refers to notes received by the petitioner from Lett as above described and sold to the First National Bank of Miami. The First National Bank of Miami and the First Trust & Savings Bank have affiliated.
When the petitioner resold the property to Lett in 1924, he was behind in his payments on notes given Lett when he purchased the property in 1922, and he had been advised by Lett that if payments were not promptly made foreclosure would be necessary. This was given as a reason by petitioner for reselling the property.
During 1925 a building or buildings were erected on some one of the lots involved.
In the fall of 1924 the real estate market in Miami and vicinity was fairly active. In the spring of 1925 the market boomed and was very active at high prices.
In 1924 the financial condition of J. C. Lett was rather poor. He was short of cash and such real property as he held was mortgaged.
In his income-tax return for 1924 the petitioner reported the sale to Lett as follows: Amount received, $32,453.50 and terms, $8,500 cash, $3,000—May, 1925; $5,000 — May, 1926; $8,000—May, 1927; and
14,318.32 $7,953.50 — May, 1928. Profit _________ of $8,500 cash received = 32,453.50
$3,750.13. He was, therefore, reporting the transaction as an installment sale.
Respondent has determined that the sale to Lett was not an installment sale and that the fair market value of the notes received by the petitioner from Lett in 1924 was equal to their face value and he has included them in the petitioner's income for that year accordingly.
In 1923 the petitioner was engaged in the automobile tire business, selling at retail. Sometime during that year he discontinued the business and during 1924 he expended $592 for the dismantling, transportation and storage of the furniture, equipment, and stock on hand when the business was discontinued. The property mentioned was never converted to the personal use of the petitioner and was later sold.
OPINION.McMAHON:
The respondent concedes error in his denial of a deduction of $592 representing ordinary and necessary business expenses for the year 1924. This deduction will, therefore, be allowed.
The only other error alleged in the petition is that the respondent refused to compute the profit upon the sale to Lett upon the installment sale basis provided in section 212 (d) of the Revenue Act of 1926.
The respondent treated the transaction as closed in the year 1924 and determined that the entire profit upon the sale was realized in 1924. He held that the fair market value of the notes at the time they were received by the petitioner equaled their face value of $23,953.50. The evidence offered and the brief submitted by the petitioner are directed to the fair market value of these notes when received from Lett in 1924. The petitioner contends, as stated in his brief, "that the mortgage notes above mentioned in the amount of $23,953.50 were income to the taxpayer in the year 1924 only to the extent of $10,000 * * *." No argument is presented in the petitioner's brief as to the question of whether the respondent erred in failing to treat the sale as an installment sale, but petitioner does not specifically abandon this assignment of error and we shall, therefore, dispose of it as presented.
Section 212 of the Revenue Act of 1926 provides, in part:
SEC. 212. (d) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of * * * property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case * * * (2) of a sale or disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.
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