Burnet v. Building Corporation

• Citation: 77 L.Ed. 861,53 S.Ct. 428,288 U.S. 406
• Decision Date: 13 March 1933
• Docket Number: No. 475,475
• Parties: BURNET, Commissioner of Internal Revenue, v. S. & L. BUILDING CORPORATION
• Court: United States Supreme Court

288 U.S. 406

53 S.Ct. 428

77 L.Ed. 861

BURNET, Commissioner of Internal Revenue,

v S. & L. BUILDING CORPORATION.

No. 475.

Argued Feb. 10, 1933.

Decided March 13, 1933.

The Attorney General and Mr. Whitney North Seymour, of Washington, D.C., for petitioner.

Mr. Leo H. Hoffman, of New York City, for respondent.

[Argument of Counsel from page 407 intentionally omitted] Mr. Justice McREYNOLDS delivered the opinion of the Court.

The respondent, building corporation, sought redetermination of deficiency income taxes for 1924 and 1925. The Board of Tax Appeals sustained the Commissioner's final action of June 17, 1930; the court below reversed its judgment. 60 F.(2d) 719. The point now in controversy has relation to the distribution for taxation of income derived from sales on the installment plan of two pieces of real estate on Eighty-Second and Eighty-Third streets, New York City. Each was covered by one or more mortgages which the purchaser assumed.

The Revenue Act 1926, c. 27, 44 Stat. 9, 23, 39, 41, § 230 (26 USCA § 981 note), lays a tax upon the net income of corporations. Section 232 (26 USCA § 984) provides: 'In the case of a corporation subject to the tax imposed by section 981 of this title (230) the term 'net income' means the gross income as defined in section 985(233) less the deductions allowed by sections 986(234) and 937(206), and the net income shall be computed on the same basis as is provided in subdivisions (b) and (d) of section 953(212) or in section 968(226).'

Sec. 212 '(b) The net income shall be computed * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but * * * if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *

'(d) Under regulations prescribed by the commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal 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 (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other 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.' (26 USCA § 953(b, d).

Sec. 1208. 'The provisions of subdivision (d) of section 953 of this title (212) shall be retroactively applied in computing income under the provisions of * * * the Revenue Act of 1924. * * *' (26 USCA § 953a).

Treasury Regulations 69, Article 44, promulgated August 28, 1926—as amended in 1929:—

'Art. 44. Sale of Real Property Involving Deferred Payments. Under section 212(d) deferred-payment sales of real property fall into two classes when considered with respect to the terms of sale, as follows: (1) Sales of property on the installment plan, that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made do not exceed one-fourth of the purchase price.

'(2) Deferred-payment sales not on the installment plan, that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made exceed one-fourth of the purchase price.

'Sales falling within class (1) and class (2) alike include (a) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the purchase price has been paid, and (b) sales where there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments.

'In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall be included as a part of the 'purchase price,' but the amount of the mortgage, to the extent it does not exceed the basis to the vendor of the property sold, shall not be considered as a part of the 'initial payments' or of the 'total contract price,' as those terms are used in section 212(d), in articles 42 and 45, and in this article. Commissions and other selling expenses paid or incurred by the vendor are not to be deducted or taken into account in determining the amount of the 'initial payments,' the 'total contract price,' or the 'purchase price.'

'Art. 45. Sale of Real Property on Installment Plan.—In transactions included in class (1) in article 44, the vendor may return as income from such transactions 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 property is paid for bears to the total contract price.'

In 1924 respondent sold the Eighty-Second street property then under mortgage which it had executed to secure a loan of $1,100,000, payable in semiannual installments of $22,000 until 1933 when the balance would become due. The purchaser assumed the mortgage, paid $300,000 in cash, agreed to pay $700,000, and secured this by a purchase-money mortgage. Upon the latter mortgage $30,000 was paid in 1924 and $36,250 in 1925. In 1924 and 1925, respectively, the purchaser paid upon the assumed mortgage $22,000 and $24,000.

The Commissioner estimated the depreciated cost of the property at.$1,541,323.48. Subtracting this from the total sale price, $2,100,000, he ascertained realized profit, $558,676.52.

He ruled that for 1924 the taxable sum was the same proportion of the amount actually received during the year ($330,000) as the entire profit ($558,676.52) was of the total ($1,000,000) payable directly to the taxpayer, 55 per cent. plus. He excluded the assumed mortgage from the total used for determining the applicable percentage and held 'total contract price' was what the purchaser agreed to pay directly to the vendor; the whole amount which the taxpayer expected to receive in money.

Payments received by respondent during 1925 were likewise assessed.

In 1925 respondent sold the Eighty-Third street property then subject to two mortgages which it had executed to secure loans of $1,100,000 and $500,000 respectively, payable in installments, six and three months, until 1933 and 1934 when the balance would become due. The purchaser assumed both mortgages, paid $300,000 in cash, and agreed to pay $265,000, and secured this by a...