Darby Inv. Corp. v. Comm'r of Internal Revenue
| Decision Date | 31 January 1962 |
| Docket Number | Docket No. 82187. |
| Citation | 37 T.C. 839 |
| Parties | DARBY INVESTMENT CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Frank C. Smith, Esq., for the petitioner.
Julian R. Ettelson, Esq., for the respondent.
The petitioner purchased certain Michigan land contracts at substantial discounts of the principal balances due and payable on the face thereof at the time of petitioner's purchase. The contracts were readily marketable and at the time of the petitioner's purchase thereof had fair market values equal to the respective amounts the petitioner paid for them. Held, that each monthly payment received by the petitioner on the contracts includes, after deduction of interest, realized discount income in proportion to the difference between the petitioner's cost and the principal balance due upon the face of such contracts at the date of the petitioner's purchase thereof.
Deficiencies have been determined by the respondent in the income of petitioner for the taxable years ended August 31, 1956 and 1957, in the respective amounts of $1,778.46 and $2,427.21.
The only issue is whether respondent has erred in adding to petitioner's gross income for each year a part of each monthly payment received by petitioner from Michigan land contracts representing partial collection of discount income where petitioner had purchased the vendor's interest in such contracts at a discount.
All of the stipulated facts are found and we adopt the portion of the stipulation of facts necessary for our decision as our detailed findings of fact.
Petitioner Darby Investment Corporation, hereinafter sometimes referred to as Darby, is a corporation organized on August 15, 1955, under the laws of the State of Michigan. Its authorized capital at the date of incorporation was 2,500 shares of common stock at $100 par value. Since its organization Darby has been engaged primarily in investing its funds in the vendor's interest in land contracts. Darby accounts for and reports its income on a cash receipts and disbursements method.
Darby filed corporate income tax returns (Forms 1120) for the taxable years ended August 31, 1956 and 1957, with the district director at Detroit, Michigan.
There are involved in this case 76 land contracts purchased by the petitioner, during its fiscal years ended August 31, 1956 and 1957, at a discount, that is to say, at an amount less than the unpaid balance due upon the face of each contract. Darby performed no services in the making of the contracts, but only purchased land contracts negotiated by others. In each instance the price paid was an agreed percent less than the principal amount due on the contract, the difference being the discount in question.
Each contract provided for a downpayment by the land contract vendee upon the execution and delivery of the contract. The remaining unpaid principal balance was to be paid by monthly payments of a specified amount, which monthly payments were to include interest at 6 percent per annum on the whole principal sum that was from time to time unpaid. The legal title to the premises was retained by the land contract vendor until the terms of the contract were fully completed.
In reporting its income Darby treated no part of the monthly payments on the contract as earned discount.
The deficiencies determined against Darby for the fiscal years ended August 31, 1956 and 1957, were based on the determination by the Commissioner that each monthly payment represents:
1. Interest.
2. Recovery of cost.
3. Discount.
The full particulars concerning the date the petitioner acquired each land contract, the unpaid principal balance as of the date of acquisition, petitioner's cost, the amount of the discount, collections on the unpaid balance of the contract, and interest for the fiscal years ended August 31, 1956 and 1957, are as set forth in Exhibits 3-C and 4-D which are made a part hereof by reference. The land contract listed in Exhibit 3-C as 4451 Farrand Road is not here at issue.
The discount income in dispute for the fiscal year 1956 is the amount of $5,928.21 and for the fiscal year 1957 is the amount of $8,011.05.
Approximately 90 percent of the land contracts were purchased by the petitioner from builders. The builder had erected a ‘shell’ house which was to be finished by the land contract vendee, as more fully explained below. The builder would enter into a land contract with the land contract vendee which provided for a downpayment upon the execution and delivery of the contract, and for the unpaid principal balance of the contract to be paid by monthly payments as explained above. Typically, the terms of most land contracts, covering new and used homes, provided for full payment in approximately 11 years, 7 months. Generally, the petitioner did not anticipate holding the land contract for the full term provided for in the contract. At the time the petitioner purchased the vendor's interest in the land contract from the builder, possibly one, but never more than two, of the monthly payments provided for by the terms of the land contract had been paid by the land contract vendee.
Land contracts purchased from a builder invariably covered a ‘shell’ house. The inside of the house was unfinished. Invariably the builder delivered to the premises materials and equipment necessary for the completion of the house. Among the items delivered to the premises were:
1. 3,000 feet of sheetrock.
2. 1,000 feet of oak flooring.
3. Stool, tub, lavatory, and shower.
4. 1,700 feet of installation.
5. 50-gallon hot-water heater.
6. Kitchen sink.
Most of the land contracts contained a provision under which the vendee was required to complete the interior of the house within 6 months to a year from the date of the contract. Invariably, the building permits issued to the builder required that the building be completed within a year from the starting date and that the home pass a municipal inspection concerned chiefly with sanitation and electrical wiring at the end of a year. Most of the land contracts specifically provided that the title to all of the personal property supplied to the premises should remain in the seller and that said items were accepted by the vendee for the sole purpose of annexing same to the premises and improving the premises and for no other purpose.
The vendee was thus required to apply the sheetrock to the walls and ceiling, lay and finish the flooring, install the insulation, hang and finish doors, install the plumbing fixtures, and install the hot-water heater and kitchen sink as set forth above. In addition to the above-described improvements, it was practically necessary that the vendee install kitchen cabinets and purchase and install light fixtures and paint the premises, all at his own expense.
The increase in the cash value of the property, resulting from the completion of construction by the land contract vendee was of prime importance to the petitioner. Savings and loan associations and banks were during the years involved limited in the...
To continue reading
Request your trial
-
Underhill v. Comm'r of Internal Revenue
...of its negotiability. Phillips v. Frank, supra; Darby Investment Corporation v. Commissioner, 315 F.2d 551(C.A.6, 1953), affirming 37 T.C. 839(1962); Walter H. Potter, 44 T.C. 159(1965), on appeal (C.A.9, Oct. 4, 1965). We note that, in the context with which we are dealing, marketability a......
-
Ehlers v. Vinal
...recovery of discount on bonds purchased for less than their face amount." 25 T.C. at 476-477. (Emphasis ours) See also Darby Investment Corp., 37 T.C. 839, 843 (1962), aff'd 315 F.2d 551 (6 Cir. 1963), wherein the parties conceded in a similar transaction that the "discount income" received......
-
Kaufman v. Commissioner
...that exists where a purchaser of such land installment contracts at a discount collects on such contracts. In Darby Investment Corporation Dec. 25,339, 37 T. C. 839 (1962), affirmed per curiam 63-1 USTC s 9396 315 F. 2d 551 (C. A. 6, 1963), we held that each payment on such a land installme......
-
Potter v. Comm'r of Internal Revenue , Docket Nos. 81795
...The discount income from the notes was 17 percent. In Darby Investment Corporation v. Commissioner, 315 F.2d 551 (C.A. 6, 1963), affirming 37 T.C. 839 (1962), not only did the discount involved amount to approximately 26 percent but other relevant factors indicated that the risk of recovery......
-
Final regs. clarify basis and distribution issues, but leave unanswered questions.
...in part and rev'd in part, 424 F2d 219 (9th Cir. 1970) (25 AFTR2d 70-936, 70-1 USTC [paragraph] 9327). (18) See Darby Investment Corp., 37 TC 839 (1962), aff'd, 315 F2d 551 (6th Cir. 1963) (11 AFTR2d 1242, 63-1 USTC (19) Rev. Rul. 64-162, 1964-1 CB 304. (20) Rev. Rul. 68-537, 1968-2 CB 372;......