Darby Investment Corporation v. CIR
| Decision Date | 09 April 1963 |
| Docket Number | No. 15017.,15017. |
| Parties | DARBY INVESTMENT CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Dale E. Andrews, Flint, Mich., Frank C. Smith (Deceased), Flint, Mich., on brief, for petitioner.
Norman H. Wolfe, Department of Justice, Washington, D. C., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Joseph Kovner, Attorneys, Department of Justice, Washington, D. C., on brief, for respondent.
Before CECIL, Chief Judge, MILLER, Circuit Judge, and BOYD, District Judge.
Darby Investment Corporation petitions this Court for a review of the decision of the Tax Court of the United States redetermining deficiencies in its income taxes for its fiscal years ending August 31, 1956 and 1957. The taxpayer is a corporation organized under the laws of the state of Michigan and during the time pertinent to this case was engaged in the business of buying land contracts at a discount in Michigan.
Seventy-six contracts are involved here which were purchased by the petitioner during its fiscal years 1956 and 1957. Approximately ninety percent of these contracts were purchased from builders and in each case the builder had erected a "shell house" on the land which was the subject of the contract. A "shell house" was one in which the inside was unfinished. The house would be sold by the builder with certain materials and equipment included to be used by the purchaser for its completion. It was generally provided in the contracts that the house must be completed within a year.
The vendee of one of these houses would buy on contract with provisions for a small down payment and for monthly payments to be made on the balance until the entire purchase price was paid. The unpaid balance of the principal bore interest at six percent and the interest was included in the monthly payments. The builder would retain legal title to the land.
Generally, after one or two monthly payments were made, the builder would sell the contract to the petitioner. The price paid was an agreed percentage less than the principal amount due on the contract. This difference is the discount income which is the subject of this controversy. The percentage of discount on these contracts varied with different transactions but generally ran from 25% to 27%. The builder would give the petitioner a deed for the land and it would then hold the legal title until the purchase price was fully paid, or until the home purchaser could pay it off by getting a conventional loan from a financial institution. On an average these "shell houses" when completed were worth twenty-nine percent more than their fair market cash value as "shells."
The other ten percent of the land contracts involved were those covering used homes from twenty to thirty years old. They were purchased from individuals at discounts of from ten to twenty-three percent. These homes were in more stable neighborhoods and had more readily predictable cash values than was true of the "shell houses."
The parties stipulated certain facts and the pertinent facts are fully set forth in the opinion of the Tax Court, reported at 37 T.C. 839.
The sole issue is whether the petitioner must include as income received with each monthly payment under the contracts, in addition to 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 their purchase. The petitioner performed no services other than financing, through the purchase of contracts. The amount received in payment on the principal in excess of the cost of the contract is conceded to be ordinary income.
The Commissioner contends that the taxpayer must report each year as income a proportionate part of each monthly payment as realized discount income. In other words, each monthly payment represents interest, recovery of cost and discount income. The taxpayer claims that it should be permitted to recover its cost before it is required to return any portion of the monthly payments as realized discount income.
The discount income in dispute for the fiscal year 1956 is...
To continue reading
Request your trial
-
Warren Jones Co. v. Comm'r of Internal Revenue
...value.’ Sec. 1.1001-1(a), Income Tax Regs. See also McCormac v. United States, 424 F.2d 607 (Ct. Cl. 1970); Darby Investment Corporation v. Commissioner, 315 F.2d 551 (C.A. 6, 1963); Marsack's Estate v. Commissioner, 288 F.2d 533 (C.A. 7, 1961); Chamberlin V. Commissioner, 286 F.2d 850 (C.A......
-
Underhill v. Comm'r of Internal Revenue
...the obligation, which involves the subsidiary consideration 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 tha......
-
Ehlers v. Vinal
...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 was ordinary income, not capital gain. Comp......
-
Kaufman v. Commissioner
...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 installment contract, after deduction of interest, included realized discount income in proportio......
-
Final regs. clarify basis and distribution issues, but leave unanswered questions.
...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; see also Smith, note 17. (......