Johnson v. Comm'r of Internal Revenue
| Decision Date | 31 July 1946 |
| Docket Number | Docket No. 866. |
| Citation | 7 T.C. 465 |
| Parties | THERESE C. JOHNSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. The petitioner in 1929 repossessed real estate from a defaulting lessee who had constructed and paid for a building thereon. The petitioner at no time reported any portion of the value of the building as income in her income tax returns. She sold the land and building in 1938. Held, that in computing her gain on the sale, no adjustment need be made to the cost basis to reflect the fair market value of the building when acquired in 1929.
2. Petitioner's cost basis of the real estate determined.
3. The petitioner paid taxes and assessments for local improvements on the property involved. She also paid attorney fees in the court proceedings for repossession. After obtaining possession she made various improvements and additions to the property. Held, that the taxes and attorney fees are not includible in the cost basis of the property; held, further, that the amount of the assessments for local improvements is includible in the cost basis of the property; held, further, that certain of the expenditures made for additions and improvements are capital expenditures, and the depreciated cost thereof should be added to the basis of the property.
4. Petitioner paid $2,000 attorney fees, $231 for transfer stamps, and $25 for a quitclaim deed to clear title, all in connection with the sale of the property. Held, these items were proper deductions as selling expense in determining her gain on the sale.
5. Held, petitioner is entitled to report her gain from the sale on the installment basis. Jo V. Morgan, Esq., W. F. Finch, Esq., and Walter F. Travers, Esq., for the petitioner.
Charles P. Bagley, Esq., for the respondent.
Respondent determined a deficiency in petitioner's income tax for the calendar year ended December 31, 1938, in the amount of $17,788.58.
The issues are: (1) Whether petitioner's gain on the sale of land and a building erected thereon by her lessee is to be computed by including in the basis thereof the fair market value of the building when acquired by her in 1929 on repossession of the land and, if so, what that fair market value was; (2) whether the cost basis of the land sold was only $6,598.34, as determined by the respondent; (3) whether attorney fees expended in connection with litigation through which petitioner repossessed tract No. 3 and acquired the building located thereon and certain other expenditures, claimed by petitioner to be capital expenditures, made in connection with the property sold were allowable as adjustments to the cost basis of the property; (4) whether in determining petitioner's profit on the sale, petitioner is entitled to deduct as selling expense $2,000 attorney fees, $231 paid for transfer stamps, and $25 paid for a deed to perfect title; (5) whether the petitioner was entitled to report her profit on the sale of the property in 1938 on the installment basis and, if not, (6) whether, in the alternative, petitioner is entitled to report her profit on the deferred payment basis, which alternative issue involves determination of the fair market value of certain second mortgage notes received by petitioner in connection with the sale of the property.
An issue presented by the pleadings as to the allocation of the selling price of the property between the land and the building was abandoned by the petitioner on brief.
Petitioner is an individual, residing in Palm Beach, Florida. Her original and amended income tax returns for the taxable year 1938 were filed with the collector of internal revenue for the district of Florida.
On January 13, 1920, petitioner acquired at a cost of $19,000 lots 35 and 36 in block E in the Royal Park Addition to the town of Palm Beach, Florida. The property was unimproved and was located on the southwest corner of Royal Palm Way and County Road, with a frontage of 187 feet on Royal Palm Way and 200 feet on County Road. Lot 35 was the corner lot, 87 feet in width, and lot 36 adjoining it was 100 feet in width, and both lots extended back, at the named widths, for a depth of 200 feet.
Lots 35 and 36 were subsequently divided into three portions which, for convenience, are designated and hereinafter referred to as tract No. 1, No. 2, and No. 3.
Tract No. 1 was comprized of the west 87 feet of the north 125 feet of lot 36. Petitioner built a residence thereon which cost about $14,000 and was sold by her, with furnishings, in 1923 for $21,000.
Tract No. 2 was comprized of the south 75 feet of lots 35 and 36, having a frontage of 75 feet on County Road, with a depth of 187 feet. In 1924 petitioner gave this tract to her husband and it was sold unimproved by him the same year for $22,000.
Tract No. 3 was a rectangular corner tract, with 100 foot frontage on Royal Palm Way and 125 foot frontage on County Road. This tract was composed of the north 125 feet of lot 35 and the east 13 feet of the north 125 feet of lot 36. Tract No. 3 was retained by petitioner after she had made the above mentioned transfers of tracts Nos. 1 and 2.
In 1924 petitioner entered into a 99-year lease covering tract No. 3, by the terms of which the lessee was to pay a specified land rental and to erect on the property a building consisting of business stores and apartments. The building was constructed in 1925 and is known as the Royal Palm Way Building. It was of the Spanish and Mediterranean type. Petitioner described this building in her income tax return for 1938 as ‘Hollow Tile Building.‘
Sometime prior to 1929 the lessee defaulted in payment of rent. Petitioner brought an action against the lessee and, on February 13, 1929, obtained judgment for recovery of the property. Possession and enjoyment of the property was returned to petitioner sometime in 1929. Petitioner paid attorney fees of $1,500 in connection with the foregoing litigation.
In 1929 Royal Palm Way, the street running east and west upon which the property involved fronts, was the principal thoroughfare connecting Palm Beach with West Palm Beach, and County Road was the most important street running north and south. The new Flagler Bridge between Palm Beach and West Palm Beach, constructed after 1929, has resulted in a slight diversion of traffic.
In March 1938 petitioner sold the Royal Palm Way Building and tract No. 3, on which it was located, for $114,710, of which $25,000 was paid in cash, an unpaid balance of $25,500 on the existing first mortgage was assumed by the purchasers, and petitioner was given a second mortgage, securing notes on the property for $64,210. The first of the second mortgage notes was in the amount of $8,000, the next five notes were in the amount of $10,000 each, and the seventh note was in the amount of $7,000. The notes matured serially and provided for annual payments on principal of $1,500 on March 1, 1939, and March 1, 1940, and annual payments on March 1 of each year thereafter of $2,500, except the last payment, which was $2,000. Interest on the notes was payable at 5 1/2 per cent per annum. The total amount of the foregoing notes is $65,000, but it is agreed that the aggregate amount thereof received by petitioner was $64,210, due to an unspecified credit of $790. The selling price of the property is properly allocable as follows:
+----------------------------+
¦Land, 55% or ¦$62,942.34¦
+-----------------+----------¦
¦Building, 45% or ¦51,767.66 ¦
+-----------------+----------¦
¦Total ¦114,710.00¦
+----------------------------+
In his computation of gain from the sale of the property involved respondent included $64,210 in the total selling price as the value of the second mortgage notes.
Petitioner and her husband filed a joint income tax return for the calendar year 1929. They did not report therein any income or gain derived from the acquisition of the building in 1929, when the real estate upon which the building was located was repossessed; nor did that return indicate that petitioner had acquired the building in the manner in which she did acquire it. In her income tax returns for the years 1930 to 1937 and in subsequent years petitioner reported no income or gain as derived from the acquisition of the building; nor did those returns indicate that petitioner had acquired the building in the manner in which she did acquire it. In none of the returns was any deduction taken for depreciation of the building. In her 1938 return she computed gain upon the sale of the land and building by including $40,000 in her basis as the 1929 fair market value of the building ($50,000 less depreciation at 2 per cent per year for 10 years, or $10,000).
The respondent in his deficiency notice eliminated the $40,000 from petitioner's basis and allocated her cost of lots 35 and 36 among the foregoing three tracts, into which the lots were divided as follows:
+----------------------------------------------+
¦ ¦Square feet¦Cost ¦
+------------------------+-----------+---------¦
¦Tract No. 1, 87' x 125' ¦10,875 ¦$8,700.00¦
+------------------------+-----------+---------¦
¦Tract No. 2, 75' x 187' ¦14,025 ¦3,701.66 ¦
+------------------------+-----------+---------¦
¦Tract No. 3, 100' x 125'¦12,500 ¦6,598.34 ¦
+------------------------+-----------+---------¦
¦Total ¦37,400 ¦19,000.00¦
+----------------------------------------------+
The cost of the land comprising tract No. 3 was $10,000.
During the period 1928 to 1938, inclusive, petitioner made expenditures with respect to tract No. 3 and the Royal Palm Way Building and improvements thereon at the times, in the amounts, and for the purposes as set out below:
+-----------------------------------------------------------------------------+
¦Payment at unstated date, of balance due on sprinkler system ¦ ¦
¦installed in building by lessee prior to...To continue reading
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