Lucas v. Schneider, 5578.

Decision Date06 March 1931
Docket NumberNo. 5578.,5578.
Citation47 F.2d 1006
PartiesLUCAS v. SCHNEIDER.
CourtU.S. Court of Appeals — Sixth Circuit

John H. Pigg, of Washington, D. C. (Thomas J. Sparks and Frank A. Ropke, both of Louisville, Ky., and C. M. Charest, of Washington, D. C., on the brief), for appellant.

Elwood Hamilton, of Louisville, Ky., for appellee.

Before DENISON, HICKS, and HICKENLOOPER, Circuit Judges.

HICKS, Circuit Judge.

Bagby-Howe Drug Company, herein called the taxpayer, was a Kentucky corporation engaged at Louisville from 1904 to 1926 in the manufacture and sale of drugs at wholesale. Subsequent to March 1, 1913, and before the taxable year 1925, the taxpayer acquired certain real estate with improvements at 626 Main street, Louisville, at an aggregate cost of $69,460.46. Prior to 1925, it took deductions in its income tax returns for depreciation of said property in the amount of $15,263, leaving an undepreciated balance of $54,197.46. In the taxable year 1924 the taxpayer executed two mortgages upon the property and received thereon $90,000 upon the first and $2,000 upon the second. In the taxable year 1925 it sold the property for $155,000, which was paid as follows:

                  Cash (paid in 1925) .................   $13,066.27
                  Commission on sale ..................     4,300.00
                  State and County taxes (paid by
                    purchaser) ........................       568.48
                  Transfer taxes (paid by purchaser)
                    ...................................        65.25
                  Second mortgage notes, extending
                    over period of five years .........    45,000.00
                  First mortgage notes, assumed by
                    purchaser .........................    90,000.00
                  Second mortgage notes, assumed
                    by purchaser ......................     2,000.00
                                                         ___________
                  Total selling price .................  $155,000.00
                

The profit realized or to be realized from the sale was $84,842.04, computed as follows:

                  Total selling price .................  $155,000.00
                  Less cost of property
                    including improvements
                    ......................  $69,460.46
                  Less depreciation ......   15,263.00
                                            __________
                                             54,197.46
                  Selling expense ........   15,960.50
                                            __________
                                                           70,157.96
                                                         ___________
                                                          $84,842.04
                

In its tax return for the year 1925 the taxpayer as a part of its gross income included as profit from the sale of the real estate the sum of $60,123.78. This resulted in a tax liability of $1,279.56 which was paid by appellee Schneider, trustee in bankruptcy, the taxpayer having been adjudicated a bankrupt on April 14, 1926. Appellee insists that the inclusion of the aforesaid sum of $60,123.78 in the return for 1925 was erroneous; that all the payment the taxpayer received that year upon the sale of the real estate was the $13,066.27 above indicated; that this payment did not exceed one-fourth of the purchase price, and that the taxpayer should therefore have made its 1925 return under section 212(d), and § 1208, of the Revenue Act of 1926, retroactively applied (U. S. Code, tit. 26, § 953(d) and section 953a, 26 USCA § 953(d) and section 953a), called the installment plan basis, and that when so made its taxable income for 1925 would amount to only $19,091.44; that it had therefore overstated its taxable net income on the entire year's business to the amount of $41,032.32 and had shown a profit of $11,841.22 when it had in fact sustained a loss of $29,191.12; that it had therefore overpaid its taxes and was entitled to recover the said payment of $1,279.56 and interest. Respondent insists that the taxpayer is not entitled to have its taxable income for the year 1925 on the sale of said real estate computed upon the installment plan basis, but that the entire profit of $84,842.04 should have been included in its return for that year.

The question for decision is whether the sale of the property was an installment sale within the meaning of said section 212(d). This question is made to depend by the statute upon whether the initial payments exceed one-fourth of the purchase price. If they do not it was an installment sale; otherwise it was not. It is necessary therefore to determine what is meant by the "purchase price" and the "initial payments." The purchase price is unquestioned — it was $155,000. Initial payments are defined in the statute as follows: "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."

The statute recognized the common method of making payments in either cash or property, or both, and provided that initial payments might be in either or both but excluded "evidences of indebtedness of the purchaser during the taxable period in which the sale * * * is made" from the initial payments. Section 212(d) has reference to the indebtedness of the purchaser to the seller. It deals with no other relationship. It has nothing to say touching mortgages or mortgagees or evidence of indebtedness to mortgagees. It is a revenue measure dealing with the return of a taxpayer who has made a sale of property (in this case of real estate) upon the installment payment plan, and excludes evidences of indebtedness by reason of the deferred installment payments because to have included such evidences in the initial payments would have defeated the purpose of the installment plan of return.

All other "property" received by the seller from the purchaser as a payment during the taxable period in which the sale was made must be included in the "initial payments." See Elmore v. Comm'r, 15 B. T. A. 1210, 1212. Was the assumption of the mortgages by the purchaser "property" to be included just as was cash in hand? We think it was. It was one of the chief considerations for the sale. It was not a promise to pay the seller; it was a promise to the seller to pay the mortgagee. Its effect in equity was to relieve the seller of any direct liability. As between seller and purchaser it constituted the seller the surety and the purchaser the principal debtor to the mortgagee. Under the law of Kentucky (Gray v. Gilliam, 166 Ky. 194, 196, 179 S. W. 22) the purchaser is liable personally to the mortgagee. See Union Mut. Life Ins. Co. v. Hanford, 143 U. S. 187, 190, 12 S. Ct. 437, 36 L. Ed. 118. We think the promise coupled with the cash payment was...

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  • Bostedt v. Comm'r of Internal Revenue
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    ...Commissioner, 19 B.T.A. 1050 (1930). Cf. Watson v. Commissioner, 20 B.T.A. 270 (1930). This result was also reached in Lucas v. Schneider, 47 F.2d 1006 (6th Cir. 1931), cert. denied 284 U.S. 622 (1931), and Sterling v. Ham, 3 F. Supp. 386 (S.D. Me. 1933). Similarly, in Riss v. Commissioner,......
  • United States v. Anderson, 15267.
    • United States
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    • July 17, 1942
    ...1, 35) has been accepted in subsequent federal cases. Among the more recent cases which quote it or refer to it are Lucas v. Schneider, 6 Cir., 1931, 47 F.2d 1006-1008; In Hoyd v. Citizens Bank of Albany Co., 6 Cir., 1937, 89 F.2d 105, 107, in defining the word "property" as generally used,......
  • Riss v. CIR
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    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
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    ...by the seller of that part of the sale price. Burnet v. S. & L. Building Corp., 288 U.S. 406, 53 S.Ct. 428, 77 L.Ed. 861; Lucas v. Schneider, 47 F.2d 1006 (6th Cir.); Stephen A. Cisler, Jr., supra; James Hammond, supra; J. W. McWilliams, Williams v. C. I. R. 15 B.T.A. 329. "When a taxpayer'......
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