Meagher v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 13 June 1930
• Docket Number: Docket No. 24105.
• Parties: CHARLES F. MEAGHER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

20 B.T.A. 68 (1930)

CHARLES F. MEAGHER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 24105.

Board of Tax Appeals.

Promulgated June 13, 1930.

H. A. Mihills, C. P. A., for the petitioner.

Maxwell E. McDowell, Esq., for the respondent.

The petitioner herein appealed from deficiencies in income taxes of $5,822.50 and $7,816.95 determined by respondent for the calendar years 1922 and 1923, respectively, and which were determined by inclusion in petitioner's gross income for such years of sums representing amounts due in future years on sales made in the taxable years in question, on the basis of deferred payments, respondent contending that these sales were not upon the installment basis, and all of the income represented thereby was realized in the year of sale. By amended answer to the petition, respondent admits error in the basis used for determining the deficiencies, admits that the sales in question were ones made upon the installment basis, and requests that as to the deficiency determined for the year 1922, the notice of deficiency be amended to show an overassessment of $797.71, but that for the year 1923, the deficiency be increased to the sum of $17,435.19, averring that in the latter year, petitioner disposed of his accounts receivable, representing the installment obligations, for stock in a corporation organized to take over his business, and that such disposition constituted the present realization of such deferred payments as income in that year. Accordingly, there is but one year in controversy, and one issue framed and presented by the pleadings, this being whether the transaction under which these deferred payments were disposed of by petitioner constituted a realization of income in the amount of uncollected profit represented thereby.

FINDINGS OF FACT.

Petitioner is an individual residing in Detroit, Mich., and for several years prior to June 13, 1923, conducted a retail lumber business as a sole proprietorship under the name of Charles F. Meagher, a large number of his sales being on the basis of a portion of the purchase price in cash and the balance on extended terms of payment.

In the year 1923 the business had grown to such proportions that it became difficult for petitioner to give each transaction his personal attention and, to facilitate the operation of the business, he decided to incorporate it. This decision was carried out by his causing to be organized a Michigan corporation, the Charles F. Meagher Lumber Co., with $250,000 authorized par value stock, and on June 13, 1923, he conveyed to this corporation all of the assets of his personal business, having a book value of $249,000, and paid in $1,000 in cash to make up the difference of the par value of the corporate stock, and the entire amount of this stock was issued to him and his nominees, as follows: petitioner, 1,251 shares; petitioner's wife, 1,248 shares; Harry V. Quermbach, 1 share. These three parties were all the subscribers to the articles of association of the corporation in its organization.

Included in the assets transferred by petitioner to the corporation there was an item of $117,863.13 which was represented by accounts receivable consisting of balances due in future years upon the sales made upon the installment basis. Of the total of $117,863.13, the sum of $53,488.57 represented uncollected profits on the several sales. The corporation under the transfer took title to such accounts and received the payments afterward made thereon by the several debtors.

OPINION.

TRUSSELL:

The issue presented in this proceeding is one of law, there appearing to be no dispute as to the facts in connection with the transaction or in respect to the figures and amounts involved.

It is admitted by respondent that the transfer of these assets by petitioner was one which, under the provisions of section 202 (c) (3) of the Revenue Act of 1921, gave rise to neither gain nor loss. However, he contends that in this transfer the disposal of installment obligations which, had they been retained and not disposed of by petitioner, would...