WD Haden Co. v. Commissioner of Internal Revenue, 11948.

• Decision Date: 23 January 1948
• Docket Number: No. 11948.,11948.
• Parties: W. D. HADEN CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

165 F.2d 588 (1948)

W. D. HADEN CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11948.

Circuit Court of Appeals, Fifth Circuit.

January 23, 1948.

Bleecker L. Morse, of Galveston, Tex., for petitioner.

I. Henry Kutz, Sewall Key, George A. Stinson and Helen R. Carloss, Sp. Assts. to Atty. Gen., Theron L. Caudle, Asst. Atty. Gen., J. P. Wenchel, and Claude R. Marshall, both of Washington, D. C., for respondent.

Before SIBLEY, HOLMES, and WALLER, Circuit Judges.

SIBLEY, Circuit Judge.

In redetermining income and excess profits taxes of W. D. Haden Company for 1940 and 1941, five claimed deductions were disallowed by the Tax Court which are the subjects of this petition for review. The primary facts found are not disputed, and will be stated briefly as to each controversy.

1. Highland Farms Transaction. In October, 1931, the taxpayer, conducting a business of selling building materials and oyster shells, had advanced Highland Farms Corporation a total sum of $29,116. The Corporation assigned eighty-nine land sales contracts to secure the debt. On Jan. 19, 1932, in settlement of the debt the Corporation deeded 123 lots and farm tracts in its subdivision subject to a mortgage, and three notes secured by a second lien on certain properties. The lands and lots for which the eighty-nine sales contracts were first assigned were among those deeded in the settlement, and the title to the lands was subject to the sales contracts and the outstanding mortgage and the mortgage provisions for releases as lots were paid for. The total of the sales contracts was $46,785, and the total of the sums to be paid the mortgagee for releases of the lots sold was $19,175, leaving a net face value of $27,610. Nearly all the sales were on a basis of $200 per acre, payable in installments of $10 per month per acre, and were dated over a period of six years. The mortgage went into default and foreclosure was begun May 28, 1932. Esteeming that it had a loss measured by the original debt of $29,116 the taxpayer so reported in its tax return for 1932, but obtained no tax benefit because it owed no tax anyhow. There was a cross-action against the mortgagee, however, which after litigation resulted in 1935 in a total defeat of the mortgage. The taxpayer in that year restored the charge-off to its income less $1,019 collected meanwhile, that is to say it set up on its books a new basis of $28,097. The year 1935 was also a loss year, so that no tax was paid in consequence. During the next six years, through 1941, collections on the sales contracts and new sales were made to the amount of $8,231 and applied against said $28,097 basis, reducing it to $19,865. On December 19, 1941, the taxpayer sold all the remaining contracts and lands to Highland Farms Corporation for $9,250 in cash, and claimed a deduction in its tax return of $10,615 as a long term capital loss. The Commissioner disallowed it.

The Tax Court held the original basis was not the original debt of $29,116, but the fair market value of the lands and sales contracts when acquired, and that they were not to be valued as an aggregate, but each item separately; that if the sum of the values was less than the debt paid the difference would have been a bad debt to be charged off in 1932 if not collectible; that there was no appraisement of these properties when acquired in 1932 or since; and there was no testimony as to market values except that the values were equal to the list prices at which the sales were made. The Tax Court then says that on that basis the difference between the aggregate of sales contracts and the payments due to the mortgagee for releases was $27,610 and not $29,116. We are not sure that this last conclusion follows, because as we understand the facts there were unsold lots and lands transferred in 1932, and so not represented in the then aggregate of sales contracts. Their value would have to be added. The Tax Court also held that the sales contracts and the list prices on which they were based are installment prices and so do not represent cash values, but must be discounted, and because what was left in 1941 was resold for about fifty percent of face value that the basis in 1932 ought to be discounted fifty percent. We do not think this is a logical inference, because it is not found that the sales contracts bore no interest and it is found that while the remnant of them was closed out at a discount of about fifty percent, the Highland Farms Corporation later collected $29,000 on them, or nearly three hundred percent of the amount the Corporation paid for them. It seems to us that the sale in 1941 is shown probably to have been below value and is no yardstick to measure the values in 1932. The final conclusion was that no basis for computing loss had been furnished, and that the claimed basis of $29,116 could not be sustained. The latter conclusion we could not say is wrong, for $29,116 is the original debt and not the market value of the property which was acquired for it in 1932, nor is it shown that the debt was worth its face when settled. It is also clear that if the sales contracts drew no interest they ought to be discounted according to the prevailing rates of interest to find their then value. That is a matter of law. But we do not think that because an appraisement was not made in 1932, or because neither side asked the witness as to value to figure out this discount, the court is excused from doing it. Law and justice require either that the Tax Court should figure it out for itself, or having announced that this must be done to arrive at a proper value, should reopen the hearing that the taxpayer may supply the omission. As to this item we set aside the disallowance and direct that the hearing be reopened for further evidence. There seems to be also a question as to whether certain collections made were returns of capital or income. This also may be further explored.

2. Harrisburg Depot Transaction. Briefly stated, taxpayer owned lot No. 16. The adjoining lot No. 15 was owned by one Beeley. Another lot No. 17 was owned by Texas Company. All had water frontage. One Goodwin, an independent real estate man, offered to get an exchange of No. 16 for No. 17, if taxpayer would pay him a commission of $750. Taxpayer declined the offer, but offered to trade with him even. Goodwin then on his own account made arrangements with Texas Company to buy lot 17 for $7,600, and to sell to Beeley a part of lot 16 for $7,800. Beeley later agreed to purchase of Goodwin the remainder of lot 16 for $3,000. All these trades were made in writing in Goodwin's name. The only contract signed by taxpayer was with Goodwin, agreeing to exchange No. 16 for No. 17 with no money consideration. When it came to making the deeds, instead of Goodwin taking Beeley's money and buying of Texas Company lot 17 and deeding it to taxpayer, and taking taxpayer's deed to No. 16 and then deeding it to Beeley, he requested Texas Company to convey No. 17 to taxpayer and taxpayer to convey No. 16 to Beeley, which was done. The Tax Court correctly held that the taxpayer had exchanged its...