Crayton v. Commissioner

J. S. F. CRAYTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Crayton v. Commissioner Docket No. 11306. United States Board of Tax Appeals 11 B.T.A. 1375; 1928 BTA LEXIS 3627; May 15, 1928, Promulgated *3627 1. Under a deed executed in 1907, the petitioner was granted a one-half undivided remainder interest in certain real estate in Anderson, S.C., upon the condition that he survive the life tenant. If he alone should survive the life tenant then he was to take all of the remainder. In 1920 the petitioner and the coremainderman bought out the life tenant. Held, that the interest in the real estate acquired by the petitioner under the deed was property within the meaning of the taxing statute and capable of definite valuation on the basic date. 2. Fair market value of petitioner's interest at March 1, 1913, determined. 3. Petitioner's gain upon the sale of property in 1920 determined. 4. The assessment by the respondent of the statutory penalty for delinquency in filing a return approved. J. alex Neely, Jr., Esq., for the petitioner. P. M. Clark, Esq., and C. C. Holmes, Esq., for the respondent. SMITH *1375 This is a proceeding for the redetermination of a deficiency in income tax for 1920 of $10,861.12 plus a 25 per cent penalty of $2,715.28 for delinquency in filing a return, of which amounts $6,063.53 plus a penalty of*3628 $1,515.88 were assessed in 1922 or 1923, and claim in abatement filed, which claim has not been acted upon by the Commissioner. No part of the tax or penalty claimed to be due has been paid. The petitioner admits a tax liability of $32.85. The principal point in issue is the profit, if any, derived in 1920 upon the sale of certain property. FINDINGS OF FACT. The petitioner, J. S. F. Crayton, also known as J. S. Fowler, Jr., is an individual residing at Anderson, S.C. In 1907 he was granted, by a deed executed by Hortense C. Fowler, an interest in certain real estate situated in Anderson, S.C. The deed provided as follows: Know All Men by These Presents, That I, Mrs. Hortense C. Fowler, of the County of Anderson, in the State aforesaid, for and in consideration of the sum of Five ($5.00) dollars to me in hand paid at and before the sealing of these presents, by J. S. Fowler, of the County of Anderson, State aforesaid, *1376 (the receipt whereof is hereby acknowledged) and of other valuable consideration to me paid, have granted, bargained, sold and released, and by these presents do grant, bargain, sell and release unto the said J. S. Fowler, all that certain piece, *3629 parcel or lot of land situate, lying and being within the incorporate limits of the City of Anderson, County of Anderson, South Carolina, containing two (2) acres, more or less, bounded on north by West Whitner Street, on the east by Peoples Street, on the south by West Benson Street, and on the west by Towers Street, it being the entire square enclosed by said Streets, being same lot conveyed to me by deed of J. W. B. Skelton, which will be found of record in the office of the Clerk of Court for Anderson County, in Book WW, pages 720-721. Together With All and Singular the Rights, Members, Hereditaments, and Appurtenances to the said premises belonging, or in anywise incident or appertaining. To Have and to Hold, all and singular, the said premises before mentioned unto the said J. S. Fowler, for his life and after his death (if they both be living) to J. S. F. Crayton and Sallie C. Crayton, their heirs and assigns; if J. S. F. Crayton only be living then, the whole to him, his heirs and assigns; if at J. S. Fowler's death, J. S. F. Crayton be dead then an undivided one-half interest to Sallie C. Crayton, her heirs and assigns and the other to the heirs of J. S. Fowler; if both*3630 J. S. F. Crayton and Sallie C. Crayton be dead at the death of J. S. Fowler, then to his heirs forever. The petitioner is the step-grandson and the adopted son of J. S. Fowler. Sallie C. Crayton is the petitioner's mother. In 1920 the parties got into litigation among themselves. The property referred to in the above-mentioned deed of 1907 was valuable as business property. There was an outside party who made the grantees named in the deed of 1907 a proposition to buy an interest in the Fowler square. J. S. Fowler, Sr., agreed to sell his entire interest in the property for a consideration of $40,000. The petitioner's mother, Sallie C. Crayton, agreed to relinquish any claim that she might have to the eastern half of Fowler square, provided the petitioner would relinquish to her any interest which he might have in the western half of the square. The petitioner agreed to take for his interest in the square a one-half interest in the eastern half of the property provided the outside party, W. K. Stringer, would pay to J. S. Fowler, Sr., $40,000 and to himself $5,000, the parties agreeing that the fair value of the eastern half of the square was approximately $90,000. The*3631 interest acquired by W. K. Stringer was evidenced by the following instrument: STATE OF SOUTH CAROLINA, County of Anderson. This agreement entered into this March 1920, between Mrs. Sallie C. Crayton and J. S. Fowler, Jr., parties of the first part, and W. K. Stringer, party of the second part, Witnesseth: 1. That the parties of the first part hereby agree to sell to the party of the second part, for the consideration below named, an undivided one-half interest *1377 in a certain lot or parcel of land situate in the City of Anderson, in the County and State aforesaid, beginning at the Southwest corner formed by the intersection of Peoples Street and West Whitner Street, running thence Westwardly along the South side of West Whitner Street One hundred and eighty (180) feet, more or less, thence Southwardly parallel with Peoples Street to West Benson Street, thence Eastwardly along the North side of West Benson Street one hundred and eighty feet more or less to the intersection of Peoples Street, thence Northwardly along to the West side of Peoples Street to the intersection of West Whitner Street. 2nd. The party of the second part agrees to pay for the said*3632 one-half interests in said premises the sum of Forty-Five thousand ($45,000.00) Dollars, of which amount it is understood that Forty Thousand ($40,000.00) Dollars shall be paid in to J. S. Fowler, Sr., in payment for the purchase of his interest in all of the square, which includes the lot above described, and the remaining Five Thousand Dollars to be payable to the parties of the first part. The said Forty Thousand Dollars is to be paid when J. S. Fowler, Sr., tenders proper conveyance of his said interest, and the said Five thousand Dollars payable upon the consummation of this sale. 3rd. It is understood and agreed that the party of the second part is not to be held to the payment of any part of the said purchase money until proper title deeds are tendered him, conveying an undivided one-half interest in said premises in fee simple, with good and marketable title, clear of all encumbrances. At or about the same time the above deed of March, 1920, was executed, the petitioner deeded to Sallie C. Crayton for a named consideration of $45,000 any interest which he might have to the western half of the square and Sallie C. Crayton by a separate instrument deeded to the petitioner*3633 for a like consideration of $45,000 all her right, title and interest in and to the eastern half of the square. Thereafter, the petitioner and W. K. Stringer subdivided their property into sixteen lots and sold off some of them at auction. Lots 9, 10, 11, and 15 were not sold at auction and the petitioner retained an undivided one-half interest therein, the cost of which to the petitioner as determined by the respondent was $7,210.85. The remaining lots were sold at auction for $76,065. The petitioner received as his share of the proceeds from the sale $37,417.25. The cost to the petitioner of his interest in the lots not sold plus his share of the proceeds from the sale of lots plus $5,000 paid to him by Stringer was as follows: Cost undivided one-half interest in lots 9, 10, 11 and 15 $7,210.85 Proceeds from sale of lots 37,417.25 Cash received from Stringer 5,000.00 Total 49,628.10 The fair market value of the Fowler square on March 1, 1913, was $140,000 and the value of the petitioner's interest in the property on March 1, 1913, was $41,108.37. The petitioner did not file an income-tax return for the year 1920 within the statutory period, since*3634 he had been advised by a former *1378 deputy collector, who was at that time acting as a tax consultant, that he was not required to file a return for that year. In May, 1922, the collector for the petitioner's district prepared and filed on behalf of the petitioner a return for the year 1920 which was executed by the petitioner and upon which he wrote "I sign under protest." On June 19, 1922, the petitioner filed an amended return for the year 1920 showing no taxable income. On November 27, 1925, the respondent mailed to the petitioner a deficiency letter reading in part as follows: The determination of your income tax liability for the year 1920, as set forth in office letter dated January 13, 1925, has been changed as a result of an opinion by the Solicitor of Internal Revenue in your case from $2,083.40 to $5,996.99. The adjustments made are explained in detail in the attached statement. * * * STATEMENT Year 1920, deficiency in tax $4,797.59 Penalty 1,199.40 Total tax and penalty 5,996.99 Reference is made to office letter dated January 13, 1925, in which you were advised of a deficiency in tax for the year 1920, aggregating $2,083.40. *3635 You are advised that your protest of July 25, 1924, relative to the adjustments made has been reviewed by the Solicitor of Internal Revenue. Your return for the year 1920 has, accordingly, been reaudited, based on the recommendations of the Solicitor of Internal Revenue, together with the supplemental revenue agent's report dated November 2, 1925. The only issue involved is whether or not the value of your half interest in land acquired partly through gift and partly through purchase be placed at $90,000 on the date that you entered into possession for the purpose of arriving at the gain or loss on the sale in 1920. It is held that in the year 1907, you and Mrs. Sallie C. Crayton had a vested remainder in the property in question subject to be divested on certain contingencies. This office is, therefore, of the opinion that the basis of computing gain or loss on the sale of the property is the fair market value of your remainder interest on March 1, 1913, plus one-half the amount paid by you to J. S. Fowler for his life interest and that you made a gift to Mrs. Crayton of one-half of the life interest. It is held that the value of your remainder interest should be computed*3636 in accordance with the ruling IT: 2076 (Bull. 111-37, P-3) and Table A, on Page 18, of Regulations 63, revised. Relative to the March 1, 1913, value of the Fowler Square you are advised that the evidence in the case, as shown by affidavits and opinions from several real estate dealers, indicates that a valuation of $45,000.00 which is considered high. However, this office has used the valuation of $54,394.52. Profit on the sale is determined as follows: * * * Net profit from the sale of property $53,656.24 * * * Tax Penalty $10,861.12 $2,715.28 Previously assessed 6,063.53 1,515.88 Deficiency in tax 4,797.59 Deficiency in penalty 1,199.40 *1379 This assessment is in addition to all other outstanding and unpaid assessments appearing upon the Collector's lists. OPINION. SMITH: The petitioner and the respondent are substantially in accord as to the amount of petitioner's gross receipts from the sale of the property in 1920 but are at difference both as to the date of its acquisition by petitioner and as to its cost or March 1, 1913, value. The petitioner contends that he did not acquire the property prior to*3637 March, 1920; that under the Hortense C. Fowler deed executed in 1907 he acquired only a contingent interest in the property which did not vest or become a certainty until by virtue of the agreement entered into in 1920. In support of this contention he cites Martin & Earle v. Maxwell,96 S.C. 1; 67 S.E. 962, and Home Bank of Lexington v. Fox,113 S.C. 378; 102 S.E. 643, which he claims are authority for the proposition that under the laws of South Carolina the interest in property of a remainderman, conditioned upon his survival of the holder of the prior estate, is not a vested but a contingent estate which is not subject to attachment by creditors. The petitioner then deduces that a "contingent interest" is not an "acquired interest" and that, therefore, he did not acquire his gift under the deed of Hortense C. Fowler in the year 1907. It is not material, as we see it, whether the petitioner acquired under the deed in question a vested or a contingent interest in the property, or whether such interest as he did acquire was or was not subject to attachment, levy and sale under the laws of South Carolina. Whatever*3638 interest he did acquire, whether contingent or vested, was property under the laws of South Carolina and within the meaning of the taxing statute. In Martin & Earle v. Maxwell, supra, the court said: * * * It is true, as has been often said, that a contingent remainder is not technically an estate, but a mere possibility of an estate in the future; but that is very far from saying that it is not property. The term "property," used in the bankruptcy act, is of the broadest possible signification, embracing everything that has exchangeable value, or goes to make up a man's wealth - every interest or estate which the law regards of sufficient value for judicial recognition. Chas. & W.C. Ry. Co. v. Reynolds,69 S.C. 481, 48 S.E. 476; South Bound Ry. Co. v. Burton,67 S.C. 515, 46 S.E. 340; Delassus v. United States,34 U.S. 117, 9 L.Ed. 71; Knight v. United Land Association,142 U.S. 161, 12 Sup.Ct. 258, *1380 35 L.Ed. 974. It follows that under our decisions the interest of the bankrupt under the will was "property" which he could have transferred, and that, therefore, *3639 it passed to his trustee in bankruptcy to be sold by him. Restriction of the meaning and scope of the term "property" as used in the taxing statutes may not be imputed. Lynch v. Alworth-Stephens Co.,267 U.S. 364. See also Anna Taylor,3 B.T.A. 1201, and other cases there cited. Section 202(a)(1) of the 1918 Act provides: (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be - (1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date; * * * The reasonable and practicable interpretation of the statute is that it includes all forms of and interests in property whatsoever. Under the deed of Hortense C. Fowler the petitioner acquired a certain interest in the property which was capable of a definite valuation at March 1, 1913. In arriving at the March 1, 1913, value of such interest the respondent has used a method of valuation which is not here in dispute. He has found that the value of the entire property known as the Fowler square at March 1, 1913, was*3640 $54,394.52. The petitioner claims a value of $140,000. It is not necessary here to analyze the evidence relating to valuation. It convinces us that the value claimed by the petitioner is a reasonable one. This evidence is corroborated by the fact that in a prior case before the Board, J. S. Fowler, Sr.,4 B.T.A. 427, we found that the identical property had a value at March 1, 1913, of $140,000. Upon the same method of valuing the March 1, 1913, value of petitioner's interest in the Fowler square as that used by the respondent, but using as the value of the fee on March 1, 1913, $140,000 instead of the $54,394.52 used by the respondent, the March 1, 1913, value of petitioner's interest in the property was $41,108.37. Since no question has been raised by either party as to the correctness of the method used by the respondent in valuing the petitioner's interest in the property on March 1, 1913, we accept the same for the purpose of arriving at the value. In computing the profit upon the sales in 1920 the respondent has included in the sale price $45,000 representing the consideration paid by Sallie C. Crayton to the petitioner for his interest in the western*3641 half of the square. We think that this was error. The evidence indicates that the consideration named in the deeds was merely for the purpose of showing an even swap and the petitioner testified that there was no intention on the part of any of the parties that the transaction should be anything more than an even swap of one interest for another. The facts are clear that all that the petitioner *1381 got out of the transactions at the close of 1920 was an undivided one-half interest in lots 9, 10, 11 and 15, which the respondent determined cost the petitioner $7,210.85, plus cash and first mortgages received from the auction sales of $37,417.25 and $5,000 cash received from Stringer. The total amount received in value of land and cash or the equivalent of cash was $49,628.10. The total profit from the entire transactions was $8,519.73. The deficiency letter indicates that the petitioner had other income for the year of $1,200. The tax liability should be computed accordingly. Section 3176 of the Revised Statutes, as amended by section 1317 of the Revenue Act of 1918, provides in part as follows: * * * In case of any failure to make and file a return or list within*3642 the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner of Internal Revenue shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. * * * The petitioner filed no return for the year 1920 until one had been made for him by the deputy collector. We think that there was no reasonable cause for the delinquency and that the 25 per cent penalty provided for by the statute attached. Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50.