Elmore v. Commissioner

J. W. ELMORE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Elmore v. Commissioner Docket No. 16031. United States Board of Tax Appeals 15 B.T.A. 1210; 1929 BTA LEXIS 2702; April 2, 1929, Promulgated *2702 1. The fair market value of a farm acquired prior to March 1, 1913, determined as of that date. 2. Petitioner held not entitled to return income from sale of farm in 1921 on the installment basis, the sale being a completed one in 1921, and more than one-fourth of the sale price being received in the initial payment. Elwood Hamilton, Esq., for the petitioner. Harry LeRoy Jones, Esq., for the respondent. LITTLETON *1210 The Commissioner determined a deficiency in income tax of $2,299.75 for 1921. FINDINGS OF FACT. The petitioner is a resident of Lancaster, Ky. May 17, 1920, he entered into a written contract with E. G. Creech, as follows: This agreement or contract of sale made this May 17, 1920, by J. W. Elmore, 1st party and E. G. Creech, 2nd party, viz; 1st J. W. Elmore has sold his farm of 105 acres on the west side of the Lancaster & Hubble pike adjoining land of J. W. Sweeney on North; W. E. Moss on West and H. B. Cox on South and Lancaster & Hubble pike on East side; to E. G. Creech for the sum of ($32,500.00) thirty two thousand and five hundred dollars, to be paid as follows: Two hundred dollars cash in hand paid*2703 receipt of which is hereby acknowledged. $18,000.00 to be paid on January 1, 1921, the balance, $14,300.00, to be paid in three equal installments for which notes with lien on said farm with usual maturity clause will be given. $4,766 2/3 due January 1, 1922; $4,766 2/3 due January 1, 1923; and $4,766 2/3 due January 1, 1924, bearing 6% from January 1, 1921 - each. Full possession will be given January 1, 1921, when deed will be made. Usual seeding privilege given in Fall of 1920, and all the tobacco sticks used on said farm to go with the farm, also tenant house now being built must be finished as intended and farm to be handled by Ed. Elmore during balance of 1920 as usual. The $200 mentioned in the contract was paid, but when January 1, 1921, arrived, E. G. Creech stated he could not purchase the farm and make payments as previously agreed, as a result of which the contract was materially modified and deed made to Creech in accordance with such modification, the only portion of such modification necessary to be here considered being in substance as follows: The total consideration to be paid petitioner by Creech for the farm purchased to remain at $32,500; the sum of $3,521.24*2704 to be paid in cash and the further sum of $14,478.76 paid by the transfer and assignment by Creech to petitioner of four promissory notes, each *1211 for $3,619.69, dated January 1, 1921, and executed by G. B. Swinebroad, and payable to E. G. Creech in one, two, three, and four years, respectively, from their date, each of said notes bearing interest at the rate of 6 per cent per annum, payable annually from their date until paid, which notes were executed as deferred payments on a 60-acre farm in Boyle County, Ky., conveyed by Creech to Swinebroad, a lien being retained in the deed to secure the payment of said notes. The notes were further secured by a lien retained on land conveyed by petitioner to E. G. Creech. The remaining sum of $14,500, balance of consideration to be paid petitioner by Creech, was evidenced by three promissory notes of Creech dated January 1, 1921, each note for the sum of $4,833.33 1/3 due and payable to petitioner one, two, and three years, respectively, from their date, bearing interest at the rate of 6 per cent per annum, payable annually, until paid, with a lien retained on the property conveyed to secure the payment of said notes; said notes*2705 also contained the usual maturity clause that if any note or interest should not be paid when due, then each and all of said notes due, at once to become due and payable, and the lien therefor enforceable. All the deferred payment notes, with the exception of a small amount of interest, were paid prior to or in 1923. The 105.3-acre farm sold Creech was bought by petitioner in 1909 for $85 an acre. Petitioner, between that date and March 1, 1913, expended $4,000 for improvements thereon. The farm was in good condition on March 1, 1913, and on that date the fair market value of the farm was $150 an acre, or $15,795. Shortly after May, 1920, there was a substantial decline in the market price or value of farm lands in the vicinity of the land here involved, due to a great decline in the price of tobacco, which was the principal product of farms in that locality. The notes executed by Swinebroad, endorsed by Creech and received by petitioner as part payment for the farm sold Creech had a readily realizable market value when received by petitioner of 50 per cent of their face value. The notes executed by Creech and received by petitioner in the of $14,500 had a readily*2706 realizable alue when received by petitioner of 75 per cent of their face value. OPINION. LITTLETON: The evidence convinces us that the fair market value of petitioner's farm on March 1, 1913, was $150 an acre, or a value of $15,795, as found by the Commissioner. Determination of the Commissioner on this point is approved. *1212 The petitioner insists that the Commissioner erred in not treating the sale and transfer of his farm to Creech as an installment sale. He states it would undoubtedly be such but for the fact that the Swinebroad notes endorsed by Creech were turned over to petitioner as part consideration for the transfer. With this declaration we agree. He contends, however, that the Swinebroad notes endorsed and transferred to him in payment of a part of the purchase price were the obligations of Creech, the purchaser, and did not properly constitute any part of the initial payment in the sense of section 212(d) of the Revenue Act of 1926, which provides as follows: (d) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may*2707 return as income therefrom in any taxable year that proportion of the installment payment actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. 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. Section 1208 of the Revenue Act of 1926 makes the above section retroactive. The petitioner received only $3,521.24 in actual cash and if that was all that should be considered as constituting the "initial payment" he received, the transaction would clearly be an installment sale. He, *2708 however, also received the four lien notes for $3,619.69 each, made by G. B. Swinebroad and given Creech as deferred payments on a farm of 60 acres valued at $18,000, which had been purchased from Creech, and these notes had at the time a readily realizable market value of $6,739.38. In the opinion of the Board, these notes can not properly be classed as "evidences of indebtedness of the purchaser," Creech, in the sense in which "evidences of indebtedness" is used in the statute. They were evidences of indebtedness of Swinebroad to Creech but they were property transferred to petitioner as part of the initial payment for the farm. Creech assumed no existing indebtedness on the farm he bought of petitioner. He neither assumed nor paid as part consideration any debt of petitioner. He simply paid part in cash and got petitioner to accept as part of the initial payment, notes of Swinebroad which were "property other than evidences of indebtedness of the purchaser during the taxable period on which the sale" was made. The necessary elements to constitute the transaction *1213 an installment sale are lacking, and the Commissioner was not in error. Petitioner's farm and*2709 the farm of Creech were sold at inflated prices and when the deed and notes as to each were executed and delivered in January, 1921, the value of farms had greatly depreciated and land lien notes were numerous in petitioner's vicinity, with few buyers. The lien notes made by Swinebroad and accepted by petitioner had, at the time received, the readily realizable values heretofore indicated in our findings of fact. The initial payment consisting of $3,521.24 in cash and the Swinebroad notes amounting, face value, to $14,478.76 and having a readily realizable value of 50 per cent of their face value, or $6,739.38, exceed one-fourth of the purchase price of petitioner's farm and the transaction is not, therefore, an installment sale within the purview of the statute. Judgment will be entered under Rule 50.