Milan v. Commissioner

M. A. MILAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Milan v. Commissioner Docket No. 21555. United States Board of Tax Appeals 16 B.T.A. 1112; 1929 BTA LEXIS 2449; June 21, 1929, Promulgated *2449 Where one sold in 1924 a tract of land on the installment plan, and where, after the sale was completed, he conveyed in trust one of the installment notes for the benefit of his wife and children, held that the vendor is entitled to report the transaction under the provisions of section 212(d) of the Revenue Act of 1926. Wallace Huntington et al.,15 B.T.A. 851, followed. Jesse I. Miller, Esq., and Douglas D. Felix, Esq., for the petitioner. E. W. Shinn, Esq., for the respondent. GREEN *1112 In this proceeding, the petitioner seeks a redetermination of his income-tax liability for the calendar year 1924, for which year the respondent has determined a deficiency in the amount of $12,536.52, of which amount only $11,577.19 is in issue. The controversy is as to the method of taxing the gain from a sale of real estate. The petitioner originally reported this gain on the return of capital basis. The respondent has determined that the notes were the equivalent of cash and has treated the transaction as completed in the year 1924, while the petitioner now contends that he is entitled to have his income from the above*2450 transaction computed on the installment basis. FINDINGS OF FACT. The petitioner is an individual, residing in Miami, Fla. During the year 1924 he sold lots 1, 2, 3, 5, and 6 of block 14, south, City of Miami, Fla., to one A. C. Converse, for an agreed price of $141,500. Petitioner received $29,000 of this amount in cash, two promissory notes being given for the balance of the sale price, one for $12,500, due in one year, and the other for $100,000, due in five years. The payment of both notes was secured by a first mortgage on the lots sold. The lots were situated in a residential section of Miami. Four of them were vacant, while the fifth was improved with a concrete block house, built in 1910, at a cost of $2,500, and to which $1,000 worth of improvements were later added. These lots in 1924 had some prospect of becoming business property, but they were not located at the junction of any important streets and any value which they might have had as future business locations was speculative. *1113 At the time the sale was made, the real estate market in Miami was inflated. The actual value of the lots was between $50,000 and $60,000. Converse, the purchaser, *2451 was reputed to be worth one million dollars. The notes received from the sale of this property were never sold, nor were they hypothecated as security for the borrowing of money. The petitioner, on May 10, 1924, executed and delivered a trust deed, transferring the $100,000 note, together with the mortgage securing the same, to the Biscayne Trust Co. of Miami, Fla., as trustee for the use and benefit of his wife and children, the wife being given a life estate, with the remainder over to the children at her death. It was provided that the corpus of the estate was to be divided equally between the children, free of trust, when they reached the age of twenty-five years. The transfer to the trustee was, in fact, a gift for the benefit of his wife and children. No payments have been made on the principal of the notes, and no interest has been paid on them since the year 1926, with the exception of small payments aggregating about $1,200. Taxes on the property have not been paid since 1925 or 1926. The notes were never offered for sale nor as collateral security. There was no market for notes secured by mortgages on unimproved property in Miami during the year 1924. The notes, *2452 on account of the value of the property which secured them, had at least a speculative value. The fair market value on March 1, 1913, of the property sold in 1924 was $25,000. The petitioner paid a commission of $7,075 on the sale of the property sold in 1924. The petitioner, in his original income-tax return, reported the sale as follows: 1924 Deferred Payment Sales & Real Estate 1. Deferred payment Sale: Sale of Flagler St. lots & home $141,500.00 Settlement: 1. 1st Mortgage due 5 yrs $100,000.00 2. Cash 29,000.00 3. 1st Mortgage note due 1 yr 12,500.00 141,500.00 2 and 3 used to reduce the basis 41,550.00 Bought about 1907. Value March 1, 1913 25,000.00 Realized Gross Gain in 1924 16,500.00 Commission for selling 7,075.00 Net Taxable Gain in 1924 9,425.00 *1114 The respondent computed the profit on the sale as follows: Selling price $141,500.00 Value March 1, 1913 $25,000.00 Commission on sale 7,075,00 32,075.00 Profit to be realized 109,425.00 OPINION. GREEN: The error assigned is that the respondent erred in not computing the income derived from the sale of the*2453 real estate in question in accordance with the provisions of section 212(d) of the Revenue Act of 1926 as retroactively applied by section 1208 of the same Act. Section 212(d) provides: 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 return as income therefrom in any taxable year that proportion of the installment payments 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*2454 the purchaser during the taxable period in which the sale or other disposition is made. (Italics supplied.) The respondent contends: (1) That the facts as proven do not meet the requirements of section 212(d), in that the record is not clear on the fact whether the petitioner sold or hypothecated the $12,500 note during 1924; that the burden was upon the petitioner to show that the "initial payments" received during the taxable period did not exceed one-fourth of the purchase price; and that he had failed in his prooof, and (2) that even though the sale did meet the requirements of an installment sale, as provided in section 212(d), supra, the petitioner, by disposing of the $100,000 note in the manner set out in our findings, voluntarily barred himself of the right to return the income from the sale in accordance with the installment method provided in section 212(d), supra, in that such method would no longer reflect the true income of the petitioner, and that, although section 44(d) of the Revenue Act of 1928 was not retroactive, it was, nevertheless, declaratory of the basis to be applied in determining the petitioner's true income for the taxable year in question. *2455 The record does not support the respondent's first contention. On direct examination, the petitioner testified that he did not receive any cash during 1924, other than the $29,000. On cross-examination, he said: "I am sure I did not receive anything but the $29,000 that *1115 year (1924)," and on redirect examination, he further testified that he "did not hypothecate it (note for $12,500) in 1924 or any other year." We have found as a fact that the only "cash or property other than evidences of indebtedness of the purchaser" received by the petitioner during the year 1924 was the $29,000 in cash. This amount does not exceed one-fourth of the purchase price. We are, therefore, of the opinion that in accordance with sections 212(d) and 1208, supra, the income from the sale may be returned on the basis and in the manner prescribed in section 212(d), which amounts to 109,425/141,500 of $29,000, or $22,426.33. See , and . The arguments in support of the respondent's second contention have already been answered by us in the recent case of *2456 , the salient facts of which are practically on all fours with the facts in the instant case. What we said there is controlling here. The deficiency, if any, should be recomputed by including as income from the sale in question for the taxable year 1924, the amount of $22,426.33 instead of $109.425. Judgment will be entered under Rule 50.