Giffin v. Commissioner

MRS. E. A. GIFFIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Giffin v. Commissioner Docket No. 37933. United States Board of Tax Appeals 19 B.T.A. 1243; 1930 BTA LEXIS 2247; May 28, 1930, Promulgated *2247 INSTALLMENT SALE OF REAL ESTATE. - Where real estate was sold by one not a dealer and the profit reported on the installment method, the expenses incident to the sale serve to reduce the selling price in determining the profit to be realized, thus being spread over the same period as the installment payments, and are not deductible in full in the year of sale. Douglas D. Felix, Esq., for the petitioner. Arthur H. Murray, Esq., for the respondent. ARUNDELL *1243 The deficiency in income tax of $379.55 for the year 1925, as determined by the respondent, arises out of the difference in methods used by petitioner and respondent in computing the taxable profit from the sale of real estate, which sale was reported by petitioner as an installment sale. Respondent disallowed claimed deductions of a broker's commission, stamp taxes, and abstract fees as deductions from the initial payment received and added the amount claimed to the cost of the property sold. The facts were stipulated. FINDINGS OF FACT. In 1925 the petitioner sold an undivided one-fourth interest in lot 7, block 42 north, City of Miami, to one C. A. Gwinn, an undivided one-half*2248 interest in said lot to said Gwinn as trustee for the State Life & Realty Co., an Ohio corporation, and an undivided one-fourth interest in said lot to E. F. Kimmel, of Dayton, Ohio, for a total contract sale price of $85,000. Title to said real estate was transferred by petitioner to the said purchasers in the year 1925 by a general warranty deed. Petitioner received $21,250 of the sale price in cash in the year 1925, but no part of the balance of the purchase price, to wit, $63,750, was due, payable, or paid to the petitioner in that year. The balance of the purchase price, to wit, $63,750, was represented by three promissory notes, one each maturing in the years 1926, 1927, and 1928, and the payment of said notes was secured by a first mortgage on the above-described land, which mortgage and notes were made and delivered by the purchaser to the petitioner in the year 1925. The petitioner expended $101.15 in 1925 for revenue stamps and abstract fees incident to and in connection with the sale of the above-described real estate. The petitioner contracted to pay and paid a commission of $4,250 to one W. J. Brown, a real estate broker, in the year 1925, for and in consideration*2249 of services rendered by said broker in negotiating the sale of the aforesaid real estate. Said services were the sole consideration for the payment of the said sum, and the services were *1244 completely performed in 1925 when title to the land was conveyed to the purchasers by petitioner and payment was made to petitioner in the sum of $21,250, and the promissory notes and the mortgage were delivered to the petitioner as aforesaid for the deferred payments, aggregating $63,750. The contract between the petitioner and the real estate broker unher which the commission was paid was completely performed in the year 1925. The liability of petitioner to pay the broker his commission was not in any respect contingent upon the abovementioned promissory notes, representing the deferred payments, being paid, and in the event of default in the payment of said deferred payment notes petitioner had no claim whatsoever for the recovery of any part of the commission paid to the broker in the year 1925. The commission paid was reasonable in amount. The cost of the real estate to petitioner was $8,052. The petitioner did not keep books of account during the year 1925, and she*2250 reported her income for said year on the cash receipts and disbursements basis. She computed the profit on the sale as follows: Contract sale price $85,000.00 Cost 8,052.00 Total profit to be realized (90.5271%) 76,948.00 Initial payment $21,250.00 Deferred payments 63,750.00 85,000.00 90.5271% of initial payment ($21,250.00) 19,237.00 Less: Commissions paid $4,250.00 Revenue stamps 85.00 Abstracts 16.15 4,351.15 Taxable profit 1925 14,885.85 The respondent computed the profit as follows: Contract sale price $85,000.00 Cost $8,052.00 Commission 4,250.00 Revenue stamps 85.00 Abstract 16.15 12,403.15 Total profit to be realized (85.408 1/17% 72,596.85 85.408 1/17% of $21,250.00 (initial payment) $18,149.21 Income per taxpayer's method $14,885.85 Income per Commissioner's method 18,149.21 Difference (proposed additional income) 3,263.36 The petitioner was not a dealer in real estate in 1925. *1245 ARUNDELL: In addition to the facts stipulated by the parties, they also stipulated that: The sole question to be decided by the Board is whether the commission*2251 of $4,250 and other selling expenses amounting to $101.15 paid by petitioner in 1925 is [are?] deductible in the year paid or whether the said commission and other selling expenses aforesaid should be prorated over the life of the installments. The question here presented arises under section 212(d) of the Revenue Act of 1926, which gave legal sanction to the installment sales method of reporting income and which was made retroactive by section 1208 of the same act. See Blum's, Incorporated,7 B.T.A. 737, for a review of the history of this method of returning income. Section 212(d) as far as material here 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 * * * of a sale or other disposition of real property, if * * * the initial payments do not exceed one-fourth of the*2252 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. There is no controversy between the parties as to whether the commission and other expenditures in connection with the sale ought to serve to reduce the profit. They agree that it should, but the petitioner asks for the reduction in toto in the year of the sale, while by the respondent's method of computation it is spread over the period during which additional payments on the property are to be received. Petitioner contends that the commission paid to the real estate broker is a current expense. As a matter of accounting that may be so, but that does not necessarily make it a deductible item for tax purposes. The taxing statute does not recognize as deductions all things that may be labeled by the bookkeeper as expenses. In Blum's, Incorporated, supra, we held that the taxpayer was entitled to deduct in full all "the expenses, allowances, and losses" (with an exception not here important) which are enumerated in sections 214 and 234 and which were paid or*2253 incurred or paid or accrued within the taxable year. The sections mentioned, one of which applies to individuals and the other to corporations, both provide for the deduction of "All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *." (Italics supplied.) As it was stipulated that this petitioner was not a *1246 dealer in real estate, it is plain that the commission paid was not an expenditure made in carrying on a trade or business and she is not entitled to deduct the payment as a statutory expense. Under section 212(d), supra, the amount to be returned as income is that proportion of the payments received "which the total profit realized or to be realized when the payment is completed bears to the total contract price." The parties are in agreement on the total contract price which was $85,000. They differ on what is meant by the words "total profit realized or to be realized." Does this phrase mean merely the excess of selling price over cost, or is it necessary to make an adjustment for selling costs to arrive at the "total profit"? In the present case was petitioner's total profit realized*2254 or to be realized, $76,948 (selling price, $85,000, less cost, $8,052), or was it $72,596.85 (selling price, $85,000, less cost of $8,052 and selling costs of $4,351.15)? In our opinion it was the latter. It seems to us that the words "to be realized" requires us to look ahead to the end of the period during which payments are to be made and when we do this it is plain that the total profit can not be arrived at by any other method than by reducing the sale price by the amount of selling costs. A more accurate set-up might be produced by deducting the selling cost directly from the sale price than to place such costs in the same column as the cost of the land, as appears to be the respondent's practice, but the result is the same either way. In his published rulings the respondent recognizes expenses incident to the sale in cases of this sort as an "offset" to the sale price and not as a part of the cost of the land. See I.T. 2305, C.B. V-2, p. 108; I.T. 2340, C.B. VI-I, p. 43. In at least two previous cases, Dalriada Realty Co.,5 B.T.A. 905, and *2255 Hannibal Missouri Land Co.,9 B.T.A. 1072, involving the same question as does this case, in which the respondent used the same method of computation, we approved the result. The effect of this method of computation is that in cases where the taxpayer elects to project the profit realized into years beyond that in which the sale is made, the expenses incident to the sale are taken into account over the same period of time. This seems to us to be the result intended by the law, and upon careful consideration of the question we think the decision announced in the above cases was sound and we adhere to it in the present proceeding. Reviewed by the Board. Decision will be entered for the respondent. STERNHAGEN: The charging off of the commissions, etc., in the first year, whether by their subtraction from the total sale price or by their addition to the cost, seems to me to be incorrect and in conflict *1247 with the view which the Board, after extended consideration, adopted in Bonwit Teller & Co.,17 B.T.A. 1019; *2256 Julia Stow Lovejoy,18 B.T.A. 1179; James M. Butler,19 B.T.A. 718; and Central Bank Block Association,19 B.T.A. 1183. Mathematically, the result may be the same, but the clash of principle seems to me apparent. The installment method is that of spreading sale profits over more than one year. There is no essential difference for the purpose of a true reflection of income between a transaction yielding periodic income called rent and one yielding periodic income called installments of profit; and if the initial outlay made to bring about the income-producing lease should, as the Board has held in the above cited cases, be spread (and see Anahma Realty Co. v. Commissioner, 42 Fed.(2d) 128, so should the outlay made to secure the annual profit-producing sale. The balance between the coming in of profits and the going out of costs which prompted the recognition of the installment basis of taxing income compels the spreading of the related commissions and other charges.