Bourne v. Commissioner

LOUIS M. BOURNE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bourne v. Commissioner Docket No. 46326. United States Board of Tax Appeals 23 B.T.A. 1288; 1931 BTA LEXIS 1734; August 12, 1931, Promulgated *1734 Leon F. Cooper, Esq., for the petitioner. O. J. Tall, Esq., for the respondent. VAN FOSSAN *1288 This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1926, in the sum of $1,047.08. *1289 The petitioner alleges the following errors on the part of the respondent: (1) Failure to allow a deduction of $1,200 as the cost of hospital and medical attention necessitated by an attack of arthritis in 1926. (2) The inclusion of the sum of $2,772.93 in the petitioner's share of income of the partnership of Bourne, Parker & Jones, the said amount not having been received by the petitioner individually. (3) The inclusion of $5,000 received by the petitioner on account of a sale of real estate made in November, 1925. (4) The improper valuation of certain real estate consisting of 88 acres, as of March 1, 1913, the property having been acquired prior thereto and sold in 1925 on the installment basis. At the hearing the respondent, by proper motion, raised the following issue in the alternative: (5) The 88-acre tract mentioned in the fourth allegation of error was acquired by the petitioner*1735 on March 8, 1913, instead of February 14, 1913, as alleged by the petitioner. FINDINGS OF FACT. The petitioner is a resident of North Carolina where he has practiced law for over 40 years. From about May 1, 1926, to late in October of that year the petitioner was incapacitated by reason of an attack of arthritis in the left knee. During that time he did not participate in the affairs or business of the law firm of which he was a member. Much of the time was spent in Johns Hopkins Hospital. During 1926 he expended for hospital and medical care about $1,400, for which he was not compensated or reimbursed by insurance or otherwise. During 1926 the petitioner practiced law as a member of the partnership of Bourne, Parker & Jones. The firm was formed in 1920 under an oral agreement that Jones was to receive 25 per cent of the net profits and Bourne and Parker were to divide the remainder equally. After the first two years the three partners were to share the profits and losses equally. The partnership was terminated as of October 31, 1930. The firm maintained a bank account and expenses were generally paid from it. They were met by contributions from each partner. Frequently, *1736 however, the individual partners paid firm bills and reported such payments. The partner collecting a fee would make a note thereof in his private book and use the money if he wanted it. No regular books were maintained by the partnership but a "sort of a book" was kept by it. It was the custom and practice for each partner to report each year, usually in February or March, the monies and fees received by *1290 him, the books of the partnership being adjusted with such reports thereof. No settlements between the partners were made. In 1926 an equal division of profits was contemplated but not made. No complete adjustments had been made at the date of hearing, December 15, 1930, in order to give full effect to the partnership agreement. The petitioner actually received $5,234.85 in fees collected by him for the partnership. The sum of $2,772.93 found by respondent was the difference between that amount and one-third of the total net profits of the firm. On November 24, 1925, the petitioner entered into an agreement with Fred L. Seeley for the sale of 125 acres of land in Chunn's Cove, about a mile east of Asheville, N.C., at the price of $200,000, out of which the*1737 petitioner was required to pay $10,000 as commission. At this time there was a pronounced boom in real estate in the vicinity of Asheville. On November 25, 1925, Seeley gave the petitioner a check for $5,000 as "earnest money." The check was issued by Grove Park Inn, Inc., of which Seeley was manager, and bears the notation "In part payment Happy Valley Farm, Chunn's Cove." The petitioner and his wife executed a deed dated November 24, 1925, to Grove Park Inn, Inc., conveying the said 125 acres, more or less. The deed was acknowledged December 4, 1925. The sale was subject to the approval of title by the grantee's attorneys. The title was approved and the deed was delivered in January, 1926. An additional $20,000 was then paid. Grove Park Inn, Inc., and F. L. Seeley executed nine mortgage notes aggregating $175,000, dated November 24, 1925, and bearing interest from that date. Lewis Maddux died in 1906 or 1907. His will designated Dr. H. C. Sexton of Indiana as testamentary trustee for Loretta Maddux, wife of the decedent. During that year Sexton encountered considerable dissatisfaction on the part of the heirs because of the way he handled an unproductive tract of 88 acres*1738 located in Chunn's Cove, about a mile east of Asheville, and included in the 125-acre tract sold by the petitioner to Seeley as above mentioned. A local insurance and real estate dealer advised him to sell the 88-acre tract for $3,000. Petitioner, who was attorney for Sexton, the trustee, and also for Mrs. Maddux, executrix of her husband's estate, offered to buy the land for $5,000 if the trustee could not effect a more profitable sale. About February 1, 1913, Sexton and Mrs. Maddux executed a deed conveying the said tract to the petitioner in consideration of $5,000 cash. The deed was acknowledged by Sexton and Mrs. Maddux on February 20, and February 22, 1913, respectively. It was recorded on March 8, 1913. On February 14, 1913, the petitioner executed a deed of trust covering the said 88-acre tract to secure a loan of $5,000 evidenced by three notes, "all of *1291 said notes being for the purchase money of the lands herein described." The deed of trust was acknowledged and recorded on March 8, 1913. The 88-acre tract belonging to the Maddux estate was situated at the eastern limits of Asheville, about three-quarters of a mile from Public Square in that city. Two*1739 good country roads passed through the property. About 73 acres were cleared of timber. Two small frame houses and a cattle barn were on the property. The acreage was not uniform in value. Since 1888 it had been remored that a tunnel would be built through the mountain, emerging in the vicinity of the Maddux land. The tunnel was not actually constructed until 1927 or 1928. On March 1, 1913, the land comprising the 88-acre tract was farm land and part of it had a potential value for speculative development as a residential section. Such development would have involved the expenditure of much money and time within which to work it out. By March 1, 1913, some demand for small farms had developed. No sales of property in Chunn's Cove were made on or about March 1, 1913, except the one to the petitioner. Land in the vicinity of Chunn's Cove increased greatly in value subsequent to March 1, 1913, and very rapidly in the years 1922 and 1923. The average fair market value per acre of the 88-acres of land on March 1, 1913, was $100. The petitioner kept his books on the cash receipts and disbursements basis. The deficiency letter of the respondent dated September 18, 1929, is*1740 based on a cost of the 88-acre tract on February 14, 1913, of $5,000 and asserts that no greater value on March 1, 1913, had been proven. OPINION. VAN FOSSAN: The first issue arises from the claim of the petitioner to an allowance as a deduction of $1,200 paid by him as hospital and medical charges occasioned by an attack of arthritis. Section 214(a) of the Revenue Act of 1926 provides, in part, as follows: (a) In computing net income there shall be allowed as deductions: * * * (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business; (5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; but in the case of a nonresident *1292 alien individual only if the profit, if such transaction had resulted in a profit, would be taxable under this title. No deduction shall be allowed under this paragraph for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before*1741 or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed; (6) Losses sustained during the taxable year of property not connected with the trade or business (but in the case of a nonresident alien individual only property within the United States) if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise. The basis for determining the amount of the deduction under this paragraph, or paragraph (4) or (5), shall be the same as is provided in section 204 for determining the gain or loss from the sale or other disposition of property. The petitioner contends that sums spent as medical and hospital expenses are losses within the meaning of either subsection (4) or subsection (6) *1742 of section 214(a). He maintains that the practice of law is a "business" and that his talents and ability to earn constitute his "capital" and that, hence, any loss of capacity to earn due to disease or an accident is an impairment of capital. He maintains in the alternative that his illness was a casualty. Section 215(a) of the said act provides that: (a) In computing net income no deduction shall in any case be allowed in respect of - (1) Personal, living, or family expenses; * * * Petitioner has advanced no argument or theory that persuades us that this item does not fall within the inhibitions of the above section. The item is not a proper deduction. In his second allegation of error the petitioner claims that he is chargeable with only the amount he individually received from fees as a member of the law firm of Bourne, Parker & Jones and not with his one-third share of the total earnings of the partnership. Section 218(a) of the Revenue Act of 1926 provides as follows: (a) Individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive*1743 share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the taxable year upon the basis of which the partner's net income is computed. *1293 The petitioner admits that the partnership agreement under which he practiced law as the senior member of Bourne, Parker & Jones specified an equal division of profits during the years following 1922 and included the year 1926, but claims that this provision fell into disuse and that no adjustment had ever been made between members of the firm to give effect to the original agreement. It is evident that the firm did not keep its books on a strictly businesslike basis, but it is obvious that there were sufficient data from which a total partnership income of $24,053.24 in 1926 was calculated. Any irregularities in the firm's method of conducting its own affairs are matters to be settled by the members. *1744 We are not concerned with how inequalities in their incomes may be adjusted. Under the agreement admittedly in force during 1926 each member of the firm was entitled to one-third of the profits and his distributive share must be included in computing his income tax, whether actually distributed or not. The petitioner returned the sum of $25,000 as having been received during 1926 as the cash payment of 125 acres of land in Chunn's Cove, sold to F. L. Seeley. The record discloses that $5,000 of this amount was actually paid to petitioner as "earnest money" on November 25, 1925, and the remainder on January 19, 1926, when the deed to the property, dated November 24, 1925, was delivered by the grantor. The petitioner now claims that the $5,000 so received should have been included in his income-tax return for 1925 and consequently excluded from the computation of his income tax for 1926. Under the facts here we are of the opinion that the sale was not consummated until the delivery of the deed in January, 1926. The fact that the deed and mortgage notes bore date of November 24, 1925, is not determinative. All that had been done preceding that time was conditional and subject*1745 to being nullified by an adverse finding as to title. So far as we are informed the payment of $5,000 would have been repayable had the title been disapproved. Petitioner did not obtain the unconditional right to retain this sum until the delivery of the deed. It was properly included in 1926 income. We have found as a fact that the fair market value of the 88-acre tract of land acquired by the petitioner in 1913 was $100 per acre as of March 1, 1913. In arriving at this figure of value we have accorded to the opinion testimony of the several witnesses produced by petitioner such weight as we feel it was entitled to. These witnesses were not introduced as experts, but were permitted to express an opinion as that of one familiar with the property. These opinions, which were singularly uniform among the witnesses, were not supported *1294 by any theory or basis of computation and did not commend themselves as being entitled to much weight. They were not based on knowledge of sales. Similarly, because of differentiating factors, the evidence of other sales introduced by petitioner is not persuasive. Far more persuasive is the fact that petitioner, at approximately March 1, 1913, actually*1746 bought this land for $5,000. Petitioner had acted as attorney for both the trustee and the executrix. He occupied a position of confidence and trust with relation to the property. He was familiar with the property and, presumptively, with its value. To hold that on February 14, 1913, he bought from the very parties who placed him in this position of trust for $5,000 property which was actually worth some $43,000, as now contended by him, would be tantamount to finding him guilty of perpetrating a gross fraud on those who trusted him. Also persuasive is the corroborative fact that petitioner later bought contiguous or adjacent-lying land at figures fairly commensurate with the value found. When all the evidence is weighed and accorded such weight as it seems to merit, we are not persuaded that the land had on March 1, 1913, any such value as is asserted by petitioner. Where, subsequent to March 1, 1913, property has appreciated greatly in value, it is not easy for a witness to eject from his mind all consideration of such subsequent events and place himself fairly in the same position he occupied at the basic date for the purpose of valuing the property. In the instant case, *1747 when this is done and all pertinent factors are duly considered, we believe the value found represents the true fair market value. The respondent asserts as an alternative issue that the sale of that tract to the petitioner was made on March 8, 1913, and bases his contention on the fact that a deed of trust securing the purchase money was acknowledged and recorded on that date. The deed from Sexton and Mrs. Maddux to the petitioner was dated February 14, 1913, and acknowledged by them on February 20, and February 22, 1913, respectively. No date of delivery was proved. The formal recordation of a deed does not determine the date of sale of the property it conveys. Nor is the date of the acknowledgment of a mortgage, given to secure money borrowed to purchase the property, conclusive of the date on which the money was actually borrowed. We are of opinion that respondent has not established his contention as to this issue, the burden of proving which rested on him. Judgment will be entered under Rule 50.