Carolina Light & Power Co. v. Commissioner

CAROLINA LIGHT AND POWER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Carolina Light & Power Co. v. Commissioner Docket No. 43005. United States Board of Tax Appeals 23 B.T.A. 140; 1931 BTA LEXIS 1921; May 11, 1931, Promulgated *1921 The petitioner in 1905 purchased a piece of real estate for $2,500 for the purpose of erecting an ice plant on it, in the event the drilling of a well thereon would supply sufficient water. A well was drilled thereon, proved a failure, was capped, never used, added no value to the real estate, and the project of erecting the ice plant was in the same year abandoned, the cost of drilling the well being then ascertained to be $5,396.99. In 1916 petitioner made an agreement with one Carroll to sell the property to him for $1,500, of which $150 was to be paid cash, the same amount in one year, and the balance in two years, the prospective purchaser to have possession of the property, pay the taxes thereon, together with interest on deferred payments, but in the event of his failure to make payments when due the agreement was to become "void and of no effect." Carroll made the cash payment and also the one-year payment, but did not fully comply with his agreement and in December, 1925, with his consent, the petitioner sold and conveyed the property to one Thomas for $1,883.06, the amount of the balance due, computed on the basis of the Carroll agreement. Held: (1) That the cost*1922 of drilling the well, $5,396.99, in 1905 was a loss, so ascertained in that year and not, therefore, a deductible loss in 1925, when the property was sold to Thomas. (2) That the cost of the property to petitioner in 1925 was only $2,200, $300 having been received on the proposed sale to Carroll, and when it sold the same to Thomas for $1,883.06, it sustained a deductible loss of the difference, $316.94. Francis J. Sweeney, Esq., for the petitioner. Philip A. Bayer, Esq., for the respondent. SEAWELL *141 The Commissioner determined a deficiency in income tax for the year 1925 in the amount of $701.61, in arriving at which he, in his amended answer, asserts he erroneously allowed as a deduction from gross income an alleged loss of $1,000 claimed by petitioner to have been sustained by it in 1925 in connection with the disposition in that year of certain real estate in Aiken, S.C. The issue is whether or not the petitioner sustained any loss and the amount thereof, if any, which is deductible for income-tax purposes, upon the sale in 1925 of said real estate. The facts are stipulated and substantially as follows. FINDINGS OF FACT. *1923 The petitioner is a corporation organized under the laws of South Carolina with its principal office at Augusta, Ga. It is engaged in the business of generating and distributing electrical energy. In 1905 the petitioner purchased a piece of real estate, consisting of land with a dwelling thereon, in Aiken, S.C., at a cost of $2,500. This property was purchased for the purpose, and with the intention, of erecting thereon an ice plant. The property was located within the city limits of Aiken, and the city water system was available for ordinary purposes, but was not sufficient for the requirements of an ice plant. Immediately after the purchase in 1905 the petitioner had a well sunk on the property in an endeavor to obtain the quantity of water necessary to operate an ice plant. The petitioner expended in drilling the well an amount of $5,396.99. In 1905 the sinking of the well was determined to be a failure as the amount of water obtainable from the well was small and was insufficient for the requirements of an ice plant. The well was, accordingly, capped in 1905 and has never been used. As sufficient water was not obtainable, the petitioner in 1905 abandoned the project*1924 of erecting an ice plant on the property. The well on the property did not increase the value of the property. The fair market value of the property on March 1, 1913, was not in excess of $2,500. *142 On April 25, 1916, the petitioner as the party of the first part and Louis Carroll as party of the second part entered into a contract relative to the above property, which contract provided that the party of the first part agrees to sell to the party of the second part the property in question and the party of the second part agrees to pay to the party of the first part, its successors or assigns, fifteen hundred and no/100 dollars as purchase money for the above lot, as follows: One Hundred and Fifty Dollars on signing and delivery of this agreement; One Hundred and Fifty Dollars one year from this date, and the balance of Twelve Hundred Dollars two years from this date. All sums unpaid to draw eight per cent interest until paid in full. The party of the second part does agree to pay all State, County and City taxes assessed on this property after this date, and also all water rates. The party of the first part agrees to execute to party of the second part a*1925 full warranty deed when party of second part completes the payments. If the party of the second part fails to make the payments as they fall due then this agreement becomes void and of no effect. The said contract was recorded September 2, 1924, in Bond for Title, Book No. 1, in the office of the Clerk of the Court for Aiken County, S.C. Louis Carroll took possession of the property on April 25, 1916, and retained possession thereof until December 4, 1925, when B. S. Thomas took possession thereof. The petitioner opened and maintained an account on its books with Louis Carroll, which account, covering the period April 25, 1916, to November 20, 1925, shows that Louis Carroll made payments in connection with his contract of April 25, 1916, in the amount of $822.50, of which amount $300 was paid as first and second installments under said contract and $522.50 as interest and taxes thereunder, leaving a balance due under said contract, on November 20, 1925, of $1,883.06. On December 4, 1925, the petitioner executed a deed, conveying the land in question to one B. S. Thomas for and in consideration of the payment of the sum of $1,883.06. On the same date, December 4, 1925, and*1926 attached to the same instrument of conveyance, Lewis Carroll duly executed the following: CANCELLATION OF BOND FOR TITLE I, Lewis Carroll, for valuable consideration to me paid do hereby deliver up and cancel a certain bond for title and agreement and contract to sell the within described property executed in my favor by Carolina Light and Power Company on the 25th day of April, 1916, and I do consent to the making of the within deed to B. S. Thomas my rights under said bond for title having terminated. In arriving at the deficiency in income tax of $701.61, the Commissioner allowed as a deduction from gross income an amount of *143 $1,000, being the difference between the original cost of the real estate in 1905 and the selling price of same as set forth in contract with Louis Carroll dated April 25, 1916. Louis Carroll is the same person as Lewis Carroll. OPINION. SEAWELL: The petitioner, in 1905, drilled a well on its land at Aiken, S.C., at a cost of $5,396.99. The sole purpose in drilling the well was to obtain water in sufficient quantity to operate an ice plant. The well proved to be a failure, was capped in the same year, and the ice plant project*1927 was then abandoned. The petitioner contends that the cost of drilling the well should be added to $2,500, the original cost of the land, in order to ascertain the profit or loss (under section 204(b) of the Revenue Act of 1926) realized when the land was sold. The drilling of the well should not be added to the cost of the land; it was a business enterprise and when abandoned was a loss to the petitioner in the year of abandonment. . It could not, therefore, affect income for either 1916 or 1925. The petitioner contends there was no consummated sale of the land in 1916, when it and Louis Carroll entered into the contract of sale and purchase denominated a bond for title. With this contention we agree and hold with the petitioner. There is a wide difference between a deed for land and a title bond. The one is the evidence of an executed contract, the other is the evidence of an unexecuted contract; the former is evidence that a sale has been made, the latter that a sale is to be made; the one is a sale, and the other a contract for a sale. *1928 Moseby v. Partee, 5 Heisk. (Tenn.) 30; ; . See also ; ; . But under this contract for sale and purchase Carroll paid the petitioner $300 in addition to certain interest and taxes. This amount of $300 reduced the original cost of the land, $2,500, to the petitioner to the sum of $2,200. Under the stipulated facts Louis Carroll surrendered his bond for title and contract, and consented to the making of a deed by the petitioner to one B. S. Thomas in 1925. Upon the execution of the deed to Thomas the petitioner received the sum of $1,883.06, which subtracted from the $2,200, the remaining cost of the property in the hands of the petitioner, leaves $316.94, the amount of the petitioner's loss in the transaction in that year. Judgment will be entered under Rule 50.