Boca Ceiga Dev. Co. v. Commissioner

BOCA CEIGA DEVELOPMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Boca Ceiga Dev. Co. v. Commissioner Docket No. 40446. United States Board of Tax Appeals 25 B.T.A. 941; 1932 BTA LEXIS 1447; March 22, 1932, Promulgated *1447 1. Upon the evidence, held, that petitioner's books of account were kept and its income-tax returns filed on the basis of actual receipts and disbursements. 2. The respondent's disallowance of amounts alleged to have been accrued as commissions upon real estate sales sustained. 3. Where petitioner received shares of its capital stock as the initial payment upon an installment sale of real estate, it realized no gain in the acquisition of this stock. Houston Brothers Co.,21 B.T.A. 804, followed. Edward J. McGrath, C.P.A., for the petitioner. James K. Polk, Esq., and Harold Noneman, Esq., for the respondent. SMITH *941 The Commissioner determined deficiencies in the petitioner's income tax of $4,084.17 for the fiscal year ended February 28, 1926, and $2,323.68 for the fiscal year ended February 28, 1927. The petitioner alleges that the Commissioner erred (a) in holding that it kept its books and reported its income upon the basis of cash receipts and disbursements; (b) in refusing to allow the deduction of alleged compensation for services rendered; and (c) in determining that the amount of the initial payment*1448 upon an installment sale of real estate was $48,000, the par value of certain shares of petitioner's stock received by it in the transaction. *942 FINDINGS OF FACT. The petitioner is a Florida corporation with its principal office at 607 Penfield Building, Philadelphia, Pennsylvania. During the taxable years under consideration, the petitioner dealt in Florida real estate. The petitioner's books of account consisted of a "day book" and a "ledger," that were in the form of single entry books of record. These books contained records of cash receipts and disbursements and memorandum entries of mortgages and notes receivable and payable. On its returns for the fiscal years ended February 28, 1926, and February 28, 1927, petitioner answered "Yes" to the question, "Is this return made on the basis of actual receipts and disbursements?" with the following notation on the earlier return: "but with small annuals for taxes on properties unsold." The items of gross income and deductions shown on the return for the fiscal year ended February 28, 1926, were as follows: Gross Income Interest on Bank Deposits, Notes, Mortgages, and Corporation Bonds $21,973.80 Profit from Sale of Real Estate, Stocks, Bonds, and other Capital Assets 70,827.78 Total Income 92,801.58 Deductions Interest $15,584.00 Other deductions: Miscellaneous Expenses (Trav. etc.) 5,468.10 Legal Services $2,630.00 Advertising 3,970.21 6,600.21 Recording deeds on properties sold, etc. 1,827.70 Total deductions 29,480.01 Net Income 63,321.57 *1449 The items of gross income and deductions shown on the return for the fiscal year ended February 28, 1927, were as follows: Gross Income Interest on Bank Deposits, Notes, Mortgages, and Corporation Bonds $28,967.97 Profit from sale of Real Estate, Stocks, Bonds, and other Capital Assets 25,014.33 Total Income 53,982.30 Deductions Interest $14,696.38 Taxes 3,549.03 Other deductions: Miscellaneous expenses $1,794.87 Commission 2,500.00 4,294.87 Legal services 5,400.00 Recording, etc. 237.90 5,637.90 Total deductions $28,178.18 Net Income 25,804.12 *943 The deductions appear upon petitioner's books as expenditures in the respective years. The following is a copy of the minutes of "A Special Meeting Of The Stockholders Of The Boca Ceiga Development Company," held March 25, 1925: Mr. Ingoldsby made a general report to the stockholders as to conditions in Florida and that there was every indication of the company making large profits on its investments. He told of the number of sales his office was making and that they were doing a very large business, and that now with the prospect*1450 of the Company making profits there should be some arrangements made for compensation to the officers who were doing all the work and not receiving any compensation. After some discussion, it was moved by Mr. Linton and seconded by Mr. Oliver that 10% of the profits of all the St. Petersburg properties be paid to Mr. Ingoldsby; 10% of all the profits on all Florida properties be paid to Mr. Abernethy and 5% of all the profits on all the Florida properties to be paid to Mr. Herrmann as compensation for their services. Commissions upon the sale of petitioner's real estate were earned as and when a sale was closed. On October 5, 1926, $2,500 was paid to S. C. Abernethy and entered upon petitioner's "day book" as follows: "Commissions &c paid S.C.A. - a/c serv. & cs. 2500." This item appears in petitioner's "ledger" under "Commissions and Fees due Officers," which account was closed out to profit and loss at the close of the fiscal year, February 28, 1927. No other commissions for the officers mentioned in the above minutes were paid or credited to them, or accrued upon the petitioner's books during the years under consideration. Petitioner's estimated gross profits upon sales*1451 of real estate in the fiscal years ended in 1926 and 1927 were $302,763.78 and $2,258.33, respectively. In addition to the $2,500 paid to S. C. Abernethy, petitioner claims deductions of $52,414.57 and $4,838.74 for commissions as compensation *944 for services actually rendered during the fiscal years ended in 1926 and 1927, respectively. On October 30, 1925, petitioner sold to J. H. Inglesby, one of its then stockholders, a tract of Florida land designated as Lake Maggiore for a gross consideration of $504,000. The Commissioner computed the realized profit upon the installment sales basis, as follows: Sale price: Mortgage $384,000.00 Mortgage assumed by vendee 42,000.00 Stock of taxpayer corporation at par value also fair market value 48,000.00 Notes receivable ($30,000.00, no market value) Total sale price exclusive of notes 474,000.00 Cost 199,448.29 Profit 274,551.71 Sale price 474,000.00 Less: Mortgages assumed by vendee 42,000.00 Amount to be paid by vendee 432,000.00 Percentage of profit, $274,551.71/$432,000 = 0.63553. Initial payment 48,000.00 Profit realized 30,505.44 OPINION. SMITH: The petitioner contends that*1452 its "books were kept substantially on the accrual basis, as evidenced by the fact that there are entries there for bills receivable, mortgages receivable, accounts payable and notes receivable." The books were submitted in evidence, and these have been carefully examined in the light of the returns filed. While there appear to be accounts designated as "receivable" and "payable," such accounts appear merely as memorandum records of such items as mortgages and notes and there do not appear therein accrued items of income and expenses, as the case may be, as such for either of the years before us. Much of the testimony in support of petitioner's contention that its books were on the accrual basis related to transactions of years not before us, but even then the items referred to were not shown to have been accrued as income or expense of the particular years. In other words, petitioner's books do not clearly reflect its income earned during the taxable period and expenses incurred in and properly attributable to the process of earning that income. To illustrate, petitioner's estimated gross profit from real estate sales in the year ended February 28, 1927, was $2,258.33, upon which*1453 there would have accrued certain commissions, assuming petitioner's contention respecting *945 commissions to be correct, but no amount was accrued therefor, and the books show under this account a payment of $2,500 to S. C. Abernethy on October 5, 1926, which amount was carried to profit and loss at the close of the fiscal year. This item is deductible on the basis of receipts and disbursements, but not on the accrual basis, assuming that petitioner correctly states that this sum represents commissions based upon profits from sales, since the amount of the commission is greater than the amount of the estimated profit on the sales for the year. An accountant, who had audited petitioner's books and assisted in the preparation of the returns for the years under consideration, stated that these returns were made upon the same basis as shown by the books. The 1926 return bears the notation that it was made upon the cash receipts and disbursements basis except for small accruals for taxes on properties unsold, but there is no deduction on this return for taxes. After locating as far as possible the items appearing on the returns upon the books of account, we are satisfied that*1454 petitioner correctly stated in the returns that the returns were made on the basis of actual receipts and disbursements. The respondent's determination is upon that basis and is sustained. Having found that petitioner was on a cash receipts and disbursements basis, the second issue requires no discussion, since petitioner does not contend that any portion of the alleged commissions was paid. However, it is to be noted that the minutes allegedly authorizing such commissions as compensation fail to show what action, if any, was taken upon the motion relating to such commissions. The respondent's disallowance of the claimed deduction is sustained. The remaining issue is whether the respondent has correctly computed the profit realized in the fiscal year ended February 28, 1926, upon the sale of the Lake Maggiore land. The initial payment upon this sale consisted of 480 shares of the petitioner's capital stock, which the respondent has treated as cash to the extent of its "par value (also fair market value)" of $48,000. Petitioner contends that this was a capital transaction by which it acquired its own stock (which was then canceled), and that the value of this stock should*1455 not be considered in computing the profit upon the sale. We have heretofore held that a corporate taxpayer realizes neither gain nor loss upon the acquisition of its own stock. ; ; . Since in the taxable year before us the petitioner received only shares of its stock it realized no gain, and upon the authority of those decisions its contention is sustained. Judgment will be entered under Rule 50.