Burley v. Commissioner

BLANCHE B. BURLEY, EXECUTRIX, ESTATE OF MARY DODSON SWIFT, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Burley v. Commissioner Docket No. 44909. United States Board of Tax Appeals 26 B.T.A. 615; 1932 BTA LEXIS 1287; June 30, 1932, Promulgated *1287 1. During 1925 petitioner's decedent paid $20,000 to a broker as commission for negotiating a 99-year lease of certain real estate then owned by decedent. The lease contract was surrendered and canceled in 1927, but no evidence was adduced to show that such cancellation could have been reasonably anticipated in 1925. Held, in computing tax liability for 1925, the amount of the commission so paid should be spread ratably over the life of the lease according to its terms and an aliquot portion allowed as a deduction in the taxable year. Central Bank Block Association,19 B.T.A. 1183; affd., 57 Fed.(2d) 5. 2. During the taxable year decedent received installment payments on the sale of real estate aggregating $49,000, of which amount $22,070 represented profit. A contract of sale was entered into on April 20, 1920, under the terms of which payment of the purchase price installments was not completed and deed executed and delivered until 1925. Held, that the real estate constituted a capital asset in the hands of the petitioner's decedent, and the sale thereof having been consummated after December 31, 1921, the profit received in 1925 constituted*1288 capital gain, within section 208(a) of the Revenue Act of 1926, and is taxable as such. G. Allan Hancock,25 B.T.A. 607. Douglas D. Felix, Esq., for the petitioner. Hartford Allen, Esq., for the respondent. TRAMMELL *616 This is a proceeding for the redetermination of a deficiency in income tax for the year 1925 in the amount of $4,462.90. At the hearing, and also in his answer to the amended petition, respondent conceded that the petitioner is entitled to additional miscellaneous deductions from gross income for the taxable year on account of business expenses, as claimed in the amended petition, in the total amount of $5,060.26. The petitioner conceded, contrary to the allegations contained in the amended petition, that during the taxable year her books were kept on the cash receipts and disbursements basis. This leaves for decision here only two issues raised by the pleadings, viz., (a) whether or not respondent erred in disallowing as a deduction from gross income $19,898.99 of a commission of $20,000 paid by the petitioner during the taxable year to a broker for negotiating a 99-year lease of certain real estate owned*1289 by the petitioner, and (b) whether or not respondent erred in including $22,070 of the petitioner's income for the taxable year in ordinary income rather than in capital net gain. FINDINGS OF FACT. The original petition was filed June 24, 1929, by the petitioner, as executrix, and by the Biscayne Trust Company, as executor, of decedent's estate, but thereafter on August 15, 1930, the Biscayne Trust Company was removed as such executor, and petitioner was authorized and directed to complete the administration of the estate. During the taxable year 1925 the petitioner sustained depreciation on business property and made expenditures for business expenses in the aggregate amount of $5,060.26, in addition to amounts allowed by the respondent as deductions from gross income for said year in computing the deficiency in controversy. *617 During the taxable year, the petitioner kept her books of account on the basis of cash receipts and disbursements. By an indenture made and entered into on June 16, 1925, decedent leased to the Mizner Development Corporation certain real estate for a term of 99 years beginning July 1, 1925, at a rental of $36,000 per year for the first*1290 six years of the term. Under the provisions of the lease the rental for the first two years in the amount of $72,000 was paid to the decedent upon execution of the lease on June 16, 1925. On or about the same date in 1925 the decedent paid a broker the sum of $20,000 as his commission for negotiating the lease. No rental was ever accrued or paid to the decedent other than the $72,000 above mentioned, and the lease was surrendered and canceled on April 22, 1927. On October 29, 1917, the decedent entered into a written contract or agreement, whereby, for a consideration of $116,939.66, she acquired possession of, and the right to receive title to, certain real property therein described from one Annie F. Forssell. Said property was known as the Greentree Inn, and while decedent was described in the contract as trustee, apparently for the purpose of facilitating the ultimate transfer of the property to a corporation which was to be organized to operate it, the corporation was not in fact organized, and the decedent, pursuant to the terms of the contract, became and was personally liable thereunder. The total consideration for the conveyance of the property was to be paid in specified*1291 annual installments during the years 1917 to 1926, inclusive. The provisions of the contract, material here, read as follows: ARTICLES OF AGREEMENT Made this 29th of October, A.D., 1917, between Annie F. Forssell, a single woman of Miami, Dade County, Florida, party of the first part, and Mary D. Swift, as Trustee, a single woman of Miami, Dade County, Florida, party of the second part. WITNESSETH: That if the said party of the second part, her successors or assigns, shall first make the payments and perform the covenants hereinafter mentioned on her part to be made and performed, the said party of the first part hereby covenants and agrees to convey and assure to the said party of the second part, her successors and assigns, in fee simple, clear of all indebtedness whatsoever, by a good and sufficient warranty deed, the lots, pieces or parcels of ground, situate in the County of Dade and State of Florida, described as follows: * * * On April 20, 1920, decedent entered into a written contract or agreement with one W. W. Goucher and Bertha S. Goucher, his wife, whereby for a consideration of $225,000, payable in specified annual installments during the years 1920 to 1930, *1292 inclusive, decedent agreed to convey to the Gouchers the same property which was the subject matter of the contract of October 29, 1917, hereinabove referred to. *618 This second contract for deed was made subject to the first and then existing contract for deed, there being no direct assumption therein of the decedent's remaining unpaid installments. On August 6, 1920, the Gouchers transferred, assigned and set over to William A. Leach and others all of their right, title and interest in and to the contract of April 20, 1920, above mentioned, and such assignment of the contract was consented to in writing by the decedent. On March 18, 1925, decedent received title or deed to the property hereinabove mentioned, in accordance with the original agreement of October 29, 1917, said deed reading in part material here as follows: This indenture, Made this 18th day of March, A.D. 1925, BETWEEN ANNIE F. FORSSELL, a widow, of the County of Dade, in the State of Florida, party of the first part, and MARY D. SWIFT, a widow, of the County of Dade, in the State of Florida, party of the second part. WITNESSETH, that the said party of the first part, for and in consideration of*1293 the sum of TEN DOLLARS AND OTHER VALUABLE CONSIDERATIONS to her in hand paid by the party of the second part, the receipt whereof is hereby acknowledged, has granted, bargained and sold to the said party of the second part, her heirs and assigns forever, the following described land, situate, lying and being in the County of Dade, and State of Florida, to-wit: * * * This deed is made in pursuance of a contract made and entered into on the 29th day of October, 1917, and except as to liens and encumbrances placed or permitted upon the said property by the party of the second part or her assigns subsequent to the date of the said contract, the said party of the first part does hereby fully warrant the title to said land, and will defend the same against the lawful claims of all persons whomsoever. By deed dated March 23, 1925, William A. Leach and others received the title to said property from decedent in accordance with the aforementioned agreement of April 20, 1920, and the assignment of August 6, 1920, which deed reads in material part as follows: THIS INDENTURE, Made this 23rd day of March, A.D. 1925, BETWEEN Mary D. Swift, a single woman, of the County of Dade, in the State*1294 of Florida, party of the first part, and William A. Leach, Harry A. Leach and W. D. Leach and Carolyn Leach Hunter of the County of Dade, in the State of Florida, parties of the second part. WITNESSETH, That the said party of the first part, for and in consideration of the sum of Ten ($10.00) Dollars and other good and valuable considerations to her in hand paid by the said parties of the second part, the receipt whereof is hereby acknowledged, has granted, bargained and sold to the said parties of the second part, their heirs and assigns forever, the following described land, situate, lying and being in the County of Dade, and State of Florida, to-wit: * * * This conveyance is pursuant to and in compliance with a certain agreement made and entered into in duplicate the 20th day of April 1920 between the grantor herein as party of the first part and W. W. Goucher and Bertha S. *619 Goucher, his wife, as parties of the second part, whereby said party of the first part agreed to convey and assure said property to said parties of the second part and which said agreement was by the said W. W. Goucher and wife assigned to the grantees herein by assignment dated August 6th, *1295 1920. The property described in the contracts and deeds hereinabove referred to, and which was known as the Greentree Inn, was operated by the decedent as a restaurant and hotel from 1917 to 1920. She purchased the property in 1917 for an investment. In April, 1920, when decedent entered into the contract with the Gouchers, she relinquished to them possession of the hotel property and right to operate it. Installment payments aggregating $49,000 were received by the decedent during the taxable year 1925, of which amount $22,070 represented profit. The decedent was engaged in the real estate business during the year 1925, but was not so engaged prior to that time. OPINION. TRAMMELL: The respondent's deficiency letter dated April 20, 1929, which forms the basis for this appeal, covered the years 1924 to 1927, inclusive, and the period January 1 to January 15, 1928. However, in that letter respondent determined a deficiency only for the year 1925. The original petition filed herein alleged errors in respect of the respondent's determination of the petitioner's tax liability for both the years 1925 and 1926, notwithstanding no deficiency was determined for the latter*1296 year. The amended petition referred only to the year 1925. At the hearing on March 9, 1932, respondent moved to dismiss as to 1926, which motion, without objection by the petitioner, was granted. Accordingly, this appeal, in so far as it purports to relate to the year 1926, will be dismissed for lack of jurisdiction. The first issue for consideration here questions the action of the respondent in prorating the amount of $20,000 paid by the petitioner's decedent during the taxable year 1925 to a broker for negotiating a 99-year lease of certain real estate then owned by the decedent. The lease was surrendered and canceled in 1927. The decedent kept her books on the basis of cash receipts and disbursements, and petitioner contends that the full amount of the commission so paid constituted a business expense and should be allowed as a deduction from gross income for 1925, but further contends that, even if the amount be held to be a capital expenditure, the entire amount should nevertheless be allowed as a deduction for "depreciation" in the taxable year. In support of her contention petitioner cites *620 the decision of the United States District Court for the Southern*1297 District of New York in . In ; affd., , we held that the total amount of commissions paid by the petitioner for services in procuring the lease of its property for a period of 50 years should be spread ratably over such period and not deducted as an expense in the years in which paid, notwithstanding the petitioner was on a cash receipts and disbursements basis. In that connection we considered the case of , and expressed our dissent therewith. The petitioner offered no evidence to show that at the time the lease contract was executed, nor at any other time during the calendar year, 1925, it could have been reasonably anticipated that the contract would be surrendered and canceled in 1927 or prior to its expiration. Therefore, the fact that it was subsequently canceled does not affect the amount of the deduction allowable for 1925. The lease contract by its terms extended over a period of 99 years, beginning July 1, 1925. The respondent allowed as a deduction from 1925 income 1/2 of 1/99 of*1298 the commission paid, and for 1926, he allowed 1/99, and for 1927, the year in which the contract was canceled he allowed the remainder of the total amount not theretofore allowed. On authority of , the respondent's action on this point, in so far as it affects the tax liability of the petitioner for 1925, is approved. The years 1926 and 1927 are not before us. See also ; ; ; certiorari denied, . The second issue presented here involves the question whether the amount of $22,070 of the decedent's income for 1925, which admittedly represents profit comprised in the installment payments received by decedent in said year under the contracts referred to in our findings of fact, should be taxed as capital net gain or as ordinary income. The Revenue Act of 1926, which is the statute applicable here, provides as follows: SEC. 208. (a) For the purposes of this title - (1) The term "capital gain" means taxable gain from the sale or exchange*1299 of capital assets consummated after December 31, 1921; * * * (8) The term "capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. * * * The *621 respondent contends, first, that the sale of the real estate which gave rise to the income in question was consummated prior to December 31, 1921, or on April 20, 1920, when the decedent entered into the contract or agreement with the Gouchers for the sale of the Greentree Inn, and therefore the amount of profit realized in 1925 was not "capital gain" within the meaning of that term as defined in section 208(a)(1), supra; and, second, that this property in 1925 was being held by the decedent primarily for sale in the course of her trade or business, since she was then engaged in the real estate business, and hence was not a capital asset as defined in section 208(a)(8), *1300 supra. The latter contention, we think, is obviously without merit. The evidence shows, and we have so found, that the decedent contracted for the purchase of this property in 1917 solely for investment purposes. At that time she was not engaged in the real estate business, but took possession of the hotel property and thereafter operated it until she made the contract of sale with the Gouchers in 1920. She did not enter the real estate business until 1925, and obviously she was not holding the property during that period primarily for sale in the course of her trade or business. That the property was held by the taxpayer for more than two years is not controverted. The real question for decision on this point, then, is whether the sale of the property in question was consummated prior to December 31, 1921 (on April 20, 1920), when the contract for deed was executed between the decedent and the Gouchers, or when the title was passed to the Goucher's assignees after December 31, 1921, by deed dated March 23, 1925. In *1301 , we held that the sales there involved were not consummated until the purchase money had been paid and the deeds in fact executed and delivered, all of which, in that case as well as in the present case, occurred subsequent to December 31, 1921. The Hancock case arose under the capital gain provisions of the Revenue Act of 1921, which, so far as material here, are the same as those quoted above from the Revenue Act of 1926. On authority of that decision, the action of the respondent on the second issue in this proceeding is reversed. See also , affirming ; and , affirming . As to the year 1926, the proceeding will be dismissed for lack of jurisdiction. As to the year 1925, judgment will be entered under Rule 50.