Henry A. Cleland Estate Co. v. Commissioner

HENRY A. CLELAND ESTATE COMPANY, LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Henry A. Cleland Estate Co. v. Commissioner Docket Nos. 33585, 40890, 51197. United States Board of Tax Appeals 29 B.T.A. 436; 1933 BTA LEXIS 942; November 24, 1933, Promulgated *942 1. Under the provisions of a will and under the laws of Michigan the interests of certain remaindermen were vested and they acquired the property devised to them as of the date of the death of the testator. 2. The fair market value of certain real estate determined as of March 1, 1913. 3. The proper basis for determination of gain or loss on the sale of property devised subject to a life estate is the fair market value of the property as of the testator's death. Huggett v. Burnet, 64 Fed.(2d) 705, followed. 4. Evidence as to the value of a building based solely on a computation, in which the number of cubic feet in a building is multiplied by a factor supposed to represent the value of a cubic foot, is not sufficient to overcome the Commissioner's determination as to value. J. H. Amick, C.P.A., for the petitioner. James K. Polk, Esq., for the respondent. MARQUETTE *437 These proceedings have been consolidated and involve the redetermination of the following deficiencies in income tax for the following years: [1925] $2,230.48 [1926] 649.71 [1927] 260.48 [1928] 7,367.21 The errors alleged are, *943 that the respondent has determined that the basis for the computation of gain arising from the sale of certain realty in 1925 and of a loss arising from the demolition of a building in 1927 were the respective fair market values of the properties on March 1, 1913, rather than their fair market value on August 14, 1921, the date of their acquisition, and also that he has erred in his determination of such value as of March 1, 1913. The petitioner further alleges that he is entitled to deduct from gross income for 1928 a net loss incurred in 1927. The respondent on brief asserts that while he has not asked for an increase in any of the deficiencies, they should not be decreased if the Board determines greater value as of March 1, 1913; in that the proper basis for the computation of gain or loss is the respective fair market values of remainder interests on the basic date rather than the fair market value of respective properties on that date. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of Michigan, with its principal office at Detroit. Henry A. Cleland died testate July 19, 1911. His will was admitted to probate by the Probate Court of Wayne*944 County, Michigan. By his will he devised and bequeathed all his property to his executors and trustees in trust to pay the net income to his sister, Hannah Maria Cleland, during her life. By the third subdivision of his will be provided: Upon the death of my said sister, Hannah Maria Cleland, the trust hereby created shall cease and terminate, and I give, devise and bequeath all the rest and residue of my estate then remaining, and any increase thereof, in manner following, to-wit: *438 The will also contains the following pertinent provisions: K. To the children of Charles W. Restrick and Jane Cowie Restrick, to-wit, ROBERT C. RESTRICK, EDNA H. RESTRICK, WILLIAM C. RESTRICK and HELEN C. RESTRICK, the sum of Ten Thousand Dollars ($10,000.00), to be divided equally between them, share and share alike. In case of the death of any of said children before such distribution without issue, then the share of such child shall belong to the survisors equally, and in case of such death of any of said children leaving issue, such issue shall represent and take such deceased parent's share. L. TO GEORGE B. DUFFIELD, HENRY C. DUFFIELD and FREDERICK H. DUFFIELD, children*945 of George and Clara C. Duffield, the sum of Seven Thousand Five Hundred Dollars ($7,500.00), to be divided equally between them. In case of the death of any of said children before such distribution without issue, then the share of such deceased child shall be and belong to the survivors or survivor equally, and in case of such death leaving issue, such issue shall represent and take such deceased parent's share. M. TO AGNES A. CLELAND, daughter of my brother, James Cleland, the sum of Eight Thousand Dollars ($8,000.00). N. TO HENRY CLELAND, WILLIAM CLELAND, MARY Y. LOCKHART, FANNY AUGUSTINE and HANNAH M. WELCH, children of my brother, James Cleland, the sum of Fifteen Thousand Dollars ($15,000.00), to be divided equally between them, share and share alike. In case of the death of any of said children without issue before such distribution, then the share of such deceased child shall be and belong to the survivors equally, and in case of such death leaving issue, such issue shall represent and take the share of the parent so dying. FOURTH: In case there shall be any further surplus or residue after the payment of all the foregoing bequests in this Will contained, *946 then such surplus and residue shall belong to and be distributed among the same persons as are named and mentioned in paragraphs K, L, M, and N of Section or Sub-division Third of this Will, pro rata, that is to say, in the proportion that the specific legacy given to each bears to the total sum of such specific legacies, viz., Forty Thousand Five Hundred Dollars ($40,500.00). * * * SIXTH: I hereby expressly give to my said Executors and Trustees hereinafter named, or the survivor of them, both as Executors and as Trustees, full power to sell, mortgage, lease, exchange and convey any portion of my estate as may be proper and requisite to carry out the terms of this Will, and as they may deem advisable and requisite for the best interests of my estate and the trust herein created, provided that my residence property on Canfield Avenue West in the City of Detroit shall not be sold during the life of my said sister, Hannah M. Cleland, without her consent. SEVENTH: I hereby appoint WILLIAM CLELAND and WILLIAM A. LIVINGSTONE, both of Detroit, Michigan, as TRUSTEES of my estate, and as EXECUTORS of this my last Will and Testament, and expressly request that no bond shall be required*947 to them as such Executors or Trustees. Hannah Maria Cleland died August 14, 1921. Shortly after her death the estate was distributed pursuant to the third subdivision of the will. The individuals to whom distribution was made under paragraphs K, L, M, and N of subdivision Third forthwith caused the petitioner to be organized and transferred to it their respective interests in and to the property received by them under the will in *439 exchange for its capital stock, each taking stock in proportion to his interest in the property transferred. Among the properties thus acquired by the petitioner were (1) the westerly 28 feet of lots 9 and 10 and the southerly 25 feet 6 inches of the easterly 95 feet 5 inches of lot 10 of park lots 84, 85, and 86 of the city of Detroit, commonly known as the Woodward Avenue and Columbia Street property; and (2) a parcel of real estate on Parsons Street, Detroit, upon which was located an apartment house known as Cynthia Apartments. Parcel (1) is "T" shaped with a base on Woodward Avenue of 25 feet 6 inches, beginning 51.12 feet north of Columbia Street and extending easterly about 95 feet to meet the top bar of the "T", which in turn fronts*948 28 feet on Columbia Street and extends back inward over 90 feet to an alley. These lots inclose a corner lot of 51.12 feet front on Woodward Avenue by a depth of 95 1/2 feet on Columbia Street. The improvements on the properties had the following fair market values on March 1, 1913: Woodward Avenue property, $15,000; Columbia Street property, $1,500. The fair market value of the land in both lots was $64,000 on March 1, 1913. The fair market value of the above tracts of land and improvements thereon on August 14, 1921, was, land, $188,600; buildings, $11,640. In 1925 the petitioner sold the above properties for $252,500, payable $52,500 in 1925, $15,000 in 1926, $15,750 in 1927, and $169,250 in 1928. Payments were made when due. The petitioner returned its income from the sale on the installment method. The respondent has computed the petitioner's taxable gain on this sale for 1925 as follows: Gross sale price $252,500.00 March 1, 1913 value, shown in depreciation schedule: Woodward Avenue property $59,783.27 Columbia Avenue property 8,825.15 Total $68,608.42 Less: Depreciation, 1922 $764.50 Depreciation, 1923 834.00 Depreciation, 1924 597.83 $2,196.33 66,412.09 Gross profit $186,087.91 Percentage, gross profit to sale price 73.7% Cash received during 1925 52,500.00 Taxable income $52,500.00 X 73.7% 38,692.50 Taxable income reported on sale 22,396.50 Additional income 16,296.00 *949 *440 The respondent has included the gain from such sale for subsequent years as follows: [1926] $11,054.75 [1927] 11,576.25 [1928] 124,398.75 Hannah Maria Cleland on March 1, 1913, had a life expectancy of 7.77 years. In 1927 the petitioner demolished the building known as Cynthia Apartments, which was a four-story brick building with eight apartments and a janitor apartment. The petitioner claimed a loss on this transaction of $20,020.50 and the respondent has determined a loss of $11,743.13, based on the March 1, 1913, value adjusted for accrued depreciation at 3 percent to December 31, 1927. OPINION. MARQUETTE: The petitioner concedes that the basis for the computation of gain on the sale made in 1925 and of the loss suffered in 1927 is the same as if the gain or loss had been made or suffered by the beneficiaries under the will of Henry A. Cleland. Section 202(c)(3) of the Revenue Act of 1921, section 203(b)(4) and (i), and 204(a)(8) of the Revenue Act of 1926. The respondent has determined that the basis in this case is the fair market values of the petitioner's properties on March 1, 1913. See section 204(a)(5) and (b) of the Revenue Act*950 of 1926. The petitioner contends that the proper basis is the fair market values of the properties as of August 14, 1921, the date of the death of Hannah Maria Cleland. The question for decision is when these beneficiaries "acquired" these properties. If the interests of the beneficiaries were vested as of the date of the death of the testator the respondent must be affirmed on this point. , and cases cited. Whether these interests were vested or contingent must be determined under the laws of Michigan, where the testator resided, his will was probated, and the real estate was located. ; ;. For this reason, among others, , on which the petitioner relies is not in point. That proceeding was decided under the laws of Wisconsin. Further, the deed there involved differs in many of its provisions from the will of Henry A. Cleland. Among the differences is the fact that the gift to the remaindermen made by the deed is found in*951 the provision that after the termination of the life estate the trustees should convey the property to the remaindermen. Here the testator in disposing of the remainder interests uses the words "I give, devise and bequeath." There is nothing in the will which *441 indicates an intention on the part of the testator that the vesting of the remainder estates should be postponed. Only the right to possession was postponed. The devises and bequests were to named individuals. The rule of pay or divide has no application. Cf. Section 11531 of the Compiled Laws of Michigan (1916) provides: Further estates are either vested or contingent: They are vested when there is a person in being who would have an immediate right to the possession of the lands, upon the ceasing of the intermediate or precedent estate; They are contingent whilst the person to whom, or the event upon which they are limited to take effect, remains uncertain. The named remaindermen under Cleland's will were persons in being who would have had an immediate right to the possession of the land on the ceasing of the estate of Hannah Maria Cleland. *952 These remainder interests were therefore vested as of the date of the testator's death. Subdivision Fourth of the will contains no words importing a contingency, but, assuming that any or all these interests might have been divested by death before thf expiration of the life estate, yet the fact remains that these interests were vested as of the testator's death, and, not having been divested, the remaindermen acquired the properties devised as of July 19, 1911, the date of the testator's death. This conclusion is in harmony with the decision in ; . There the testator devised a farm to his wife for life, remainder to his daughter, and upon the death of the latter to a grandchild should she survive the daughter; if she did not survive the daughter, then to others. The court held that the granddaughter took a vested interest subject to be divested in case of her death before the death of the daughter. On the question of the fair market value as of March 1, 1913, of the property sold in 1925 each party introduced two witnesses. All were real estate operators in Detroit and well qualified to express opinions*953 as to such value. Their valuations differ widely. The petitioner's two witnesses placed such value at $100,000 and $103,600, respectively, while the respondent's two witnesses placed this value at $44,046 and $61,900. The witnesses testify as to many sales, but often do not state whether the property was or was not improved. From their testimony it appears that there was in this locality a gradual increase in value prior to 1913 and that business was approaching this section from the south, so that southerly lots would possess greater values than those farther north. Woodward Avenue was a more important thoroughfare than Columbia Street. In this mass of testimony we find two sales which we think have an important *442 bearing on the then fair market value of the petitioner's property. One of these sales was of a lot fronting 26 feet on the west side of Woodward Avenue by a depth of 116 feet to an alley. This lot was 24 feet south of the north corner of the same block on which the petitioner's property was located. This property was sold on April 16, 1913, for $65,000, of which $5,000 represented the value of the improvements. The other sale, made April 5, 1912, was*954 of the corner lot, which had a front of 51.12 feet on Woodward Avenue at a depth of 95 1/2 feet and was bounded on the north and west by the petitioner's property. The sale was for $125,000, of which $18,000 to $20,000 represented the cost of improvements. Although the petitioner's property was not a corner lot it possessed elements of corner value. It fronted on the two streets. It had the advantage of the alley. It had potential value in that it cut off access to the alley from the corner lot. In our opinion the so-called two lots should be treated as a single tract. As such they were sold. After careful consideration of the evidence we have arrived at the fair market values set forth in our findings. Having arrived at a greater value than that determined by the respondent, we are met by his contention that we should use as a basis not the fair market value of the property on March 1, 1913, but the then fair market value of the remaindermen's interests. This contention is denied on the authority of . The only evidence as to the fair market value of the building known as the Cynthia Apartments was the testimony of*955 two witnesses introduced by the petitioner. These witnesses valued this building as of March 1, 1913, at $23,909 and $25,000, respectively, and as of March 4, 1921, at $19,636 and $19,921. They based these valuations solely on computations in which the cubic contents of the building were multiplied by a factor representing the then value of a cubic foot. The witnesses did not agree on the values to be attributed to each cubic foot. One used a factor of 28 cents a cubic foot for 1913 value and of 31 cents for 1921 value, while the other used factors for the same years of 27 cents and 34 cents. Both deducted depreciation from the year 1896 at the arte of 2 1/2 percent. Section 204(b) of the Revenue Act of 1926 calls for proof of "fair market value," that is, what a willing buyer would give and a willing seller would accept. This is quite a different thing from cost () and, of course, from reproduction cost, even after deducting accrued depreciation. We are not informed as to the physical condition of the building on the basic dates or its rent rolls. Obsolescence is a factor. We are not even given the independent judgment*956 of the witnesses as to what *443 in their opinion was the then fair market value of the building. All that we have before us is the application of a hard and fast rule of thumb. Such evidence is not sufficient to overcome the determination of the respondent. ; ; affd., ; ; affd., ; ; . The respondent's determinations both as to value and as to the rate of depreciation on this building are sustained. The petitioner's right to deduct from gross income for 1928 a net loss of 1927 will be determined upon final computation. Judgment will be entered under Rule 50.