Schoen v. Commissioner

LOUIS SCHOEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Schoen v. Commissioner Docket No. 56776. United States Board of Tax Appeals 30 B.T.A. 1075; 1934 BTA LEXIS 1229; June 28, 1934, Promulgated *1229 1. Petitioner relied upon deeds executed by himself to show that he owned less than the whole interest in real estate condemned for public use by a municipality. Held, the burden was upon petitioner to show not only execution, but delivery of the deeds to the grantees named. 2. The New York State law provides, in effect, that the filing of notice of the pendency of an action for condemnation of land shall be constructive notice to purchasers of the property affected thereby, and that a subsequent purchaser shall be bound by all that is done in the proceeding to the same extent as if he were a party thereto. Held, that deeds executed by petitioner after condemnation proceeding was begun in New York State and after lis pendens was filed and the land condemned, but before the award was entered or paid, were ineffective to reduce petitioner's interest in the award paid to him. 3. Interest paid to petitioner upon an award in condemnation by a municipality is includable in petitioner's gross income. 4. Interest paid in the taxable year by petitioner to release liens on the land condemned is deductible under section 23(b) of the Revenue Act of 1928. *1230 Joseph Getz., Esq., for the petitioner. George R. Sherriff, Esq., for the respondent. SEAWELL *1076 This proceeding is for the redetermination of a deficiency in the income tax of petitioner for the year 1928 in the sum of $4,288.50. The controversy involves the profits realized by petitioner in the purchase of certain real estate which was later condemned for public use by a municipality. Petitioner denies that the whole award belonged to him, because of conveyances he had made; he denies that any of the interest paid by the municipality on the award is taxable to him; and he asserts that interest on the liens on the real estate paid by him out of the award is deductible from his gross income. FINDINGS OF FACT. Petitioner is an individual, a citizen of the United States, residing at Yonkers, New York, and in 1928 was engaged in the retail furniture business there. On January 5, 1923, petitioner purchased certain real estate in Yonkers at the price of $32,500, and expended $32,630 in improvements thereon. The proper allocation of the cost of the property after the improvements is stipulated to be for the land $23,000 and for the buildings $42,130. *1231 On November 24, 1926, the city of Yonkers began proceedings and condemned said real estate for public use and filed notice lis pendens in reference thereto. The condemnation proceedings were prosecuted to conclusion and final decree and award, and the award was paid to the petitioner, as hereinafter shown. On September 14, 1927, petitioner and his wife, as parties of the first part, executed an indenture to Louis Schoen (petitioner) as trustee, party of the second part, granting and releasing to him for a nominal consideration said real estate, subject to all encumbrances and "pursuant to a certain trust agreement entered into between the parties and others dated September 14, 1927." On the same day an agreement in writing was executed by petitioner as an individual and also as trustee and by his wife, Yetta Schoen, their two daughters, Miriam Schoen Deutsch and Flora Schoen, and Miriam's husband Sydney Deutsch, and the fiance of Flora, Moses N. Glick, whereby it was agreed for a nominal consideration that Louis Schoen and Yetta Schoen, his wife, would upon certain contingencies convey their right, title, and interest in the real estate to Louis Schoen as trustee; that the*1232 trustee would hold the real estate in the capacity of a trustee until the marriage of Flora Schoen and Moses N. Glick, Louis Schoen reserving, however, to himself "the absolute and full control of said property * * * and the right to dispose of the said property, at any time, at such price and on such terms, as may be, in his opinion, most advantageous to the parties * * *"; that upon the marriage of Flora Schoen and Moses N. Glick, the trustee would promptly execute proper warranty deeds for the real *1077 estate, one half to Louis Schoen and his wife and one eighth to each of the daughters and their husbands; that in case the trustee should sell the real estate before the marriage of Flora Schoen and Moses N. Glick, then at the time of their marriage the trustee would distribute among the parties the net proceeds of such sale in the same proportion as named for the distribution of real estate in case it had not been sold; and that in the event Flora Schoen and Moses Glick should not marry within one year from the date of the agreement, then the agreement should be null and void and the trustee should reconvey the real estate to Louis Schoen and Yetta Schoen or turn over any*1233 proceeds of sale thereof to them. On December 27, 1927, an award of damages for the real estate theretofore condemned was duly made in the proceeding for the condemnation thereof, to be paid by the city of Yonkers to the petitioner in the amount of $135,000 and interest. During March 1928 Flora Schoen and Moses N. Glick were married to each other. On March 17, 1928, an instrument of indenture was executed by petitioner, signed "Louis Schoen, Trustee", to Louis Schoen and Yetta Schoen his wife, purporting to convey to them and their heirs "an absolute one-half undivided interest" in said real estate "subject to incumbrances of record," with a recital that the deed was given pursuant to a certain trust agreement dated September 14, 1927. By other indentures similarly dated and signed and with similar recitals, Louis Schoen, trustee, purported to convey to Miriam Schoen Deutsch, Sydney Deutsch, Flora Schoen Glick, and Moses N. Glick, each, a one-eighth undivided interest in the real estate. On April 2, 1928, the city of Yonkers paid to petitioner the award of $135,000 and interest amounting to $11,891.24. Respondent determined the profit and income of petitioner on the transaction*1234 to be as follows: Total amount received from the city of Yonkers $146,891.24 Less amount paid attorneys 13,500.00 Net proceeds 133,391.24 Less cost of land $23,000.00 Less cost of buildings $42,130.00 Less depreciation, 4 1/2 years at 2 percent 3,791.70 38,338.30 Total depreciated cost 61,338.30 Profit from sale 72,052.94 Petitioner contends that only one half of this amount of $72,052.94 is taxable to him. *1078 At the time of the payment of the award there were certain mortgages on the property, including certain accrued interest, all of which was paid out of the award. The interest so paid amounted to $3,452.16. On October 10, 1928, Louis Schoen, trustee, and Sydney Deutsch, Miriam S. Deutsch, Moses N. Glick, and Flora S. Glick signed a document purporting to show a final accounting and distribution of the net proceeds of the award after the deduction of liens on the property, 50 percent to Louis Schoen, trustee, and 12 1/2 percent to each of the others named. OPINION. SEAWELL: The main controversy is the quantum of interest the petitioner had in the award paid to him by the city of Yonkers in*1235 the condemnation of the real estate mentioned. He says it was only one half, by reason of the fact that he had conveyed away one half to his daughters and their husbands by the deeds put in evidence. With this contention we do not agree for several reasons. In the first place there is no evidence that the alleged deeds were ever delivered to any of the respective grantees. This was, of course, necessary. . Petitioner, witness for himself never testified that he delivered any of the deeds, and none of the alleged grantees or others were witnesses. There is no presumption that the deeds were delivered. None of them was registered or filed with the public registry. But there is a more substantial ground for denying the contention of petitioner. Almost a year before any of these alleged deeds were executed, on November 24, 1926, the city of Yonkers commenced condemnation proceedings against this real estate in the hands of the petitioner and filed lis pendens, and the land was condemned for public use. It is provided in the New York statutes that from the time of filing of the notice of the pendency of the action *1236 (lis pendens) it "shall be constructive notice to a purchaser or incumbrancer of the property affected thereby * * * and a person whose conveyance or incumbrance is subsequently executed or subsequently recorded, is bound by all the proceedings taken in the proceeding after the filing of the notice, to the same extent as if he was a party thereto" - McKinney's Consolidated Laws of New York, Annotated, Book 9, A, sec. 13. From the time of the judgment of condemnation, November 24, 1926, petitioner's claim to any interest in the real estate was limited to the collection of the award thereafter to be made; and when that award was paid, it had reference back to the filing of the lis pendens and annulled all intermediate conveyances or encumbrances. Apparently, petitioner understood the situation, *1079 or his adviser did, for none of the instruments relied on were filed for registration; and none of the parties intervened in the condemnation suit to claim any interest in the fund. At most, petitioner's alleged conveyances were nothing more, under the circumstances, than promises to give to the parties certain interests in the proceeds of the award in the condemnation proceeding*1237 when he thereafter received the money. In that situation the money received was first income to him, though his promises were carried out and payments were made out of the award to his daughters and their husbands. ; . If the deeds in question were valid and effective for the purpose contended for by petitioner, his claim that only one half of the $72,052.94 is taxable to him could not be sustained. The deeds are made expressly subject to encumbrances, and the grantees were not promised each 12 1/2 percent of one half of $72,052.94, the net profit on the deal to petitioner, but such percentage only after petitioner's debts which were liens on the property had been canceled. These liens on the property amounted to $80,216.90, according to petitioner's Exhibit 8, showing final accounting with the alleged grantees. Cancellation of his obligations, under the circumstances, could not be ignored in determining gain to petitioner on the transaction in question. We feel we must sustain the respondent on this issue, which we do. Petitioner, in his pleading, maintained that the $11,891.24 interest*1238 on the award paid him by the city of Yonkers is not subject to income tax, because it was interest on an obligation of a political subdivision of a state. He frankly says, however, in the brief that this issue has been decided by the Board against his view in , and he merely wishes to preserve his rights pending the determination of the issue in the Circuit Court of Appeals. We sustain the respondent on this issue. ; certiorari denied, ; . As shown in our findings of fact, at the time the award was paid to petitioner there was interest amounting to $3,452.16 accrued on the liens on the real estate condemned which petitioner paid out of the award, but for which he failed to claim deduction in his return for the year. In section 23(b) of the Revenue Act of 1928 it is provided: In computing net income there shall be allowed as deductions: * * * (b) Interest. - All interest paid or accrued within the taxable year on indebtedness * * *. [Remainder of paragraph not material here.] *1080 *1239 Petitioner having paid this interest on his indebtedness within the taxable year, we sustain petitioner on this issue. Another issue raised on the pleadings was expressly abandoned by petitioner. Judgment will be entered under Rule 50.