Citizens Nat'l Trust & Sav. Bank v. Commissioner

CITIZENS NATIONAL TRUST & SAVINGS BANK OF LOS ANGELES, EXECUTOR OF THE ESTATE OF MIRA HERSHEY, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Citizens Nat'l Trust & Sav. Bank v. Commissioner Docket No. 68018. United States Board of Tax Appeals 34 B.T.A. 140; 1936 BTA LEXIS 745; March 18, 1936, Promulgated *745 On the date of her death decedent owned unpaid installment obligations from the sale of real estate and in respect of which gain had not been reported for any prior year. Held, that said gain should be reported and computed under the provisions of section 44(d) of the Revenue Act of 1928 for the taxable period ended with decedent's death; held, further, that the said section is not unconstitutional. P. D. Johnston, Esq., for the petitioner. E. C. Algire, Esq., for the respondent. TURNER *140 This proceeding is based upon the determination by the respondent of a deficiency in income tax in the amount of $75.75 for the period beginning January 1, 1930, and ending on March 6 of the same year. The petitioner claims that there has been an overpayment of income tax for that period in the amount of $9,132.52. The only issue presented for determination involves the constitutionality of section 44(d) of the Revenue Act of 1928, and the applicability of that section to the transmission of installment obligations by reason of the death of the owner thereof. Two other issues involving *141 the March 1, 1913, value of certain of the real*746 estate, the sale of which gave rise to the installment obligations here in question, are now conceded by the petitioner. No oral testimony was offered and the case was submitted on a stipulation of facts and certain written documents filed as exhibits thereto. FINDINGS OF FACT. The petitioner, Citizens National Trust & Savings Bank of Los Angeles, is the executor of the estate of Mira Hershey, deceased. Mira Hershey died on March 6, 1930, and the petitioner was appointed executor on the 27th day of the same month. On September 15, 1923, Mira Hershey, by written agreement, sold to William Green and Gertrude A. Green, his wife, the Hershey Arms Hotel, located at 2600 Wilshire Boulevard, Los Angeles, California, for a total sales price of $300,000, payable $74,250 down and $25,000 on the 15th day of September of the years 1924 to 1932, inclusive. No payments other than the down payment of $74,250 were made during the year 1923. At the time of Mira Hershey's death there remained unpaid of the principal, or sales price, under the contract the sum of $75,750, of which the sum of $22,122.66 represented capital gain or profit over and above the decedent's basis for the unpaid*747 balance. During previous years she had reported her gain from this transaction on the installment basis and had not reported the $22,122.66 for any year. During 1923, on or prior to March 20, 1923, Mira Hershey entered into an agreement with one C. E. Toberman, whereby she agreed to sell the property here known as the Toberman-Hay Canyon property for the sum of $425,000, payable $42,500 in cash and the balance payable on or before seven years from and after the date of recording of a quitclaim deed canceling a certain oil lease dated February 16, 1921, given by Mira Hershey to H. S. Montgomery, the said balance to bear interest from the date of the recording of such deed at the rate of 7 percent per annum on the amount of principal from time to time remaining unpaid. No payments other than the down payment of $42,500 were made during the year 1923. On February 26, 1923, Mira Hershey deeded the Toberman-Hay Canyon property to the Title Insurance & Trust Co. for a recited consideration of $10. On March 20, 1923, Title Insurance & Trust Co. executed a declaration of trust with reference to the said property wherein Mira Hershey was designated as the payee and C. E. Toberman as*748 the beneficiary. The trust instrument recited further that the title to the property in question was held in trust for the benefit of the said C. E. Toberman as beneficiary thereunder and under the terms and conditions set forth therein and for certain *142 specified uses and purposes, the first purpose being to secure "in the manner hereinafter provided, (a) the payment of the debt hereinbefore described owing to said payee, (b) the payment of all other sums in this declaration provided to be paid by said beneficiary, (c) and the performance of each and every act herein provided to be performed by said beneficiary." The trust instrument also contained provisions for the subdivision, improvement and sale of the property. It set forth the terms for release by the trustee of parcels sold. It also provided that costs of development, taxes, insurance, and other similar items were to be paid by the beneficiary. Provision was also made for the enforcement of the beneficiary's obligations by advertisement and sale upon proper notice being given of the interest of said beneficiary in the property. At the time of the death of Mira Hershey there remained unpaid of the principal, *749 or sales price, under the contract with Toberman, the sum of $195,000, of which the sum of $55,553.30 represented capital gain or profit over and above the decedent's basis for the unpaid balance. The decedent had reported her gain from this transaction during previous years on the installment basis. The said $55,553.30 had not been reported in any income tax return of the decedent for any year. During 1924, on or prior to January 23, Mira Hershey entered into an agreement with J. N. Richards, J. C. Merwin and Hattie T. Merwin, his wife, George W. Carson and Mary F. Carson, his wife, and John E. Carson, whereby she agreed to sell to the said parties the property here known as the La Crescenta Canada property for the total sum of $125,000, payable $20,000 down and the balance on or before five years from February 2, 1924, together with interest from February 2, 1924, on the amount of principal from time to time remaining unpaid, at the rate of 7 percent per annum, payable quarterly, and should the interest not be paid when due it was to be added to the principal of the debt and should thereafter bear interest at the same rate as principal. On December 22, 1923, Mira Hershey*750 deeded the La Crescenta Canada property to the Title Insurance & Trust Co. for a recited consideration of $10. On January 23, 1924, Title Insurance & Trust Co. executed a declaration of trust with reference to the property, wherein Mira Hershey was designated as payee and the individuals named above as purchasers of the property as the beneficiaries. The trust instrument was in substance, for the purposes of this case, the same as the trust instrument executed with reference to the Toberman-Hay Canyon property. At the time of Mira Hershey's death there remained unpaid of the principal, or sales price, the sum of $32,000, of which sum $12,736 represented capital gain or profit over and above the decedent's basis *143 for the unpaid balance. The decedent had reported her gain from this transaction in previous years on the installment basis. The said $12,736 had not been reported by her on any income tax return for any year. The petitioner, as executor of the estate of Mira Hershey, filed an income tax return in due course for the period beginning January 1, 1930, and ending March 6, 1930, disclosing ordinary net income of $10,131.54 and income tax liability in the amount*751 of $2.75. Upon an examination of the return, the respondent determined a deficiency in the amount of $9,129.77. The deficiency resulted from the addition to income of capital net gain in the amount of $90,155.96 with respect to the three real estate transactions previously described. Upon agreement by the petitioner the amount of this deficiency was assessed and paid during the year 1931 and it is this amount, plus the original tax, that is claimed as an overpayment. Thereafter the respondent determined a further deficiency for the period in question, in the amount of $75.75, and on or about August 18, 1932, mailed a notice of this determination to the petitioner. This deficiency resulted from an increase in the amount of capital gain from $90,155.96, as shown in the previous determination, to $90,411.96. OPINION. TURNER: The only issue for determination is whether or not the installment obligations arising from the sales of the Hershey Arms property, Toberman-Hay Canyon property, and the La Crescenta Canada property, which were unpaid at the date of Mira Hershey's death, were transmitted by reason of her death within the meaning of section 44(d) of the Revenue Act of*752 1928, so as to require the inclusion in income for the period here in question of the excess of the fair market value of the obligations on that date over the basis prescribed therefor in the said section; and, further, if section 44(d) is applicable, whether or not it is constitutional. The constitutionality of section 44(d), supra, and its applicability to cases such as we have here have already been considered and determined adversely to the petitioner. , affirming ; , affirming on this point ; ; , affirming . Under authority of these cases the issue stated above is decided for the respondent. In the petitioner's brief, contention is made that the transactions disposing of the Toberman-Hay Canyon property and the La Crescenta Canada property were not sales but options to purchase under *144 subdividing agreements. As*753 a basis for this contention the petitioner relies on the declarations of trust executed by the Title Insurance & Trust Co. in respect of the two properties. This contention does not come within any of the issues raised by the petition and is not supported by the facts disclosed by the record. In the petition it is alleged that the sales of the properties in question were made in 1923 and 1924, and the taxpayer elected to report the income therefrom on an installment basis, and that the deficiency herein resulted from the inclusion in income by the respondent of unreported profits on installment obligations transmitted by the death of the taxpayer. In short, the petition alleges sales of the properties on an installment basis and contains no allegation whatever raising an issue that the contracts covering the disposition of the Toberman-Hay Canyon property and the La Crescenta Canada Property were option contracts rather than agreements of sale. Certain provisions of the trust instruments closely resemble the provisions contained in the instrument considered in *754 , which was held to be an option agreement rather than a contract of sale. In this case, however, it is to be noted that the instrument relied on is not an agreement between the parties at all, but is a declaration of trust executed by the Title Insurance & Trust Co. on March 20, 1923, for the benefit of Toberman and to secure payment of the debt owing to Mira Hershey. Further, it is stipulated here than on or prior to March 20, 1923, the date of the declaration of trust, Mira Hershey entered into an agreement of sale with one C. E. Toberman, whereby she agreed to sell Toberman the property here referred to as the Toberman-Hay Canyon property and there is nothing whatever in the trust instrument that in any way negatives the stipulated fact that an agreement of sale was entered into between Mira Hershey and C. E. Toberman on or prior to the date of the declaration of trust. In this respect the facts with reference to the La Crescenta Canada property are the same. It is thus apparent that regardless of the fact that no issue was made that the agreements in respect of the two properties were option agreements rather than sales, the*755 facts in the record would not support such an issue if it had been raised. Long after the filing of the brief herein and subsequent to the decision of the Circuit Court of Appeals for the Ninth Circuit in , the petitioner filed a motion to restore this proceeding to the trial calendar for the purpose of presenting proof to show that the transactions mentioned were option transactions and not sales. After hearing on the motion and consideration of the arguments advanced, the motion was denied for the reason that it was not timely and sought to present proof outside of *145 the issues contained in the petition, which had never been amended and in respect of which no motion to amend has at any time been made. Consideration will not be given to issues not raised by the pleadings. ; ; ; ; *756 ; ; . Decision will be entered for the respondent.