Butler-Fornari Realty Corp. v. Commissioner

BUTLER-FORNARI REALTY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Butler-Fornari Realty Corp. v. Commissioner Docket No. 83328. United States Board of Tax Appeals 37 B.T.A. 933; 1938 BTA LEXIS 965; May 26, 1938, Promulgated *965 Petitioner corporation in 1929 sold lots under contracts which obligated it to make street improvements. From 1929 to 1937 petitioner was not called upon to make any improvements. The facts indicate that some sales contracts are delinquent and that it is doubtful whether petitioner will ever be called on to make agreed improvements. Respondent allowed deduction of original cost of lots in computing taxable gain, but disallowed, as additions to original cost, estimated costs of future improvements required under contracts. Held, respondent correctly disallowed additional costs of future improvements. Petitioner failed to support claim that basis for lots should be more than original cost. Rule in Cambria Development Co.,34 B.T.A. 1155, not applicable under facts here. Mario Fornari for the petitioner. D. D. Smith, Esq., for the respondent. HARRON *933 The Commissioner determined a deficiency in income taxes for the year 1929 in the amount of $976.14. The petitioner concedes that part of the additions to income made by respondent is correct to the extent of $243.60. Petitioner contests the amount of the deficiency*966 which results from the respondent's determination that there should not be added to the petitioner's cost of realty, allocated portions of future expenses for improving the realty for which petitioner claims to be liable under the contracts for the sale of the realty in question. *934 FINDINGS OF FACT. The petitioner, a New York corporation, in 1929 and in prior years, was engaged in developing, improving, and selling in lots tracts of land located in New York State. In 1926 the petitioner acquired an unimproved tract of land, named the Fox Hills tract, for $85,736.76. In 1928 the petitioner corporation acquired another tract of land called the Orange Lake tract. The Fox Hills tract was subdivided into 271 lots and the Orange Lake tract was subdivided into 676 lots. In 1929 petitioner sold 19 lots of the Orange Lake tract for $8,000. In 1929 80 lots were sold of the Fox Hills subdivision. Petitioner corporation sold lots under a contract which provided for an immediate part payment of the purchase price and payment of the remainder in monthly installments over a period of time to be agreed upon by the parties. The contracts of sale obligated the petitioner corporation*967 to grade and ash streets, lay water mains and cement walks, and install electric light poles, such improvements to be made on the streets on which the premises front. The petitioner corporation was obligated to make these improvements under the contracts it entered into in 1929 in the sale of 99 lots in the two tracts. The contracts were in force in 1929. The contracts provided that, in case of default in an installment payment for 90 days, at petitioner's option it could declare the contract forfeited and annulled and all rights of the second party to the contract, the buyer, should cease and terminate. In some instances, the buyers did not keep up monthly installments but the petitioner did not exercise the option to declare the contracts forfeited. An estimate of the cost of the street improvements and water mains was included in the cost of property appearing on petitioner's books and a reserve account was set up to reflect the estimated future expenditures. Allocated over all of the property included in each tract, petitioner estimates the cost of the future improvements to be $150 per lot. The depression in the real estate business affected petitioner's business. The*968 buyers of lots have not begun any construction of houses on the lots and the petitioner has not been called upon to make any of the improvements required in the contracts of sale and no improvements have been made up to the present time. In its income tax return the petitioner added to the cost of lots sold in 1929 a total of $16,195.14 for estimated developmental cost. The respondent determined that this total amount should be eliminated from the cost base to the petitioner and added it to petitioner's taxable income. Petitioner alleges that this is error. OPINION HARRON: Petitioner claims that under decisions of the Board it is entitled to add to original cost of land the estimated cost of future *935 development. The rule we have followed is stated in , as follows: * * * It is well established that as a matter of law the petitioner has the right to include in its cost such estimated future expenditures for the development of the property as required by its contracts of sale. *969 ; ; ; . The difficulty that confronts us in this case is to determine whether the facts here are in accord with the facts which, in the cases cited, formed the predicate for the rule. The evidence in this case is meager. Petitioner's officer who tried the case apparently was not aware of the necessity of proving the facts sufficiently to demonstrate that they square with the facts in the cited cases. In the above cases an important fact was that the taxpayers established that at least some of the improvements required by the sales contracts had been made. Further, in those cases, there was no reason to doubt that the sums claimed would be spent and thus become a part of the cost of the lots sold. Presumably in this proceeding the Commissioner has allowed the deduction of the original cost and in so doing has complied with the statute in treating as gross income only the excess of receipts over the basis. *970 If that basis is to be increased in any way the petitioner has the burden of clearly proving his right to the claimed increase. We do not have here any statutory requirement that tax liability is to be determined solely upon the probabilities of 1929, nor any prohibition against looking to the future to determine the reasonableness of those probabilities. Cf. . According to the evidence in this case, as late as December 1937 the petitioner had not made any of the improvements called for by the contracts. For more than eight years the petitioner has done nothing to give support to its claim that it has a basis greater than the original cost of its land. Moreover, there are indications in the documents on file that the petitioner has lost by foreclosure the unsold portions of the Fox Hills tract. There is considerable doubt as to whether petitioner will be called on to make future improvements under contracts for the sale of the 80 lots in the Fox Hills tract which were sold in 1929, in view of some delinquencies in the contracts themselves and because of the loss of the unsold remainder of the tract. The improvement*971 of streets in a real estate subdivision is a matter relating to whole blocks in the tract, if not to the whole tract, and for all we know the locations of the 80 lots sold in 1929 are scattered over the tract. As to these 80 lots, with which we are concerned in this proceeding, it is not within reason to suppose that the petitioner will spend money for improvements unless forced to, and there is no indication that any *936 attempt has been made to compel the construction of any improvements. Accordingly, the facts which gave rise to the rule in the Cambria and other cases above have not been shown to exist here, and there is no place for the application of that rule here. As the evidence fails to establish any basis for the lots higher than the basis allowed, the respondent's determination must stand. The petitioner has conceded that the other adjustments made by respondent are correct, namely, the addition of $243.60 to taxable income. There is, therefore, a deficiency due in the amount set forth by the respondent in his notice of deficiency. Decision will be entered for the respondent.