Sline v. Commissioner

JOHN T. SLINE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Sline v. Commissioner Docket No. 6752. United States Board of Tax Appeals 9 B.T.A. 1222; 1928 BTA LEXIS 4267; January 13, 1928, Promulgated *4267 1. Profit on sale of land determined and apportioned. 2. Certain business expenses and losses determined and others rejected for lack of evidence. J. M. McMillin, Esq., for the petitioner. Shelby S. Faulkner, Esq., for the respondent. MILLIKEN *1222 This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1920, amounting to $10,193.99, plus a penalty of $2,548.49 for failure to file a return for the year in question. Petitioner assigns the following errors: (1) The respondent erred in determining the profit derived from the sale of 231.2 acres of land; (2) the respondent erred in his failure to allow as deductions losses and ordinary and necessary business *1223 expenses; (3) the 25 per cent penalty should not be asserted for failure to file a return. FINDINGS OF FACT. Petitioner during the calendar year 1920 resided in Texas, was married and living with his wife. He was engaged in the business of farming, cultivating approximately 2,800 acres of land. He worked about 200 acres with hired help and the remainder with some 27 tenant farmers who were entitled to share*4268 in the proceeds from the sale of the crops which were raised. The working agreement with the tenants provided for the sale of the crops grown by the tenants if they so desired and the payment of one-half the proceeds from the same to petitioner, or the latter might sell the crops when gathered and retain one-half the proceeds. The tenants were liable to petitioner for advances he had made to them for groceries, work clothes, and supplies, payment to be made after the crops had been grown and sold. Cotton was the principal crop grown during the year. The market price for cotton was very low during 1920, with the result that the tenants, with the exception of three or four, abandoned their crops and went to work for wages, with the result that it was necessary for petitioner to complete the crop, as well as pick the same. After picking the cotton a small portion was sold and the remainder of the crop, as well as some cotton held over from a previous year, was withheld from the market and sold in 1921. In connection with his farming operations, petitioner paid in 1920, $5,765.28 for feed and seed, $2,965.61 for labor and supplies, $1,816.47 for hoeing and picking, and $1,847.69*4269 for miscellaneous expenses. Losses were sustained in 1920 of $100 through the sale of an automobile used in the business and $1,350 by reason of the death of four mules purchased in 1920, for that sum. During the year petitioner paid interest in the amount of $16,185.78, and taxes on real and personal property in the amount of $1,453.45. He also paid during the year $2,390.96, for groceries and work clothes for tenants and at the end of the year was indebted for similar advances in the amount of $7,043.84. Petitioner sold during the year 231.2 acres of land and the improrvements located thereon for the sum of $86,670. Of the acreage sold, 131.2 acres had been acquired by petitioner and wife on November 5, 1915, at a cost of $19,012.40. The fair market value of the remaining 100 acres on March 1, 1913, was $17,500. The improvements on the 100 acres had a fair market value on March 1, 1913, of $9,000. *1224 During the year 1920, petitioner owned and used in this business the following depreciable assets: 40 mules acquired prior to 1920 costing at least $9,040 62 mules acquired in 1920 costing at least 20,982 27 houses acquired prior to 1920 costing at least 18,500 11 houses acquired in 1920 costing at least 6,400 20 barns acquired prior to 1920 costing at least 4,400 9 barns acquired in 1920 costing at least 1,350 Farm implements and equipment: Acquired in 1917 to 1919, incl costing at least 10,645 Acquired in 1920 costing at least 6,910 2 automobiles acquired prior to 1920 costing 2,160 *4270 Petitioner was interested during the year 1920 in a partnership with Tom Shenault and George Byers, which was engaged in road construction business. The partnership sustained losses. The amount of the losses is not in evidence. In 1921, when the income-tax return for petitioner was due for the year 1920, he sought advice from his banker who informed him that inasmuch as he had sustained losses during the year 1920, he was not required to file a return. On March 25, 1925, a deputy collector of internal revenue made a return upon which was reflected a profit from the sale of 231.2 acres of land in the amount of $53,103. No returns had been filed for the year 1920 except the return filed by the deputy collector. Petitioner kept no books of account. Petitioner, prior to his marriage, purchased 100 acres of land included in the 231.2 acres sold in 1920. The purchase price was $2,500, of which $500 was paid in cash and subsequent to his marriage the remaining $2,000 was paid. OPINION. MILLIKEN: The first issue relates to the profit resulting from the sale of 231.2 acres of land. The land was sold for $86,670. Of the acreage sold, 131.2 acres were acquired in 1915, *4271 at a cost of $19,012.40. We are of the opinion that the March 1, 1913, value of the 100 acres acquired prior to March 1, 1913, was $17,500. The improvements located on the 100 acres had a value on March 1, 1913, of $9,000, and at date of sale in 1920, the depreciated value was $6,000. Of the total acreage sold in 1920, petitioner had purchased 100 acres prior to his marriage. The cost of the same was $2,500. The initial payment made was $500. Subsequent to his marriage the remaining $2,000 was paid. Counsel for petitioner insists that one-fifth of the 100 acres was the separate property of petitioner by reason of the fact that $500 of the total cost of $2,500 had been paid prior to marriage and the remaining four-fifths interest was the joint property of petitioner and wife. The decided cases of the courts of the State of Texas do not support this view. We need not extend this opinion by a discussion of the cases. They all are authority *1225 for the conclusion that the 100 acres was the separate property of the petitioner when sold in 1920. Nor do we have any evidence that the improvements placed thereon were paid for out of community funds. In the absence of*4272 proof we must presume they were paid for out of the separate funds of petitioner. See ; ; ; ; ; . In determining the profit from the sale of the 231.2 acres of land, 100 acres, together with improvements, should be treated as the separate property of the petitioner. We have set forth in the findings of fact the deductions to which petitioner is entitled. Counsel avers that petitioner should be allowed a deduction of $7,043.84, representing advances made for tenants during the year and for which petitioner was indebted at the close of the year. The petitioner maintained no books of account and reported his income on the basis of actual receipts and disbursements. He had not paid the sum sought to be deducted at the close of the year and in fact a part of the advances were to be reduced by the application of the tenants' share of the crops for the year. The respondent did not err in refusing to allow*4273 the same. We have set forth in the findings of fact the equipment, machinery, live stock, and various assets used by petitioner in carrying on his business during the year. Counsel requests us to determine a rate of depreciation on the same to which petitioner is entitled. We entertain no doubt that he is entitled to a deduction for depreciation, but no evidence was introduced as to the proper rate of depreciation applicable and accordingly the claimed allowance is denied. There is no issue between the parties of the community property status of the income from the sale of the 131.2 acres of land purchased in 1915 and sold in 1920, or of the deductions to which petitioner and wife are entitled for the year as herein allowed. The 25 per cent penalty for failure to file a return was imposed by respondent pursuant to the provisions of section 3176 of the Revised Statutes. Petitioner testified to the circumstances in 1921, resulting in his failure to file a return. However cogent this reason may have been and that his failure was due to reasonable cause and not willful neglect, it is nevertheless true that the petitioner has not, to this day, complied with the statutory requirement*4274 that a return be filed, accompanied by the showing of the reason for the delay, and it follows from the mandatory provisions of the statute that the 25 per cent penalty should be imposed. See . Judgment will be entered on 15 days' notice, under Rule 50.