Opinion
No. 42528.
November 5, 1934.
D.J. Gantt, of Atlanta, Ga., for plaintiff.
Elizabeth B. Davis, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Suit by Otto C. Owen, trustee for the Kenilworth Park Company, against the United States.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. The Kenilworth Park Company was organized under the laws of the state of Florida in February, 1925. Its activities consisted in acquiring real estate in or near Winter Haven, Fla., subdividing it, and selling it in the form of lots. Pursuant to a plan of dissolution, the company on September 23, 1931, conveyed to Otto C. Owen, trustee, plaintiff herein, all its assets, with authority to dispose thereof and distribute the proceeds to the stockholders. It surrendered its charter to the secretary of state of Florida late in 1931.
2. The Kenilworth Park Company filed with the collector of internal revenue its corporation income tax return for the calendar year 1925, indicating thereon a net loss of $18,847.82.
Following an examination of the taxpayer's returns for 1925, 1926, and 1927, the Commissioner of Internal Revenue assessed against the taxpayer a tax of $12,508.07 and $2,052.69 interest for the year 1925, and determined an overassessment for 1926 in the amount of $2,313.26, and for 1927 in the amount of $7,852.99. The tax and interest for 1925 were paid by crediting against the same the overassessments of $2,313.26 and $7,852.99 for 1926 and 1927, respectively, and by the payment on March 28, 1929, of $4,494.51 in cash.
On March 22, 1932, the taxpayer filed a claim for refund of $14,560.76 so credited and paid, on the ground that the obligations of the vendees of the real property hereinafter described had no fair market value, and that the profit or loss from cancellation of contracts of sale and repossession of property should be determined without reference to payments made subsequent to the taxable year.
The claim was denied by the Commissioner January 21, 1933.
In denying the claim for refund, the Commissioner explained his action as follows: "On sales where substantial payments were received and there was every indication that the entire purchase price would be paid, the notes were held to have face value and the entire profit included. On sales which were canceled before the date of the field examination, the notes were included at a value according to the cost of the property plus any subsequent payments received."
3. During the taxable year 1925 the taxpayer sold 166½ lots on which it reported for that year a profit. They were sold under a contract whereby the vendor agreed to convey them by warranty deed upon completion of all payments stipulated or, if the purchaser so desired, upon completion of one-half the payments; in the latter event the purchaser to cover the remaining payments by mortgage to the vendor. In case of default in the stipulated payments, the vendee was to surrender the property to the vendor upon demand. The agreed payments, other than the amount paid down at time of sale, were covered by a series of promissory notes.
(a) The following transaction involved the sale of one lot covered wholly by notes:
Sale price ....................... $1,000.00 Face of notes .................... 1,000.00 =========
No down payment. Payment on notes ................. 500.00 Cost of lot ...................... 269.10 _________ Profit reported .................. $ 230.90
In this case the profit was computed on full cost, without allocation.
(b) Transactions in which the sale price was wholly paid for, either as down payment or payment on notes, were as follows; 14 lots being involved:
Sale price ....................... $26,000.00 Face of notes .................... 7,466.67 __________ Down payments ................. 18,533.33 Payment on notes ................. 7,466.67 __________ Total payments ................ 26,000.00 Cost of lots ..................... 7,279.90 __________ Profit reported ............... $18,720.10
In these cases also the profit was computed on full cost, without allocation.
(c) Transactions on which less than 25 per cent. of the sale price was received in cash, either as down payment or as payment on notes, together with the profit as computed and reported by the taxpayer, were as follows; the number of lots so sold being 11½:
Sale price ....................... $25,986.66 Face of notes .................... 23,496.66 __________ Down payments ................. 2,490.00 Payment on notes ................. 1,010.00 __________ Total payments ................ 3,500.00 Cost allocated to 1925 ........... 940.55 __________ Profit reported ............... $ 2,559.45
In computing the profit reported as earned in 1925 on each lot the taxpayer deducted from the cash realized in 1925 a cost for 1925 obtained by applying to the full cost of the lot the percentage of the sale price realized in 1925 in cash.
(d) Transactions on which 25 per cent. of the sale price was received in cash, either as down payment or as payment on notes, together with the profit as computed and reported by the taxpayer, were as follows; the number of lots so sold being 23½:
Sale price ....................... $54,825.00 Face of notes .................... 43,943.75 __________ Down payments ................. 10,881.25 Payment on notes ................. 2,843.75 __________ Total payments ................ 13,725.00 Cost allocated to 1925 ........... 3,632.53 __________ Profit reported ............... $10,092.47
The taxpayer computed the profit by the same method used in sales where less than 25 per cent. of the purchase price had been received in cash during the taxable year.
(e) Transactions on which more than 25 per cent. of the sale price was received in cash, either as down payment or as payment on notes (exclusive of those on which the entire sale price was received in cash and the one lot covered wholly by notes on which partial payment only was made), together with the profit as computed and reported by the taxpayer, were as follows; the number of lots so sold being 116½:
Sale price ....................... $269,660.00 Face of notes .................... 202,051.36 ___________ Down payments ................. 67,608.64 Payment on notes ................. 24,657.82 ___________ Total payments ................ 92,266.46 Cost ............................. 71,474.80 ___________ Profit ........................ 20,791.66 Profit reported .................. 21,791.66 ___________ Discrepancy ................... $ 1,000.00
The discrepancy is in an overstatement of profit by $1,000 on lot No. 4 of block A based on indicated cost.
In these cases the profit was computed on full cost, without allocation.
(f) The following summarizes the transactions:
Sale price ....................... $377,471.66 Face of notes .................... 277,958.44 ___________ Down payments ................. 99,513.22 Payment on notes ................. 36,478.24 ___________ Total payments ................ 135,991.46 Cost (full or allocated) ......... 83,596.88 ___________ Profit ........................ 52,394.58 Profit reported .................. 53,394.58 ___________ Discrepancy ................... $ 1,000.00
The total payments, amounting to $135,991.46, were all made during the taxable year 1925.
The balance due on notes at the end of the year 1925 was $241,480.20. During the year 1926, $47,521.58 was collected on notes made in 1925, given by purchasers of lots in 1925, and in the year 1927, $42,226.92 was collected thereon, and both these collections were added by the Commissioner to the taxpayer's income for 1925.
4. At the time the taxpayer commenced business, real property transactions in and around Winter Haven, Fla., were unusually active. The region was "enjoying a boom." During its existence lots were bought and sold in great numbers for speculative purposes only; in most cases the purchaser buying only for the purpose of resale at a higher market. The transactions hereinabove described in finding 3 were a part of and involved in this general situation. The evidence does not show definitely when the "boom" was over, but only that it was in the latter part of 1925 or in 1926, and also fails to show that the notes given in these transactions had no fair market value at the end of the taxable year 1925.
(a) In 1926, 12 lots were repossessed by the taxpayer, with balances due, as follows:
Sale price ....................... $26,800.00 Face of notes .................... 22,346.00 __________ Down payments ................. 4,454.00 Payment in 1925 on notes ......... 2,283.00 Payment in 1926 on notes ......... 1,906.00 __________ Total payments ................ 8,643.00 Balance due at repossession ...... $18,157.00
(b) In 1927, 41½ lots were repossessed by the taxpayer, with balances due, as follows:
Sale price ....................... $99,950.00 Face of notes .................... 74,905.50 __________ Down payments ................. 25,044.50 Payment in 1925 on notes ......... 5,880.00 Payment in 1926 on notes ......... 5,804.17 Payment in 1927 on notes ......... 200.00 __________ Total payments ................ 36,928.67 Balance due at repossession ...... $63,021.33
(c) In 1928, 40 lots were repossessed by the taxpayer, with balances due, as follows:
Sale price ....................... $95,046.66 Face of notes .................... 75,654.33 __________ Down payments ................. 19,392.33 Payment in 1925 on notes ......... 5,601.35 Payment in 1926 on notes ......... 5,951.24 Payment in 1927 on notes ......... 1,590.00 Payment in 1928 on notes ......... 100.00 __________ Total payments ................ 32,634.92 Balance due at repossession ...... $62,411.74
(d) In 1929, 8 lots were repossessed by the taxpayer, with balances due, as follows:
Sale price ....................... $19,850.00 Face of notes .................... 15,237.50 __________ Down payments ................. 4,612.50 Payment in 1925 on notes ......... 1,073.34 Payment in 1926 on notes ......... 667.50 Payment in 1927 on notes ......... 709.00 Payment in 1928 on notes ......... 100.00 __________ Total payments ................ 7,162.34 Balance due at repossession ...... $12,687.66
(e) The following is a summary of the repossessions; there being 101½ lots repossessed out of 166½ on which profit was reported:
Sale price ....................... $241,646.66 Face of notes .................... 188,143.33 ___________ Down payment .................. 53,503.33 Payment in 1925 on notes ......... 14,837.69 Payment in 1926 on notes ......... 14,328.91 Payment in 1927 on notes ......... 2,499.00 Payment in 1928 on notes ......... 200.00 ___________ Total payments ................ 85,368.93 Balance due at repossession ...... $156,277.73
This suit is brought to recover the amount of $4,494.51 income tax for the year 1925, paid on March 28, 1929, together with Interest thereon. The plaintiff alleges that the Commissioner of Internal Revenue in computing the income of the Kenilworth Park Company for the year 1925 erroneously included certain promissory notes at their face value in determining the profits from the sale of certain real estate, and that he should have included in the gross income only the amount actually paid thereon in cash for the reason that said notes did not have any fair market value in 1925.
Under these allegations the issue is one of fact as to whether the plaintiff has shown by a preponderance of the evidence that the Commissioner fixed the amount of the income of said company for the year 1925 at too high an amount and also what the correct amount was.
The evidence shows that the notes were given in payment for sales of real estate around Winter Haven, Fla., at a time when such transactions were very active, and in ordinary parlance the region was "enjoying a boom." We may assume that most of the transactions were entered into for speculative purposes, and it is quite evident that notes given in the course thereof could not be sold for their full face value. Under such circumstances, when the boom was over or had collapsed it is quite evident that such notes would have no market value and would be unsalable for any substantial sum unless the makers thereof were individually responsible. The defect in plaintiff's case is that the evidence fails to show whether the boom ended in 1925 or 1926, or anything whatever as to the responsibility of the makers of the notes in controversy. On the other hand, the evidence shows that in 1926 $47,521.58 was collected on notes made and given in 1925 by purchasers of lots, and even in the year 1927 $42,226.92 was collected thereon. This showed plainly that some of the makers of these notes were able and willing to pay them. There was, it is true, due at the end of the year 1925 $241,480.20 on notes. We are not disposed to determine the exact weight and effect of evidence as to what happened subsequently, but we think the fact that about one-third of these notes was afterwards paid tends to rebut the claim of plaintiff that they had no substantial value, and on the whole of the evidence we have found that it fails to show what the value of the notes in controversy was in 1925. The Commissioner may have erred in making his computation on the basis that these notes were worth the full face value. Notes of this kind would have no market value in the sense that the term "market value" is generally used. But we think they had some substantial value, and, as the plaintiff has failed to show what that value was, we cannot say in what amount the Commissioner erred in making his assessment.
It follows that plaintiff's petition must be dismissed, and it is so ordered.
BOOTH, Chief Justice, and WHALEY, WILLIAMS, and LITTLETON, Judges, concur.