Court Opinion

ID: 4594761
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:13:37.481031+00
Date Added: 2024-06-11T07:51:18.135073
License: Public Domain

APPALACHIAN REALTY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Appalachian Realty Co. v. CommissionerDocket No. 9685.United States Board of Tax Appeals12 B.T.A. 52; 1928 BTA LEXIS 3607; May 23, 1928, Promulgated *3607  Acquisition cost of certain real estate on April 1, 1920, determined.  E. S. Parker, Esq., and Jesse I. Miller, Esq., for the petitioner.  Julian G. Gibbs, Esq., and Jeff T. Jones, Esq., for the respondent.  GREEN *52  In this proceeding the petitioner seeks a redetermination of its income and profits taxes for the calendar years 1920 and 1921 for which years the respondent has determined deficiencies of $21,414.17 and $1,521.51, respectively.  *53  The petitioner alleges that the respondent erred in treating $265,000 as the cost of certain real estate on April 1, 1920, contending that its cost was $365,000, paid by the assumption of $265,000 of indebtedness incurred by its grantor and the issuance of $100,000 of its capital stock.  All other allegations of error were abandoned at the trial.  FINDINGS OF FACT.  The petitioner is a corporation organized under the laws of the State of North Carolina with its principal office at Biltmore in that State.  Early in 1920, George Stephens learned from Walter P. Taylor that Biltmore Village, consisting of about 50 acres with 58 buildings, could be purchased from the Estate of George*3608  Vanderbilt.  Up to this time the Vanderbilt Estate had refused to sell any parcels of land in the village and it was not known that it would be sold as a unit.  Stephens, upon the information received from Taylor, entered into negotiations with the agent of the Vanderbilt Estate and on February 13, 1920, obtained a contract to purchase the property for a total consideration of $265,000, of which $100,000 was allocated to the 50 acres at $2,000 per acre and $165,000 to the 58 buildings situated thereon.  A subsequent survey showed the propety to contain only 49 acres and the Vanderbilt Estate adjusted the difference by a credit of $2,000.  The contract of purchase provided for a $10,000 cash payment which was made by Stephens, $38,000 in notes and $215,000 in first mortgage bonds.  The consideration was to pass as of April 1, 1920, and on that date possession to be given to Stephens.  Shortly after February 13, 1920, Stephens was advised that William K. Vanderbilt, one of the trustees of the Vandebilt Estate, was preparing to leave the United States and that it would be necessary for the estate to execute a deed immediately.  Stephens, who had determined to turn the property over*3609  to a corporation, on February 21, 1920, caused the Appalachian Realty Co., the petitioner herein, to be organized and instructed the trustees of the Vanderbilt Estate to have the deed executed to the petitioner.  The deed was executed by the trustees on February 23, 1920, and was placed in escrow in the Central Bank & Trust Co. of Asheville, N.C., by which it was formally deliered to the petitioner in August, 1920.  Stephens agreed to sell Taylor seven acres of the land at cost in return for the information which had led him to make the purchase.  On March 25, 1920, Stephens entered into a written agreement with Taylor in which he agreed to sell Taylor 14.481 acres and the buildings thereon for $100,000.  This agreement included the seven acres at cost or $2,000 per acre.  The balance of the purchase price, $86,000, *54  covered the remaining 7.481 acres and the buildings.  The cost of the 7.481 acres was $14,962, the buildings cost $52,850, or a total cost of $67,812, resulting in a profit of $18,188.  On May 11, 1920, Stephens entered into another contract with Taylor whereby he agreed to sell him the "office building" for $35,000.  The contract price of this building when*3610  purchased from the Vanderbilt Estate was $14,000, and the sale resulted in a profit of $20,960.  On April 1, 1920, Stephens transferred to the petitioner all his right, title and interest in and to the contract with the Vanderbilt Estate, the contract of March 25, 1920, with Taylor, and whatever interest he had in pending negotiations with Taylor which took final form in the agreement of May 11, 1920.  In consideration of the conveyance to it of the contracts enumerated, the petitioner reimbursed Stephens in the sum of $10,000 paid by him to the Vanderbilt Estate, assumed the balance of $255,000 due under the Vanderbilt Estate contract and issued to Stephens fully paid-up $100,000 par value of its capital stock with the exception of two qualifying shares which were issued to Stephens' nominees.  On and after February 13, 1920.  when the general public became advised of the sale of Biltmore Village to Stephens, the property appreciated greatly in value.  The petitioner, as soon as it came into possession of the property, increased the lent on the several buildings to reflect an additional $100,000 of value.  Expert evidence was introduced at the trial which shows the fair market*3611  value of Biltmore Village on April 1, 1920, to be from $400,000 to $500,000.  Subsequent to April 1, 1920, the petitioner conveyed to various persons certain portions of Biltmore Village, including portions thereof contracted by Stephens to be sold prior to April 1, 1920.  In computing such profit, the respondent assumed that the cost to the petitioner was the purchase price of $265,000 for which the Vanderbilt Estate sold to Stephens.  The petitioner maintains that the cost to the corporation was $365,000 representing the corporation's assumption of Stephens' liability of $265,000 under his contract with the Vanderbilt Estate plus the value of $100,000 par value of its capital stock issued to Stephens.  The respondent computed depreciation on the basis of $265,000 while the petitioner contends that $365,000 should be used.  The respondent upon a reaudit of the petitioner's income and profits-tax returns for the years 1920 and 1921 has determined deficiencies of $21,414.17 and $1,521.51, respectively, making a total deficiency of $22,935.68.  *55  OPINION.  GREEN: The sole question involved in this proceeding is the determination of the cost to the petitioner of Biltmore*3612  Village.  On February 13, 1920, Stephens entered into a contract with the Vanderbilt Estate for the purchase of Biltmore Village at an agreed price of $265,000, later reduced to $263,000.  On April 1, 1920, he conveyed to the petitioner, a corporation, all his right, title and interest in said contract together with certain intervening contracts in consideration of which the petitioner reimbursed him for the money already paid the Vanderbilt Estate, assumed the balance of the Vanderbilt Estate contract and issued to him $100,000 par value of its capital stock.  We are of the opinion that the circumstances surrounding the sale of Biltmore Village by the Vanderbilt Estate to Stephens on February 13, 1920, preclude us from accepting the $263,000 paid the Estate as the fair market value of the tract on April 1, 1920.  We have here a 49-acre tract of land improved with 58 buildings in the hands of a wealthy estate which had refused to sell any of the tract in parcels and made no attempt up to that date to dispose of the tract in its entirety.  As soon as it was known that the tract had been sold and that it would be subdivided there was an immediate appreciation in its value.  This*3613  increase is concretely shown in the profits reflected on the contract for the sale of 7.481 acres made by Stephens before the property was conveyed to the petitioner, which shows a gain of 47.8 per cent over the cost to Stephens.  The situation was not the same on April 1, 1920, as it had been on February 13, 1920.  The petitioner acquired property which was available for sale in small tracts and in addition sales contracts reflecting a profit of 47.8 per cent over the cost of the parcels to the original purchaser in return for which it assumed the obligations due the Vanderbilt Estate and issued $100,000 par value of its stock in addition.  The contracts with Taylor alone reflected a profit of $39,148 and the evidence is undisputed that the entire tract was worth from $400,000 to $500,000.  Accordingly, we are of the opinion that the stock issued by the petitioner was worth par and that the cost of Biltmore Village to the petitioner was $365,000.  Judgment will be entered under Rule 50.