Court Opinion

ID: 4628720
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:03:55.549102+00
Date Added: 2024-06-11T07:57:15.409200
License: Public Domain

THOMAS J. AVERY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Avery v. CommissionerDocket No. 27688.United States Board of Tax Appeals11 B.T.A. 958; 1928 BTA LEXIS 3681; May 2, 1928, Promulgated 1928 BTA LEXIS 3681">*3681  Petitioner and others received a bond for title to property in 1917.  Two portions of the tract were sold and deeds therefor were received from the vendor.  In 1918 the unpaid balance of the agreed purchase price was paid and petitioner and associates received deed to balance of tract, which they sold in 1922.  Held, that a taxable gain resulted from the sale in 1922 determined by an allocation of the purchase price to the portion sold in that year.  Edgar Watkins, Esq., for the petitioner.  A. S. Lisenby, Esq., for the respondent.  TRAMMELL11 B.T.A. 958">*958  This is a proceeding for the redetermination of a deficiency in income tax for 1922 in the amount of $6,808.96.  The errors alleged are: (1) That the respondent erroneously determined that the petitioner received income during 1922 in the amount of $8,133.33 on account of profit on the sale of land; (2) that the respondent erroneously asserted a 5 per cent penalty for negligence; (3) that the respondent erred in refusing to allow as a deduction an amount representing debts claimed to have been ascertained to be worthless and charged off; and (4) that the respondent erred in refusing to increase the1928 BTA LEXIS 3681">*3682  net loss for 1921 applicable as a credit against the net income for 1922 by an amount representing collections which were claimed to have been erroneously included in 1921 income upon the belief that debts had been previously charged off.  At the hearing counsel for the respondent admitted that he had erred with respect to the last error assigned and that the net income for 1921 should be reduced by the amount of $4,284.84 to be applied as a credit against net income for 1922.  FINDINGS OF FACT.  The petitioner is an individual residing in Atlanta, Ga.  In 1915 the petitioner, George M. Napier and W. H. Nunnally entered into a 11 B.T.A. 958">*959  contract of special partnership for the purpose of selling and disposing of a tract of 100 acres of land purchased by them from Mrs. Kitty B. Anderson, such partnership to be conducted and operated under the name of the Griswold Realty Co.  The three individuals entered into a contract with Mrs. Anderson to purchase the property and received a bond for title under which the grantor obligated herself to convey the property by proper instruments when the terms and conditions set forth in the bond for title were performed by the individuals. 1928 BTA LEXIS 3681">*3683  The purchase price of the entire tract as set forth in the bond for title was $42,500, $7,000 of which was paid in cash, the assumption of an indebtedness against the property in the amount of $23,000 which became due and payable in 1919, with the privilege of paying same earlier, and the remainder of the purchase price, $12,500 was represented by five promissory notes of $2,500 each, due and payable on or before one, two, three, four and five years from date.  The $7,000 cash payment was borrowed by the purchasers.  After the cash payment of $7,000 and the receipt of the bond for title, the purchasers made extensive repairs to a building located on the premises, paid taxes upon the property, paid interest upon the amount of the indebtedness assumed, and also had the property surveyed for which they paid a considerable amount.  Nunnally, one of the partners, received $500 as attorney's fees for legal services rendered in behalf of the partnership.  On February 15, 1917, a portion of the property acquired, including the residence, was sold for $19,500, and on September 27, 1917, another portion was sold for $1,900.  On May 29, 1922, the remainder of the land was sold for $45,000. 1928 BTA LEXIS 3681">*3684  The petitioner and his associates, not having acquired the legal title to the property in 1917, arranged with the person from whom they secured the bond for title and satisfied her with respect to the purchase price in order to induce her to make them a deed to the two tracts which they sold.  On February 2, 1917, Kitty B. Anderson executed a conveyance to a portion of the tract, the deed reciting a consideration of $20,000, and on August 24, 1917, she executed another deed to a portion of the tract, the consideration recited in the deed being $10 and other valuable considerations.  On July 27, 1918, Kitty B. Anderson executed a deed to the petitioner and his associates for the balance of the tract, the consideration recited in the deed being $20,600.  The petitioner and his associates sold the balance of the property on May 29, 1922, for $45,000.  They paid a commission of $2,250 upon the sale in 1922.  In 1922 the petitioner and his associates paid taxes on the property in the amount of $199.85 and for previous 11 B.T.A. 958">*960  years the total amount of taxes amounted to $1,477.39.  The associates of the petitioner, before making their income-tax returns for 1922, stated the1928 BTA LEXIS 3681">*3685  facts relating to the land transaction to "one of the officials of the Internal Revenue Department at Atlanta," and were advised that no tax was due from this transaction.  This information was conveyed to the petitioner.  No information relating to this transaction was set forth in the petitioner's income-tax return.  Items of income, however, were omitted from the petitioner's income-tax return, so that his taxable net income for the year involved would be approximately $18,000 in excess of that reported without considering any income from the land transaction in question.  The petitioner does not protest the other items of income and assigns no error to the action of the respondent in increasing his income except with respect to the errors here involved.  The respondent added to the petitioner's tax for 1922 a penalty of 5 per cent for negligence.  The petitioner in his return for 1922 deducted $690.05 on account of worthless debts.  The debtors were Fred L. Nichols, R. T. Shirling and J. W. Tuck.  The same debtors were indebted to the petitioner in a previous year in different amounts and the petitioner after investigation ascertained the debts for 1920 to be worthless and charged1928 BTA LEXIS 3681">*3686  them off and took a deduction in his income-tax return therefor.  Subsequent to 1920 the petitioner sold machinery and other property to the same debtors and extended them credit.  The debts owed by these men, which were charged off in 1920, were never paid.  Credit on the subsequent transactions was extended to these men upon their character, the petitioner knowing that they had no a vailable assets from which they could pay the debts unless they realized income subsequent to the extension of the credit.  The petitioner, however, ascertained that during 1922 the above-named debtors would not be able to pay the amounts which they owed and that there were no means by which the debts could be collected.  He accordingly charged them off as worthless debts during that year and claimed a deduction therefor in his income-tax return.  These deductions were disallowed by the respondent.  OPINION.  TRAMMELL: The first question is the extent to which the petitioner received taxable income in 1922 from the sale of the property to which the petitioner and his associates acquired bond for title in 1917 and to which they acquired a deed in 1918.  The petitioner contends that the purchase of1928 BTA LEXIS 3681">*3687  the tract of land was one inseparable transaction and that the amount of income realized should be determined by considering the entire selling price, notwithstanding the fact that there 11 B.T.A. 958">*961  were three sales of the property.  The petitioner also contends that the amount of taxes and interest should be added to the purchase price of the property.  On the other hand, the respondent contends that the petitioner and his associates did not acquire the real estate which was sold in 1922 in 1917 when they received the bond for title, but, that they received it in 1918 when they received the deed to the property, and that the consideration of $20,600 recited in this deed was the actual consideration paid for the particular property which was sold in 1922.  It appears, however, from the evidence that the petitioner and his associates, when they received the bond for title, paid $7,000 in cash for the entire tract, assumed an indebtedness against the entire tract of $23,000 and gave their notes for $12,500, making the purchase price of the entire tract, $42,500.  The assumption of the indebtedness and the cash amounted to $30,000, leaving only $12,500 to be paid in the future.  The1928 BTA LEXIS 3681">*3688  purchasers immediately went into possession of the property, had it surveyed, had the building extensively repaired and proceeded to sell the property, and during the same year sold two portions thereof.  There is testimony to the effect that the notes which the petitioner gave, in the amount of $2,500 each, were paid as they became due.  We think, in view of all the facts in this case, that the petitioner and his associates acquired the property in one tract in 1917 when they received the bond for title.  The fact that they did not acquire a deed is not determinative of the question when they became the owners of the property.  Under such circumstances the petitioner and his associates became the actual owners of the property and their vendor merely held the legal title as security.  The fact, however, that the property was acquired in 1917 in one tract, does not mean that the entire tract must be disposed of before a determination of gain or loss may be made on the portions thereof which have been sold or disposed of.  Property may be acquired in one tract, divided and sold in several tracts, and, in our opinion, it is not necessary to wait until all of the tract is disposed1928 BTA LEXIS 3681">*3689  of before gain or loss may be determined with respect to the subdivided tracts.  The purchase price of the entire tract may be allocated to the portions or subdivided tracts which are sold and gain or loss determined.  The portion of the tract which was sold in 1922 was conveyed by deed to the petitioner and his associates in 1918, although included in the bond for title they received in 1917.  The deed in 1918 recited a consideration of $20,600 and other valuable considerations.  There was, however, no other consideration than that amount in the bond for title.  The petitioner and his associates paid only $42,500 for the entire tract and, at the time of the execution of the deed by the 11 B.T.A. 958">*962  grantor to the petitioner and his associates, the unpaid purchase price represented by the notes which had not previously been paid was paid.  The testimony is to the effect that the petitioner and his associates considered the $20,600 recited in that deed as being the correct consideration for that part of the property, notwithstanding the fact that a portion of that amount had already been paid.  Revenue stamps were placed upon the deed based upon a consideration of $20,600.  In our1928 BTA LEXIS 3681">*3690  opinion, the amount of $20,600 recited as the consideration in this deed, represents a fair and reasonable allocation of the total purchase price of $42,500 to this particular portion of the land.  The parties to the transaction apparently so considered it.  This being true, the situation narrows itself down to this: The petitioner and his associates acquired the property for $20,600, which they sold in 1922 for $45,000.  The profit would thus be $24,400 to be divided between the petitioner and his associates in equal proportions, making the amount of $8,133.33 the petitioner's portion of the amount.  The three partners paid a commission of $2,250 on the sale of the property in 1922, and the respondent has allowed the petitioner a deduction of $750 representing his one-third thereof.  While we reach our conclusion upon an entirely different theory from that upon which the respondent determined the amount of gain from the land transaction, the result is the same.  The amount of taxes and interest paid by the petitioner in holding and carrying property is deductible from income in the years in which paid or accrued according to the method of bookkeeping adopted by the petitioner, 1928 BTA LEXIS 3681">*3691  such amounts may not be added to the purchase price of the property.  ; . With respect to the question of the repairs and survey, there was testimony to the effect that extensive repairs were made and also that a considerable sum was paid out for surveying.  The repairs which were made may not be added to the purchase price of the property, being expense items.  In any event, there is no testimony as to the amount of the repairs or the nature thereof.  With respect to the surveying expenses, there is no testimony as to the amount thereof.  On the question of the 5 per cent penalty for negligence, it appears that the petitioner aside from the land transaction had income in the amount of $18,000, with respect to which he made no entries in his return and which he does not deny, and does not contend and did not contend before the Bureau, was not taxable income.  In our opinion, the failure to set forth the facts relating to this income or to disclose information relating thereto, indicates carelessness and negligence to say the least, and in our opinion, the 5 per cent 11 B.T.A. 958">*963 1928 BTA LEXIS 3681">*3692  penalty for negligence should be imposed, even though the petitioner was acting in good faith and relied upon information that he received to the effect that the land transaction did not result in taxable gain.  With respect to the bad debts, we are convinced that the petitioner ascertained the debts in question in the amount of $690.05 to be worthless and charged them off during the taxable year involved.  The fact that the petitioner had sold property to the same individuals and had ascertained in a previous year that they were unable to pay and that he could not collect, does not prevent the petitioner from ascertaining subsequent debts to be bad and receiving the benefit of a deduction with respect thereto.  We can not assume that the petitioner intended to give away his property or that he did not consider that he had prospects of collecting when he sold the property as a result of which the debts were incurred which were charged off in the taxable year.  In our opinion, the deduction on account of bad debts is allowable.  Judgment will be entered on 15 days' notice, under Rule 50.