Court Opinion

ID: 4610201
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:46:21.783348+00
Date Added: 2024-06-11T07:59:50.059782
License: Public Domain

JACOB M. DICKINSON, JR., AND THE NATIONAL BANK OF THE REPUBLIC OF CHICAGO, EXECUTORS, ESTATE OF JOCOB M. DICKINSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Dickinson v. CommissionerDocket No. 29208.United States Board of Tax Appeals18 B.T.A. 790; 1930 BTA LEXIS 2587; January 14, 1930, Promulgated 1930 BTA LEXIS 2587">*2587  In 1919 the decedent sold a cotton plantation and transferred title by deed to the purchaser.  Profit from the transaction was reported on the installment basis.  In 1923 he reacquired the plantation by foreclosure, exchanging therefor purchase money notes of a face value equal to the then fair market value of the land.  Held that the sale and reacquisition are separate transactions and may not be considered together in computing gain or loss.  Held, further, that the utilization of the purchase money notes in reacquiring the plantation at trustee's sale constitutes a realization of profit under the installment method of reporting income of that proportion of the notes utilized which the total profit bears to the total contract price.  James S. Y. Ivins, Esq., and Fred E. Youngman, Esq., for the petitioners.  John D. Foley, Esq., and Lloyd Creason, Esq., for the respondent.  LANSDON 18 B.T.A. 790">*791  The respondent has asserted a deficiency in income taxes for the year 1923 of $27,111.07.  The deficiency arises from the respondent's action in disallowing as a deductible loss the amount of $30,000 which represents certain promissory notes alleged1930 BTA LEXIS 2587">*2588  to have been worthless in the taxable year, and in adding to the income reported an amount of $48,176.73 as profit upon the repossession of a cotton plantation sold by the decedent in 1919.  The petitioners have abandoned the first issue, leaving for determination in this proceeding the single question whether payments received in 1919, 1920, and 1921 on the purchase price of a cotton plantation, less amounts previously reported as profit, were income upon reacquisition of the property in the taxable year.  The facts are stipulated.  FINDINGS OF FACT.  Jacob M. Dickinson, the original petitioner herein, died on December 13, 1928.  Jacob M. Dickinson, Jr., is a resident of the city of Chicago, State of Illinois, and is one of the coexecutors of the estate of Jacob M. Dickinson, deceased, the other coexecutor being The National Bank of the Republic of Chicago.  Said coexecutors were substituted as petitioners in this proceeding by an order of the Board dated March 14, 1929.  The notice of deficiency in this case was mailed on or after April 23, 1927.  The petition was filed June 20, 1927.  For many years prior to July 7, 1919, Jacob M. Dickinson owned a cotton plantation, containing1930 BTA LEXIS 2587">*2589  about 1,440 acres of land, in Mississippi County, Arkansas.  On July 7, 1919, Jacob M. Dickinson sold said plantation and the improvements thereon to one Steve Ralph for an agreed price of $233,025, and on that day transferred the title to the property by a deed from himself to Steve Ralph.  Of the aforesaid agreed price of $233,025, the amount of $23,025 was paid to Jacob M. Dickinson in cash at the time of sale, and the balance, to wit, $210,000, was paid to him with promissory notes of Steve Ralph, as follows: One note in the amount of $15,000, payable March 1, 1920; seven notes in the amount of $25,000 each, one of 18 B.T.A. 790">*792  which was payable on December 1 in each of the years from 1920 to 1926, inclusive; and one note in the amount of $20,000, payable December 1, 1927.  Steve Ralph also gave to Jacob M. Dickinson on the date of sale notes for interest on the aforesaid principal notes, said interest notes being calculated at 6 per cent and being payable on the same date as the particular principal note to which each related.  On the promissory notes representing the principal mentioned above, Jacob M. Dickinson received $15,000 on March 1, 1920, $10,000 on October 24, 1921, and1930 BTA LEXIS 2587">*2590  $6,700 on November 27, 1921.  On December 1, 1921, there remained unpaid $178,300 of said principal notes.  On December 1, 1921, there also remained unpaid notes for interest accrued to said date in the amount of $11,700.  On December 1, 1921, Steve Ralph sold the aforesaid plantation to Messrs. Bowden, Darden, and Ledbetter, for an amount in excess of $233,025, and such excess was paid to Steve Ralph.  On December 1, 1921, Jacob M. Dickinson accepted a new series of promissory notes secured by a trust deed on the plantation executed and delivered by Messrs. Bowden, Darden, and Ledbetter to Jacob M. Dickinson, and it was agreed that the aforesaid deed of trust executed and delivered by Steve Ralph on July 7, 1919, should be kept alive as a part of the transaction to secure the payment of the notes given by Messrs. Bowden, Darden, and Ledbetter as additional security to the second deed of trust.  In December, 1923, Messrs. Bowden, Darden, and Ledbetter were in default with respect to certain of the aforesaid notes made to Jacob M. Dickinson.  The makers of the promissory notes having failed to pay said notes on demand, Jacob M. Dickinson took steps to have the trust deeds1930 BTA LEXIS 2587">*2591  on the property foreclosed under trustee's sale without court proceedings, as provided for in the trust deed and permitted under the laws of the State of Arkansas.  As required under the laws of the State of Arkansas, providing for trustee's sale, the property was duly appraised by disinterested appraisers, who appraised the fair market value of said plantation to be $125,000 as of December 18, 1923.  On December 18, 1923, Jacob M. Dickinson purchased the said plantation from the trustee, at a trustee's sale, for the amount of $125,000.  In his return of Federal income taxes for the calendar year 1919, Jacob M. Dickinson computed the amount of taxable gain or profit from the aforesaid sale as $16,637.67.  He received during said year on account of the purchase price for said plantation the sum of 18 B.T.A. 790">*793  $23,025, and in his return for 1919 reported $3,243.13 thereof as taxable profit.  During the year 1920, Jacob M. Dickinson received, on account of the aforesaid notes of Steve Ralph, the sum of $15,000, and reported in his Federal income-tax return for said year the sum of $2,112.79 as taxable profit.  During the year 1921 Jacob M. Dickinson received, on account of the1930 BTA LEXIS 2587">*2592  aforesaid notes of Steve Ralph, the sum of $16,700, and reported in his income-tax return for said year the sum of $1,192.35 as taxable profit.  Jacob M. Dickinson received no payments during the years 1922 or 1923 on account of the principal notes then due.  The Commissioner accepted Jacob M. Dickinson's returns of the items mentioned above as correct for each of the years 1919, 1920, and 1921.  He likewise accepted the 1922 return as correct.  In auditing the 1923 return of Jacob M. Dickinson and in computing the deficiency asserted in his 60-day letter, the respondent cumulated the amounts paid to Jacob M. Dickinson on account of the principal, as shown above, during the years 1919, 1920, and 1921, and added the total thereof, to wit, $54,725, less that portion thereof previously reported as income during said years, to wit, $6,548.27, or $48,176.73, to taxable income of Jacob M. Dickinson for the year 1923.  The respondent, in computing the deficiency asserted in his 60-day letter, also further increased net income for 1923 by eliminating a deduction of $30,000 taken by Jacob M. Dickinson, representing an alleged loss claimed to have been sustained in said year by Jacob M. 1930 BTA LEXIS 2587">*2593  Dickinson on account of the principal notes.  The total amount received by Jacob M. Dickinson from the sale of said plantation and/or on account of the principal notes above mentioned was $54,725, received during the years 1919, 1920, and 1921, aforesaid.  Except for the real estate transaction reported on the installment basis as hereinbefore indicated, Jacob M. Dickinson's accounts were kept and his returns for the years 1919 to 1923, inclusive, were filed on the basis of cash receipts and disbursements.  When Jacob M. Dickinson purchased the plantation from the trustee at trustee's sale on December 18, 1923, for the amount of $125,000, payment to the trustee was made by the cancellation of outstanding notes of the mortgagors in the amount of $125,000.  OPINION.  LANSDON: On July 7, 1919, the decedent sold a cotton plantation and the improvements thereon for $233,025, and conveyed the property by deed to the purchasers.  Profit from the transaction was 18 B.T.A. 790">*794  reported on the installment plan.  In December, 1923, the purchasers were in default and foreclosure proceedings were instituted.  As required by the laws of Arkansas, certain disinterested appraisers determined1930 BTA LEXIS 2587">*2594  the fair market value of the property on December 18, 1923, to be $125,000, and on that date the decedent purchased the plantation at trustee's sale for its appraised value, making payment therefor by canceling purchase money notes of the face value of $125,000.  The decedent returned no profit from the reacquisition in 1923.  Upon audit of the 1923 income-tax return the respondent included as income the amount of all payments received on the purchase price, less profit previously reported, on the theory that the decedent had recovered the identical property sold and had retained the payments previously made.  The sale in 1919, when title was passed to the purchasers, and the reacquisition in 1923 by purchase at the trustee's sale were separate and distinct transactions which may not be considered together in computing gain or loss.  ; ; ; ; ; 1930 BTA LEXIS 2587">*2595 . None of those cases, however, involved sales where return of income was on the installment basis, which fact, the respondent argues, is the foundation for the different treatment of sale and repossession transactions found in Regulations 69, articles 44, 45, and 46.  The method adopted for reporting profit from the sale of teal estate is only an incident of the sale and can not alter the nature of the transaction.  If at the time of the sale title passed to the purchaser, the sale is complete.  If the vendor reacquires the property after default by the purchaser and exchanges purchase money notes for the property, there is a repurchase which may give rise to gain or loss.  The treatment for income-tax purposes of such installment sale and repossession transactions must depend upon the question whether in fact there is one transaction or two.  We think the respondent erred in including in decedent's income for 1923 the amount of all purchase money payments received and kept, less the profit previously reported.  The reacquisition, or repurchase of the plantation on December 18, 1923, was effected1930 BTA LEXIS 2587">*2596  by an exchange of notes having a face value of $125,000 for the plantation which then had a fair market value of $125,000.  The utilization of the purchase money notes in reacquiring the plantation constitutes a realization of profit, under the installment method of reporting income.  The total contract price, when the plantation was sold, was $233,025; the profit was $16,637.67.  The profit is 7.1398 per cent of the total contract price and under the installment 18 B.T.A. 790">*795  method of returning income that part of each payment constitutes profit realized.  It follows that 7.1398 per cent of $125,000, or $8,924.75, constitutes profit in 1923.  Reviewed by the Board.  Decision will be entered under Rule 50.MURDOCK MURDOCK, dissenting: In my opinion the determination of the Commissioner should have been approved for lack of evidence.  SMITH agrees with this dissent.