Court Opinion

ID: 4609126
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:44:04.264491+00
Date Added: 2024-06-11T07:53:49.968358
License: Public Domain

HOME STATE BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Home State Bank v. CommissionerDocket No. 14462.United States Board of Tax Appeals15 B.T.A. 121; 1929 BTA LEXIS 2918; January 29, 1929, Promulgated 1929 BTA LEXIS 2918">*2918  The petitioner, having sold real property in 1915 which it repossessed in 1920 because of default on the part of the purchaser, is entitled to deduct any loss sustained upon said repossession.  Samuel A. Dew, Esq., for the petitioner.  P. M. Clark, Esq., for the respondent.  MORRIS15 B.T.A. 121">*121  This proceeding is for the redetermination of a deficiency in income and profits taxes of $1,909.45 for the calendar year 1920, and the sole issue for consideration is whether the respondent erred in the disallowance of an alleged loss sustained by the petitioner of the difference between the face value of certain notes, amounting to $13,440, and $4,180.48, representing the value of real estate received in exchange for said notes in 1920 in full and complete discharge of the indebtedness thereunder.  The petitioner alleges the amount in controversy to be $2,592.67.  FINDINGS OF FACT.  The stipulated facts herein show that in 1914 the petitioner acquired the Camden County, Missouri, property, involved herein, at a cost of $13,500; that in 1915 it sold said land to Charles V. Sass for $16,440, the purchase price to be paid by two notes for $7,000 and $6,440, 1929 BTA LEXIS 2918">*2919  secured by mortgages on said land, and two notes for $1,000 and $2,000, secured by mortgages on other real estate; that a profit of $2,940 was derived by the petitioner from the foregoing transaction and was so recorded in the books of account and accounted for by the petitioner in its income-tax return for the calendar year 1915; that from the date of sale to Sass the petitioner carried all of said notes in its books of account, aggregating in amount $16,440, at their full face value, until 1920 when said land was repossessed by it as hereinafter related.  The stipulated facts show further that Sass defaulted in the payment of interest due on the foregoing mortgage notes and in 1917 the petitioner filed suit against him on the $6,440 note, $1,000 note and $2,000 note in the District Court of Wyandotte County, Kansas; that in December, 1919, Sass, being 15 B.T.A. 121">*122  delinquent as aforesaid and said suits still pending, and having further defaulted in interest and taxes accruing subsequently to the suits aforesaid, petitioner entered into a settlement agreement with said Sass covering his entire indebtedness arising out of the purchase of the land above described; that this settlement1929 BTA LEXIS 2918">*2920  agreement was finally consummated in February, 1920, by the terms of which Sass paid the accumulated interest and taxes on the Camden County property by giving to the petitioner notes and mortgages on other property, and new notes and mortgages covering the $1,000 and $2,000 notes aforesaid, secured by other real estate, all of said new notes were recorded in the petitioner's books of account and carried at their face value, and the remaining principal indebtedness of $13,440 above described was canceled by Sass deeding back to the petitioner the 1,400 acres of land in Camden County, in consideration for which the petitioner dismissed the pending suits against Sass and canceled all of the notes and mortgages received by it from him upon the sale of said Camden property.  The petitioner thereupon charged off upon its books of account, in reduction of the value of the property so repossessed, various amounts at different dates during 1920 aggregating $9,259.48, thus reducing the value of the land as carried on the books to $4,180.52.  The tract of land in controversy is located 185 miles southeast of Kansas City in the direction of the Ozark region, 35 miles from the nearest railroad, 1929 BTA LEXIS 2918">*2921  and the approach thereto is by means of a typical unimproved country road.  The surrounding country, in and about Linn Creek, the County seat of Camden County, where this land is located, is composed of great ranges, mountains, and timber-clad hills which are rough and rocky, rendering the soil valueless for agricultural purposes.  In fact there is very little farming done in this locality except in the river and creek bottoms.  The spring from which water was hauled was a mile and a half from the property.  The only improvements to these 1,400 acres of land were a small native sawed lumber house, constructed of rough timbers cut from the premises, containing one large room and a large shed adjoining which was used for a store house, and a 12-year old orchard of 400 fruit trees occupying 20 or 25 acres of cleared ground immediately surrounding the house.  In 1920 the orchard was badly diseased and broken up.  There were no windows in the house and the roof was full of holes.  There was one-half mile of woven fence wire on the premises which had been there 10 or 15 years, but was all down.  In or about 1922 the petitioner arranged for a caretaker of the premises whose duty it was1929 BTA LEXIS 2918">*2922  to repair the fences, prune the orchards, and clean off what young timber had grown up on the land, in consideration for the use of the land for that season.  He cultivated only about 15 B.T.A. 121">*123  three acres of kaffir corn having a value of about $15.  The remainder of the tract he used as a free range for the grazing of cattle.  The petitioner received no income from this land in 1921 nor in 1922.  In 1923, 1924, 1925, and 1927 petitioner received a total of $370 income from crops raised on the premises.  This tract of land when repossessed by the petitioner in 1920 had a value of $3 an acre.  The respondent increased the petitioner's net income as reported for 1920 by $9,319.48 on account of "Real estate sold in 1915, recovered 1920." OPINION.  MORRIS: The petitioner relies for its right to the deduction claimed upon the provisions of article 46, Regulations 69, promulgated by the respondent pursuant to the Revenue Act of 1926, which provides: If the vendor had retained title to the property and the purchaser defaults in any of his payments, and the vendor repossesses the property by agreement or process of law, the difference between (1) the entire amount of the payments1929 BTA LEXIS 2918">*2923  actually received on the contract and retained by the vendor and (2) the sum of the profits previously returned as income in connection therewith and an amount representing proper adjustment for exhaustion, wear and tear, obsolescence, amortization and depletion of the property while in the hands of the purchaser, will constitute gain or loss, as the case may be, to the vendor for the year in which the property is repossessed, and the basis of the property in the hands of the vendor will be the original basis at the time of the sale.  If the vendor had previously transferred title to the purchaser, and the purchaser defaults in any of his payments and the vendor reacquires the property, such repossession shall be regarded as a transfer by the vendor, in exchange for the property, of so much of the face value of the purchaser's obligations as are applied by the vendor to the purchase or bid price of the property.  Such an exchange will be regarded as having resulted in the realization by the vendor of gain or loss, as the case may be, for the year of repossession, measured by the difference between the fair market value of the property and the face value of those obligations of the1929 BTA LEXIS 2918">*2924  purchaser which were applied by the vendor to the purchase or bid price of the property to the extent that the fair market value thereof was previously recognized in computing income.  The fair market value of the property shall be presumed to be the amount for which it is bid in by the vendor in the absence of clear and convincing proof to the contrary.  If the property so acquired is subsequently sold, the basis for determining gain or loss is the fair market value of the property at the date of acquisition.  The foregoing article of the regulations provides further that: The provisions of articles 44 and 45 and of this article shall be retroactively applied in computing income from the sale of real property under the Revenue Acts of 1916, 1917, 1918, 1921, and 1924, or any of such Acts as amended.  (See section 1208.) The facts of record show that the petitioner sold the land in question to one Sass for $16,440, payable by promissory notes secured by mortgages, and that the profit of $2,940, being the difference 15 B.T.A. 121">*124  between the cost of $13,500 and the said selling price of $16,440, was recorded in its books of account and accounted for by the petitioner in its tax1929 BTA LEXIS 2918">*2925  return for that year.  The record shows further that the purchaser defaulted on his obligations, that suit was filed against him, and that in 1920 a settlement agreement was entered into resulting in the cancellation of $13,440 of said indebtedness and the repossession of the property.  The evidence adduced convinces us that the land when to repossessed had a value of not more than $3 an acre.  Satisfied as we are that there were two separate and distinct transaactions, namely, a sale by the petitioner in 1915 on which it reported the income derived therefrom, and a repossession in 1920 because of default of the purchaser, resulting in a deeding back of the same property to the petitioner; that a loss was actually sustained upon said repossession measured by the proven fair market value of the property at that time, and being of the opinion that the respondent's regulations relied upon by the petitioner apply to the identical facts adduced here, we hold that error was committed in disallowing the loss sustained.  Reviewed by the Board.  Judgment will be entered under Rule 50.