Court Opinion

ID: 4630825
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:08:19.591119+00
Date Added: 2024-06-11T07:57:37.464658
License: Public Domain

REALTY SALES CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Realty Sales Co. v. CommissionerDocket No. 18145.United States Board of Tax Appeals10 B.T.A. 1217; 1928 BTA LEXIS 3919; March 8, 1928, Promulgated *3919  The value of an option acquired by the petitioner for its capital stock, determined for purpose of computing gain or loss on the sale of real estate covered by said option.  E. Marvin Underwood, Esq. for the petitioner.  A. H. Fast, Esq., for the respondent.  E. Marvin Underwood, Esq., for the petitioner.  alleges error on the part of the respondent in that: MORRIS*1217  This proceeding is for the redetermination of a deficiency of $6,566.66 in income tax for the calendar year 1922.  The petitioner alleges error on the part of the respondent in that:(1) He refused to allow a deduction of $25,000 from the sale price of certain real estate, representing the cost of an option purchased by the issuance of $25,000 fully paid up capital stock of the petitioner; and (2) He included $31,122.03 in income for 1922, representing deferred payments on certain real estate received in 1923 and returned by the petitioner for that year.  Certain facts were stipulated.  *1218  FINDINGS OF FACT.  The petitioner was incorporated on January, 14, 1922, under the laws of Georgia.  On September 25, 1921, Paul F. Vose secured from Mrs. Emma Koehler, *3920  without payment of consideration, a ninety-day option to purchase 276.15 acres of land and one lot 100 X 190 feet, located in Fulton County, Ga., for the purchase price of $69,037.50 to be paid, $17,259.38 upon the execution of the deed of conveyance, and the remainder in four annual installments of $12,944.53 each.  On December 7, 1921, for a consideration of $25, said option was extended for a period of thirty-two days from the expiration of the original option.  By an instrument dated January 10, 1922, said option was transferred by Paul F. Vose "for value received" to Realty Sales Co.  The consideration for said transfer was the entire capital stock of Realty Sales Co. of par value of $25,000.  On January 13, 1922, a contract of sale by the Realty Sales Co. and Paul S. Etheridge was executed for the sale of 92.3 acres of the above mentioned tract of 276.15 acres for the consideration of $35,000 cash, and $500 earnest money was paid thereon by said Etheridge on January 13.  On January 13, 1922, a contract was signed in the name of and for Realty Sales Co. and Paul S. Etheridge, A. McD. Wilson and Wm. J. Mahoney for the sale of 145.2 acres, being a part of the above mentioned*3921  276.15 acres, and the property known as the Vose home place, for a consideration of $115,000, to be paid $25,000 cash and the balance of $90,000 in installments of $30,000 each, payable in one, two and three years, and said three individuals paid Paul F. Vose, agent, $2,000 earnest money on said transaction on January 14, 1922.  This contract was, on March 16, 1922, extended to May 15, 1922, upon the payment of $3,000 cash.  This contract was transferred on May 15, 1922, to Clarke Realty Co.On January 14, 1922, a charter was granted Realty Sales Co. by the Superior Court of Fulton County, Ga., dated January 14, 1922, and provided for a minimum capital stock of $25,000.  On the same day the Realty Sales Co. was duly organized by meeting of the incorporators and stockholders, at which all of its stock amounting to $25,000 par value was subscribed by Paul F. Vose, Malcolm Lockhart and Chas. H. Currens, "said subscriptions to be paid in full by transfer of the Koehler option." The transfer of the Koehler option by Paul F. Vose to Realty Sales Co., as above set forth, was accepted and a resolution was also passed at said meeting to the effect "that the transfer of the option from Mrs. *3922  Emma Koehler as above described, by Paul F. Vose, Currens and Lockhart, to the corporation.  *1219  be and the same hereby is accepted and the subscription to the original stock of $25,000 declared to be fully paid." On January 20, 1922, said option was consummated by the Realty Sales Co., and Mrs. Emma Koehler made to it four deeds conveying the said 276.15 acres of land and said lot 100 X 190 feet located in Fulton County, Ga., one deed being for a tract of 92.3 acres; one for a tract of 145.2 acres; one for a tract of 38.65 acres; and one deed for a lot 100 X 190 feet.  The agreed purchase price of $69,037.50 was paid by Realty Sales Co.  On March 15, 1922, the Realty Sales Co. deeded the above mentioned 92.3-acre tract to the University Land & Development Co. for a consideration of $35,000 in cash, which was paid.  On or about May 11, 1922, the Realty Sales Co. purchased of Paul F. Vose his home place in said county and contiguous to said above described property for the sum of $25,000, $19,000 of which was paid in cash and the balance by the assumption of a $6,000 mortgage.  On May 15, 1922, Realty Sales Co. conveyed to Clarke Realty Co. by bond for title 145.2 acres*3923  of said land, and the Vose home property mentioned in the preceding paragraph, by the terms of which the purchaser paid $25,000 cash, assumed mortgages in the amount of $36,000, and gave notes covering installments of $24,000, payable February 20, 1924, $30,000 payable February 20, 1925.  These deferred payments were paid subsequent to the year 1922.  The bond for title was transferred on May 15, 1922, by the Clarke Realty Co. to the Knights of the Ku Klux Klan and a deed was made pursuant to said bond by the Realty Sales Co. to the latter on July 16, 1923.  The sale prices received by Realty Sales Co. for said real estate sold by it during the year 1922 were as follows: For the 92.3-acre tract, $35,000 cash, and for the 145.2-acre tract and the Vose home place $115,000, $25,000 of which was cash and the balance on installment and the assumption of $36,000 of mortgages.  This constituted all of said real estate except 38.65 acres which were not sold until a later year, to wit, in 1924, and said lot 100 X 190 included in the Koehler option.  Paul S. Etheridge represented the purchasers in the sale of the two tract hereinabove set forth.  He purchased the 92-acre tract for himself*3924  and others, and organized a corporation, known as the University Land & Development Co., which took over the property.  The deed, consummating the contract of sale hereinabove set forth, ran from the petitioner to the University Land & Development Co. Included in the stockholders of the University Land & Development Co. were Vose, Lockhart and Currents.  In his capacity as a representative of the Knights of the Ku Klux Klan, Etheridge, with others, had contracted to purchase the 145 acres for $90,000, and the Vose home place for $25,000.  Etheridge knew, at the time *1220  he entered into the contracts to purchase the tracts, that the petitioner was being organized for the purpose of taking title and transferring the property.  In financing its transaction the petitioner was forced to borrow money from its stockholders.  The stockholders made a loan to the company for the purpose of consummatng its option and took a second mortgage on the property.  In determining the gain derived from the sale of the property in question, the petitioner included $25,000, the par value of the stock issued for the option, as part of the cost of said property.  The respondent added back to*3925  income $24,748 of that amount.  OPINION.  MORRIS: The question raised is whether, in determining the gain on the sale of the property herein, the cost of the option should be included as a part of the cost of the property to the petitioner.  It is obvious that the option cost the petitioner $25,000 par value of its capital stock, but this exchange of corporate stock for the option does not in and of itself prove that the market value of the option was $25,000.  However, considering all the factors surrounding this option, the acquisition of the property by the petitioner and the later resale, and the period of time within which all these negotiations were consummated, it is our opinion that the record clearly substantiates the value of $25,000 placed on the option by the petitioner.  A brief resume of the facts shows that, at the time the petitioner issued its stock for the option, two contracts for the sale of the larger portion of the whole tract of 276 acres had been entered into whereby the petitioner would realize a profit over and above the purchase price of the land of more than $50,000.  In addition to the profits which would result from these contracts, petitioner*3926  still held two parcels the disposition of which would further increase its profits on the whole transaction.  Finding as we do that the option had a value of $25,000, the issuance by the corporation of its capital stock in that amount represents additional cost to it of all the property subsequently purchased upon the exercise of the option, which additional cost should be taken into consideration in determining the gain derived from the sale of the property.  At the hearing counsel stipulated with respect to the second allegation of error that the computation of the tax should be on the installment sales basis.  Judgment will be entered on 15 days' notice, under Rule 50.This proceeding is for the redetermination of a deficiency of