Court Opinion

ID: 4617950
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:37:37.426083+00
Date Added: 2024-06-11T07:55:23.173142
License: Public Domain

FRANK B. ESSEX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  RICHARD P. WHITTY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Essex v. CommissionerDocket Nos. 31126, 31127.United States Board of Tax Appeals21 B.T.A. 270; 1930 BTA LEXIS 1880; November 11, 1930, Promulgated *1880  1.  Petitioners contention that the partnership in which each was entitled to receive one-half the distributable gains sustained a loss in the construction of a certain hotel in 1922 is not sustained by the evidence.  2.  Loss claimed in 1924 on account of an investment in a Canadian land syndicate established by the evidence and the amount thereof determined.  3.  Evidence not sufficient to prove that certain debts due a partnership in which each of petitioners owned a 50 per cent interest became worthless in 1924.  D. N. Burnham, C.P.A., for the petitioners.  B. M. Coon, Esq., for the respondent.  LANSDON *270  The respondent asserts deficiencies against the petitioner, Essex, for the years 1920, 1921, 1922, 1923, and 1924 in the respective amounts of $1,255.06, $3,595.39, $894.20, $1,516.62, and $622.47, and against the petitioner, Whitty, for the same years in the respective *271  amounts of $1,270.85, $3,559.08, $864.05, $1,494.87, and $635.06.  Such deficiencies are alleged to result from the right of each petitioner to receive one-half the distributable profits of the partnership of the R. P. Whitty Co.  For their causes of action*1881  as finally pleaded at the hearing the petitioners allege: (a) That the partnership sustained a loss in the amount of $12,750 in 1924, as the result of an investment of that amount in a syndicate formed to handle a certain tract of land in Canada; (b) That the Commissioner erred in his determination that the partnership realized a profit in 1922 in the amount of $52,219.11 from the completion of its contract for the construction of the Hamilton Hotel and that in fact such contract resulted in a loss in the amount of $2,155.89; and (c) That certain debts due the partnership from Michael Heister and S. F. Henry in the respective amounts of $6,572.91 and $986.09 were ascertained to be worthless and charged off in 1924.  The two proceedings, involving identical issues, by agreement of the parties, were consolidated for hearing and decision.  FINDINGS OF FACT.  The partnership, operating under the name of R. P. Whitty Co., Washington, D.C., was formed in 1916 for the purpose of engaging in the contracting business.  In the taxable years it was composed of R. P. Whitty and Frank B. Essex, with each owning a 50 per cent interest therein and entitled to receive 50 per cent of the*1882  distributable net earnings.  The items of income involved herein represent parts of the distributable net earnings of such partnership or deductions therefrom in each of the several taxable years involved.  The business accounts of the partnership were kept in a single entry set of books.  Income from contracts was reported on the completed contract basis.  Hereinafter the word "partnership" will be used instead of the name "R. P. Whitty Company." Some time prior to 1921, the partnership contracted to build the Chastleton Annex and to take as its compensation approximately $45,000 in second mortgage notes.  It was to be repaid in cash for all construction expenditures.  There was a deficiency in cash payments and it took in lieu thereof additional second mortgage notes in the amount of $12,750.  Upon audit of the partnership return of income for 1921 the Commissioner increased the reported income from completed contracts in the amount of $33,067.89, which represented the discount value of the $45,000 second mortgage notes taken as a fee and not included in any amount by the partnership in computing its distributable income from contracts completed in such years.  *272  The*1883  second trust notes in the amount of $12,750 received in 1921 were endorsed by the petitioners and assigned in 1922 to a Canadian land syndicate which was made up of fifteen persons.  This syndicate acquired 8,640 acres of unimproved prairie farm land in Manitoba, Canada, at a cost of $10 per acre.  The syndicate agreement required certain annual payments from each of the members to meet taxes and other current obligations.  In 1924 the partnership failed to meet its obligations to the syndicate and thereby forfeited all interest therein.  In that year the syndicate investment was a total loss to the partnership.  In 1922 the partnership completed the construction of the Hamilton Hotel under a contract that provided for the return of actual cash, plus a fee or profit of $30,000.  The total cash cost was $940,833.12, and the net cash amount received was $938,677.23.  During the construction of the hotel the owners became financially involved and were unable to make all the cash payments due the partnership, which was forced to accept corporation notes from both the hotel company and other interested concerns.  In all, such notes in the amount of $188,000 were received, and at the close*1884  of the year the unpaid balance thereon was $72,500, which was then all in the form of second trust notes on the Hamilton Hotel property.  In its return for 1922 the partnership reported a profit from the construction of the hotel in the amount of $30,000, and in so doing included the second trust notes in its gross income at a value of $27,844.81.  In his audit the Commissioner determined a profit of $52,219.11.  This result was arrived at by including the second trust notes for $72,500 in the receipts of the partnership discounted to 75 per cent of their par value.  In the taxable year such notes could neither be sold nor used as collateral for bank loans.  The partnership made many efforts in 1922 and later to sell or collect the $72,500 of second mortgage notes, but was unable to realize anything therefrom then or at any later times, and, at the date of the hearing, still owned the notes.  Shortly after the close of 1922 the Hamilton Hotel Co. and the Commonwealth Finance Co. of New York, which had undertaken to finance the construction of the hotel, both became insolvent and later their affairs were settled in bankruptcy proceedings.  The second trust notes received by the partnership*1885  in 1922, in the amount of $72,500, had no market value at the date of receipt.  In 1918 the partnership secured a contract covering the labor and superintendency of construction, or about 25 per cent of the total cost of construction of a residence for Michael Heister, a member of the firm of Milburn and Heister, architects, practicing in Washington.  The total cost to the partnership, under such contract, was $11,306.11.  Payments thereon were received on June 25 and December 18, 1918, in the respective amounts of $1,500 and $3,500, leaving *273  an unpaid balance of $6,572.91.  No other payments have been received.  In its income-tax return for 1924, the partnership deducted such unpaid balance from its gross income as a debt ascertained to be worthless and charged off in that year.  The partnership never attempted to collect from Heister by an action at law, for the reason that it had secured some building contracts, and hoped to receive others through the friendly influence of Milburn and Heister.  In 1924 Heister owned some equity in the residence in question and it was his home at that time.  At the same date he was still practicing his profession in Washington but his*1886  business was much less in volume than in 1918.  OPINION.  LANSDON: Deficiencies for the taxable years 1920, 1921, 1922, 1923, and 1924 have been asserted against each of the petitioners.  The statement of issues upon which the parties agreed at the hearing relates only to the years 1922 and 1924.  It is obvious therefore that the petitioners concede that the deficiencies asserted for 1920, 1921, and 1923 are correct and, therefore, we redetermine such deficiencies in the respective amounts asserted by the respondent.  The single question as to 1922 is whether the partnership realized a gain or sustained a loss upon the completion in that year of its contract to construct the Hamilton Hotel.  This contract was on what is known as the cost-plus basis.  The partnership was to receive all the costs it incurred in the construction, and, in addition, a cash fee of $30,000 as its compensation or profit thereon.  The evidence discloses that the actual cash cost of the construction was $940,833.12, and that the partnership received on account thereof the net cash amount of $938,677.23.  On this showing the partnership claims a loss in the amount of $2,155.89.  It appears, however, that*1887  in addition to the cash received, the partnership, in the taxable year, accepted certain second trust notes of the face value of $72,500.  The Commissioner determined that such notes had a value of 75 per cent of their face at the time received and increased the reported income of the petitioners to the amount of $52,219.11.  Petitioners contend that at date received by the partnership such notes not only had no market value, but were worthless.  The Hamilton Hotel Co. and the financing corporation connected therewith were unable to meet their obligations in 1922.  The partnership could neither sell the notes nor use them as collateral for bank loans.  Shortly after the close of such year both corporations became insolvent and their affairs were settled *274  in the courts.  We are of the opinion that the second trust notes in question had no market value at December 31, 1922, and should not be included in the income of the partnership for such year.  The fact that the second trust notes had no market value in the taxable year does not establish their worthlessness at that time.  Some of them were accepted for payments due late in the year and it must be assumed that they had*1888  value even though not marketable at that time.  It follows, therefore, that the loss claimed in the amount of $2,155.19, which is predicated solely on the worthlessness of such notes at December 31 of the taxable year, can not be allowed.  The evidence is conclusive that the partnership invested second trust notes of the Chastleton Hotel of the par value of $12,750 in the Canadian land syndicate in 1922, and that such investment was a total loss in 1924.  The only question as to this issue relates to the value of such notes, and, therefore, to the amount of the loss.  In his adjustments of the income of the partnership for 1921, the year in which the notes were received, the Commissioner has determined a value of 75 per cent of the face value thereof.  This determination has not been challenged by evidence adduced by the petitioner.  We conclude, therefore, that the partnership's loss in 1924 from its investment in the Canadian land syndicate was 75 per cent of $12,750, or $9,562.50, and that one-half of such amount is deductible from the gross income of each of the petitioners in such year.  Petitioners each claim a deduction of one-half the amounts of the debts due the partnership*1889  which it is alleged were ascertained to be worthless and charged off in 1924.  The debt of Heister was incurred by him in 1918.  Petitioners admit that no attempts were ever made to collect by an action at law.  It was suggested by counsel for the Government that the three-year period of the statute of limitations of the District of Columbia ran against this debt in 1921, but the statute has not been cited by either party.  Upon the record we think petitioners have failed to show that the debt was worthless in 1924, or, if so, that it was not equally worthless as early as 1921.  Petitioners introduced no evidence relating to the Henry debt.  On the issue of bad debts the determination of the respondent is affirmed.  Reviewed by the Board.  Decision will be entered under Rule 50.STERNHAGEN and MURDOCK dissent.