Court Opinion

ID: 4618777
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:39:19.685197+00
Date Added: 2024-06-11T07:55:31.610418
License: Public Domain

DETROIT EGG BISCUIT & SPECIALTY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Detroit Egg Biscuit & Specialty Co. v. CommissionerDocket No. 10563.United States Board of Tax Appeals9 B.T.A. 1365; 1928 BTA LEXIS 4232; January 17, 1928, Promulgated *4232  1.  Where one contracts to transfer his factory and site for a money consideration, and does so, and in the same contract agrees to use the money received, so far as necessary, to purchase a new site and erect a new factory for himself, held, the resulting transaction is a sale rather than an exchange of property.  2.  In determining the March 1, 1913, value of a factory erected in 1906 on a main thoroughfare of a rapidly growing city, the street improvements, erection of other factories in the general vicinity, growth of the city, etc., are all relevant on the question of value.  3.  A depreciation rate of 3 per cent annually on a brick and wood factory building held not excessive.  J. H. Amick, C.P.A., for the petitioner.  D. D. Shepard, Esq., for the respondent.  MARQUETTE *1365  This proceeding is for the redetermination of a deficiency in income and profits taxes in the amount of $19,796.22 asserted by the respondent against the petitioner for the year 1920.  FINDINGS OF FACT.  The petitioner is a corporation organized under the laws of Michigan in 1906.  In that year it acquired by purchase real estate at Hastings Street and*4233  East Grand Boulevard, in Detroit, and erected thereon a brick factory building, with wooden joists and floors, 45 feet wide by 79.6 feet long, which covered practically all of the land.  The petitioner occupied the premises continuously until some time in 1920.  The useful life of the building was 33 years from March 1, 1913.  On December 12, 1919, the petitioner and the Goodyear Improvement Co. entered into the following written contract: WHEREAS, the Detroit Egg Biscuit and Specialty Company, a corporation of the City of Detroit, Michigan, hereinafter called the first party, is the owner of Lot 219 and the west 1/2 of Lot 218 of Frisbie and Foxen's subdivision of part of fractional section 31, and Lot 18 of Theodore J. and Dennis J. Campau's subdivision of fractional sections 29 and 32, town 1 south, range 12 east, according to the plat recorded in Liber 6 of plats at page 78, Wayne County records, upon which is located its plant and first party desires to sell said property to the Goodyear Improvement Company, a corporation of Akron, Ohio, hereinafter called second party and second party desires to purchase the same.  AND WHEREAS, first party is about to purchase property*4234  at the southeast corner of Custer and St. Antoine Streets in the City of Detroit aforesaid for the purpose of erecting thereon a new plant, and is about to erect thereon *1366  such new plant under the supervision of Smith, Hinchman & Grills at a cost of approximately $40,000.00.  Now therefore it is agreed as follows: 1.  In consideration of the sum of Eighty-five Thousand ($85,000) Dollars to be paid by second party to first party, first party agrees to convey to second party by Warranty Deed free and clear from all incumberances the property first above described, and will also within thirty (30) days after the date of this agreement deliver to second party a Burton or Union Trust Company abstract, showing good and marketable title in the first party.  2.  Said Eighty-five Thousand ($85,000) Dollars shall be paid by second party to first party as follows: Five Thousand ($5,000) Dollars on the execution and delivery of this contract, the receipt of which is hereby acknowledged.  Five Thousand ($5,000) Dollars on December 15, 1919.  It is agreed that first party will use said $10,000 to purchase said lot at the southeast corner of Custer and St. Antoine Streets. *4235  Five Thousand ($5,000) Dollars on January 1, 1920.  Ten Thousand ($10,000) Dollars on January 15, 1920.  Ten Thousand ($10,000) Dollars on February 1, 1920.  Ten Thousand ($10,000) Dollars on March 1, 1920.  Five Thousand ($5,000) Dollars on March 15, 1920.  The balance of Thirty-five Thousand ($35,000) Dollars shall be paid upon the execution and delivery of said Warranty Deed and upon the surrender of possession by first party, which possession shall be surrendered by first party within fifteen (15) days after Smith, Hinchman & Grills notify first party and second party by letter that said new building at the corner of Custer and St. Antoine Streets is substantially completed; it being understood that the item of oven equipment is not a part of the building.  No interest is to be allowed on deferred payments.  3.  First party agrees within ten (10) days from the date hereof to purchase said property at the corner of Custer and St. Antoine Streets and within a like time agrees to enter into a contract for the erection of a building thereon suitable for their needs, said contract to be made with reputable contractors, through Smith, Hinchman & Grills.  First party further*4236  agrees to use their best efforts to secure the completion of the said building at the earliest possible date so that second party can be given possession of the property first above described as soon as possible.  This contract was carried out by both parties according to its terms, and in 1920 petitioner transferred the property to Goodyear Company.  The fair market value of the property on March 1, 1913, was $25,000.  In its tax return for the year 1920 petitioner did not include any profit from its transaction with the Goodyear Company, but it later admitted a taxable profit on the sale of real estate amounting to $26,109.53, basing its computation on a fair market value of $60,000 as of March 1, 1913.  The respondent, taking $14,000.46 as the depreciated cost at March 1, 1913, and allowing for subsequent depreciation, computed the profit on the Goodyear transaction to be $73,468.48.  *1367  OPINION.  MARQUETTE: The petitioner claims (1) that the Goodyear transaction was an exchange of property, not a sale, and that there was no taxable gain; (2) that if the transaction is held to be a sale, then the March 1, 1913, value of the property should be considered as greatly*4237  in excess of its cost, and that this increased value should be the basis of computing the taxable gain, and (3) that the annual depreciation rate on the building should be 2 per cent.  The facts do not sustain the petitioner in its contention that it exchanged property with the Goodyear Company.  The latter contracted to buy the petitioner's property and made the cash payments called for by the contract.  The petitioner purchased a new factory site and erected thereon a new factory building at a total expenditure of about 61 per cent of the price paid by Goodyear to the petitioner for its property.  In our opinion the transaction was a sale, not an exchange, and the respondent was right in so treating it.  We think, however, that the respondent erred in his determination of the March 1, 1913, value of the petitioner's property.  The evidence adduced shows that the property originally cost about $14,100; that it was well kept up, in good repair; that it was located on one of the principal thoroughfares of the City of Detroit; that from 1906 to 1913 the city's population increased between 50 and 75 per cent; that during those years the streets bounding the petitioner's property had*4238  been paved, and railroad grade crossings in the vicinity of the property had been eliminated, and that other factories had been built in that section of the city.  There is evidence, also, as to the fair market value of the land as of March 1, 1913.  Considering all of these elements we can not agree with the respondent that petitioner's property did not increase in value between 1906 and March 1, 1913.  We think it did so increase and that its fair market value on the latter date was $25,000.  The respondent has computed depreciation from March 1, 1913, until the property was transferred in 1920, at the rate of 3 per cent per annum.  The petitioner contends that 2 per cent is the proper rate.  The evidence does not sustain this contention.  Petitioner claimed, and was allowed, 3 per cent annual depreciation for income-tax purposes before the property was sold, and the evidence offered to show that the depreciation was less than 3 per cent was not, in our opinion, sufficient to establish that as a fact.  The rate of 3 per cent, therefore, must stand as a reasonable allowance for exhaustion, wear and tear.  Judgment will be entered on 15 days' notice, under Rule 50.