Court Opinion

ID: 4615883
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:33:20.670594+00
Date Added: 2024-06-11T07:55:01.422956
License: Public Domain

MAMIE E. EINIG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Einig v. CommissionerDocket No. 38955.United States Board of Tax Appeals19 B.T.A. 1105; 1930 BTA LEXIS 2256; May 26, 1930, Promulgated *2256  The petitioner, having received 46.25 per cent of the sale price of a tract of land during the taxable period in which the property was sold, is not entitled to report the profit realized on the sale on the installment basis.  W. L. Schuyler, C.P.A., for the petitioner.  A. H. Murray, Esq., for the respondent.  ARUNDELL*1106  Proceeding is for the redetermination of a deficiency in income tax for the year 1925 in the amount of $2,129.13.  The issue is whether the gain realized on the sale of a parcel of land should be taxed on the basis of a closed transaction or on the installment basis.  The facts were stipulated.  FINDINGS OF FACT.  The petitioner, a resident of Miami, Fla., in 1920 purchased for $6,500 a parcel of land of about 10 acres located in section 22, township 53 south, range 41, east, State of Florida.  On January 13, 1925, she sold the said land to the Citizens Utilities & Improvement Co., a Florida corporation, hereinafter called the "Improvement Company," for $40,000, of which $5,000 was paid in cash at the time of the sale and the balance of $35,000 was covered by four notes each in the sum of $8,750, payable within one, two, *2257  three, and four years from the date of sale, respectively, secured by a first mortgage on the property, described as one tract of land.  A provision of the mortgage dated January 13, 1925, given by the purchaser, reads as follows: The mortgagee agrees that if the mortgagor desires to subdivide said premises that when plat has been prepared, submitted to and approved by the mortgagee, she will enter into an agreement agreeing to release from the lien and effect of this mortgage any lot not exceeding 50 X 150 feet in size on the payment of a certain sum for each lot so released, said sum to be specified in said agreement; provided, however, that the aggregate amounts for releases so specified in said agreement shall not be less than 130% of the mortgage; provided, however, that no releases will be given if there is any default in the payment of principal or interest or in the performance of any of the terms and conditions of this mortgage, and provided further that all costs of such releases, including preparation and recording of same and the attorney's fees of the mortgagee, shall be paid by the mortgagor.  All moneys paid for releases shall be credited on the notes becoming due. *2258 The Improvement Co. subsequently subdivided the tract into seventy lots.  Thereafter, on March 24, 1925, the petitioner and the Improvement Co. entered into a written agreement, which, after reciting the purchase of the land, the execution of the mortgage and the provisions thereof giving the Improvement Co. the right to subdivide the tract, provides as follows: Now, THEREFORE, it is agreed by and between the parties hereto that the mortgagee, being the party of the first part, to this agreement, hereby agrees to release from the lien and effect of said mortgage, the lots therein as follows, to-wit: Lots One, Twenty-Eight, Fourteen and Fifteen of Block 5; Lots One, Twenty-Eight, Fourteen and Fifteen and of Block 4; Lots One and Fourteen of Block 3, on the payment of Seven Hundred and Fifty Dollars ($750.00) for each lot released.  Any other lots in said subdivision, the party of the first part agrees to release from the lien and effect of said mortgage, on the payment of the sum of Five *1107  Hundred and Fifty dollars ($550.00) for each lot so released, said sums to be credited on the notes next becoming due after the payment thereof; provided, however, that no release*2259  shall be given, if there is any default in the payment of any of the sums provided to be paid on the said mortgage, or if there is any default in the performance of any of the terms and conditions of said mortgage; and provided further that all costs of Releases, including the preparation and recording thereof, and attorneys fees, and the fees of the attorney for the mortgagee, shall be paid by the party of the second part.  Pursuant to the agreement of March 24, 1925, during 1925 the petitioner by appropriate instruments released from the effect of the mortgage twenty-three lots, upon the payment to her by the Improvement Co. of the sum of $750 and/or $550 per lot, the payments so received in 1925 totaling $13,500.  These payments were made direct to petitioner by the Improvement Co.  The purchasers of lots from the Improvement Co. did not conduct any negotiations or have any dealings of any kind or description with petitioner in connection with the passing of title by the Improvement Co. to its vendees.  The petitioner was not engaged in the business of buying and selling real estate.  In her return for 1925 petitioner reported a profit of $15,540 realized on the sale, computed*2260  on the installment basis, the amount so reported being equal to 84 per cent of the amount received by her in 1925 from the Improvement Co.  In his audit of her return the respondent concluded that since more than 25 per cent of the purchase price of the land was paid to petitioner in the taxable year, the transaction should be treated as a closed transaction, and, accordingly, determined a profit of $33,500 on the deal, based upon a cost price of $6,500 and a selling price of $40,000.  OPINION.  ARUNDELL: The fair market value of the deferred payments under the sale is not in controversy, the single question before us being whether the tax on the transaction should be computed on the installment basis, as contended by petitioner, or on the basis of a completed sale, as determined by the respondent.  Section 212(d) of the Revenue Act of 1926 provides that "the income derived from a sale of real property, as here, may be returned on the installment basis in cases where "the initial payments do not exceed one-fourth of the purchase price." The term "initial payments" as used in the subdivision is therein defined as meaning "the payments received in cash or property other than evidences*2261  of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made." Here $5,000 of the sale price of $40,000 was paid in cash at the time the sale was made.  Subsequently during the taxable year additional payments aggregating $13,500 were made by the vendee, *1108  so that before the close of 1925 petitioner had received in cash the sum of $18,500 or 46.25 per cent of the selling price.  The mortgage given by the Improvement Co. as security for the deferred payments covered the entire property, described therein as a tract of land.  By a provision inserted in the instrument the mortgagor was given the right to subdivide the land into lots, and upon the sale of any lot in the subdivision and the payment of a specified sum on account thereof, to receive from petitioner a satisfaction of the mortgage as to the lot for which the payment was made.  The Improvement Co. exercised the right given it by petitioner, and during the year 1625 a mumber of lots were released from the mortgage lien upon payment to petitioner of the agreed amounts.  The exercise of the right given the Improvement Co. did not, in our opinion, have the effect of changing*2262  the sale from one covering a single undeveloped tract of land to a number of sales measured by the number of lots into which the tract was subdivided, as petitioner contends.  The sales of lots were transactions between the Improvement Co. and the purchasers of the lots and had no direct relation to the sale in question.  The respondent's action in refusing to permit petitioner to return the profit realized on the sale on the installment basis is sustained.  Decision will be entered for the respondent.