Court Opinion

ID: 4619085
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:39:56.369152+00
Date Added: 2024-06-11T07:55:34.459669
License: Public Domain

BANK OF COMMERCE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bank of Commerce v. CommissionerDocket No. 4800.United States Board of Tax Appeals10 B.T.A. 73; 1928 BTA LEXIS 4190; January 21, 1928, Promulgated *4190  1.  Where the petitioner entered all real estate transactions over a period of years in one account and charged thereto the cost of each parcel as acquired, and credited thereto all rents and profits received from such property, and in the year 1918 closed out the account, charging the balance thereof to operating costs, it is held that the gain derived from the sale of one piece of property in the year 1920, which was acquired in 1918, is to be determined upon the basis of the cost of that particular piece of property.  The fact that the petitioner so treated rents and profits from other property in prior years as to reduce upon its records the cost of a particular piece of property can not alter the basis for determining gain or loss as provided in section 202 of the Revenue Act of 1918.  2.  The mere fact that a taxpayer fails to report income for taxation in the proper years does not justify the Commissioner in including such income in his computation of tax for a subsequent year.  Henry J. Richardson, Esq., for the petitioner.  L. C. Mitchell, Esq., for the respondent.  VAN FOSSAN *74  This proceeding is for the redetermination of a*4191  deficiency of $3,803.08 in income and excess-profits taxes for the calendar year 1920.  It is alleged that the Commissioner erred in refusing to allow the deduction of the cost of certain real property from the sale price thereof in determining the gain derived.  The Commissioner alleged that the cost of the property had been charged off as a deduction from income for tax purposes in prior years and that the entire proceeds of sale were profit and taxable income.  FINDINGS OF FACT.  The petitioner is a Wyoming corporation with its principal office at Sheridan.  On November 2, 1914, Claudia B. Decker Kimmel conveyed certain real property in the City of Sheridan, known as the Kimmel property, to the petitioner in consideration of $10,000.  On the same day the parties to the transaction entered into a contract of repurchase, known as a security contract, wherein it is recited that Claudia B. Decker Kimmel is indebted to the petitioner in the sum of $10,193.50, and has conveyed the Kimmel property to the petitioner as security for the payment of said indebtedness.  Said contract provided that in the event Claudia B. Decker Kimmel should pay to the petitioner said sum of $10,193.50*4192  within three years from the date thereof the petitioner would reconvey said Kimmel property to her, and in the event she should fail to pay said sum within the specified time, petitioner's title to the Kimmel property should be absolute.  The deed of conveyance and the contract for repurchase were given as security for the loan, in lieu of a mortgage with provision for foreclosure upon default.  Subsequent to the conveyance of said property, the petitioner carried the transaction in its accounts as a secured loan under the title of "Loans and Discounts No. 892." On January 14, 1918, petitioner closed out this transaction from its loan account, as which time there remained due it on account thereof $8,669.07, and charged the same to its real estate account in that amount.  The property was sold by the petitioner on April 14, 1920, for the sum of $12,000, plus accrued rentals of $903.28, a total of $12,903.28.  In its income-tax return for 1920 the petitioner reported as income from this property the difference between the sale price thereof and the amount of the loan unpaid on January 14, 1918, to wit, $3,330.93, plus the sum of $402.80, representing rent received, or a total of $3,733.73. *4193 *75  The real estate account carried by the petitioner was first opened on April 1, 1909.  In the years following, this account reflected all transactions in real estate acquired, held and disposed of by it.  As particular parcels of real property were acquired the cost thereof was charged to the real estate account, and upon the sale of each parcel the proceeds thereof were credited to the account.  All rents received from each parcel of property also were credited to the account, with the idea of reducing it so that the estate account would appear as small as possible upon the published statements of the bank.  All rentals received from real property were reported by the petitioner each year in its income-tax return.  During the year 1914 and prior years, the petitioner credited to the real estate account profits in the sum of $3,472.05 and charged thereto losses in the sum of $873.84.  There also were credited to the account, from the time it was opened until the year 1918, rentals received in the sum of $2,103.66.  During the year 1918, the petitioner closed its real estate account, which then showed a balance of $2,986.48, and charged that amount against operating costs, *4194  merely for the purpose of removing the real estate account from the books.  Upon the sale of the Kimmel property in 1920, the petitioner credited the proceeds thereof to its reserve account, there being no other account in which to enter the transaction.  Neither the Kimmel property itself nor the loan, or any part thereof, for which it was acquired, was at any time charged off as a worthless debt by the petitioner.  The petitioner acquired the Kimmel property on January 14, 1918, at a cost of $8,669.07 and sold the same on April 14, 1920, for the sum of $12,000.  In addition the petitioner received from said sale accrued rents in the sum of $903.28, of which $402.80 was reported by petitioner as income in its income-tax return for 1920.  In his determination of the deficiency the respondent treated the entire proceeds from the sale of said property, $12,903.28, as taxable income.  OPINION.  VAN FOSSAN: In this proceeding we have to determine only the profit derived by the petitioner upon the sale of the Kimmel property in 1920.  The respondent has treated the entire proceeds, $12,903.28, as taxable income upon the ground that the petitioner charged off the cost of the property*4195  in prior years.  The position of the respondent is that the petitioner treated all dealings in real estate as one transaction and credited rents and profits received from individual items of property against the total cost of all property; that the unextinguished cost of all property when the account was closed in 1918 was *76  charged off to operating costs; and that the entire proceeds of sale of the Kimmel property is profit and taxable income.  The petitioner kept all real estate transactions in one account, charging thereto the costs of property acquired and crediting thereto rents received and profits realized upon sales.  The balance of $2,986.48 in the account in 1918 was charged to operating costs, and the account was closed.  Rents and profits received from real estate transactions were reported by the petitioner in its income-tax returns, and presumably sucm income was subjected to taxation in the proper years.  The Kimmel property cost the petitioner $8,669.07 and neither the property itself nor the loan, in lieu of which it was accepted, was at any time charged off as a bad debt.  Nor was a deduction therefor at any time claimed or allowed for tax purposes.  *4196 The effect of respondent's action is to tax as income for 1920 rents and profits received in prior years.  This he can not do.  Income is taxable in the year in which received or accrued, as the case may be, and is not subject to tax in another year.  (See , and .) Nor has either petitioner or respondent the right or authority to designate arbitrarily the year in which income shall be reported or taxed.  (See ; ; .) Counsel for respondent admitted that if the actual facts as to this property were shown petitioner would prevail, but urged that the petitioner is estopped from setting up the true cost of the Kimmel property as a basis for determining the gain upon the sale.  Respondent, however, offered no evidence of any facts sufficient to work an estoppel against the petitioner.  If estoppel existed it was incumbent upon the respondent to establish*4197  it, and that he failed to do.  Estoppel is not established by intimations.  . Section 202(a)(2) of the Revenue Act of 1918 provides that in the case of property acquired on or after March 1, 1913, the cost thereof shall be the basis for ascertaining the gain or loss from the sale or other disposition of the property.  The cost of the Kimmel property was $8,669.07 and the total receipts from the sale thereof in 1920, including accrued rents of $903.28, were $12,903.28.  The gain derived by the petitioner from the sale is, therefore, $4,234.21.  The deficiency, if any, shall be recomputed in accordance with this opinion.  Judgment will be entered on 15 days' notice, under Rule 50.