Court Opinion

ID: 4593613
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:11:11.307897+00
Date Added: 2024-06-11T07:51:05.915999
License: Public Domain

MIAMI BEACH IMPROVEMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Miami Beach Improv. Co. v. CommissionerDocket No. 14869.United States Board of Tax Appeals14 B.T.A. 10; 1928 BTA LEXIS 3041; November 6, 1928, Promulgated 1928 BTA LEXIS 3041">*3041  Certain purchase-money notes taken by petitioner in 1920 held to have had no fair market value, and should not be included in income for that year.  Jesse I. Miller, Esq., and Douglas D. Felix, Esq., for the petitioner.  Clark T. Brown, Esq., for the respondent.  MARQUETTE 14 B.T.A. 10">*10  This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1920 in the amount of $64,414.29.  The petitioner alleges that the respondent erred in computing the profit realized by the petitioner in 1920 from the sale of certain real estate, and in failing to allow as part of the cost of said real estate the cost of certain improvements which the petitioner was obligated to make thereon under its contracts of sale.  FINDINGS OF FACT.  The petitioner is a Florida corporation, with its principal office and place of business at Miami.  During the year 1920 it was engaged in reclaiming, developing ans selling a 3,000-acre tract of land at Miami Beach.  The development of the tract of land mentioned began in 1912.  At that time Miami Beach was a wilderness and was entirely separated from the City1928 BTA LEXIS 3041">*3042  of Miami by the waters of Biscayne Bay.  A large part of the petitioner's land consisted of a mangrove swamp and the balance was higher land covered with palmetto and rough wild growth.  Before this land could be sold to the public in smaller parcels, it was necessary that Miami Beach be connected with the mainland and that the land be otherwise improved.  In 1912 the petitioner began the construction of a bridge across Biscayne Bay and shortly thereafter began to fill in the swamp land.  It was realized at the time that the higher land would have little value unless the swamps were eliminated, and that the entire project would require a large amount of money.  By the year 1920 about one-half of the development and improvement work had been completed and the petitioner began to market portions of the land in that year by selling a number of lots therein, said sales being as follows: 1.  Sales in the amount of $92,725, in which the entire sales price was paid in 1920.  2.  Sales in the amount of $111,000, in which less than 25 per cent of the sales price was paid in 1920.  14 B.T.A. 10">*11  3.  Sales in the amount of $141,075, in which exactly 25 per cent of the sales price was paid1928 BTA LEXIS 3041">*3043  in 1920.  4.  Sales in the amount of $205,595, in which more tham 25 per cent of the sales price was paid in 1920, the unpaid balances in the amount of $107,901.52 being evidenced by deferred-payment notes.  In all cases where the entire purchase price was not paid in 1920 a written contract was entered into between the petitioner and the buyer.  By this contract the petitioner agreed, conditioned upon full payment by the buyer of the agreed purchase price, to convey to the buyer the property described therein.  The contract also provided for certain cash payments to be paid on the execution of the contract, the balance of the purchase price to be evidenced by promissory notes for various amounts and maturing at various dates.  The contract also contained the following provision: It is further covenanted and agreed that the time of payment of each and every installment herein mentioned, and interest thereon, shall be of the essence of this contract, and that failure to pay any such amount when due shall render this contract null and void; and all payments made on the same shall be forfeited as liquidated and stipulated damages for rent and not as part payment of the amount covered1928 BTA LEXIS 3041">*3044  by this contract; in which event the party of the first part, its successors and assigns, shall have the right to immediately reenter and take possession of said real estate without notice, and in the event legal proceedings shall become necessary to obtain the same, then the part - of the second part, heirs and assigns, agree to pay all costs, damages and reasonable attorneys' fees that may be incurred by said party of the first part in such legal proceedings, and said costs, damages, and attorneys' fees shall constitute a lien upon said land.  In entering these contracts of sale in 1920 the petitioner agreed verbally with each purchaser that the improvements, then about onehalf finished, would be completed.  These representations were necessary in order to sell the land, as its value depended largely on the completion of the entire project.  The improvements were completed some time subsequent to 1920.  During and after the year 1920 the petitioner required larger amounts of money, not only to pay off its indebtedness to the dredging and paving companies for work already done on the land herein mentioned, but also to complete the project to a point where it could realize on its1928 BTA LEXIS 3041">*3045  investment.  Therefore, in 1920 the petitioner endeavored to discount or borrow money on the deferred payment notes received by it from purchasers of its lots during that year.  A number of attempts were made to realize cash on these notes, all of which were unsuccessful.  The petitioner was unable to borrow any money on the said notes and all of its loans made during the year 1920 and in subsequent years were upon the personal credit of its stockholders, with the exception of small amounts loaned to the 14 B.T.A. 10">*12  petitioner on its own credit.  The deferred payment notes mentioned had no fair market value in the year 1920.  The respondent, upon audit of the petitioner's income and profitstax return for the year 1920, determined that the sales of the petitioner's lots in which exactly or more than 25 per cent of the purchase price was paid in 1920 were closed transactions in 1920; that the deferred-payment notes were worth their face value, and that the entire profit from the sale of said lots was realized by the petitioner in 1920.  He also made other adjustments in the petitioner's income which are not material here, and determined that there is a deficiency in tax for the year1928 BTA LEXIS 3041">*3046  1920 in the amount of $64,414.29.  OPINION.  MARQUETTE: There is no controversy between the parties to this proceeding as to the correctness of the method employed by the respondent in computing the profit realized by the petitioner in 1920 from the sales set forth in the findings of fact in which the entire purchase price, or less than 25 per cent, was paid in that year.  The respondent now concedes that the sales in which exactly 25 per cent of the purchase price was paid in 1920 should be treated as sales on the installment basis, and the petitioner has abandoned its assignment of error relative to the cost of certain improvements made by it subsequent to 1920 pursuant to promises made by it to purchasers of lots.  This leaves for our consideration only the question of whether the respondent has properly computed the income realized by the petitioner in 1920 from the sales where more than 25 per cent of the purchase price was paid in that year.  The respondent takes the position that the sales in question were completed transactions in 1920, and that the deferred-payment notes were the equivalent of cash and were income to the petitioner in that year.  The petitioner contends1928 BTA LEXIS 3041">*3047  that the notes had no fair market or readily realizable value in 1920, and that no part of the notes constituted income.  Upon the record we must sustain the contention of the petitioner.  The evidence is clear that the petitioner was in need of large amounts of money in 1920 to complete its development project and to liquidate obligations already incurred, and that it made diligent effort to discount or borrow money on the notes in question, but was unable so to do, and it appears that the banks and other financial institutions at Miami considered the notes of no present value.  This lack of confidence in the notes on the part of the bankers and other lenders of money was due to some extent at least to their belief that the notes were bound up with the contracts of sale, and that the contracts might be terminated and canceled in the event of a breach 14 B.T.A. 10">*13  thereof.  Whether these notes had an existence separate and apart from the contracts, or were so bound up with the contracts as to stand or fall with them, it is not necessary for us to decide.  It is sufficient in this case that such a construction was placed upon them by the bankers and other purchasers of securities or1928 BTA LEXIS 3041">*3048  lenders of money with whom the petitioner dealt or was in a position to deal with in the ordinary course of its business, and to whom they were offered for purchase, discount, or as collateral.  The situation, briefly stated, is that the financial institutions in Miami considered that the notes had no value at that time, unless it was a mere speculative value.  In other words, nobody wanted them.  We are satisfied that the notes had no fair market value in 1920 and that the petitioner realized no income from them in that year, and we so hold.  Judgment will be entered under Rule 50.