Potter Farms, Inc. v. Commissioner , 6 B.T.A. 110 ( 1927 )

OPINION.

Trammell:

The questions involved in this appeal are: (1) How should the income from the sales of land during 1920 and 1921 be determined and what was the amount of income for each year; (2) what further deduction for depreciation than that allowed by the Commissioner is the taxpayer entitled to for 1920 and 1621; (3) should invested capital as determined by the Commissioner be increased by the amount of $256,889.26; and (4) should the total amount of income and profits taxes for 1920 be excluded in the computation of taxpayer’s invested capital for 1921?

By section 1208 of the [Revenue Act of 1926, the pertinent provisions of section 212 (d) of that Act. are made applicable to sales of real estate made in the years 1920 and 1921.

Section 212 (d) reads as follows:

(d) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term “ initial payments ” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

The regulations issued in pursuance to the authority granted by the Act are contained in Treasury Decision 3921. The pertinent portions of these regulations are:

SALE OF REAL PROPERTY INVOLVING DEFERRED PAYMENTS.

Under section 212 (d) of the Revenue Act of 1926 deferred-payment sales of real property fall into two classes when considered with respect to the terms of sale, as follows:

(1) Sales of property on the installment plan; that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made do not exceed one-fourth of the purchase price.

(2) Deferred-payment sales not on the installment plan; that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made exceed one-fourth of the purchase price.

Sales falling within class (1) and class (2) alike include (a) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the purchase price has been paid, and (b) sales where there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments.

SALE OF REAL PROPERTY ON INSTALLMENT PLAN.

In transactions included in the first class of deferred-payment sales the vendor may return as income from such transactions in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the property is paid for bears to the total contract price.

In 1920 one sale was made. The purchase price was $8,800; the cash payment was $2,400, which was in excess of one-fourth of the purchase price. This sale, therefore, is not one on the installment plan as provided by statute, and the income therefrom may not be computed and returned on the installment basis.

In sales not on the installment plan the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash to the amount of their fair market value. As no evidence was introduced to show the value of the notes received in connection with this sale, or the financial ability or standing of the maker, the determination of the Commissioner that they had a fair market value equal to their face value will not be disturbed. Appeal of Aaron W. Wolfson, 1 B. T. A. 538. Taxpayer’s gross income from this sale, therefore, was $6,128.

Of the two sales made in 1921, one was for $36,800, of which $6,400 was a cash payment. The selling price of the other was $33,600, and a cash payment of $6,400 was made. Since the cash payment in each of these sales was less than one-fourth of the purchase price, the sales are to be regarded as on the installment plan, ánd the taxpayer may return as income from such sales that proportion of the cash payment received in 1921 which the total profit to be realized when the property is paid for bears to the total sale price. The gross income in 1921 computed on this basis was $8,444.

Relative to the question of depreciation, the taxpayer contends that both of the disallowances were erroneous as a matter of law; that the Commissioner made the disallowances arbitrarily and not upon any claim that depreciation taken by the taxpayer was unreasonable. The question raised by the taxpayer is whether there is lawful authority for the disallowance of depreciation by the Commissioner on the theory pursued by him. This contention of the taxpayer is without merit. Appeal of Atkins Lumber Co., 1 B. T. A. 317. The amount of the depreciation deduction is to be determined from all the facts in each case. When the Commissioner determines that the deduction should be less than the amount claimed by a taxpayer, then the taxpayer must introduce evidence to show that the action of the Commissioner is erroneous. This the taxpayer has not done in this case.

On the question of invested capital, the stipulation filed shows that the greater part of the selling price of farms sold in 1917, 1918, and 1919, was not paid and there is no evidence that the amount of $256,889.26, excluded from invested capital on account of alleged profits from the sales of those years, should be included therein. The determination of the Commissioner in that respect is, therefore, approved.

The remaining issue is in regard to the amount of income and profits taxes for 1920 and its relation to invested capital for 1921. The invested capital for 1921 should be adjusted by including therein the prorated amount of income and profits taxes for 1920 in accordance with section 1207 of the Eevenue Act of 1926.

Judgment will be entered on 15 days' notice, under Rule 50.