Crouse v. Commissioner ( 1928 )

CALVIN CROUSE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Crouse v. Commissioner

Docket No. 3717.

United States Board of Tax Appeals

11 B.T.A. 1327; 1928 BTA LEXIS 3633;

May 14, 1928, Promulgated

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INCOME. - The value of a purchase money note and mortgage on the date received by petitioner, determined and also gain derived from sale of farm determined.

F. E. Northrup, Esq., for the petitioner.

A. H. Murray, Esq., for the respondent.

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TRUSSELL

Petitioner appeals from the respondent's determination of a deficiency in the amount of $990.32 in his income tax for the calendar year 1920, and alleges that respondent erred in determining that petitioner realized a profit in the amount of $23,320 from the sale of a farm in 1920.

FINDINGS OF FACT.

Some time prior to March 1, 1913, petitioner acquired a 120 acre farm in Grundy County, Iowa. He lived upon and operated that farm property from the time he purchased it until on or about March 1, 1920. The March 1, 1913, value of that farm with buildings and equipment was $27,000. Subsequent to March 1, 1913, and prior to the date of the sale, petitioner added improvements costing $1,000. The reasonable allowance for exhaustion, wear and tear of buildings subject to depreciation during the period from March 1, 1913, to date of sale amounted to $1,120.

In August, 1919, petitioner entered into a contract for the sale of his 120 acre farm, the sale to be made and the property to be transferred on March 1, 1920. On the latter date the sale was made and petitioner deeded his farm property to the purchaser and received from the purchaser a cash payment of $20,000, together with a purchase money note and first mortgage for the further sum of $29,200. The purchaser entered upon the property and remained in possession thereof until on or about March 1, 1926, when, being unable to continue making payments of interest on his note secured by the mortgage, he reconveyed the property to the petitioner.

The purchaser of petitioner's farm owned no other property aside from the interest he acquired in the property in question. The purchase money note had a value only to the extent of the security represented by the first mortgage upon the farm. The sale price of $49,200 was greatly in excess of the intrinsic value of the farm in 1920, and was a speculative figure brought about by the speculative buying and selling of Iowa farms at that time. Petitioner could have sold the mortgage on March 1, 1920, only at a discount of from 40 to 50 per cent.

For the calendar year 1920, the petitioner made an individual income-tax return showing a gross income in the amount of $20,187.75, in which amount he included the sum of $19,120 as profit from the sale of the farm. Upon the audit of petitioner's return, the Commissioner added depreciation sustained in the amount of $1,120, to the sale price of $49,200; subtracted therefrom the March 1, 1913, value of $27,000, and computed the amount of $23,320 as the profit realized by petitioner upon the sale of his farm.

OPINION.

TRUSSELL: This record contains the testimony of two experienced dealers in Iowa farm lands and farm loans who testified at length to market values of farm property as of March 1, 1920, and also as to such values of farm mortgage loans made on the basis of the then prevailing selling prices. The testimony is convincing that there were many sales of farms made in the State in 1919 and 1920, at grossly inflated prices; that such prices were far in excess of any intrinsic values in farm property and that practically all of the buyers during those years were people who expected to make a quick turnover of their purchase and had no thought of retaining properties for farming purposes. They also agreed that there was no true market for farm mortgages taken during those years at the prevailing inflated prices, although there were occasionally found persons who would buy such mortgages at discounts ranging from 40 to 50 per cent. All of this testimony taken as a whole convinces us that the note and mortgage taken by the petitioner on March 1, 1920, had a then value of not in excess of 60 per cent of its face, or $17,520. Upon this basis petitioner received for his farm cash and mortgage notes aggregating a value of $37,520. The depreciated March 1, 1913, value of his farm and cost of additions to the buildings thereon was $26,880, his net gain, therefore, upon the transaction was $10,640.

Petitioner's income-tax return for the year 1920 should be amended in accordance with the findings of fact and this opinion and the deficiency or overassessment, as the case may be, recomputed upon that basis.

Judgment will be entered pursuant to Rule 50.