Flint v. Commissioner ( 1928 )

ERNEST P. FLINT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

OTTO A. BJORNSTAD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. J. CAIRNS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Flint v. Commissioner

Docket Nos. 17945, 18115, 18143.

United States Board of Tax Appeals

12 B.T.A. 20; 1928 BTA LEXIS 3621;

May 18, 1928, Promulgated

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1. Value of certain second mortgages on farms sold by a partnership of which the petitioners were members determined.

2. Depreciation on farm improvements determined by the Commissioner approved.

R. M. Cornwall, Esq., for the petitioners.

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

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LANSDON

The respondent asserts deficiencies in income taxes for the year 1920 as to Ernest P. Flint, Otto A. Bjornstad, and J. J. Cairns in the respective amounts of $145.33, $1,471.60, and $1,245.11. Two issues are involved, viz, (1) the gain realized from the sale of certain parcels of real estate in the taxable year, and (2) the correct rate of depreciation on certain farm improvements as a factor in the determination of the profit resulting from the sale thereof as a part of a certain farm property sold in the taxable year. By agreement of counsel the three proceedings were consolidated for hearing and decision.

FINDINGS OF FACT.

The petitioners, Flint, Bjornstad, and Cairns, in the taxable year were members of a copartnership known as the Iowa Securities Co. which was engaged in real estate operations at Spencer, Iowa, and owned interests therein in the respective proportions of 50/510, 55/510, and 100/510.

In 1919 the partnership sold 282.25 acres of land, known as the Erfmeyer Farm, for a recited consideration of $63,528.75, to which the Commissioner in computing the taxable gain realized from the transacion has added $591.27 as depreciation accrued on the improvements. The cost of such farm and of completing the sale thereof was $50,084.48. The consideration received consisted of $12,128.75 cash in the taxable year, the assumption by the purchasers of a first mortgage in the amount of $35,000, and a second mortgage in the amount of $16,000, due March 1, 1925, and bearing interest at the rate of 6 per cent, which was taken back by the seller. The fair market value of such second mortgage at date of sale was $4,000.

In 1920 the partnership sold 160 acres of land known as the Brown Farm, for a recited consideration of $39,125, to which the Commissioner, in computing the taxable gain realized from the transaction, has added $604.13 as depreciation accrued on the improvements. The consideration received consisted of $14,125 cash, a first mortgage assumed by the purchasers in the amount of $20,000, and a second mortgage in the amount of $5,000, due March 1, 1925, with interest at the rate of 6 per cent, which was taken back by the seller. The second mortgage had no market value at the date it was received by the partnership.

In 1920 the partnership sold 233.41 acres of land known as the Newton Farm, for a recited consideration of $52,515, to which the Commissioner, in computing the gain realized from the transaction, has added $518.93 as depreciation accrued on improvements. The consideration received consisted of $15,401.44 cash, a first mortgage assumed by the purchaser in the amount of $22,500, and two notes, one for $9,613.86 due March 1, 1925, with interest at 6 per cent, and the other for $5,000 due March 1, 1922, with interest at 8 per cent. The two notes were secured by a second mortgage on the farm, taken back by the seller. At the date of the sale the notes secured by the second mortgage had a fair market value of $6,000.

The petitioner, Bjornstad, sold a one-half interest in a farm of 316 acres located in Cottonwood County, Minnesota, in the year 1920. In computing the gain realized from such sale the Commissioner added accrued depreciation on improvements in an amount not disclosed by the record, but at annual rates of 4 per cent on farm buildings and drain tile and 10 per cent on farm fences.

In 1920 the petitioner Cairns sold his one-half interest in a farm located in Minnesota to Tom Mangan. The consideration received consisted of $3,750 cash, a first mortgage assumed by the purchaser in the amount of $7,000, and two notes, the first for $1,700 and the second for $3,550. The two notes were secured by a second mortgage on the farm taken back by the seller. At the date of the sale the two notes secured by the second mortgage had a fair market value of $1,700.

The record does not disclose the amount of profits reported by the partnership in its income-tax return for 1920, resulting from the sale of the Erfmeyer, Brown and Newton farms, bu upon audit of such return the Commissioner held that the second mortgages taken back by the partnership were worth their face value when received and determined the deficiencies here in question.

OPINION.

LANSDON: The parties agree on the cost of the farms sold by the partnership and on the recited consideration received therefor, and in connection with this point ask that the Board shall only determine the actual value of the second mortgages at the date they were received by the partnership. We have given careful consideration to the evidence introduced by the petitioners. All the witnesses were dealers in first and second farm mortgages in the vicinity of the lands in question. All know the lands and improvements sold and were familiar with land values in the neighborhood of the farms in 1920. Based upon the evidence we have found that at the dates received by the partnership the second mortgages in question had the value which we have set forth in our findings of fact.

The question of depreciation is raised only by the petitioner Bjornstad and by him only as to the improvements on the 316-acre farm in Minnesota. The evidence on this point is not sufficient for us to find that the Commissioner was in error in his computation of the accrued depreciation on the improvements on such farm at the date of sale.

Judgment will be entered under Rule 50.