R. A. Rowan & Co. v. Commissioner , 13 B.T.A. 975 ( 1928 )

R. A. ROWAN & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

R. A. Rowan & Co. v. Commissioner

Docket No. 14815.

United States Board of Tax Appeals

13 B.T.A. 975; 1928 BTA LEXIS 3133;

October 12, 1928, Promulgated

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Gain. - Where petitioner loaned money on a trust deed and foreclosed and subsequently sold at a profit, the profit should be included in income for the year in which received and should not be held in suspense account to await termination of a lawsuit between the same parties.

Ralph W. Smith, Esq., for the petitioner.

Shelby S. Faulkner, Esq., for the respondent.

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MILLIKEN

Petitioner seeks a redetermination of a deficiency in income and profits tax for the year 1920 in the sum of $4,152.72, and as cause therefor alleges that the respondent erred in including in its income for 1920 the sum of $14,572.50, alleged profit on the purchase and sale of real estate in the taxable year.

FINDINGS OF FACT.

Petitioner is a California corporation, with principal office in the Title Insurance Building, Los Angeles, Calif. In the summer of 1910, R. A. Rowan, in behalf of the corporation, induced Jeanette G. Donovan, a widow, to purchase property located at 535-537 South Main Street, Los Angeles, Calif., on the promise that the corporation would sell the property within three years and that she would derive a nice profit from the sale. She was also told that if the property was not sold within the specified three years, all of the money she had put into the property would be returned to her and she would be released from the obligation. Mrs. Donovan also erected a new building on the property at a large expense, on the advice given by R. A. Rowan in behalf of the corporation. The sale by the corporation did not take place within the specified time and she was encouraged to "hang on" a little longer. On November 1, 1917, a trust deed in the amount of $34,114.15, due August 26, 1920, with interest at 6 per cent per annum, was given to R. A. Rowan & Co. by Jeanette G. Donovan, a widow, in part payment of amounts expended by the corporation in her behalf on property owned by her located at 535-537 South Main Street, Los Angeles, Calif. In June, 1919, Mrs. Donovan entered suit against the corporation, its officers, and the estate of R. A. Rowan, jointly. This was done apparently to be sure that her interests were fully protected. On July 1, 1919, petitioner foreclosed and did the property in for $20,000. On August 28, 1920, petitioner sold the identical property for $61,511. The Commissioner computed a profit on the sale of the property by the corporation on August 28, 1920, as follows:

Trust deed received	$34,114.15
Taxes and foreclosure costs	6,897.69
Note of C. T. Crowell held against the property	5,000.00
Interest on above note	926.66
Total cost	46,938.50
Sold for cash	61,511.00
Profit from the sale	14,572.50

Petitioner withheld the profit on this sale in 1920, pending the outcome of the suit filed against it by Mrs. Donovan. The suit was settled in 1921, on a compromise basis, for $13,250, or about this sum, plus cost. The $13,250 was in settlement of a total of $153,769 claimed as damages, etc., in the complaint which included other charges against the executors of the estate of R. A. Rowan.

OPINION.

MILLIKEN: This cause was submitted on the protest which petitioner filed with the respondent at a time prior to the issuance of the 60-day letter setting forth the deficiency here in question. From that protest the parties stipulated we might find the facts. This we have done.

We have not been supplied with copies of any of the deeds or pleadings in the suit instituted by Mrs. Donovan and are accordingly unable to determine the nature of the cause of action instituted by her particularly against the petitioner. From the facts as we have found, we see no necessary connection between the profit derived from the sale of the real estate and the compromise settlement, so that one could be offset against the other, and the profit derived by the corporation on the sale of the building in question excluded from income for the year 1920. We do not know the basis of the settlement made in 1921 with Mrs. Donovan or whether any sum was paid her specifically by reason of the investment which petitioner induced her to make. We do not know whether the petitioner admitted any liability in the year 1919 or 1920 to Mrs. Donovan by reason of the suit which she had instituted. The petitioner might have litigated with Mrs. Donovan and defeated her or settled with her on a basis having no relation to the particular property sold and which forms the basis for the deficiency asserted by the respondent.

Upon the meager facts before us we are of the opinion that petitioner derived income from the sale in the year 1920, in the amount determined by the respondent.

Judgment will be entered for respondent.