Quinn v. Commissioner , 31 B.T.A. 142 ( 1934 )

PORTE F. QUINN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Quinn v. Commissioner

Docket No. 67156.

United States Board of Tax Appeals

31 B.T.A. 142; 1934 BTA LEXIS 1153;

September 5, 1934, Promulgated

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">*1153 No income was realized by petitioner as the result of cancellation of mortgages at a time when he was insolvent and his equity in the properties had no market value.

Richard S. Doyle, Esq., for the petitioner.

Harry F. Morton, Esq., for the respondent.

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ARUNDELL

">*142 This proceeding is to test the correctness of the respondent's determination of a deficiency in income taxes for the calendar year 1929 ">*143 in the amount of $4,414.53. At the trial the parties made mutual concessions which will be given effect under Rule 50, leaving for determination the question whether or not petitioner realized income in the sum of $36,262.50 by reason of the cancellation of certain mortgages.

FINDINGS OF FACT.

The petitioner is an individual, with his principal place of business in Palm Beach, Florida, and filed his income tax return for the calendar year 1929 with the collector of internal revenue at Jacksonville, Florida.

He has been engaged in the real estate business in Florida for a period of about twenty years, handling wholesale tracts of land and the subdivision of property.

In the year 1925 the Mizner Land Co., a corporation, was">*1154 formed for the purpose of taking over the subdivision of a tract of land called the "Mizner Mile." The capital stock of that company, 100 shares of $10,000 par value, was issued for services and good will, 34 shares to Victor Searles, 33 shares to Addison Mizner, who was an architect in Palm Beach, Florida, and 33 shares to petitioner.

The Mizner Mile was a mile of water front north of West Palm Beach, Florida, and Victor Searles, the owner, transferred the property to the Mizner Land Co. for a price of $252,000, payable by the company assuming the first mortgage of $127,507.90 and giving a second mortgage for the balance, $128,142.46.

Searles was a wealthy man who had invested in Florida property, and it was planned and agreed with Searles that Mizner as an architect and petitioner as a real estate operator would develop this tract of land for sale as building lots.

From 1925 to 1929 Mizner and petitioner worked on the development and sale of this property, but Searles would not agree to any proposition for sale. In 1929, therefore, they both made claims against Searles for services rendered pursuant to their agreement with him at the time the corporation was formed.

">*1155 Searles made a settlement with petitioner of his claims, by which petitioner received $28,000 cash and $12,500 in notes of the Mizner Land Co. (the notes being contingent upon the sale of certain property), and in addition thereto Searles canceled the second mortgage of $26,892.50 held by him on petitioner's residence, and also canceled petitioner's liability, if any, on a mortgage held by him on a 50-acre tract of undeveloped land, designated as Government lots 4 and 5, section 22, township 45, range 43, which the petitioner and Mizner had previously purchased jointly in 1925. In connection with the settlement petitioner surrendered his stock interest in the Mizner Land Co.

">*144 The petitioner was required to pay attorneys' fees and costs aggregating $5,089.64 from the amount of cash received from Searles in settlement of his claims.

The notes of the Mizner Land Co., $12,500, were contingent liabilities of that corporation and are not involved in these proceedings, as they were eliminated in the deficiency notice.

The mortgage on the 50-acre tract of undeveloped swamp land mentioned above was part of a purchase money mortgage on the tract which was located directly">*1156 back of the Mizner Mile. This property was purchased by Mizner and the petitioner jointly in 1925 for an agreed price of $35,000. They paid $7,000 in cash and gave a purchase money mortgage for the balance, $28,000, payable $7,000 a year over the next four years, and paid the first annual installment of $7,000, but defaulted on the second installment, whereupon the mortgage of $21,000 became due. Searles bought it in for $18,700, and agreed with petitioner and Mizner to carry it and recover his investment upon sale of the property, as well as share in the profits. The land was a mango swamp, undeveloped, and of no value unless filled in by pumping sand from the adjoining lake. It has not since been developed.

On June 3, 1929, petitioner deeded his one-half interest in the 50-acre tract to the Quinn Holding Co., a corporation. Petitioner owned one share of stock in the corporation, the remainder being owned by his wife, his daughter, and his secretary.

Petitioner's residence, "El Bravo", is a bungalow type of house of frame and stucco construction, built around a patio, has four bedrooms, living room, dining room, kitchen, laundry, and two small storage rooms, located at">*1157 Palm Beach between the County Road and the Lake on a lot 140 by 180 feet. The house was about seven years old when petitioner purchased it in 1925 from Searles at an agreed price of $58,000, of which he paid $15,107.50 in cash and assumed a first mortgage of $16,000 and gave a second mortgage of $26,892.50.

The respondent has added to petitioner's income the sum of $36,242.50, representing the face amount of the two canceled mortgages, viz., the second mortgage on petitioner's residence, $26,892.50, and one half ($9,350) of the price paid by Searles ($18,700) for the mortgage on the 50-acre tract of undeveloped land.

The real estate and business conditions in 1929 in Palm Beach, Florida, when settlement was made with Searles, were such that it was impossible to sell any property, as there was no market for property of any kind, and there were no customers. Banks had failed, and there was no chance to sell either the residence "El Bravo" or the 50-acre tract of undeveloped land. It was also impossible to get a loan on the properties. Neither property had any market value in 1929.

">*145 The second mortgage of $26,892.50 on petitioner's residence had no value at the">*1158 time it was canceled in 1929.

The mortgage of $21,000 on the 50-acre tract of undeveloped land had no value at the time of its cancellation in 1929.

At the time of the settlement with Searles in 1929 petitioner's liabilities exceeded his assets.

Petitioner was not financially responsible in 1929 for payment of the second mortgage on his residence or the one half of the mortgage on the 50-acre tract of land, in the event that the sale of those properties did not bring sufficient to pay those mortgages.

OPINION.

ARUNDELL: This case presents the familiar question of whether the cancellation of indebtedness constitutes taxable income. If the taxpayer is in fact enriched by the transaction, if he is relieved of his liabilities without a corresponding shrinkage of his assets incident to the transaction, he has realized income, ; . But he has not realized income by being relieved from paying that which he in fact is unable to pay. "Gain or profit is essential to the existence of taxable income. ">*1159 A transaction whereby nothing of exchangeable value goes to or is received by a taxpayer does not give rise to or create taxable income." ; ; .

The evidence is clear that petitioner was insolvent when the Searles settlement was made and the mortgages were canceled. Petitioner's home "El Bravo" in 1929 did not have a fair market value in excess of the first mortgage of $16,000. The real estate market in Florida was demoralized and it was practically impossible to dispose of property at any price. Nor did the petitioner realize income by reason of the cancellation of the mortgage on the 50-acre tract of undeveloped land. In 1929 this property appears to have had little, if any, value. Moreover, whatever interest petitioner had in this tract he had conveyed in June of 1929 to the Quinn Holding Co., a corporation, which assumed petitioner's obligations under the mortgage on this undeveloped tract. This was several months before the Searles settlement took place. The cancellation">*1160 of the mortgage in this case did not, as in , make available any assets to petitioner, and we hold that there was no realization of income from the transaction.

Decision will be entered under Rule 50.