Douglas Park Jockey Club v. Commissioner ( 1927 )

DOUGLAS PARK JOCKEY CLUB, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Douglas Park Jockey Club v. Commissioner

Docket No. 5738.

United States Board of Tax Appeals

9 B.T.A. 496; 1927 BTA LEXIS 2563;

December 9, 1927, Promulgated

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The evidence shows that petitioner neither realized a taxable gain nor sustained a deductible loss upon the sale of its assets in 1919.

Robert E. Moloney, Esq., for the petitioner.

Henry Ravenel, Esq., for the respondent.

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LITTLETON

The Commissioner determined deficiencies in income and profits tax in the amount of $51.16 for 1918 and $15,070.38 for 1919. Petitioner claims that the Commissioner erred in his determination in respect of the March 1, 1913, value of the property sold in 1919.

FINDINGS OF FACT.

The petitioner is a Kentucky corporation organized in 1906, with its principal office in Covington.

In 1905, Louis A. Cella, now deceased, purchased from one Douglas on behalf of himself and his associates, C. A. Tilles, S. W. Adler and John Condon, now deceased, a tract of land containing about 126 acres, then beyond but now within the corporate limits of the City of Louisville, Ky. Title to the property was originally taken in the name of Cella, but was soon conveyed to the Couglas Park Jockey Club, the petitioner herein, which continued to own the same until it sold it to the Kentucky Jockey Club, conveyance to it being made on March 5, 1919. The property was acquired for the purpose of constructing a race track and placing thereon all necessary improvements. Work was begun on the race track shortly after its purchase. The capital stock of the Douglas Park Jockey Club was $250,000 divided into 2,500 shares of the par value of $100 each.

The race track, when completed, was recognized as one of the finest in the country. In 1907, petitioner leased its properties for five years to the Louisville Racing Association, a holding corporation, one-half interest in which was owned by the stockholders of petitioner and the other half interest by the owners of the Churchill Downs race track of Louisville, Ky.

During the leased period, petitioner received a yearly rental of $15,000, being a net return of 5 per cent on an investment of $300,000. The lessee, in addition to the rental, also paid insurance, taxes, and other charges against the property and kept the property in firstclass condition and repair, and the same was in good physical condition when surrendered at the expiration of the lease in 1912. On termination of the lease, the Louisville Racing Association, the lessee, liquidated and distributed its assets among its stockholders, one-half thereof being delivered to petitioner's stockholders, and they turned some in to petitioner without cost.

Due to the fact that the petitioner's books were not accurately kept, no entry was made therein showing the receipt or value of said property, which consisted of numerous pari-mutuel machines, live stock and general race-track equipment of the value of $8,000. At the expiration of the lease, petitioner also received $7,500 from the Louisville Racing Association, lessee, to equalize expenditures made by the Association as the lessee of the Churchill Downs race track, in excess of what the lessee had expended on the property of the petitioner, the agreement being that the same amount should be expended on each race track.

Prior to 1913 expenditures, whether representing capital investments or operating costs, were generally charged by petitioner to expense. Permanent improvements and additions costing $150,000 were placed upon the land prior to the execution of the lease in 1907.

After the expiration of the lease petitioner again assumed charge of its track and property. It sold and conveyed its entire property on March 5, 1919, for $300,000, paying a commission of $15,000 on such sale, realizing net thereon $285,000.

After the sale petitioner went into voluntary liquidation, as required under the contract of sale.

No examination of the books of petitioner was made by the Commissioner until 1918, when a revenue agent made an examination covering from 1906, the date of petitioner's organization, to and including the year 1917. Corrected amended returns for the years 1910 to 1917, both inclusive, were prepared. Such returns were signed and sworn to before the agent by John Hachmeister, as secretary and treasurer of the Douglas Park Jockey Club, on September 20, 1918. The revenue agent undertook to rewrite the books of the petitioner at the time he prepared the corrected amended returns. The books and most of the records of petitioner were, after the sale of its assets, stored in a building in Covington, ky., and while there were destroyed by fire in 1921 or 1922.

There was a substantial increase in the value of petitioner's land from 1906 to 1913. Additional construction and improvements were placed thereon in 1912, costing $30,000. Additions and improvements were placed upon the land form 1913 to 1919 at a cost of $21,366.64. There was some appreciation in the value of petitioner's land from 1913 to date of sale in 1919, though the extent of the increase can not be determined from the evidence.

The fair market value of petitioner's property on March 1, 1913, was $350,000.

The sale of petitioner's property was not a fair and voluntary one, but the owners were constrained to sell by reason of the action and conduct of a majority of the members of the State Racing Commission of Kentucky which convinced petitioner that its entire investment was in jeopardy. The sale was made at the time and at the price it was through fear of sustaining a greater loss through further hostile action of the Racing Commission, if the offer made for the purchase of the Douglas Park Jockey Club's property should be rejected.

OPINION.

LITTLETON: The testimony of a number of witnesses has been submitted relative to the character, cost, and March 1, 1913, value of petitioner's property, conveyed March 5, 1919, for a total consideration of $300,000, the sum of $285,000 being the net consideration received after the allowance of $15,000 as a commission on the sale to the Kentucky Jockey Club.

The evidence is sufficient to convince the Board that the cost of petitioner's property was as follows:

Cost of land	$130,000.00
Construction prior to lease	150,000.00
Construction in 1912, after lease	30,000.00
Miscellaneous and pari-mutuels, 1912	8,000.00
Additions from 1913 to 1919	21,366.64
Total	339,366.64

The evidence also convinces us that the fair market value of petitioner's property on March 1, 1913, was $350,000 and that $7,500 per annum is a proper and reasonable allowance for exhaustion, wear, and tear of depreciable assets.

The March 1, 1913, value therefore depreciated to March, 1919, is $305,000. Petitioner realized from the sale $285,000, which is less than the fair market value of petitioner's property on March 1, 1913, but more than the cost value depreciated at the same ratio from date of acquisition to date of sale, and therefore petitioner neither realized a taxable gain nor sustained a deductible loss on the sale in 1919.

The evidence does not establish that the petitioner was guilty of negligence such as would warrant the imposition of the penalty of 5 per cent affirmatively claimed by the Commissioner in his answer and at the hearing.

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

Considered by SMITH, TRUSSELL, and LOVE.