Cole v. Commissioner , 13 B.T.A. 1310 ( 1928 )

JULES OMAR COLE, EXECUTOR, JAMES O. COLE ESTATE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Cole v. Commissioner

Docket No. 13378.

United States Board of Tax Appeals

13 B.T.A. 1310; 1928 BTA LEXIS 3061;

October 31, 1928, Promulgated

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In 1919 the decedent received from a trust, of which he was one of the beneficiaries, Liberty bonds which represented a distribution of a part of the assets of the trust. In computing the profit realized by the trust and by the beneficiaries in 1919, the Commissioner valued the bonds at par, even though their market value at the date of receipt in 1919 was less than par, and the decedent's tax liability for 1919 was determined and settled upon that basis. In 1921 the decedent sold a part of the Liberty bonds received at $11,950 less than their par value. For lack of evidence that the cost of the bonds to the decedent was greater than their market value at the date of receipt, the determination of the Commissioner is sustained.

Albert H. Cole, Esq., for the petitioner.

Harold Allen, Esq., for the respondent.

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SMITH

This is a proceeding for the redetermination of a deficiency in income tax for 1921 in the amount of $91,602.38. The petitioner claims an overassessment and overpayment of income tax for 1921 in the amount of $1,226.99. The petition alleges (1) the Commissioner erred in including in the taxpayer's income for 1921 his full distributive share of the income of the Cole & Crane Real Estate Trust of Ohio, as finally determined in the amount of $158,250.41, without deducting the income returned as having been received from the trust in the amount of $157,652.51; and (2) the Commissioner erred in rejecting the taxpayer's claim for an increase in the loss resulting from the sale by him in 1921 of $125,000 par value of Liberty bonds from $3,200, as returned, to $11,950, as set forth in his claim filed with the collector at Indianapolis, Ind., on or about February 20, 1924.

The Commissioner admits error upon the first point.

FINDINGS OF FACT.

The petitioner is the sole surviving executor of the last will and testament of James O. Cole, who died a resident of Peru, Ind., on February 3, 1923.

On and prior to December 6, 1916, James O. Cole and Clinton Crane were the owners as tenants in common in equal proportions of certain coal and timber lands in West Virginia. They also owned a saw mill in Cincinnatti, Ohio, which was operated by them as a partnership under the name and style of C. Crane & Co. Logs were cut from the lands in question and manufactured and sold in Cincinnati.

On December 6, 1916, they created what was denominated the Cole & Crane Real Estate Trust by conveying to three trustees the said coal and timber lands. Concurrently therewith the trustees executed a declaration of trust wherein it was provided, among other things, that they should hold the property and all income therefrom in trust for James O. Cole and Clinton Crane and their respective heirs, devisees, personal representatives and assignees until 20 years after the death of the survivor of certain named persons and in no event exceeding 50 years, and thereupon reconvey the property to the beneficiaries.

It was found inconvenient to have the title to the lands from which the timber was cut in the name of trustees and to carry on the logging and saw mill operations through the partnership. The trustees accordingly reconveyed the standing timber to the partnership. On December 28, 1918, a contract then tentative in character was entered into between the trust, the partnership, C. Crane & Co., and the Youghiogheny & Ohio Coal Co., an Ohio coal company hereinafter referred to as the Y & O Coal Co., whereby it was agreed that the trustees and the beneficiaries of the trust and C. Crane & Co. should convey to the Y & O Coal Co. some 7,000 acres of the trust lands in Boone County, West Virginia, including the standing timber thereon which was owned by C. Crane & Co. The price was $150 per acre for the land, including the timber, or $100 per acre for the land itself where the timber had been cut off. The contract provided that Liberty bonds to the extent of $500,000 par value should be received and credited at par upon the purchase price.

On April 22, 1919, the Y & O Coal Co., pursuant to the contract, delivered to the trustees $480,000 par value of Liberty bonds. The trustees delivered $30,000 par value of the bonds to real estate agents in part payment of the commission due them for effecting the sale. The remainder, about a month after their receipt, were divided one-half to James O. Cole and the remaining one-half to the widow and children of Clinton Grant, who had died in the year 1917.

The contract above mentioned for the sale of the lands in question was a contingent one depending upon the acquisition and conveyance of a railroad right of way without which the property could not have been operated for coal purposes, and the transaction was not concluded until 1922, when the balance of the purchase price and certain amounts withheld for curing certain defects in the title was paid. The sale was held by the Commissioner to be a sale in installments and the amount of profit derived therefrom was apportioned between the Cole & Crane Real Estate Trust and the partnership in proportion to the value of the lands and the timber thereon. It was also apportioned between the years 1919 and 1922 in proportion to the amounts received respectively in those years. All of the income of the Cole & Crane Real Estate Trust was distributed periodically in the year in which received. Both the trust and the partnership filed income-tax returns for 1918 and subsequent years for the sole purpose of disclosing taxable income received therefrom by the beneficiaries and the partners. The trust in its original tax return for 1919 reported the profit derived from the sale of the lands in question by including the Liberty bonds as a part of the purchase price received at the value of $93 on the $100, on the theory that such was the market value of the bonds at that time.

James O. Cole received $225,000 par value of the bonds in 1919 and in 1921 sold $125,000 par value for $113,050, or for $11,950 less than the par value thereof.

In his income-tax return for 1921, James O. Cole deducted from gross income the loss sustained on the sale of the $125,000 par value of the bonds sold by him in 1921, using as the cost price thereof the same value which had been used in determining the profit derived from the transaction in which they were received by the trust in the year 1919, the resultant loss being $3,200.

In 1924 the 1919 income-tax return of the Cole & Crane Real Estate Trust was audited by the Commissioner and the profit derived from the sale of the lands made by the trust and the partnership as vendors to the Y & O Coal Co. was increased by valuing the Liberty bonds so received at their par value. A conference was had at Washington in August, 1923, at which this proposed change was protested. Representatives of the Commissioner, however, insisted that the value placed upon the bonds for the purpose of fixing the profit derived from the sale of lands and timber would make no substantial difference to the interested parties, as when the bonds were sold or finally paid the loss sustained would be increased or the profit diminished to the same extent to which the profit on the sale of the land was increased by this change in valuation.

Following the conference and in accordance with an understanding therein arrived at, the Cole & Crane Real Estate Trust filed an amended return for 1919 in which the bonds were valued at par for the purpose of ascertaining the profit derived from the sale. On January 23, 1924, the trust received a letter from the Deputy Commissioner finally confirming the par valuation of the bonds for the purpose of determining the profit. The profit from the sale having been apportioned between the years 1919 and 1922, there was included in the income of the trust for the year 1922 a propertionate part of the profit derived from this sale.

In his income-tax return for 1921, James O. Cole, in the belief that the profit of the trust and of the partnership from the sale of the lands would be determined upon the basis that the bonds had a fair market value in 1919 of 93, deducted from gross income, as a loss sustained upon the sale of $125,000 of the bonds in 1921, only $3,200. The Liberty bonds of $125,000 par value were sold by Cole in 1921 for $113,050, or for $11,950 less than the par value. The Commissioner has refused to allow the deduction from gross income of 1921 of any greater loss on the sale of the bonds than $3,200.

The tax shown to be due on the original return filed by James O. Cole for 1921 was paid in full.

OPINION.

SMITH: The only issue before us is the amount of the loss sustained upon the above-described sales of Liberty bonds by James O. Cole, deceased, in the year 1921. The petitioner alleges that the basis for the determination of the loss is the par value of the bonds. No evidence has been adduced that the cost of the bonds to the decedent was their par value. The petitioner contends, however, that since the Commissioner has determined the profit on the sale fo the lands in 1919 upon the basis that the Liberty bonds received in part payment therefor should be taken at the par value thereof, the bonds were purchased at par; that since the Commissioner has used such basis in determining the profit on the sale of the lands and in ascertaining the distributable income of the trust for prior years, and since James O. Cole was required to pay and did pay additional taxes upon his part of the increased distributable income, the Commissioner can not now, for the purpose of computing the loss upon the sale of the bonds in 1921, determine a different cost for the same bonds. To preclude such action on the part of the Commissioner the petitioner would invoke, if necessary, the doctrine of estoppel.

The basis laid down by the statute for determining the profit upon the sale of the bonds in 1921 is the "cost" thereof. Section 202(a) of the Revenue Act of 1921. The evidence of record does not show the cost of these bonds to the decedent. The bonds were acquired in exchange for real estate. The fair market value of that real estate either at the date the contract was entered into on December 28, 1918, or at the time the bonds were received by the trustees in April, 1919, is not shown. The bonds apparently had a fair market value of only 93 cents on the dollar at the time they were received in April, 1919. Their fair market value on December 28, 1918, is not shown. The Commissioner has used the basis of their fair market value in April, 1919, in determining the loss. If the consideration paid for the bonds had a greater fair market value than 93 cents on the dollar the record does not disclose it.

We think that the doctrine of estoppel has no application to this case. The trustees of the Cole & Crane Real Estate Trust contended before the Commissioner that the value of the bonds at the date of receipt by them in 1919 was only 93 cents on the dollar and that the tax liabilities of the beneficiaries of the trust for 1919 should be determined upon the basis of such fair market value for the bonds. This contention was denied by the Commissioner. If the protestants had a cause of action with respect to the decision of the Commissioner, that cause of action related to the year 1919 and not to the year 1921. The year 1919 is not before us. We can only determine the proper tax for the year 1921. The statute lays down the basis for the determination of the profit or loss on the sale of the bonds and that basis is the cost of the property. If the determination of the Commissioner with respect to the cost of the bonds to the decedent is in error, the evidence does not prove it. A showing that he used an erroneous basis for determining the profit on the sale of the land in 1919 is not a showing of the "cost" to the decedent. For lack of proof of error in the determination of the basis used by the respondent such determination must be approved.

Reviewed by the Board.

Judgment will be entered under Rule 50.