Fifty-Three West Seventy-Second Street, Inc. v. Commissioner , 23 B.T.A. 164 ( 1931 )

FIFTH-THREE WEST SEVENTY-SECOND STREET, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

FELMOUS HOLDING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MARY C. SOULE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Fifty-Three West Seventy-Second Street, Inc. v. Commissioner

Docket Nos. 40416, 43284, 48580.

United States Board of Tax Appeals

23 B.T.A. 164; 1931 BTA LEXIS 1918;

May 12, 1931, Promulgated

---

1. INSTALLMENT SALES - REAL ESTATE. - In 1925 one petitioner sold at a profit certain real estate for $452,500 of which $252,500 was to be paid in cash and the balance by assumption of liability for a first mortgage then upon the property. By the contract of sale $78,500 was paid in cash in that year and the balance on installments in succeeding years. Held, that in applying section 212(d) of the Revenue Act of 1926, the "total contract price" was represented by the $252,500 cash and the "purchase price" by the $452,500 cash paid and mortgage liability assumed.

2. TRANSFEREES. - Two of the petitioners held to be severally liable for the unpaid tax deficiency of the third, one as the purchaser of all of its assets under an agreement whereby it was obligated to pay its debts, and the other as its stockholder to whom was distributed in liquidation the consideration received from the first petitioner in the transaction of sale, this consideration being in excess of the unpaid deficiency in question.

W. H. Kellogg, Esq., for the petitioner.

H. A. Tonjes, Esq., for the respondent.

---

TRUSSELL

Of these proceedings, consolidated for hearing, one asks redetermination of a deficiency in income tax for 1925, determined by the respondent in the amount of $3,828.94, and the other two ask redetermination of this same amount determined severally against each of the two other petitioners and proposed for assessment as representing liabilities as transferees of assets of the first petitioner.

The proceedings present only two issues: (a) what amount of the profit derived by the taxpayer from a sale of real estate on the installment basis represented income in the year of sale, and (b) whether the petitioner, Mary C. Soule, is liable as a transferee. The petitioner, Felmous Holding Company, admits its liability as a transferee for any unpaid tax due from the taxpayer.

FINDINGS OF FACT.

The petitioner, Fifty-three West Seventy-second Street, Inc., hereinafter referred to as the transferor, was a New York corporation, with principal place of business in New York City. It was dissolved in 1927. In 1925 this corporation sold for a price of $452,500 certain real estate located at Fifty-three West Seventy-second Street, New York City, the original cost of which was $248,717.23. The depreciation charged off on this property since purchase amounted to $19,928.32 and the cost of legal fees and commissions incident to the sale amounted to $9,355. A profit was realized of $214,346.09. In this transaction $200,000 of the total of $452,500 was provided to be paid by the assumption by the purchaser of liability for a first mortgage in that amount then upon the property and the balance of $252,500 was to be paid, $78,500 in cash in the year of sale and the balance in cash installments in later years. During the taxable year 1925 the transferor collected in cash under this sale $78,500 and in determining its tax liability for that year respondent has computed the profit represented by this payment upon the basis of the proportion which the total profit of $214,346.09 bears to the total money consideration of $252,500.

The petitioner, Felmous Holding Company, a New Jersey corporation with principal office in New York City, was organized and incorporated on May 3, 1927, for the purpose of taking over all of the assets and assuming all of the liabilities of the transferor. In consideration for these assets it issued to the transferor all of its capital stock save a few qualifying shares and specifically contracted to assume liability for all of its debts, the transaction being effected in 1927, and the transferor thereupon being dissolved. The property transferred to this petitioner as well as the stock received in consideration therefor, was, in each case, of a value in excess of the deficiency alleged to be due from the transferor. This petitioner, Felmous Holding Company, admits its liability as a transferee for the entire amount of any tax due from the transferor.

The petitioner, Mary C. Soule, was a holder of all of the outstanding capital stock of the transferor except a few qualifying shares. She surrendered such stock in 1927 following the transfer to Felmous Holding Company of the property of the transferor, accepting in lieu thereof, in the liquidating of the transferor corporation, all of the capital stock of the Felmous Holding Company received by the transferor in exchange for its property.

OPINION.

TRUSSELL: In respect to the petition of Fifty-three West Seventy-second Street, Inc., Docket No. 40416, it is alleged in the petition and admitted in the answer that this petitioner was dissolved in 1927. The Felmous Holding Company appears as a party petitioner in that proceeding, although the notice of deficiency shows the deficiency to have been determined against the taxpayer, Fifty-three West Seventy-second Street, Inc., alone. The proceeding under this docket number must be dismissed, one party petitioner being admitted to have no legal existence and the other being shown not to be a proper party to the proceeding. This action has no effect to determine issues presented by these proceedings as those issues are also germane to the two proceedings remaining and will be considered and disposed of therein.

The parties are in full agreement as to the total amount of profit attributed to the sale by the transferor corporation of certain real estate during the taxable year 1925 and they also agree that the profit from that sale may be reported on the installment sales basis. We are called upon to decide only upon the method to be followed in determining the amount of the profit to be reported as income in the taxable year 1925.

This question is controlled by section 212(d) of the Revenue Act of 1926, which so far as material here, reads as follows:

Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case * * * (2) of a sale or other disposition of real property, if * * * the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. * * *

Article 44 of Regulations 69, construing the section above quoted, provides:

In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall not be considered as a part of the "initial payments" or of the "total contract price" but shall be included as part of the "purchase price" as those terms are used in section 212(d), in articles 42 and 45, and in this article.

In those cases in which we have been called upon to construe the above quoted section of the Act we have accepted the construction placed thereon by article 44 as above set out. ; ; ; . The income of the taxpayer in the calendar year 1925 from this transaction is such proportion of the payment of $78,500 received in that year as the total profit of $214,346.09 bears to the "total contract price" of $252,500. It was upon this basis that respondent computed the deficiency which is here asserted as a liability against each of these petitioners as transferees.

The petitioner, Felmous Holding Company, admits its liability for whatever deficiency is determined from the transferor, but Mary C. Soule denies a liability in view of the fact that the assets of the transferor conveyed to the Felmous Holding Company were by contract under which that company assumed liability for its debts. In respect to this question it is clear that although by the contract of sale the purchaser, Felmous Holding Company, became liable for its debts, this result did not discharge the liability of the transferor and that such liability was assumed by the petitioner, Mary C. Soule, as a result of the distribution to her of all its property as the owner of its stock upon its liquidation.

Both of these petitioners have received assets from the transferor in excess of the total deficiency in question and these assets in each case have been received under conditions imposing upon them severally a liability for the payment of such deficiency. .

The proceeding under Docket No. 40416 is dismissed. In the proceedings under Docket Nos. 43284 and 48580, judgment will be entered for the respondent.