Jackson Sanatorium & Hospital Co. v. Commissioner

JACKSON SANATORIUM & HOSPITAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Jackson Sanatorium & Hospital Co. v. Commissioner

Docket No. 3089.

United States Board of Tax Appeals

9 B.T.A. 734; 1927 BTA LEXIS 2517;

December 21, 1927, Promulgated

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">*2517 1. The evidence is insufficient to establish the March 1, 1913, value of real estate.

2. Depreciation, on buildings and furniture, as charged on petitioner's books and deducted in prior income-tax returns, is not excessive.

3. The net selling price is the market value rather than the par value of securities received as consideration.

W. Q. Sharp, C.P.A., for the petitioner.

Brice Toole, Esq., for the respondent.

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LANSDON

">*734 The respondent has asserted a deficiency in the petitioner's income and profits taxes for the year 1919, in the amount of $1,156.68. The deficiency arises from the determination by the respondent of a gain of $4,982.78, derived from the sale of real and personal property. The only questions involved are the correct basis for the determination of gain or loss resulting from a sale in the taxable year of certain real and personal properties acquired by the petitioner both prior and subsequent to March 1, 1913, and the correct net sale price of the property.

FINDINGS OF FACT.

The petitioner is a corporation, chartered by the State of Mississippi, and authorized to own and conduct a hospital and sanatorium. ">*2518 On or about August 1, 1909, it purchased property then belonging to the Jackson Sanatorium, a corporation of similar name, located on West Street, Jackson, Miss. The property so acquired consisted of a plot of ground 100 by 300 feet fronting on West Street, and a dwelling house which had been partially renovated and made into a hospital. The consideration paid for this property was $14,000, which included $10,000 for the lot or plot of ground and $4,000 for the building. Immediately thereafter petitioner built a brick annex in front of the frame building already located on the lot and equipped the two buildings with all the necessary furniture, furnishings, and surgical equipment to make a complete and up-to-date hospital. The original costs, and the costs of additions, improvements, and equipment were as follows:

	Land	Buildings	Furniture
1909 original cost	$10,000.00	$4,000.00
1910 additions and improvements		18,195.67	$4,497.80
1911 additions and improvements		232.15	176.14
1912 additions and improvements		2,069.40	962.89
1913 additions and improvements		256.33	1,222.82
1914 additions and improvements		2,166.34	1,697.80
1915 additions and improvements			242.25
1916 additions and improvements
1917 additions and improvements		1,913.47
1918 additions and improvements
1919 additions and improvements
	10,000.00	28,833.36	8,799.70

">*2519 ">*735 Depreciation was charged on the books of petitioner against the buildings and furniture as follows:

	Buildings	Furniture
1909
1910
1911
1912	$1,622.22	$636.83
1913	131.33	622.82
1914	166.34	1,297.84
1915		1,241.25
1916	3,500.00	500.00
1917	1,575.00	225.00
1918	1,591.95	213.75
1919
	8,586.84	4,737.49

The depreciated book value of the property on August 1, 1919, was $35,017.22, which included $709.45 for unexpired insurance. On August 15, 1919, petitioner sold all the land, buildings, equipment, and unexpired insurance to J. P. Wall and W. W. Smithson, for a total consideration of $40,000, paid in Liberty bonds of a par value of $10,000, and notes for $30,000, maturing $2,000 per year over a period of 15 years, bearing 6 per cent interest and secured by a mortgage on the property. The market value of the Liberty bonds on August 1, 1919, was 96 cents on the dollar. The notes were worth their face value. The net consideration received from the sale was $39,600.

The property sold by petitioner lies within the business district of Jackson, Miss. To the east, and across West Street, is a block occupied by the mansion, ">*2520 or home, of the Governor of Mississippi. Immediately diately north of the Governor's mansion is a public square used as a park. Adjoining petitioner's property on the north, and extending for a distance of more than a block, is the property of the Catholic Church. The county court house lies adjacent to petitioner's property on the west. To the south is located the Capital National Bank, and ">*736 across an intervening street to the south lies the post office and the Episcopal Church.

Between the years 1909 and 1913, an increase in business was shown in the City of Jackson by the following facts:

	1909	1913
Postal receipts	$81,357.46	$106,954.14
Deposits in Capital National Bank	606,332.04	1,189,865.30
Deposits in Merchants Bank & Trust Co	720,761.11	867,157.33

Population 21,262 in 1910 and 22,817 in 1920.

West Street, lying immediately in front of petitioner's property, was paved throughout its entire length during the year 1912, which made West Street one of the only two paved streets running north and south through the City of Jackson, connecting the residential section with the retail business section of the city.

Petitioner ceased">*2521 operations in August, 1919, but has never been legally dissolved.

OPINION.

LANSDON: The only problem here is to ascertain the correct basis for the computation of gain, or loss, resulting from the sale of the property in question during the taxable year. There is no controversy over the costs of such property or the years in which the various assets were acquired. The respondent has used the depreciated cost of the property, reflected by the books of the petitioner at August 1, of the taxable year, as a basis, and, upon such basis, has found a gain which he asserts should be included in the taxable income of the petitioner for such year. In arriving at this basis he has disregarded the value of 1913 of the property owned at that date, or has assumed that such value was equal to the depreciated cost thereof.

The petitioner alleges error in three respects: (1) That the sale price received was less than the amount asserted by the respondent; (2) that the property, acquired prior to March 1, 1913, had materially increased in value, and, at that date, was worth substantially more than cost; and (3) that depreciation charged against the property, and used by the respondent as">*2522 a factor in the computation of the alleged gain from the transaction, was excessive.

The evidence introduced by the petitioner to establish the March 1, 1913, value of the land consists of testimony concerning the growth in population and business of the City of Jackson between 1909 and 1913. Several witnesses testified that this growth reflected an increase ">*737 in value of property within the City of Jackson. Such facts do not prove that petitioner's property became more valuable during that period nor how much the alleged increase in value was. In the absence of evidence to support the petitioner's claim of a value at March 1, 1913, greater than the cost, the basic value used by the respondent is approved.

Although depreciation charges against the buildings and furniture were irregular, the average charged against the buildings was less than 4 per cent per year, while the average charged against the furniture was, approximately, 7 per cent per year. The depreciation as charged on the books has been deducted from the taxable income by the petitioner in his prior income-tax returns, and has been used by the respondent in determining the basis for computation of gain">*2523 from the transaction. The petitioner has offered no evidence upon which we can base any finding sufficient to overcome the determination of the respondent.

We are convinced that the Liberty bonds received in lieu of the $10,000 cash payment were worth only 96 cents on the dollar at the date of sale, and that the notes were worth their face value, as petitioner testified. It follows that the net sale price was only $39,600.

Reviewed by the Board+

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