Chapman v. Commissioner , 19 B.T.A. 878 ( 1930 )

E. E. CHAPMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Chapman v. Commissioner

Docket No. 40036.

United States Board of Tax Appeals

19 B.T.A. 878; 1930 BTA LEXIS 2314;

May 8, 1930, Promulgated

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">*2314 In the early part of 1925 the petitioner sold certain real estate owned by him for $70,000, receiving in payment therefor $17,000 in cash and four promissory notes for $13,250 each, payable in one, two, three, and four years from date and which were secured by a first mortgage on the property sold. Later and during 1925 the petitioner, in part payment of certain other real estate purchased by him about that time, transferred at their face value the two notes having the latest maturity dates. Held that the petitioner is not entitled to report the profit realized from the sale of the property on an installment basis.

Fred Van Dolsen, Esq., for the petitioner.

Hartford Allen, Esq., for the respondent.

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TRAMMELL

">*878 This proceeding is for the redetermination of a deficiency in income tax of $3,251.33 for 1925. The only question involved is whether the petitioner is entitled to report on the installment basis the profit received from the sale of certain real property in that year. The case was submitted on a stipulation, from which we make the following findings of fact.

FINDINGS OF FACT.

The petitioner, an individual, is an inhabitant">*2315 of the State of Florida, and filed his 1925 income-tax return with the collector of internal revenue at Jacksonville, Fla. On or about August 1, 1919, he acquired certain real estate at a total cost of $22,497.50. About January 15, 1925, he sold said real estate, receiving therefor $17,000 in cash and four promissory notes dated January 15, 1925, numbered 1, 2, 3, and 4, each for the sum of $13,250, making a total sale price of cash and notes of $70,000. The notes were secured by a first mortgage on said real estate. Note, No. 1 was due and payable one year after date, or on January 15, 1926; note No. 2 was due and payable two years after date, or on January 15, 1927; note No. 3 was due and payable three years after date, or on January 15, 1928; and note ">*879 No. 4 was due and payable four years after date, or on January 15, 1929. On January 1, 1926, all four of said notes were still outstanding and unpaid.

On or about July 27, 1925, the petitioner purchased certain other real estate from one Lula B. Bradford for a consideration of $35,000, paying therefor $8,500 in cash and turning over to her at their face value the notes Nos. 3 and 4 described above. This purchase">*2316 of real estate was a separate and distinct transaction from the sale described in the preceding paragraph and was from a different and unrelated party. The two notes, Nos. 3 and 4, were endorsed with full recourse by the petitioner and the payment of the same was guaranteed by the petitioner in case of default by the maker of the notes.

The respondent has treated the entire profit of $47,502.50 from the sale of January 15, 1925, as taxable income to the petitioner for 1925, for the reason that the $17,000 in cash received by the petitioner plus the face value of the notes Nos. 3 and 4 which were exchanged by him for other property as described above exceeded 25 per cent of the sale price of the real estate sold by the petitioner.

OPINION.

TRAMMELL: The petitioner contends that the sale of January 15, 1925, should be treated for income-tax purposes as on the installment sale basis and that the profit on such sale taxable in 1925 is $11,536.32. He also contends that each of the notes which he transferred at their face value for other property on July 27, 1925, cost him $4,258.46 and that when he transferred them he earned a taxable profit on them of $17,983.08 for 1925 under">*2317 the provisions of section 204 of the Revenue Act of 1926. He further contends that the second transaction did not take the first one, that is the sale of January 15, 1925, out of the provisions of section 212(d) of the Revenue Act of 1926. The taxable profit for 1925 contended for by the petitioner from the sale of the real estate on January 15, 1925, and the subsequent disposition of two of the notes received in payment therefor is $11,536.32 plus $17,983.08, or $29,519.40, instead of $47,502.50 as determined by the respondent.

Section 212(d) of the Revenue Act of 1926, which is applicable to the year 1925, is 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 (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or ">*880 (2) of a sale">*2318 or other disposition of real property, if in either case 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. As used in this subdivision the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

Here a cash payment of $17,000, or slightly less than one-fourth of $70,000, the price for which the property was sold, was received at the time of the sale. For the remaining portion of the $70,000 the petitioner received four promissory notes for $13,250 each, secured by a first mortgage on the property sold. Had he continued to hold such notes at the close of his taxable year, nothing having been paid on them, he would have been entitled to report the profit from the transaction on the installment basis. See ">*2319 ; ; and . On the other hand, if he had sold all of the notes at their face value for cash during the taxable year, he would not have been entitled to report the profit on the installment basis. , and . If the purchaser of the petitioner's property had made payments during the taxable year which in addition to the $17,000 originally received by the petitioner would have amounted to more than 25 per cent of the price at which the petitioner had sold the property, he also would not have been entitled to report the profit on the installment basis. .

In the instant case, the petitioner transferred two of the notes at their face value during the taxable period for other property, namely, land. If during the taxable year the two notes had been converted into money, under the language of the statute, and in accordance with our previous decisions, the proceeds therefrom would constitute">*2320 "initial payments" within the meaning of that term as used in section 212(d). The notes having been transferred for other property within the taxable period, the transaction is the same in effect as if they had been converted into cash, with the result that the petitioner received as initial payment more than 25 per cent as provided in section 212(d). The petitioner is therefore not entitled to have his tax computed on the installment basis.

Judgment will be entered for the respondent.