Ravlin Corp. v. Commissioner , 19 B.T.A. 1112 ( 1930 )

RAVLIN CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Ravlin Corp. v. Commissioner

Docket No. 45481.

United States Board of Tax Appeals

19 B.T.A. 1112; 1930 BTA LEXIS 2259;

May 26, 1930, Promulgated

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1. Held that the deferred payments under contracts for the sale of lots in a subdivision had no fair market value.

2. Amounts paid by petitioner to clear title to a tract of land under sale to it, held to be capital expenditures.

3. Depreciation rate on automobiles determined.

P. Robert G. Sjostrom, Esq., and W. S. Hammers, Esq., for the petitioner.

Maxwell E. McDowell, Esq., for the respondent.

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ARUNDELL

The deficiency in income tax to be redetermined is in the amount of $4,427.84 for the year 1925. The issues are: (a) the value of the deferred payments under contracts for the sale of real estate; (b) whether or not an amount paid to satisfy a judgment and a fee paid to counsel for prosecuting the suit are deductible as ordinary and necessary business expenses; and (c) the proper allowance for depreciation on automobiles.

FINDINGS OF FACT.

The petitioner, a Florida corporation, with its principal office at Miami, Fla., was organized in 1922 for the development and sale of real estate. All of its capital stock was owned by F. J. Ravlin, his wife, and their two sons in equal proportions. They were its directors and officers.

Prior to the taxable year the petitioner acquired and developed as subdivisions two tracts of land named "High Pines" and "Alta Terra."

The High Pines tract, located at South Miami, consisting of 160 acres, was purchased by petitioner from F. J. Ravlin and his wife. Due to the fact that the sellers had previously transferred 20 acres of the tract to Charles B. Moore of Chicago, Ill., as security for a loan made to the Colmar Manufacturing Co., a concern in Chicago of which F. J. Ravlin was an officer, only 140 acres were actually deeded to the petitioner. They agreed, however, to transfer the remaining 20 acres to the petitioner as soon as they acquired clear title to the property, in consideration of the petitioner's agreement to pay any sum incurred by them in obtaining such a title. The petitioner's agreement to pay such amount for a deed to the land was ratified by its directors at a meeting held on September 20, 1924. After the petitioner acquired possession of the 140 acres, it divided the whole tract of 160 acres into 40 blocks of 24 or more lots each, which lots were placed on the market in 1924. The 20 acres which were not transferred to petitioner were developed as blocks 5, 6, 13, and 14, located in the center of the tract fronting on the main highway to the subdivision. The sales made in that year were on terms of 10 per cent down and the balance payable in monthly, quarterly, semiannual, or yearly installments. Only a few of the deferred payments under the sales made in 1924 have been paid. The petitioner's return for 1925 shows that the two lots disposed of in that year were sold for cash. The deed given Moore as collateral for the loan was recorded at Miami a short time after its delivery.

At some undisclosed time after the purchase of the High Pines tract, the business of the Colmar Manufacturing Co. was liquidated, and in order to clear title to the 20 acres, F. J. Ravlin and his wife instituted suit against Moore and one Bennett Hunniston. As a result of the litigation title was cleared to the 20 acres, but Ravlin and his wife were required to pay $18,901.52, which amount, together with counsel fees of $3,075 incurred in prosecuting the suit, was paid by petitioner in 1925 in accordance with the agreement it reached with Ravlin and his wife at the time of the purchase of the whole tract. The acquisition of the 20 acres was necessary for the proper development of the tract and to conform with the plans under which the lots in subdivision were placed on the market and sold.

At the time the Ravlins acquired clear title to the 20 acres there were no sales for the lots in the subdivision. Thereafter the petitioner and the Ravlins informally agreed that the property should not be transferred to it until after a settlement had been made with the bank of Bay Biscayne under the first mortgage it held on 140 acres of the subdivision as security for a loan of $55,000, and a pending suit brought against it by a former salesman of petitioner had been terminated. The petitioner has not, however, waived its right to receive a deed to the property.

In its return for 1925 the petitioner claimed the sums of $18,901.52 and $3,075 as ordinary and necessary business expenses. The respondent disallowed the claimed deductions on the ground that they were personal expenses of F. J. Ravlin.

The sales made of lots in the Alta Terra subdivision were on terms providing for an initial payment of 33 1/3 per cent of the selling price and the balance in six semiannual installments. The contracts under which the lots were sold provided for the delivery of a deed to the buyer upon payment of the last installment. The initial payment was collected in each instance, and under some of the sales additional amounts were received on the deferred payments in subsequent years. In other instances no subsequent payments were received. The deferred payments were not saleable, nor could they be borrowed on, and the value of the lots covered thereby did not justify the expense of reacquiring clear title thereto. The petitioner has not paid the 1926, 1927, and 1928 taxes assessed against the subdivision. The deferred payments under the contracts covering the sale of lots in the subdivision had no fair market value at the close of 1925.

The petitioner in its return for 1925 reported a profit of $4,638.76 on the sale of lots in the Alta Terra subdivision. It did not place any value on the outstanding deferred payments. In his audit of the return the respondent determined that the deferred payments covered by the contracts for the sale of lots in the Alta Terra subdivision had a value of $5,726.74, and increased petitioner's profit on the sales by that amount.

In 1925 the petitioner employed in its business, to transport prospective buyers to and from its properties, two automobiles, a "Packard Eight" and a "Hudson Six." The Hudson car has been rebuilt twice, and both cars have been repainted two or three times since 1925. Both cars were used by the petitioner in 1926 and 1927 and are still owned by it. A reasonable annual rate of depreciation on the cars in 25 per cent, the amount allowed by the respondent.

OPINION.

ARUNDELL: In computing the amount of profit realized by petitioner in 1925 on the sale of lots in the Alta Terra subdivision the respondent determined that the amounts due from the purchasers had a value of $5,726.74, and increased the gain reported by the petitioner in that amount. The parties are in agreement as to the cost, the number of lots sold, and the amount received in cash on their sale. The sole issue as it relates to these sales is whether or not the deferred payments had a fair market value. The evidence satisfies us that they did not. There was no market for the paper, it was not acceptable as collateral for a loan, nor could it be otherwise realized on. The Alta Terra development was one of the typical Florida land exploitations and with the collapse of the boom in 1925 the lots did not have a value equal to the amount of the deferred payments. In fact, the evidence is that the lots did not have a value warranting the expense incident to clearing title thereto. On this issue the respondent is reversed. ; ; .

Concurrently with the purchase of the High Pines tract, the petitioner agreed to pay any expense incurred by F. J. Ravlin and his wife in clearing their title to the 20 acres in return for a deed to such property. The acreage not conveyed to petitioner was developed as part of the whole tract and the subdivision was placed on the market and lots in other sections of the subdivision were actually sold with the express or implied understanding that the petitioner would acquire ownership of the remaining blocks. After the petitioner paid the costs incurred by the Ravlins in reacquiring clear title to the land, the petitioner, owing to pending and prospective suits affecting its property, concluded that it was inadvisable to take immediate delivery of a deed. The Ravlins, however, are still obligated to convey title to the land to petitioner, it never having waived its right to receive a deed to the acreage. The amounts paid out by the petitioner are capital expenditures, not ordinary and necessary business expenses, and should be treated as such by adding them to the cost of the subdivision. See ; and .

The facts do not warrant a disturbance of the respondent's determination that petitioner's automobiles should be depreciated at the rate of 25 per cent per annum.

Decision will be entered under Rule 50.