Petition for Review from the United States Board of Tax Appeals.
Before BUFFINGTON, DAVIS, and THOMPSON, Circuit Judges.
This is an appeal from an order of the Board of Tax Appeals deciding that the petitioner was liable for a deficiency of $3,153.38 in its income tax return for 1929.
Prior to that year the petitioner had sold nine lots of land in Florida for $78,750, which was to be paid in installments. Title to the land was retained as security but the purchasers took immediate possession of it. The land had cost the petitioner $54,243.99, and if all the installments had been paid it would have realized a profit of $24,506.01. The purchasers paid $39,375 on the contract, and the petitioner, having elected to report the profit in its income tax return on the installment basis, reported a profit of $12,253. This figure was reached by taking the percentage of payments made ($39,375) that the total profit which would have been realized ($24,506.01) bore to the total contract price ($78,750). In other words, one-half of the purchase price was paid and one-half of the profit was realized.
In 1929 the purchasers defaulted on their obligations. Thereupon the petitioner and the purchasers entered into certain agreements whereby "the petitioner released the purchasers from further obligation for unpaid installments of the purchase price and, in addition paid them $50 in cash for each lot, being $450 in all; and the purchasers surrendered their equity in the property to the petitioner and returned possession thereof to the petitioner." It was stipulated that the value of the land "was, at the time of repossession, less than $27,122.00," which represents the approximate cost of the land to the petitioner at that time. Though at the end the petitioner had the same land and $39,375 in addition, less the taxes paid on $12,253 profits, previously reported, and the $450 paid on repossession, the net result of the transaction to it, due to the extreme depression of land values in Florida, was a net loss, for the subtraction of the $12,253 profits and $450 from $39,375 leaves a balance of $26,672. This added to $27,122, the value of the land at that time, amounts to $53,794. This is $449,99 less than the petitioner paid for the land originally. That is, the petitioner actually lost this amount on the transaction together with the interest on the money invested and the taxes paid on the land.
The petitioner, however, in its income tax return for 1929 did not report either a taxable profit or a deductible loss as a result of its repossession of the land.
Notwithstanding this, the respondent ruled that the petitioner realized a taxable income of $26,672 from the repossession. This figure was arrived at by his determination that the entire amount of the installment payments of $39,375 received by the petitioner became a taxable gain on repossession of the land and the $26,672 represented the difference between the $39,375 paid, and the $12,253 profit previously reported plus the $450 paid to the purchasers on repossession.
The petitioner says that no taxable gain was realized and relies on section 44 (d) of the Revenue Act of 1928 (26 U.S.C.A. § 44 (d) and note), which provides that: "Gain or loss upon disposition of installment obligations. If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange -- the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange -- the fair market value of the obligation at the time of such distribution, transmission, or disposition. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.
Application of these provisions to the facts of this case shows that the petitioner did not make a profit. The face value of the installment obligation at the time of the default in making further payments was $39,375, one half of the original purchase price of the land; the other half having been paid. The income which would have been returnable if the obligation had been satisfied in full was $12,253, which is the amount of the tax returned on the first half of the purchase price. The basis of the obligation is the excess of the face value of the obligation, $39,375, over an amount equal to the income, $12,253, which would have been returned if the obligation had been satisfied in full. In other words, this is $39,375 less $12,253, or $27,122, which was the amount realized. It was stipulated that the value of the land at the time of repossession was less than $27,122. The statute provides that gain or loss is the difference between the basis of the obligation and the amount realized. Here the amount realized, less than $27,122, is less than the basis of the obligation $27,122. Consequently there can be no gain, but loss, if the statute controls this case.
We have considered the obligation which was outstanding at the time of the default. If we were to double all the figures and consider the whole transaction, the result would be the same.
The Commissioner and the Board say that the case is controlled by Article 353 of Regulations 74, as amended December 23, 1932, though the article, before and after the amendment, was promulgated to carry out the provisions of the statute.
There are two conditions necessary to bring this case under section 44 (d) of the Revenue Act of 1928: (1) The obligation must be an installment obligation, and (2) it must have been satisfied at other than its face value.
It is admitted that the obligation was an installment obligation, but the Commissioner says, and the Board decided, that the obligation was not satisfied at other than its face value. The Board said that the language of the statute did not "indicate that it was the purpose of the provision to treat an installment obligation as 'satisfied at other than its face value' when, as in the instant case, the sale was not consummated because the purchasers had defaulted in their payments and by agreement they were released from further payments." The answer to this statement ...