The Detroit Investment Company, becoming insolvent, filed a petition in the chancery court of Wayne county seeking its dissolution and asking for the appointment of a receiver.
The government filed its claim for income taxes for the years 1927, 1928, and 1929 amounting in the aggregate to $30,596.51, but this amount was later reduced to approximately $20,000. Other creditors filed claims and the trial court held for consideration only two claims, namely, the claim of the government and certain labor claims, the amount of which was not in dispute. It was agreed that if the *Page 355 claim of the government was allowed as a preferred claim, there would be no surplus to pay the labor claims.
It was claimed by the government (collector of internal revenue) that under 3 Comp. Laws 1929, § 15362, the funds available for distribution should be applied to the payment of the following items and in the following order: (1) taxes due the United States, State, county, or municipality; (2) cost of administration; and (3) all labor debts entitled to preference under the laws of this State.
The labor claimants contended that their claims have precedence over the United States Federal income tax and relied upon 3 Comp. Laws 1929, § 15930, which provides:
"That all debts which shall be owing for labor by any person or persons or corporation at the time he, they or it shall become insolvent, shall be preferred claims against the estate of such insolvent debtor or debtors, and have precedence in the payment thereof over all debts owing by such insolvent debtor or debtors at the time of becoming insolvent, which shall not have become a lien on such estate, or some portion thereof prior to the performance of the labor for which such debts for labor shall be owing."
The trial court denied the claim of the government for Federal income taxes assessed for the years 1928 and 1929. The government appealed. In deciding the issues involved in this cause, it will first be necessary to determine whether or not the claim of the government should be allowed and, if so, in what amount. The facts relating to this claim are as follows: The Detroit Investment Company on November 1, 1928, entered into an agreement with R.T. Lee and Orpha Lee, his wife, to purchase the Lee Plaza Apartment Hotel, the purchase price *Page 356 of which was mentioned as $1,750,000. The Detroit Investment Company, in addition to a cash payment of $50,000, agreed to convey by warranty deed the equity in three parcels of property at a price of $184,000. A final agreement was entered into providing that interest should be paid at the rate of six and one-quarter per cent. instead of six and one-half per cent. and also providing a down payment of $154,000 instead of $184,000. The down payment of $154,000 was composed of the following items:
Cash............................................... $50,000.00 Adjustment......................................... 130.87 Equity in Farfel Apartment......................... 29,371.48 Equity in Wager Terrace............................ 21,150.00 Equity in Glendale Apartments...................... 53,347.65 ---------- $154,000.00
On January 7, 1929, the Oakwood subdivision was transferred by the Detroit Investment Company to R.T. Lee at which time credit in the amount of $80,000 was entered upon the land contract. The Detroit Investment Company filed its income tax return for the year 1928, disclosing a tax of $4,888.01 which was assessed. Its return for 1929 was filed showing a tax of $18,988.58 which was assessed. Certain payments were made and abatements granted on the 1929 return leaving a balance due for that year of $4,948.18 with interest.
Included in the 1928 return were gross profits claimed to have been realized from the transfer of certain property to the Lees as follows:
Farfel Apartments.................................. $10,910.95 Wager Terrace...................................... 16,171.35 Glendale Apartments................................ 8,367.39 ---------- $35,449.69 *Page 357
The return for 1929 included a claimed profit from the transfer of Oakwood subdivision to the Lees in the amount of $94,000.
The department of internal revenue eliminated the item of $94,000 from the 1929 tax return and added it to the income of the corporation for the year 1928 upon the theory that while the Oakwood subdivision was not transferred until January 7, 1929, yet the profit from this transaction constituted income for 1928. It is the claim of the Detroit Investment Company that they traded or exchanged the equities in three parcels of real estate in 1928 and a fourth parcel in 1929 for and as a payment for a vendee's interest in a land contract covering the purchase of the Lee Plaza property; that at the time the exchange was made the "fair market value" of the Lee Plaza property was $1,427,600 instead of the agreed purchase price of $1,750,000; and that the Detroit Investment Company sustained a loss upon this purchase which exceeded in amount the mentioned gain made upon the properties transferred to the Lees.
The trial court made the following finding of facts:
"The court finds as a fact that by the uncontradicted testimony offered at that time it was shown conclusively that there was no valid basis for the figures and report made by the Detroit Investment Company, which, upon its face tended to show a profit. As a matter of fact, whatever may have been the motive and intent to pad or exaggerate the figures, they were not justified. * * *
"The court is forced to the conclusion that the testimony was all one way, to-wit: that there was no valid basis at the time the assessment was made, that the Detroit Investment Company had made a profit upon the Lee Plaza deal, but, on the other hand, had, in fact, sustained a loss thereby." *Page 358
We are not in accord with appellant's contention that evidence is not admissible to show the consideration received for the exchange of the properties. In Stotts v. Stotts,198 Mich. 605, we said:
"While the consideration expressed in a written instrument isprima facie to be taken as the actual consideration, the rule is well settled by abundant authority that parol evidence is admissible to show that the true consideration was greater than or different from that expressed.
See, also, Ruch v. Ruch, 159 Mich. 231; Ford v. Savage,111 Mich. 144; Flynn v. Flynn, 68 Mich. 20.
Appellant also contends that the Detroit Investment Company did not exchange the three parcels of real estate in the year 1928 and the fourth parcel during the year 1929 for a vendee's interest in the Lee Plaza property, but rather the Detroit Investment Company sold the property to the Lees for a cash consideration and with this amount together with an additional $50,000 made a down payment. When the land contract was entered into, November 1, 1928, it provided for the transfer of three parcels of land, this together with the sum of $50,000 took care of the down payment and the balance was to be paid in monthly instalments. There was no provision in this contract whereby the Oakwood subdivision was to become a part of this transaction. The latter piece of property was transferred January 7, 1929, and cannot be considered as part of the final agreement of November 1, 1928. It must follow that the gain or loss from the Oakwood subdivision transaction must be entered into the year 1929. In Lucas, Commissioner of Internal Revenue v. North Texas Lumber Co., 281 U.S. 11 (50 Sup. Ct. 184), the Supreme Court of the United States said: *Page 359
"An executory contract of sale was created by the option and notice, December 30, 1916. In the notice the purchaser declared itself ready to close the transaction and pay the purchase price 'as soon as the papers were prepared.' Respondent did not prepare the papers necessary to effect the transfer or make tender of title or possession or demand the purchase price in 1916. The title and right of possession remained in it until the transaction was closed. Consequently unconditional liability of vendee for the purchase price was not created in that year. Gober v. Hart, 36 Tex. 139. Cf. United States v.Anderson, 269 U.S. 422, 441 (46 Sup. Ct. 131); AmericanNational Co. v. United States, 274 U.S. 99 (47 Sup. Ct. 520). The entry of the purchase price in respondent's accounts as income in that year was not warranted. Respondent was not entitled to make return or have the tax computed on that basis, as clearly it did not reflect 1916 income."
In our opinion the Detroit Investment Company sustained deductible losses for the years 1928 and 1929 and under the revenue act of 1928, §§ 111-113 (45 Stat. at L. 815-821) the following rule for computing gain or loss from the sale or other disposition of property is laid down:
"(a) Computation of gain or loss — Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the excess of such basis over the amount realized. * * *
"(c) Amount realized — The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received." *Page 360
Section 113 referred to in section (a) above, (45 Stat. at L. 818), is as follows:
"Property acquired after February 28, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property."
By stipulation of the parties it is agreed that the Detroit Investment Company is indebted to the Federal government in the principal amount of $1,802.14 for corporate income taxes for the year 1927. In our opinion the claim of the government for income taxes for the years 1928 and 1929 should be disallowed. In view of this determination we do not find it necessary to dispose of the other questions raised.
The decree of the trial court is affirmed. Appellees may recover costs.
WIEST, BUSHNELL, POTTER, and CHANDLER, JJ., concurred with SHARPE, J.