*1515 1. The petitioner, H. D. Shelden, made a valid gift to his children of a real estate subdivision business on or prior to November 3, 1920. The basis for computing gain or loss to the donees from sale of the property and from certain installment contracts is the fair market price or value at the date of the gift.
2. A donor of installment contracts receivable realizes no taxable income at the effective date of the gift or in the years when the donees collect the installment payments.
3. A donee of installment contracts receivable is not taxable on the profit computed for the donor when installment payments are collected under the contracts.
4. Fair market price or value at November 3, 1920, of certain real estate subdivisions determined.
*5 The respondent has asserted deficiencies for the years and in the amounts shown below:
| Petitioner | Docket No. | Year | Deficiency |
| H. D. Shelden | 33067 | 1920 | $7,169.62 |
| 1921 | 6,856.89 | ||
| Do | 41823 | 1922 | 50,276.04 |
| 1923 | 7,194.13 | ||
| 1924 | 1,175.00 | ||
| Allan Shelden | 41824 | 1923 | 7,472.75 |
| 1924 | 31,661.23 | ||
| 1925 | 66,523.53 | ||
| 1926 | 3,036.85 | ||
| Alger Shelden | 41825 | 1923 | $2,183.43 |
| 1924 | 6,493.01 | ||
| 1925 | 19,742.85 | ||
| 1926 | 2,619.69 | ||
| Henry Shelden | 41826 | 1923 | 2,228.81 |
| 1924 | 6,529.94 | ||
| 1925 | 19,859.26 | ||
| 1926 | 3,148.36 | ||
| Robinson Trust | 41827 | 1924 | 2,752.35 |
| 1925 | 14,000.39 | ||
| 1926 | 3,193.58 | ||
| Annette S. Stackpole | 41828 | 1923 | 1,586.66 |
| Total | 265,704.37 |
*1516 *6 The deficiencies arise largely from the respondent's determination that an alleged gift of property by H. D. Shelden to his children was not effective until May 31, 1923, and that, thereafter, the donees are taxable on the basis of cost to the donor. The petitioners contend that the gift was effective prior to December 31, 1920, and that the fair market price or value at the effective date is the correct basis on which to tax the donees.
By amendment to his answer the respondent alleges (1) that if the Board should find there was a gift by H. D. Shelden to his children in 1920, and that the fair market value of the gift exceeded cost to the donor, then the difference between cost and the fair market value constitutes taxable income to the petitioner, H. D. Shelden, for the year 1920; (2) that if the Board should find there was a gift in 1920, by H. D. Shelden to his children, of certain installment contracts receivable, then all of the unreported profit from the sale of lots under such contracts is realized at the effective date of the gift and is taxable to H. D. Shelden in 1920; (3) that if any title passed to the children by the instrument of August 3, 1920, it was*1517 by purchase rather than by gift and cost to the purchasers is the correct basis for computing gain or loss upon sale of the property; and (4) that if the Board should find in Docket No. 41827 that the Robinson Trust acquired its interest from Annette S. Stackpole and the property is entitled to the same basis for computing gain or loss as it would have had in her hands, and that the children acquired their respective interests in the property by purchase from H. D. Shelden, then the Board should find that the basis for gain or loss to the Robinson Trust is cost to the predecessor owner. The respondent moves that the deficiencies be increased accordingly.
The petitioners were permitted to amend their petitions to allege that, if the Board finds the effective date of the gift to have been May 31, 1923, then the respondent erred in using a gross rate of profit of 64.96 per cent instead of 59.49 per cent. It is also alleged that "The Commissioner further made numerous and divers other errors in taking figures from taxpayers' books."
*7 FINDINGS OF FACT.
The petitioner, H. D. Shelden, is the father of the petitioners, Allan, Alger and Henry Shelden and Annette S. Stackpole, *1518 who was Annette A. Shelden before her marriage. The petitioners in Docket No. 41827, are the trustees of Robinson Trust. All of the petitioners reside in or near Detroit, Mich.
For many years prior to 1919 the petitioner, H. D. Shelden, had not been actively engaged in business. At the beginning of 1919, when his sons were mustered out of military service, he realized that he should have a business into which they might be introduced and given business training. At that time Allan was 28 years of age, Alger 22, and Henry 21. Allan suggested the real estate subdivision business, and, after investigating and considering the opportunities, H. D. Shelden determined to purchase a tract of land on Grand River Avenue, which was suitable for a subdivision.
Accordingly, on June 18, 1919, he entered into a contract with the Grand River Avenue Development Company for the purchase of approximately 238 acres of land situated about 10 miles from the business center of Detroit, and at that time about three and one-half miles outside the city limits. The material portions of the contract are as follows:
The said VENDEE agrees to buy the above described premises from, and to pay to the*1519 said VENDOR therefor, the sum of Four Hundred Forty-Three Thousand, Eight Hundred Forty-Seven and 60/100 ($443,847.60) Dollars, as follows: One Hundred Thousand ($100,000) Dollars, which has already been paid (the receipt thereof is hereby acknowledged); and a further sum of One Hundred Thousand ($100,000) Dollars to be paid on or before one year from the date of this contract, but not before January first, 1920; the balance then remaining unpaid under this contract to be paid in one or more installments of not less than $2,500 each on or before five years from the date of this contract; all sums at any time unpaid and not past due to bear interest at the rate of six per cent (6%) per annum, payable annually; all sums not paid when due to bear interest at the rate of seven per cent (7%) per annum until paid.
* * *
IT IS FURTHER AGREED that the VENDEE shall have possession of said land upon the execution of this contract and shall be entitled to retain possession thereof so long as there is no default on his part in carrying out the terms of this contract.
* * *
It is FURTHER AGREED that the VENDEE shall not sell, assign or transfer this contract or any interest therein without*1520 the consent of said VENDOR being first endorsed in writing thereon, and on the duplicate original hereof held by the said VENDOR.
* * *
During July, 1919, H. D. Shelden acquired two small tracts of land containing approximately 1 1/2 acres, adjoining the 238 acres already purchased, at a total cost of $16,837.90. A short time prior *8 thereto Shelden had purchased a 6-foot strip of land, needed to block out the contemplated subdivision, for $420.90. Part of the 238-acre tract already had been platted as Grandmont Subdivision No. 1 when it was acquired by Shelden, but on July 25, 1919, such plat was vacated by the Circuit Court of Wayne County, Michigan.
On September 18, 1919, Shelden platted a portion of the property as Rosedale Park Subdivision No. 2, and on January 2, 1920, he platted the remainder, except a small tract comprising approximately 10 acres, as Rosedale Park Subdivision No. 3. The combined properties were thus divided into 1,041 lots. Clemons, Knight, Menard & Company, which firm had previously developed a very successful subdivision as Rosedale Park No. 1, agreed to act as selling agents for Shelden on a commission of 15 per cent of the sales price. *1521 One-half of the down payment went to the salesman who sold the lot. The remainder of the 15 per cent commission was paid from the monthly payments, one-half of which went to Clemons, Knight, Menard & Company until the full amount had been received.
Sale of the lots started immediately under contracts providing for a down payment of 10 per cent, with monthly payments thereafter of 1 per cent, the balance to draw interest at 6 per cent per annum. The monthly payments were first applied against accrued interest and the balance applied to reduce the principal. A 5 per cent discount was allowed on sales for cash. The vendor agreed to construct sidewalks, pave certain streets, plant shade trees, install a street-lighting system, a water system and a sewage system. The cost of all such improvements installed up to July 31, 1920, was $177,768.10. The uninstalled improvements were estimated to cost $474,138.22. By July 31, 1920, Rosedale Park Subdivisions Nos. 2 and 3 were approximately 60 per cent sold. The land contracts receivable, at July 31, 1920, had a balance due thereon of $1,556,233.12. The total price at which the unsold lots were offered for sale was $1,333,919.
*1522 Prior to October 1, 1919, and pursuant to a provision of the contract dated June 18, 1919, with the Grand River Avenue Development Company, that the contract could not be assigned without the consent of the vendor, H. D. Shelden sought permission of the vendor to assign his interest in the contract to his children. On October 1, 1919, the following document was executed and delivered to H. D. Shelden by the Grand River Avenue Development Company:
WHEREAS, GRAND RIVER AVENUE DEVELOPMENT COMPANY, a corporation organized and existing under and by virtue of the laws of the State of Michigan, heretofore made and entered into a certain land contract with HENRY D. SHELDEN, of the Village of Grosse Pointe Shores, Wayne County, Michigan, *9 bearing date the 18th day of June, A.D., 1919, for the sale to said Henry D. Shelden of the premises therein described; and
WHEREAS, the said Henry D. Shelden may desire to assign his interest under said land contract, or some portion or portions thereof, to his sons Allan Shelden, Alger Shelden and Henry Shelden and to Henry D. Shelden, Trustee for his daughter Annette A. Shelden, or some of them, from time to time hereafter; and
WHEREAS, *1523 said Grand River Avenue Development Company, a corporation as aforesaid, is willing that such assignment or assignments be made by the said Henry D. Shelden from time to time.
Now, THEREFORE, said Grand River Avenue Development Company, a corporation as aforesaid, in consideration of the undertakings to be entered into by the assignees, and without in any way releasing the said Henry D. Shelden from his obligation to perform and carry out said land contract on the part of the vendee, does hereby consent to any and all such assignments.
DATED: Detroit, Michigan, October 1st, A.D., 1919.
GRAND RIVER AVENUE DEVELOPMENT COMPANY,
By EDWARD A. LOVELEY, Vice-President,
and HERBERT L. BERDAN, Assistant Secretary.
On August 3, 1920, H. D. Shelden executed four instruments, each of which reads in part as follows:
In consideration of the sum of One ($1.00) Dollar and love and affection, I do hereby grant, sell and convey to my son Allan Shelden all my right, claim and interest in and to the annexed Land Contract bearing date the 18th day of June, A.D. 1919, made by and between Grand River Avenue Development Company, a corporation organized and existing under and by virtue*1524 of the premises therein described, with all benefits to be derived therefrom, so far as the same relates to Lots Numbered: * * * subject, however, to any and all land contracts heretofore made by me for the sale of any of said lots and said Allan Shelden in consideration of the premises, hereby assumes and agrees to perform and carry out all parts of said annexed Land Contract (not already performed) therein provided to be performed by the party of the second part thereto so far as the same relates to the above described premises.
This assignment and gift, however, is made without releasing the undersigned H. D. Shelden from any of the liabilities or obligations imposed upon him by the terms of the said land contract referred to.
Dated at Detroit, Michigan, this 3rd day of August, A.D. 1920.
In Presence of:
H. E. HEES. O. E. HERNSON.HENRY D. SHELDEN.
An instrument in the above form was executed by H. D. Shelden and delivered to each of his three sons and to himself, as trustee for his daughter, Annette. From time to time thereafter and prior to December 31, 1920, H. D. Shelden executed assignments of his interest as vendor in contracts covering lots sold, attached*1525 them to the specific contract to be assigned, and delivered the assignment and contract to the donee child. The form of such assignment follows:
*10 DETROIT, MICH., Nov. 12, 1919.
I hereby sell, assign and transfer to Allan Shelden, all my right, title and interest in and to the within contract, executed by me as vendor and John Duncan and Harriet Duncan, his wife, as vendee.
HENRY D. SHELDEN.
Witness:
E. J. MOEDE.I, the undersigned, do hereby accept the foregoing assignment and in consideration thereof do agree to fully perform all obligations imposed upon the vendor thereby.
ALLAN SHELDEN.
Witness:
E. J. MOEDE.When a purchaser came to the office to make his payment, after the vendor's interest in the contract had been assigned, his copy of the contract was stamped with a rubber stamp bearing the name of the assignee child. For example, such a contract would then read: "Payment on the within contract must be made to Allan Shelden, assignee of Henry D. Shelden." At the same time there was stamped, at the top of the ledger sheet covering the lots so assigned, the name of the assignee child to whom the assignment ran. In the lot book the name*1526 of the assignee child was stamped opposite the particular lot assigned to him. From the date of each assignment, payments were receipted for in the name of the assignee child and the payment was credited on the books of the enterprise to that child. New contract forms were printed and used for all lots sold after August 3, 1920, in which the donee child was named as vendor.
When the Rosedale Park Subdivision was begun, H. D. Shelden opened an account with the Guaranty Trust Company of New York, Fifth Avenue Branch, titled "H. D. Shelden, Personal," to distinguish the account for the subdivision from his personal account, which was titled "H. D. Shelden." On November 3, 1920, the "H. D. Shelden, Personal" account was closed and the balance transferred to a new account titled "H. D. Shelden's Sons." The signature cards for such account disclose that Allan, Alger and Henry Shelden and H. T. Beadle were authorized to sign checks. After November 3, 1920, H. D. Shelden was not authorized to sign checks on the H. D. Shelden's Sons account.
On November 3, 1920, H. D. Shelden executed and delivered to his children an instrument which reads in part as follows:
THIS INDENTURE AND FAMILY*1527 ARRANGEMENT between Henry D. Shelden, of the Village of Grosse Pointe Shores, Wayne CountyMichigan, party of the first part, and ALLAN SHELDEN, ALGER SHELDEN, HENRY SHELDEN, and ANNETTE A. SHELDEN, all of the same place, parties of the second part, his children,
*11 WITNESSETH
WHEREAS, the said party of the first part has had in contemplation for sometime past a gift of some active business enterprise to his said children, with which he might gradually introduce them and which they should then receive and take over as their own upon their own responsibility for its ultimate success or failure, and for such purpose first associated them with him in the management and development of those certain pieces or parcels of land commonly known as (description of property follows) * * * and
WHEREAS, the said parties of the second part have acquainted themselves with said property and the various plans, agreements, parties, rights and matters appertaining thereto, and have become ready and willing to take over the opportunities which it affords; and various methods of taking over and managing said business having been considered experimentally; and a final plan, as hereinafter mentioned, *1528 having been finally adopted,
Now THEREFORE, in consideration of the premises and of the natural love and affection which the said party of the first has unto the said parties of the second part, and for their better support, maintenance, and improvement in commercial affairs, the said party of the first part hereby gives, grants, conveys and assigns, unto the said parties of the second part, their heirs and assigns, FOREVER, in the proportions, and according to the details as shown by memoranda and set of books opened for the proper recording of all transactions connected with said enterprise, all his right, title, equity and interest in and to all those certain lots, pieces or parcels of land enumerated as aforesaid and which he has at the date hereof under and by virtue of a certain Agreement bearing date the Eighteenth day of June, 1919, between Grand River Avenue Development Company, a corporation organized and existing under and by virtue of the laws of the State of Michigan, therein referred to as vendor and Henry D. Shelden, therein referred to as vendee, together with all his rights and interests thereunder and all his equities incident to and derivable from his performance*1529 thereof down to the execution and delivery of this Indenture; - and also by virtue of two certain Warranty Deeds, one bearing date the Sixteenth day of July, 1919, from Joseph F. Burger and Gertrude Burger, his wife, to Henry D. Shelden, recorded in Liber 1326 of Deeds at Page 257, and the other bearing date the Eighteenth day of July, 1919, from Daniel W. Bradley and Sarah Bradley, his wife, to Henry D. Shelden, recorded in Liber 1326 of Deeds at Page 255, and also by virtue of a Warranty Deed from Allan Shelden and Elizabeth Warren Shelden, his wife, to Henry D. Shelden dated June 17th, 1920, conveying the Easterly six (6) feet in width of the East half of the North half of the Northwest quarter Section Fourteen (14). Town One (1) South, Range Ten (10) East. TO HAVE AND TO HOLD the said premises as of a true and perfect gift from a father to his children, unto the said parties of the second part, as in said records expressed and itemized, and to their respective heirs and assigns, FOREVER.
And the said parties of the second part do hereby accept the gift of the property herein mentioned and described and take over the same as their own according to the records aforesaid.
*1530 IN WITNESS WHEREOF, we have hereunto set our hands and seals this third day of November, 1920.
HENRY D. SHELDEN.
ALLAN SHELDEN.
ALGER SHELDEN.
HENRY SHELDEN.
ANNETTE A. SHELDEN.
*12 MEMORANDA
Supplementing Indenture and Family Arrangement made this day between HENRY D. SHELDEN and his four children, ALLAN SHELDEN, ALGER SHELDEN, HENRY SHELDEN and ANNETTE A. SHELDEN, we, the said four children, hereby agree to hold and manage in common all the property covered by said Indenture and Arrangement and all additions thereto and proceeds thereof as follows:
1. Said property, additions and proceeds shall be owned, held, and managed in the same undivided proportions in which said property has been received from Henry D. Shelden, i.e., Allan Shelden, one-half (1/2), Annette A. Shelden, one-sixth (1/6), Alger Shelden, one-sixth (1/6), Henry Shelden, one-sixth (1/6), provided that any of said children may at any time withdraw his or her proportion.
* * *
On July 5, 1923, H. D. Shelden and his wife, Caroline A. Shelden, executed a quit-claim deed of their interest in Rosedale Park Subdivisions Nos. 2 and 3, to Allan, Alger, Henry and Annette A. Shelden. Such*1531 deed was recorded in the Register's Office of Wayne County, Michigan, on July 12, 1923. Sometime after January 27, 1922, a warranty deed was executed, under date of November 3, 1920, covering the small parcels of land known as the Bradley and Burger tracts and delivered to Allan, Alger, Henry and Annette A. Shelden. The deed was filed for record on July 17, 1923. Both of the above instruments, together with others not material here, were executed and recorded in connection with the transfer of title to the property acquired from the Grand River Avenue Development Company on which final payment had been made. Such instruments were necessary in clearing the record title so that a deed from that company could be executed and delivered directly to the children. None of the instruments executed and delivered by Shelden in 1920 were filed for record.
By deed executed December 31, 1923, Annette A. Shelden conveyed her one-sixth interest in the Rosedale Park property to Allan, Alger and Henry Shelden, who contemporaneously therewith executed a declaration of trust, to be known as the Robinson Trust, whereby they agreed to hold such property for the benefit of certain designated persons, *1532 paying to them "such income as we deem advisable for their best interests."
On their income-tax returns for 1920 and subsequent years the petitioners treated the income from the Rosedale property as belonging to the children of H. D. Shelden after November 3, 1920. Profit from sales of the property was returned on the installment basis, computing profit after November 3, 1920, on the alleged fair market value at that date.
The respondent has determined that the gift was not effective until May 31, 1923, and has included as income of H. D. Shelden all *13 of the profits received up to May 31, 1923, when the final deeds were executed. Thereafter, profit was taxed to the donees on the basis of cost to the donor. The installment basis has been used in computing profit from sales of the Rosedale property as to all of the petitioners and for all of the taxable years.
The fair market price or value of H. D. Shelden's interest in Rosedale Park Subdivisions Nos. 2 and 3, consisting of unsold lots and land contracts covering lots sold, was $1,000,000 when transferred by the donor. The fair market value at that date of the unsubdivided 10-acre tract was at least $13,000.
*1533 OPINION.
LANSDON: Section 202(a)(2) of the Revenue Act of 1921 provides that gain or loss from the sale or other disposition of property acquired by gift after December 31, 1920, shall be computed upon the same basis which the property would have had in the hands of the donor or the past preceding owner by whom it was not acquired by gift. If the petitioners' contention that H. D. Shelden made a valid gift of the Rosedale Park property to his children on or before November 3, 1920, is correct, the basis for computing gain or loss upon sale of the property is the fair market price or value at the date acquired by the donees. Art. 1562, Regulations 45. The respondent contends, however, that no valid gift was made prior to May 31, 1923, when deeds to the property were executed, delivered and recorded.
The principal elements of a gift are: (1) An intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion and control of the subject at the very time he undertakes to make the gift; (2) the irrevocable transfer of the present title, dominion and control of the thing given by the donor; and (3) the delivery, by the donor to the donee, of*1534 the subject of the gift or of the most effectual means of commanding the dominion of it. . We have found, in the instant case, that on October 1, 1919, H. D. Shelden secured consent of the Grand River Avenue Development Company to assign his interest in the land contract of June 18, 1919. On August 3, 1920, he executed and delivered an assignment to each of his four children covering a portion of his interest in the land contract with the Grand River Avenue Company. The four assignments together covered his entire interest under such contract. Thereafter, and prior to December 31, 1920, he executed assignments of his interest as vendor in contracts covering lots sold, attached them to the particular contract and delivered it to the donee child. The purchaser's contract *14 was then stamped to show the assignment and the lot book, ledger sheet, etc., were stamped with the name of the donee child. On November 3, 1920, Shelden executed and delivered to his children an instrument referred to in the record as the family agreement, in which he conveyed his interest in the Grand River Avenue contract, the*1535 Bradley and Burger tracts and the 6-foot strip. On that date he also transferred the bank account for the enterprise to his children.
It is well settled in Michigan that a vendor's interest under a land contract is personal property, a mere chose in action, while the interest of the vendee is real property. ; ; ; . The claim of the vendor is an ordinary money debt, secured by the contract, and while he holds the legal title, the vendee is the owner in equity. ; . In Michigan a valid gift of a chose in action, evidenced by an instrument in writing, may be made by a manual delivery of the instrument itself without any further writing, or by the delivery of a written assignment of the chose in action. ; ; and ; *1536 . All that was necessary to constitute a valid transfer of Shelden's interest as vendor in contracts covering lots sold was an expression by him to that effect, accompanied by a delivery of the thing to the donee.
As to the portions of Rosedale Park subdivisions which had not been sold under contract, we must determine whether the assignments of August 3, 1920, transferred the vendee's interest under the contract with the Grand River Avenue Development Company. A vendee under a land contract may transfer his equitable interest in the land by the delivery of an instrument of assignment. Such assignment would, of course, be subject to all the defenses which the vendor might make against the assignor. ; ; ; ; and
The assignments of August 3, 1920, and the numerous assignments of particular lot contracts effectively transferred to the children all of Shelden's interest in the subdivision property, except the 10 acres which had not been platted, and that*1537 portion of the 6-foot strip and the Bradley and Burger tracts which remained unsold. The instrument of November 3, 1920, was a blanket conveyance to the children of every interest in the property which H. D. Shelden had, including the properties covered in the previous instruments. On November 3, 1920, Shelden also changed the New York bank account so that he *15 could no longer check against the funds belonging to the subdivisions. On November 3, 1920, Shelden had irrevocably divested himself of all title, dominion and control of the subdivision property, with the expressed intention of making a gift thereof to his children and he had made delivery of the subject to the donees. We think the gift was complete on November 3, 1920. Cf. ; ; and ; .
The respondent objects to the validity of the instruments of August and November, 1920, because they were not recorded and were not entitled to record. He argues that Shelden did not divest himself of all dominion and control over the property*1538 as long as he could have conveyed it to an innocent purchaser for value, who would have taken good title upon recording his deed.
Section 11770 of the Compiled Laws of Michigan (1915) provides:
Section 1. The People of the State of Michigan enact, That contracts for the sale of land or any interest therein, shall be executed in the presence of two witnesses, who shall subscribe their names thereto as such, and the vendor named in such contract, and executing the same may acknowledge the execution thereof, before any judge, or commissioner of a court of record, or before any notary public or justice of the peace within this state; and the officer taking such acknowledgment shall endorse thereon a certificate of the acknowledgment thereof, and the date of making the same under his hand.
Section 11773 provides that any contract executed and acknowledged according to the above provisions shall be entitled to be recorded in the office of the register of deeds of the county where the lands lie. The assignments of August 3, 1920, were subscribed by two witnesses, but were not acknowledged. The sticker assignments which were attached to the specific lot contract to be assigned were*1539 subscribed by one witness, but were not acknowledged. The family arrangement of November 3, 1920, was neither witnessed nor acknowledged.
Title to real estate, however, may be transferred in Michigan by instruments which are neither witnessed nor acknowledged. In ; , the court stated:
Deeds of real estate, to be entitled to record, must be acknowledged, but an acknowledgment is not a part of the conveyance, ; Livingston v. Jones, Har. 165. Title to real estate may be transferred by conveyances not acknowledged. . Deeds in order to be recorded should be witnessed, but a deed not witnessed is good between the parties. ; ; ; ; *1540 ; ; . *16 Cf. ; ; ; .
An unrecorded land contract is not unusual and is not particularly significant in the instant proceeding. In many cases the record of title would be unnecessarily complicated by the recording of contracts, assignments and subcontracts where the relation of the parties insures safety and inspires confidence. We have found that the deeds executed and delivered in 1923 by Shelden and his wife to their children were part of a plan whereby a deed to the Rosedale property would be delivered by the Grand River Avenue Development Company directly to the children, without having the record title pass through H. D. Shelden and wife. At some time in the near future the petitioners knew that they would be required to furnish abstracts of title for each of the 1,041 lots which had been or would be sold. The record would be greatly shortened by not recording the contracts*1541 of sale, assignment, etc. When the balance of the purchase price was paid to the Grand River Company, they could then record the single deed from that company to the children which would give them a clear record title. The quitclaim deed from Shelden and his wife to the children eliminates any possibility of a cloud on the title in them.
The respondent alleges that if any transfer was effected by the instruments of August 3, 1920, it was by purchase and not by gift. He contends that the following language in each of the four instruments recites a valuable consideration which is sufficient to support a sale:
* * * In consideration of One Dollar ($1.00) and love and affection, I do hereby grant, sell and convey to * * * all my right, claim and interest in and to the annexed Land Contract bearing date the 16th day of June A.D. 1919 * * *
* * * And said [child's name], in consideration of the premises, hereby assumes and agrees to perform and carry out all parts of said annexed Land Contract (not already performed) therein provided to be performed by the party of the second part thereto so far as the same relates to the above described premises. * * *
We are not impressed*1542 with the respondent's argument. Reading the instrument as a whole, it is clear that a gift was intended by H. D. Shelden of his equity in the contract with the Grand River Avenue Development Company. That the donees in the instant case agreed to pay the balance of the purchase price does not change the character of the transfer from that of gift to that of purchase. Certainly one may make a gift of whatever interest he may have in property. And neither does the recital of "One Dollar ($1.00) and love and affection" determine whether the transfer was by gift or *17 by purchase. See ; ; .
The respondent alleges that if the Board should find there was a gift by H. D. Shelden to his children in 1920, and that the fair market value of the gift exceeded cost to the donor, then the difference between cost and the fair market value constitutes income to the petitioner, H. D. Shelden, for that year. He also alleges that if the Board should find there was a gift in 1920 of certain installment contracts receivable, then all of the unreported profit*1543 from the sale of lots under such contracts was realized at the effective date of the gift and is taxable to H. D. Shelden for 1920. Similar questions have been raised before this Board in ; ; and . In the Huntington case, we considered at length the questions whether there was a realization of taxable income by a donor at the time he effected a gift of installment obligations, and whether a tax could be imposed upon the donor in years subsequent to the gift when the donees collected payments under the contract. We held that the donors were not taxable in 1922 and 1923 upon the profit contained in installments collected in those years by the donees. There the gift occurred in 1921, and while that year was not before the Board, we stated, after discussing the controlling statutes, "that petitioners [the donors] were not in receipt of income when they received the notes in question and when they gave them to their children." In the Milan case we held that a donor of an installment contract receivable realized no taxable income upon*1544 a gift to his wife and children of the installment obligation. In the Meagher case we stated:
* * * In the present case petitioner has disposed of his deferred payment obligations in an exchange which, under the specific provision of the taxing statute, can not be considered as effecting a realization of a taxable gain. The situation here presented resembles more closely those cases in which certain deferred payment obligations under sales made upon the installment basis were by the owner disposed of by gift, and in which we held that, having disposed of such obligations and the collection thereof being by the donee and being his property when collected, the donor could not be considered as in receipt of income in respect thereof, either in the year in which the gift was made or when such installments were collected by the donee. ; ; .
We can but conclude that the transfer by petitioner of these installment obligations in a transaction which under existing law is held not to result in taxable gain can not be considered as a present realization*1545 of income therefrom, and this conclusion is further strengthened by the fact that the determining of a taxable gain from such a transaction is first provided for by the Revenue Act of 1928, in section 44(d), * * *
We *18 think our conclusions in the above cases are applicable here and hold, accordingly, that H. D. Shelden realized no taxable income when he gave the installment contracts receivable to his children.
In determining the tax liability of the donee children, the respondent has computed profit upon the same basis the property had in the hands of the donor. He has, then, taxed the donees on the profit contained in each installment payment as computed for the donor. The basis for computing gain or loss in the hands of the donee children is the fair market price or value at the date of acquisition. Art. 1562, Regulations 45. The percentage of profit contained in each installment payment, as computed for the donor, is not income to the donee in so far as such profit is included in the fair market value of the property; it is part of the gift.
It remains for us to determine the fair market value of the gifts to the children at the effective date. The property*1546 transferred is of two general classes, namely, the vendor's interest under land contracts covering lots sold, and the unsold lots. The petitioners contend that the contracts, which drew interest at 6 per cent, had a fair market value equal to the balance due thereon and that the fair market value of the unsold lots was the price at which they were offered for sale.
The petitioners, Alger and Henry Shelden, testified that in their opinion the property received from H. D. Shelden by the children had a total net value of $1,576,481.04, which value was arrived at by adding the total balance due on land contracts receivable of $1,556,233.12, to the total selling price of the unsold lots in the amount of $1,333,919, plus the acreage value of the unsubdivided 10-acre tract, and deducting the balance of commissions due on lots sold of $135,120.51, 5 per cent of both the contracts receivable balance and the unsold lots price as a discount for cash, 15 per cent of the unsold lots figure as sales commission, 5 per cent of the contracts receivable balance and the unsold lots price for costs of collection, the cost of uninstalled improvements in the amount of $557,892.96, and the balance due*1547 on the land of $242,947.60. To such result they added cash on hand of $14,485.68, an account receivable of $150.79, and the cost to date of buildings under construction on the property of $83,754.74.
The petitioner's witness, Clarkson Wormer, who had participated in the subdivision and sale of several properties similar to that involved herein, testified that while the Rosedale Park project had a value of $1,556,233.12 to the subdivider, who would hold the contracts and continue the sale of lots, the two subdivisions consisting of the unsold lots and the land contracts covering lots sold could have been sold for $1,000,000 in the latter part of 1920. Another *19 expert witness called by the petitioner testified that in his opinion the Rosedale Park subdivisions were worth par, by which we understand that he meant that the sales contract and the unsold lots were respectively worth their face value and the asking prices.
The respondent called two expert witnesses who had been extensively engaged in the subdivision business in Detroit. Frank S. Pieper testified that a depression existed in the real estate subdivision business in 1920, and that in his opinion the Rosedale*1548 Park properties had a fair market value in the latter part of 1920 of no more than the acreage value of the underlying land. The respondent's witness, Thomas Hinchman, testified that in his opinion the property had a fair market value of $2,000 per acre, plus the cost of improvements installed and less the balance due to the Grand River Avenue Development Company on the purchase price.
We think the Rosedale Park subdivisions were worth substantially more than the fair market value of the underlying acreage on November 3, 1920, when the gift of the enterprise was completed. At that time plans for development had been completed, improvements had been installed, the subdivision had gained public favor in Detroit, as evidenced by sales of 60 per cent of the lots, and there was every reason to believe that the remaining 40 per cent of the lots could be sold at or near the price asked. On the other hand the value contended for by the petitioners as contained in the testimony of Alger and Henry Shelden is based on a prospective element which we think must be eliminated in determining the fair market price or value at the basic date. To realize the value contended for by them would*1549 require that they hold the subdivisions as a business enterprise until they had been completely liquidated.
After careful consideration of all the evidence, we think the fair market price or value on November 3, 1920, of H. D. Shelden's interest in Rosedale Park Subdivisions Nos. 2 and 3 was $1,000,000, exclusive of the unsubdivided 10-acre tract, the cost of buildings under construction, and cash on hand or accounts receivable. This figure should be allocated on a percentage basis between land contracts receivable and unsold lots in proportion to the total unpaid balance of the former and the total asked price of the latter. The fair market price or value of the unsubdivided 10-acre tract was at least $13,000 at that date.
The record contains several voluminous exhibits showing figures relative to the sale of lots, repossession of lots, collections, and many other facts necessary to a recomputation under Rule 50. We have not encumbered this report with findings of fact from such exhibits, since such facts are not necessary to a determination of the issues raised. They are necessary, however, to a recomputation under Rule 50, and will be referred to in making such recomputation.
*1550 *20 The petitioners allege in their amended petition that the respondent made numerous errors in taking figures from the books kept for the Rosedale Park subdivisions. There is no allegation in particular of the errors complained of, and while the record contains an exhibit consisting of transcripts from the books, we do not feel obliged to search out errors under such a general allegation. If the parties see fit to correct the errors under Rule 50, we have no objection.
Reviewed by the Board.
Decision will be entered under Rule 50.
TRAMMELL dissents.
STERNHAGEN, concurring: While the decision is, in my opinion, entirely unfair, I see no escape from it under the law which governs it. The spreading of gains from installment sales over the years of payment was a privilege granted to afford relief from the ordinary system of taxing the gain at the time of the transaction. Cf.
By the Revenue Act of 1928, section 44(d), an attempt has been made to provide for such cases, but this was not made retroactive.