*1950 Where in the sale of real property at a purchase price of $32,000 the petitioner receives initial payments of $8,040 and pays back to the purchaser $458.52, the amount of mortgage interest, taxes, and assessments, together with interest thereon, accruing up to the date of sale, which were liabilities of the petitioner, the initial payment is not reduced thereby, and, being in excess of one-fourth of the purchase price, the income from the sale can not be reported upon the installment basis.
*1344 This proceeding is for the redetermination of a deficiency of $1,434.12 in the petitioner's income tax for 1926. The only issue is whether or not the gain realized on the sale of certain real estate is taxable on the installment basis.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of New York, with its principal office at 261 Broadway, New York City.
On March 27, 1926, the petitioner agreed to sell a certain tract of land in the "Second Ward, Borough of Queens, City of New York" *1951 *1345 to Henry Scharnberger, Inc. The contract of sale provided, among other things, that:
(1) The purchase price of $32,000 was payable:
$3,000 upon the signing of the contract;
$8,960 by assuming a mortgage in that amount;
$15,000 by purchase money bond, secured by a second mortgage on the property;
$5,040 in cash upon the delivery of the deed at closing of title.
(2) The purchaser assumed and agreed to pay in addition to the purchase price:
(a) Six installments of assessment for acquiring title to Roosevelt Avenue;
(b) Any taxes or assessments which may become liens on the premises on or after thirty days from date hereof.
(3) "Computation of interest on mortgages shall be as of the date of closing of title."
(4) Taxes and water rates for the calendar year were to be apportioned.
(5) The seller was to convey the land to the purchaser "free of all encumbrances" except as stated.
The contract of sale was carried out in accordance with its terms and on June 25, 1926, the petitioner conveyed the land to the purchaser. The statement of closing the title, shows the following settlement:
| Purchase Price | $32,000.00 | |
| ALLOWANCES | ||
| Paid on contract | $3,000.00 | |
| 1st mtge | 8,960.00 | |
| Int. on 1st mtge. May 12 to June 25, 1926 | 64.20 | |
| P. M. Mtge | 15,000.00 | |
| Roosevelt Ave. assessment, 4th Instal | 256.05 | |
| Int. Sept. 1, 1925 to June 25, 1926 | 13.17 | |
| Taxes, 1924, 2nd half | 17.81 | |
| Int. 2 years, 1 mo. 25 da | 2.62 | |
| 1925 Taxes, 1st half | 17.48 | |
| Int. 1 yr. 1 mo. 25 da | 1.33 | |
| 1925 Taxes, 2nd half | 17.48 | |
| Int. 7 mo. 25 da | .72 | |
| 1926 Taxes, Jan. 1, 1926 to Apr. 27, 1926 | 66.52 | |
| Int. on $102.37, the amount of 1st half taxes, May 1 to June 25 | 1.14 | |
| $27,418.52 | ||
| 27,418.52 | ||
| $4,581.48 |
*1952 This sum was paid by certified check of Henry Scharnberger, Inc. on Corn Exchange Bank, Steinway Branch, to order of Corona-Flushing Company, Inc. *1346 in the sumOf $5.040. The difference of $458.52 was paid to Henry Scharnberger, Inc. by check of William G. Johnson, Special.
The petitioner reported its income from the sale upon the installment basis. The Commissioner determined that the initial payment was more than one-fourth of the purchase price and that the sale was not upon the installment basis.
OPINION.
SMITH: In so far as material hereto, section 212(d) of the Revenue Act of 1926 provides that:
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 * * * of a sale or other disposition of real property, if * * * the initial payment do not exceed one-fourth of the purchase price, *1953 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.
The petitioner contends that the actual cash received, or the amount of the initial payments, was less than one-fourth of the purchase price and that this transaction is within the purview of the statute. The respondent takes the position that the initial payments amounted to more than one-fourth of the purchase price and that the income from the sale can not be reported upon the installment basis. There is no controversy as to the amount of the profit. The question then is whether the initial payments amounted to $8,040 as the respondent contends, or to only $7,581.48 as the petitioner claims. One-fourth of the purchase price of $32,000 is $8,000.
The petitioner actually received $8,040, but at the same time turned back to the purchaser $458.52 as allowances upon*1954 the closing of title. The petitioner argues that the purchaser assumed payment of these items and that the parties merely "made change" by swapping checks. If the items, aggregating $458.52, were in fact assumed by the purchaser there might be some ground for excluding these items from the initial payments, as we did in . The petitioner cites that case as controlling here. The Watson case is distinguishable; there the purchaser assumed the payment of similar items, made no payments thereon in the taxable year, and the record disclosed no disagreement as to the amount of the initial cash payment. In the instant *1347 case the contract of sale sets forth initial payments totaling $8,040 - $3,000 upon the signing of the sales contract and $5,040 upon the delivery of the deed. With much particularity the contract of sale, which the petitioner's witness testified was absolutely carried out, sets forth the liabilities assumed by the purchaser and the time after which such liabilities accrued against the purchaser. The petitioner agreed to convey the property to the purchaser free of all encumbrances, except as provided*1955 in the contract. The purchaser assumed the taxes and assessments due or becoming liens after April 27, 1926, and agreed that interest on the mortgages would be computed as of June 25, 1926, the date the title was closed.
Interest on the first mortgage up to June 25, 1926, was a liability of the petitioner under the sales agreement. The allowance of $256.05 for "Roosevelt Ave. assessment, 4th Instal." is not shown to be one of the six installments assumed by the petitioner, and the next item of "Int. Sept. 1, 1925 to June 25, 1926" supports the inference that the petitioner had to discharge that item. Taxes for the years 1924 and 1925, and interest thereon to the date of the deed, in the amounts set forth in the statement, appear to be liabilities of the petitioner in accordance with the sales agreement. The 1926 taxes were apportioned up to April 27, 1926, and interest thereon computed to the date of the deed in accordance with the terms of the contract of sale. All of these items, totaling $458,52, were liabilities which the petitioner had to discharge before it could convey the property free of encumbrances. Instead of discharging these liabilities by payment directly to*1956 the proper parties, the petitioner paid the amount over to the purchaser, who then took the property subject to the liens for unpaid assessments, taxes, and interest. Neither the purchase price nor the amount of the initial payment by the purchaser was affected by such payment. The parties to the sale might have handled the transaction in a different manner or in such a way as to bring it within our decision in , but, as we said in :
* * * It seems to us to be fundamentally unsound to determine incometax liability by when might have taken place rather than by what actually occurred. Even though the practical effect may be the same in either case, the resulting tax liability may be quite different. . * * *
The petitioner received initial payments in an amount greater than one-fourth of the purchase price, which was not reduced by the payment back to the purchaser of an amount for liabilities which the petitioner should have discharged, and is therefore not entitled to report its income from this sale upon the installment*1957 basis.
Judgment will be entered for the respondent.