*4299 1. CAPITAL EXPENDITURES. - A body of land was subdivided by survey for purposes of sale over a period of three years. Only one tract, as shown by the subdivision, was sold. Held that the cost of survey was a capital expenditure, pertaining to the land as a whole, and in determining the profit from the sale of the one tract disposed of, only such portion of this expense as pertained to that tract should be included as cost.
2. PROFITS - SALE OF LAND. - The total profit realized on a sale of land on the installment plan, and the portion of such profit received as income in the year 1919, determined.
*1073 By letter of September 18, 1925, the respondent served a notice of deficiency in income taxes upon the Hannibal Missouri Land Co., in the sum of $390.29 for the calendar year 1919. The deficiency in question arises from disallowance of drainage taxes assessed for the year 1919 and paid by petitioner in 1920, and from the inclusion of a profit received in 1919 from a sale of land.
There are two questions presented: (1) Is the cost of*4300 survey of a body of land, in subdividing it only for purposes of sale over a period of several years, a capital expense pertaining to the entire property, or a cost of sale of that portion actually sold? (2) The determining of the profit represented in a payment received within the taxable year on the sale of land on the installment plan.
FINDINGS OF FACT.
The Hannibal Missouri Land Co., a corporation, was organized under the laws of the State of Missouri in 1904, its business being the farming of land. In the year 1919 its total land holdings consisted of 2,304 acres of river-bottom farm land near Hannibal. Prior to the year 1919, the corporation placed this land on the market for sale through a real estate firm which was given three years to dispose of the property. This firm when employed requested a survey of the property, subdividing it into various tracts for purposes of sale. The survey was made by petitioner at a cost of $831.57, and the corners of the various tracts fixed by it were indicated by temporary painted wooden markers about ten feet in height. These markers had a life of three years. In September, 1919, a sale was made through the real estate firm employed*4301 of one tract of 215.29 acres as shown by the survey. The March 1, 1913, value of this particular tract was $21,529. The cost to petitioner of clearing it subsequent to that date was $1,076.40 and the sum of $5,180.66 was paid by petitioner to the real estate firm as commissions on the sale. The sale price agreed upon for this tract was $33,369.25, of which $3,363 was paid in cash at the time of sale and $6,700 agreed to be paid in 1920 and the balance in 1921.
By the contract of sale the damage to petitioner in case of the failure of the purchaser to make the two deferred payments was agreed to be the amount of the initial payment. The purchaser was also given the right upon the last payment becoming due to pay $16,500 of same by note secured by a mortgage on the land conveyed. Petitioner was to give title to the land and furnish an abstract on the making of the last deferred payment as called for, and pending that time was to retain possession of and farm the land, one-half of the net profits realized to be credited to the purchaser on the last deferred payment, when made.
*1074 The two deferred payments were made by the purchaser as provided for, his election being*4302 to give a note secured by mortgage for $16,500 of the last payment. On closing the deal in this manner in 1921, petitioner furnished an abstract of title to the property at a cost of $98.60 and allowed as a credit on the final payment the sum of $1,557.68, estimated to be one-half of the profit for the years 1919 and 1920 realized by petitioner in farming the land sold, and $57.68 interest accrued on the vendee's share of these profits. After closing the deal in 1921 petitioner sold in that year the mortgage for $16,500 given by the vendee at a discount of $572.55. The cash value of this mortgage in 1921 was its face value less the discount stated.
Petitioner's gross income for the year 1919, in addition to any profit received in that year from the sale of land mentioned, was $20,079.11. It had deductible expenses for that year of $14,908.80.
Petitioner, in making its income-tax return for the year 1919, failed to include as income any portion of the cash payment of $3,363 received in 1919 from the sale of land mentioned. The respondent increased the net income returned by including the sum of $554.90 as that portion of the profit from the sale of land represented in the*4303 cash payment received in the taxable year. Petitioner elected to return the profit on this sale on the installment basis.
OPINION.
TRUSSELL: The questions involved pertain to the determination of the amount of profit resulting from the sale of a tract of land by petitioner in October, 1919, for a total consideration of $33,369.95, payable over a term of three years and of which $3,363 was paid within the taxable year involved, petitioner having elected to return the income represented by this profit on the installment plan. The total sale price of this property was $33,369.95. The March 1, 1913, value of the land is agreed by petitioner and respondent to be $21,529, and to this the respondent added commissions on the sale of $5,180.66, clearing costs, $1,076.45, and surveying expenses of $77.70, making a total cost of $27,863.81 and a profit of $5,506.14 on the sale, or 16.5 per cent of the gross selling price. The respondent included in income for the taxable year 16.5 per cent of the installment of the sale price received in that year, or $554.90. The surveying cost allowed by the respondent is that proportion of the total surveying cost of $831.57 for the entire property*4304 of 2,304 acres represented by the 215.29 acres sold.
Petitioner insists that in determining the profit resulting from the sale there should be allowed as expense of same four additional items:
*1075 (a) The balance of the survey cost in the sum of $753.97.
(b) Interest of $57.68 rebated the purchaser.
(c) The sum of $98.60 representing abstracts furnished the purchaser in closing the sale in 1921.
(d) A loss of $572.55 in 1921 representing the discount allowed in realizing the cash value of the mortgage note taken in the sum of $16,500.
The survey in question was for the purpose of subdividing the property and fixing the boundaries of various tracts for sale over a period of three years. Although sale was actually effected of only one of the tracts shown by the survey, the expense pertains to all of the tracts. The result of the survey was used before the sale of this particular tract in efforts to sell other portions of the land and was used or available for use subsequent to that time in similar efforts. The cost of survey was a capital expense pertaining to the property as a whole and only so much of it as pertained to the tract sold can be considered*4305 as a separate cost of such tract.
The profit realized from this sale of land should be computed as follows:
| Sale price | $33,369.95 | |
| Less allowance made purchaser in settlement | 1,557.68 | |
| Net sale price | 31,812.27 | |
| Deduct: | ||
| 1913 value of land | $21,529.00 | |
| Clearing cost | 1,076.45 | |
| Commissions | 5,180.66 | |
| Survey | 77.70 | |
| Abstract | 98.60 | |
| Cost of realizing cash on mortgage | 572.55 | |
| 28,534.96 | ||
| Profit | 3,277.31 |
The total price paid by the purchaser for the land was $31,812.27, of which the profit of $3,277.31 is 10.3 per cent. Applying this percentage to the payment of $3,363 received in 1919, we find $346.49 as profit to be included as income of that year. We have found that petitioner's gross income from other sources for the taxable year 1919 amounted to $20,079.11, and that it had deductible expenses of $14,908.80. Its total net income for that year is accordingly found to be the sum of $5,516.80.
The deficiency should be redetermined in accordance with the foregoing findings of fact and opinion.
Judgment will be entered upon 15 days' notice, pursuant to Rule 50.
Considered by SMITH, LOVE, and LITTLETON.