*1811 1. Upon the evidence, held that a transaction whereby petitioner sold real property was not an installment sale and that petitioner is not entitled to return the profit upon the installment sales basis.
2. The value of real estate equities and notes of third persons received in such transaction determined.
*850 This is a proceeding for the redetermination of a deficiency in income tax for the year 1923 in the amount of $10,214.53. The petition alleges that the Commissioner erred in refusing to compute the tax on the sale of certain property on the installment sales basis, and alleges further, in the alternative, that if said sale were a completed transaction, the respondent has included in the purchase price certain notes and real estate at a value in excess of their readily realizable market value at the time of receipt.
FINDINGS OF FACT.
The petitioner is a voluntary trust duly organized under the laws of Massachusetts by a declaration of trust dated August 7, 1918. It has its principal place of business in Springfield, Mass.
On May 15, 1923, the*1812 petitioner sold property located at Dwight Street and Harrison Avenue, Springfield, Mass., for other real estate, and real estate notes and cash. The total consideration received by the petitioner as accepted for the purposes of the exchange was as follows:
| Cash | $1,303.00 | |
| Assumption of first mortgage | 175,000.00 | |
| Assumption of tax | 21,706.50 | |
| Mortgage notes as follows: | ||
| George L. Meyer | $1,800.00 | |
| F. H. Beaulieu | 4,700.00 | |
| J. T. Hafey | 6,975.00 | |
| E. & C. Guertin | 11,265.00 | |
| E. & C. Guertin | 11,265.00 | |
| Springfield Motor | 19,800.00 | |
| Schwartz & Lepovetsky | 9,300.00 | |
| L. Cohn | 30,950.00 | |
| Livingston | 1,500.00 | |
| Real estate | $32,000 | |
| Less - mortgages | 18,000 | |
| 14,000.00 | ||
| 309,564.00 | ||
| Less - adjustments due the petitioner | 9,564.00 | |
| Total | 300,000.00 |
*851 The mortgage notes received upon the sale were accepted at a total valuation of $82,264. The adjusted cost of the property sold by the petitioner was $216,956.25 and the respondent computed the profit upon the transaction to be the difference between $216,956.25 and $300,000.
All of the notes except the Springfield Motor note and the Louis Cohn note were endorsed by the purchaser*1813 without recourse. The petitioner insisted upon the purchaser endorsing the Springfield Motor note and the Louis Cohn note, with recourse, otherwise the petitioner would not have accepted them and the exchange would not have gone through.
The note of George L. Meyer in the amount of $1,800, payable $300 yearly, was secured by property which was also subject to a first mortgage. The note of F. H. Beaulieu in the face amount of $4,700 was secured by a third mortgage on property, the first mortgage being in the amount of $37,000, and the second in the amount of $10,800. This note was payable in an amount of $250 each six months. The note of J. T. Hafey was payable $300 per year and was secured by a second mortgage upon property which was also subject to a first mortgage of $15,000. Both of the notes of E. & C. Guertin were secured by second mortgages on properties each of which was subject to a first mortgage of $27,500. They were payable $135 each three months. The note of the Springfield Motor Corporation was secured by a second mortgage on a garage property which was also subject to a first mortgage of $19,800. This was considered a hazardous proposition by the petitioner. *1814 The note of Schwartz and Lepovetsky, in the amount of $9,300, was payable $100 every three months and was secured by a mortgage on a garage property. The note of Louis Cohn was secured by a second mortgage on a *852 moving-picture theatre, subject to a first mortgage of $30,000, and was payable $150 a month until January 1, 1926, and $200 a month thereafter. The note of D. & C. Livingston was payable $100 each six months and was secured by a second mortgage on property which was also subject to a first mortgage of $3,600.
The real estate taken over at a valuation of $32,000 subject to a mortgage of $18,000 consisted of two properties upon which were wooden tenement apartments. The first mortgage on one of them was later foreclosed and the petitioner received nothing therefrom. The fair market value of these properties was $10,500 each.
The petitioner attempted to get some one to take over the property secured by the two Guertin notes by foreclosure proceedings, but was forced, in order to protect its second mortgages on these properties, to bid in the properties for $1, subject to the first mortgage. These two notes have never been collected. The petitioner has*1815 not had to foreclose on any of the other properties concerned in order to protect its notes.
The fair market value of the nine notes received upon the sale was $69,963, computed as follows:
| Meyer note | $1,400 |
| F. H. Beaulieu | 3,290 |
| Hafey | 4,650 |
| Guertin | 7,510 |
| Guertin | 7,510 |
| Springfield | $15,246 |
| Schwartz | 7,905 |
| Cohn | 21,252 |
| D. & C. Livingston | 1,200 |
OPINION.
MCMAHON: The respondent, in computing the profit from the sale of real estate, used the same values for the notes and real estate acquired as part of the purchase price as were accepted by the parties to the sale, i.e., $82,264 for the notes and $14,000 for the equities in the real estate. He thus arrived at a profit of $83,043.15 which he included in the petitioner's gross income for 1923. He refused to allow the petitioner to compute the profit on the installment sales basis, since, by including the notes and the real estate equities in his computation at the values used by the parties to the sale, he calculated that the initial payment amounted to more than one-fourth of the figure agreed upon by such parties as the purchase price. The petitioner assigns as error this action of the respondent.
*1816 Section 212(d), Act of 1926, is as follows:
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 * * * (2) of a sale or other *853 disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, 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.
Section 1208 of the same act makes this section retroactive as to the 1921 Act and other acts.
*1817 The evidence discloses that the consideration received by petitioner for the sale of property consisted of cash, notes, certain equities in real property, the assumption of a first mortgage, and the assumption of taxes. It will thus be noted that there were no installment payments to be made. See .
It is our opinion that this transaction can not be considered an installment sale. It follows therefore that the respondent did not err in refusing to allow petitioner to return the profit from the sale in question upon the installment sales basis.
The petitioner alleges that in any event the respondent erred in determining the amount of gain from the sale by including the notes and the real estate equities in the amounts of $82,264 and $14,000, respectively.
The face value of the notes was $97,555, and they were valued, for the purpose of the sale, at $82,264. One of the trustees of the petitioner testified that in computing the valuation of the property and the assets received by petitioner in the transaction the price was "glorified" and the notes taken in at inflated values. Two expert witnesses, members of the*1818 appraisal committee of the real estate board of Springfield, Mass., testified that they knew the properties which constituted the security for the notes and that they had made an appraisal of the notes. The appraisal itself is not in evidence, but these witnesses stated that, considering the property itself, the income therefrom, the character of the notes (whether secured by first, second or third mortgages) and the length of time the mortgages had to run, they were of the opinion that the fair market value of the notes was $68,988. They also testified that this valuation was arrived at by discounting the notes from 15 1/3 to 33 1/3 per cent of their face value, depending upon the character of the notes and the length of time they had to run, and that this was the usual method used in Springfield in making such valuations. They also stated that if the petitioner had been forced to sell these notes it probably could not have realized more than 50 per cent of their face value. They did not know the makers of the notes in question but assumed that the makers were solvent. Upon cross-examination, one of them, upon *854 being informed that Pinney was an endorser on two of the*1819 notes, testified that in his opinion these two notes were worth approximately 2 per cent more than he had formerly testified, which increased the value of the total to $69,963. We are of the opinion that the fair market value of the notes in question at the date of the sale was $69,963. The attempt to claim a lower value is based upon the testimony of the witnesses that the petitioner would not have realized more than 50 per cent of the face value upon a forced sale. We do not feel that such testimony is sufficient to establish any lower value than $69,963.
As to the two pieces of real estate involved, the evidence is to the effect that the property, consisting of tenement flats, was in a poor condition, that it was not very desirable or easily rented, and that the reproduction cost of the building thereon would be about $9,000. One of the properties was sold at a foreclosure sale and the petitioner received nothing on account thereof. The two properties were taken in on the deal for $14,000 ($32,000 less mortgages of $18,000). The two witnesses above mentioned and also Adaskin, one of the trustees of the petitioner, testified that the fair market value of the property was*1820 not in excess of $10,500 for each piece. This, less the amount of the mortgages, makes the petitioner's equity worth not more than $1,500 for each piece. We therefore find that the value of the real estate equities received by petitioner was $3,000.
In determining the profit upon the transaction the notes and the real estate equities will be included at the values which we have hereinabove determined.
Reviewed by the Board.
Judgment will be entered under Rule 50.