*2620 1. March 1, 1913, value of leasehold owned by petitioner determined.
2. Market value of bonds received by petitioner in part payment on the sale of its assets determined.
3. A return for the period January 1 to April 30, 1918, is not a return for the calendar year 1918 and is insufficient to start the running of the statute of limitations against that part of the year not included in the return.
*643 The respondent determined a deficiency in income and profits taxes for the period May 1 to December 31, 1918, in the amount of $884,393.68. Petitioner alleges that the respondent erred in finding that any profit was realized on the sale of petitioner's assets in May, 1918; that the statute of limitations has run against any assessment for the period involved; and that the respondent erred in his selection of comparatives in computing profits taxes under section 328 of the Revenue Act of 1918. On motion of counsel for petitioner the hearing in the first instance was limited to the issues other than that involving*2621 section 328.
FINDINGS OF FACT.
Petitioner, a New York corporation, was incorporated July 18, 1905. From 1906 up to and including April 30, 1918, it was engaged in operating the Hotel Belmont, in New York City, under a lease commencing November 8, 1906, and ending November 8, 1926, and renewable for an additional period of 20 years. Under this lease petitioner covenanted to pay the lessor an annual rent of $318,256.34 and also to pay all insurance premiums, taxes, assessments, and other charges against the property.
*644 Petitioner's capital stock consisted of 5,000 shares, of which 2,000 were acquired by Benjamin L. M. Bates upon its organization. Bates was an officer of the corporation and managing director of the hotel. In 1908 or 1909 he purchased 495 additional shares and in 1918 he purchased all the remainder of the stock.
At the time of the completion of the Hotel Belmont and in 1913 it was a high-class hotel and was the only one of its class in that vicinity. Between 1913 and 1918 a number of new and larger hotels were erected near by, some of which became competitors of the petitioner, so that in 1918 neither petitioner's leasehold nor its good will*2622 were as valuable as they were in 1913. The fair market value of petitioner's leasehold at March 1, 1913, was $3,000,000.
Some time prior to April 30, 1918, Bates orally agreed to sell to J. McE. Bowman the petitioner's property, consisting of its leasehold, good will, and furniture and fixtures. Under this agreement petitioner remained in possession of the hotel property and received all the receipts up to and including April 30, 1918. Bowman, or the corporation organized by him for that purpose, took possession on May 1, 1918. On May 24, 1918, petitioner's board of directors authorized the president to execute a bill of sale of assets and assignment of lease to Bowman, and at the same meeting ratified the acts of its officers in making the sale of "the good will, the name of the Hotel Belmont, furniture, fixtures and all the assets of the August Belmont Hotel Company, as a going concern" except certain supplies, book accounts and cash, "said sale to take effect as of May 1st, 1918." The petitioner's leasehold was actually assigned to Bowman on May 29, 1918, and Bowman on the same date assigned it to the B. L. M. Bates Corporation. The consideration received by petitioner for*2623 the sale and assignment consisted of cash and short term notes in the amount of $1,200,000, bonds secured by a mortgage on the leasehold in the face amount of $2,300,000 and preferred stock of the B. L. M. Bates Corporation of the par value of $300,000, a total face value of $3,800,000. At the time this transaction took place, mortgages were seldom placed on leaseholds in New York and it was difficult to interest investors in bonds so secured. The bonds issued were never offered for sale nor were they ever used as collateral for a loan at a bank. The mortgage provided that the principal of the bonds should be paid off serially and at the time of the hearing of this proceeding bonds in the principal sum of $780,000 were still outstanding. At the time the bonds were issued in 1918 their market value was not in excess of 60 per cent of their face amounts.
The respondent computed petitioner's profit on the above transaction as follows:
| Consideration received for sale of capital assets: | ||
| Cash and notes | $1,200,000.00 | |
| Bonds | 2,300,000.00 | |
| Preferred stock - B. L. M. Bates Corporation | 300,000.00 | |
| Total consideration | 3,800,000.00 | |
| Cost value of assets transferred: | ||
| Furniture | $786,666.67 | |
| Lease | 1,209,024.44 | |
| 1,995,691.11 | ||
| Taxable profit on sale | 1,804,308.89 |
*2624 *645 From the time of its organization petitioner kept its books on a calendar year basis, and from 1909 to 1917, inclusive, it made its Federal tax returns on a calendar year basis. On March 13, 1919, petitioner filed with the collector of the third district of New York a tentative return, requesting an extension of 45 days for filing a completed return, and showing an estimated tax of $2,145.23 for one-fourth of which, or $536.31, a check or draft was submitted at the same time. In the space provided on the form for the name and place of business of the taxpayer, appears the following:
August Belmont Hotel Co. in liquidation, Park Avenue & 42d Street, New York, N.Y. (Treasurer's office 43 Exchange Place, New York City).
In the body of the form it is stated:
The amount stated below is remitted herewith in payment of not less than one-fourth of the estimated amount of the income, war-profits, and excess-profits taxes for the four months ended April 30, 1918, of the corporation whose name and address appear at the head of this form. The company ceased operations on May 1st, 1918, and is in process of liquidation.
On June 14, 1919, petitioner filed with the collector*2625 its final return on Form 1120, the heading of which, with words stricken through as indicated, appears as follows:
CORPORATION INCOME AND PROFITS TAX RETURN for year 1918 or Period begun January 1, 1918, and ended April 30th, 1918.
Item 7 of Schedule I in the return reads as follows, the words in italics being those inserted by petitioner:
Net income for taxable year (Item 25, Schedule A, page 2) 4 months from Jan. 1, 1918, to April 30th, 1918.
In Schedule H attached to the return petitioner inserted the words: "Company ceased operations on April 30th, 1918, and was dissolved."
The return was executed by Fred N. Watriss as president and Adolph Frank as secretary. The petitioner at that time had no treasurer, its last treasurer having resigned and no one having been appointed to succeed him because of the liquidation of the *646 corporation. The return showed a tax liability of $1,504.92 and a remittance accompanied the return for the difference between this amount and the sum paid when the tentative return was filed.
In January, 1920, internal revenue agents working out of the office of collector for the third district of New York made an examination of the*2626 returns filed by petitioner for the year 1918, in the course of which the sale by petitioner of its assets in 1918 was fully investigated, and evidence was filed by the petitioner which was accepted by the Bureau of Internal Revenue as establishing that no profit was realized upon the sale of petitioner's assets, and, as a result of certain adjustments in income of petitioner from its operation to the date of sale of its assets, petitioner under date of May 12, 1922, was allowed a refund of the full amount of tax paid for the year 1918, to wit, $1,504.92.
No penalties were ever imposed on petitioner on account of the filing of the above mentioned returns.
No waiver was ever filed by or on behalf of the petitioner for the year 1918.
The notice of deficiency was mailed to petitioner on April 22, 1926. It sets forth a deficiency, computed under section 328 of the Revenue Act of 1918, in the amount of $884,393.68 for the period May 1 to December 31, 1918.
OPINION.
ARUNDELL: No question was raised by either party as to the Board's jurisdiction to hear these proceedings. However, in view of certain statements appearing in the record that the petitioner corporation was dissolved*2627 in the summer of 1918, the Board on its own motion set the case down for hearing on the jurisdictional question. Both parties contend that the petitioner, though dissolved in 1918 by virtue of the laws of New York State (under whose laws it was incorporated), continued in existence for an indefinite time "for the purpose of paying, satisfying, and discharging any existing debts or obligations, collecting and distributing its assets, and doing all other acts required in order to adjust and wind up its business and affairs, and may sue and be sued for the purpose of enforcing such debts or obligations, until its business and affairs are fully adjusted and wound up." ; ; . In our opinion the petitioner corporation was the proper party to institute this proceeding and we have jurisdiction to entertain it.
*647 Proceeding to consider the issues raised by the pleadings, we take up first that of whether the statute of limitations has run against the deficiency proposed by the respondent.
*2628 The position of the petitioner, as we gather it from the brief, is that the tentative return started the running of the statute, but even if it did not, then the final return did, as it showed all the petitioner's gross income. We do not find it necessary to pass on the question of which return started the running of the limitation period because more than five years elapsed between the date of filing the last return (June 14, 1919) and the mailing of the deficiency notice on April 22, 1926. The respondent's position is that the final return, covering as it did only the first four months of the year, was not a return for the year 1918 as contemplated by statute and therefore was not sufficient to start the running of the limitation period for that year.
The petitioner kept its books on a calendar year basis and prior to 1918 it had filed its returns on that basis. That was the proper basis for filing its returns and the statute required that it continue to file them in that manner unless permission to change the accounting period was obtained from the Commissioner. Sections 212 and 226, Revenue Act of 1918. The papers which the petitioner filed with the collector were not*2629 and did not purport to be calendar year returns and the respondent was not required to accept them as such. "The statute of limitations does not begin to run until a return or returns have been filed which at least purport to cover or include the period involved." ; affd., . This is not a case merely of an honest mistake in attempting to comply with the law as in the Mabel Elevator Co. case, ; ; neither is it a case where all the items of gross income were shown in the return filed, as in ; nor is there in this case a "substantial" compliance with the statute as in , and . The petitioner's largest transaction in 1918 was the sale of its assets in May of 1918. The returns which it filed, both being filed in the succeeding calendar year, not only make no mention of the transaction, but very carefully state that they cover only the period prior to that in which the transaction*2630 took place. , and similar cases cited are not in point because of the lack of any showing that petitioner's taxable year ended short of the full calendar year. It is clear from the evidence that the corporation was in existence subsequent to April 30, 1918, for as late as May 24, 1918, a meeting of its board of directors was held. In , the petitioner's *648 return as filed covered only three months of the calendar year and we held:
Since the returns filed in May, 1921, covered only three months of the calendar year before us, the period within which the tax for that year must be assessed did not begin to run from the date of such filing.
In , three affiliated corporations, with a fiscal year ending March 31, filed a return for the period April 1, 1920, to December 31, 1920. On March 7, 1921, they filed preliminary certificates of dissolution with the secretary of state of the jurisdiction under which they were incorporated. They filed no tax return for the period January 1 to March 7, 1921, and*2631 the respondent asserted a deficiency for that period which the transferee of the corporations contended was barred. Holding that the return filed was insufficient to start the running of the limitation statute against the period involved, we said:
The return filed appeared on its face to cover only the period to December 31, 1920. It included only the income to that date. No return has ever been filed by the predecessor companies for any period after that date. The period within which assessments may be made does not begin to run until a return is filed. A return for nine months is not a return for twelve months even though a twelve months' return should have been filed which would include the nine months for which the return was filed.
On the authority of the above cases we hold that the statute of limitations has not run against the deficiency proposed for the period May 1 to December 31, 1918.
Petitioner argues that the notice of deficiency issued by the respondent is void because it asserts a deficiency for the period May 1, 1918, to December 31, 1918, and, as the taxpayer was on a calendar year basis the tax must be computed for the calendar year. We had a similar*2632 situation in , where the respondent computed a deficiency for only the first month (February, 1918) of petitioner's fiscal year. We held that:
Petitioner, under the facts in this case, could have no deficiency "for the month of February, 1918." The deficiency, if any, is for the fiscal year ending January 31, 1919 * * *.
So, in the present case, while it is improper to call the deficiency a deficiency for a part of a year, the respondent's improper designation of it does not void his determination. Cf.
In finding the amount of profit realized by petitioner on the sale of its assets in May, 1918, the respondent treated the face value of the property received as its actual value in the amount of $3,800,000, and deducted from this what he denominated the "cost value" *649 of the furniture and leasehold in the aggregate amount of $1,995,691.11. The consideration received consisted of cash, notes, bonds, and preferred stock. There is no issue as to the amount of cash received by petitioner nor as to respondent's determination of the value of the notes and stock. *2633 The value placed by respondent on the furniture for the purpose of determining gain or loss on its sale is not in dispute. This narrows our immediate problem down to determining the value of the bonds received and the value of the leasehold.
In the deficiency notice respondent used the figure of $1,209,024.44 as the "cost value" of the lease. It is not explained in the record what is meant by the term "cost value," but we presume that it is fair market value as of March 1, 1913, depreciated to date of sale. See section 202 of the Revenue Act of 1918. For the purpose of establishing the March 1, 1913, value petitioner offered the testimony of three witnesses, one of whom, although he gave details as to the method of computation of leasehold values, expressed no opinion as to the value of this lease. Of the other two witnesses, one is a practical hotel man of twenty years experience in New York City, and the other is a hotel broker, who for twenty years had been engaged in buying, selling, leasing, appraising and operating hotels. Both of these witnesses were familiar with hotel conditions and the value of hotel leaseholds in New York in 1913. One of them arrived at a March 1, 1913, value*2634 of slightly over $3,000,000, by computing the estimated gross income from room rentals and liquor sales, deducting from this the rent payable under the lease, taxes, and operating expenses, and reducing the resultant figure to present worth. The hotel broker fixed the value of the lease at $3,000,000 partly on the basis of earnings, and on his knowledge of the sales price of other leaseholds. From the testimony of these witnesses, supported as it was with the details of the methods by which they reached their values and their familiarity with leasehold values, we find as a fact that the fair market value of petitioner's leasehold at March 1, 1913, was $3,000,000. In determining the amount realized on the sale this figure, $3,000,000, should be depreciated by that portion of the original term of 20 years that elapsed between March 1, 1913, and the date of sale, May 1, 1918. .
Petitioner also offered evidence for the purpose of establishing the value of its good will at March 1, 1913. The opinions expressed by the witnesses on this point were predicated primarily on a statement of income for five years preceding 1913 which was placed*2635 in evidence. The earnings reported in petitioner's tax returns filed for that period differed so widely from those presented to the witnesses *650 that we deem it impossible to find the value of good will with any degree of accuracy.
On the question of the value of the bonds received as a part of the consideration for the sale, the petitioner's evidence consisted of the testimony of two witnesses, each of whom has been in the business of appraising and buying and selling real estate and mortgages for thirty years or more. It appears that at the time of the issuance of the bonds here involved, supported by a mortgage on the leasehold, this method of financing was unusual in New York and it was difficult to interest investors in such securities. Mortgages of this kind were regarded as junior mortgages. In this particular case the mortgage given was on the leasehold only, whereas leasehold mortgages are sometimes secured by a building erected by the lessee, and in this respect the mortgage here involved was regarded as rather an inferior type. From the testimony of petitioner's witnesses we find as a fact that the bonds received by the petitioner as a part of the consideration*2636 for the sale of its leasehold and other assets had a market value at the time received not in excess of 60 per cent of the face value, or $1,380,000.
Further proceedings will be had under Rule 62(d).