*1834 1. The cost to a corporation of a tract of land acquired for its entire stock, for computing gain or loss from subsequent sales of lots carved therefrom, is to be determined upon the basis of the fair market value of the land when acquired; and the finding of such fair market value is made upon the entire evidence, consisting of earlier transactions in other property, later sales of the stock and of some of the lots, opinions of witnesses, and detailed circumstances of the acquisition and the plans and expectations of the promoters of the venture.
2. Where a tract of land is purchased and subdivided, and a portion thereof is reserved as a park for the use of lot purchasers, it is proper, in computing the cost of lots sold, to allocate part of the entire cost to the reserved area, if such area was not permanently and irrevocably dedicated to the public and the possibility of gain was merely postponed.
3. Where the evidence establishes that the lots held for sale were more desirable and valuable than those contained in the reserved area, the allocation of the cost should be equitably made on the basis of such evidence rather than on the basis of the ratio of the area of the*1835 lots to the area of the reservation.
4. Profits from sales of lots, involving a payment within the year of sale of less than 25 per cent of the purchase price, made by a taxpayer whose accounts were kept and returns were made on the installment sales method should be accounted for by that method. Sections 212(d), 1208, Revenue Act of 1926.
5. Contracts for the sale of lots for an initial payment and deferred payments, not evidenced by notes, by the terms of which title does not pass and no deed is made until the full purchase price is paid, and payments made are forfeited and the contract becomes void upon failure to meet any deferred payment, are mere agreements to sell; they are not present sales nor do they involve an exchange of property for property.
6. As to such contracts involving initial payments of over 25 per cent of the purchase price, the deferred payments are held to have been improperly included in income for the year of sale, because none of them accrued in that year, and, assuming the contractual promises of the vendees were property, the evidence shows they were without market value when received.
*731 The respondent determined deficiencies in income taxes for 1920 to 1925, inclusive, except for 1922 as to which he determined an overassessment of $799.50, in amounts as follows: 1920, $44,565.67; 1921, $3,626.75; 1923, $3,591.20; 1924, $10,857.19; 1925, $39,777.46.
The petitioner assails the respondents' determinations, (1) because he has used an improper cost basis for the purpose of computing the *732 gains derived in each year from sales of realty, (2) in charging the petitioner with gains from certain of such sales, determined on the installment sales basis, (3) in charging the petitioner with excessive gains from the remainder of such sales not on the installment basis, and (4) in disallowing deductions claimed for 1923, for depreciation, auto expense and truck repairs.
FINDINGS OF FACT.
The petitioner, a Florida corporation with its principal place of business at Miami, was organized on February 23, 1918, by the members of a syndicate, pursuant to an agreement entered into by them on September 10, 1917, as modified by a further agreement of January 12, 1918. The syndicate was*1837 formed in 1917, for the purpose of acquiring, developing and selling certain submerged land lying under the waters of Biscayne Bay, between the cities of Miami and Miami Beach, Fla.
After considerable negotiations with Federal, State and county officials, the syndicate acquired 120.52 acres of submerged land from the trustees of the Internal Improvement Fund of Florida, secured the consent of the War Department to the construction of two islands and its permission to take filling materials from a certain area, and obtained the permission of the Commissioners of Dade County to connect the islands with a nearby causeway between Miami and Miami Beach. All of these steps were essential in rendering the property commercially valuable.
Title to the land so acquired was vested in the Fidelity Bank & Trust Company on January 18, 1918, and continued to remain in that company until the time of the transfer of the land to this petitioner.
The purchase price paid for the land by the syndicate was $36,156, or $300 per acre. The syndicate also disbursed considerable sums for lawyers' fees, traveling expenses, salaries, etc., in effecting the purchase, securing the permits, and obtaining*1838 quit-claim deeds from land owners asserting riparian rights over the property.
In March, 1918, the syndicate transferred the land in question to the petitioner in exchange for $300,000 par value of petitioner's capital stock. Pursuant to an agreement between the syndicate members, 10 per cent of the amount of stock which each was entitled to receive, $30,000 par value in all, was issued by the petitioner to F.C.B. LeGro, in consideration of valuable services rendered the syndicate in the acquisition of the land and in the securing of the essential permits for development.
The fair market value of the land, in March, 1918, when acquired by the petitioner from the syndicate, was $130,000.
*733 Originally, Palm Island was subdivided into 88 lots and Hibiscus Island into 76 lots. Later, 27 of the lots on Palm Island were redivided into 83 lots, and the 76 lots on Hibiscus Island were resubdivided into 120 lots. In subdividing Hibiscus Island the lots were extended back only 175 feet from the water front, leaving a large interior area not subdivided. The petitioner reserved this area for ten years as a playground and recreational center for the use of lot purchasers, *1839 and later extended the term an additional three years. This area comprises 14.45 per cent of the entire area of the two islands. It was exempted as a public park from taxation by the city. Its value was only about one-third that of land having a water front; but by its use for public park purposes, the petitioner was enabled to realize about a third more profit per square foot for the lots on Hibiscus Island than for the larger lots on Palm Island. The portion of the total cost applicable to this area is $53,705.69.
During the years in question, the petitioner disposed of a large number of lots on both islands under a contract providing for an immediate down payment of less than the purchase price and deferred payments over a term of years, with interest at 8 per cent. Failure to meet any of the deferred payments rendered the contract null and void and effected a forfeiture of the payments made; it also entitled the petitioner to immediate repossession of the land. No deed was made or title passed to the purchaser until the full contract price had been paid. No notes were given by the purchaser, the contract being the only evidence of the transaction. Repeated efforts by*1840 petitioner's officers during the years in question to procure loans, using these contracts as collateral, resulted in failure, although they offered finally to pay a high rate of interest. The petitioner's rights under the contracts had no fair or readily realizable market value.
In its returns for 1919 to 1925, inclusive, the petitioner reported all profits from the sales of lots on an installment basis. Its accounts had been kept on an installment sales basis. The respondent divided the sales into two classes: (1) installment sales, comprising all sales in which the initial payments were less than 25 per cent of the purchase price, and (2) sales in which the initial payments were more than 25 per cent of the purchase price. In the case of the latter sales, the respondent treated the total selling price stated in the agreement as income of the years in which such agreements were made. The respondent found the original cost of the property to be $40,173.33, to which he has added the undisputed development cost and arrived at a total cost of $1,024,856.62. From such total cost the respondent subtracted $148,091.78, or 14.45 per cent thereof, as representing that portion of*1841 the total cost allocable to the area *734 on Hibiscus Island devoted to public park purposes, thereby arriving at a net cost of $876,764.84 for the lots sold or held for sale. The cost of each lot was determined by dividing the latter sum by the total number of lots.
In the construction and development work on the islands, the petitioner used equipment consisting of a truck, tractor and miscellaneous tools. The total cost of the equipment on hand at the end of 1923 was $14,141.01, of which a little over half was acquired in that year. In the return for 1923, the petitioner claimed expense deductions of $2,798.09 for depreciation of equipment, of $1,454.95 for auto and truck expense, gas and oil, and of $814.53 for tires, repairs, etc. The respondent disallowed the deductions. Similar deductions were claimed in the return for 1924 and allowed by the respondent.
OPINION.
STERNHAGEN: The proceeding involves several questions which arise in the course of determining the petitioner's gain in the sale of its lots on Palm and Hibiscus Islands at Miami, Fla. As to 1922, the Commissioner determined an overassessment, and this is not before us. *1842 Cornelius Cotton Mills,4 B.T.A. 255">4 B.T.A. 255.
1. The petitioner contends that when it acquired the land in March, 1918, in exchange for its shares, the land was worth $300,000, the par value of its shares; while the respondent contends that the land was worth no more than $40,173.33, which it had cost the syndicate shortly before. There is evidence of several kinds in the depositions, consisting of earlier transactions in other property, later sales of petitioner's shares, later sales of some of the lots in question, and opinions of witnesses. The circumstances of the acquisition and the plans and expectations of the venture were fully described. From the whole record it has been found that the property, when acquired, had a fair market value of $130,000. This should be used as the initial cost to the petitioner. William Ziegler, Jr.,1 B.T.A. 186">1 B.T.A. 186; Reliance Investment Co.,22 B.T.A. 1287">22 B.T.A. 1287.
2. In distributing the total cost among the lots, the respondent has included the interior area, thus reducing the cost and increasing the gain on the lots sold. The petitioner urges, first, that this area should be excluded from the computation*1843 of cost so that the entire cost of the tract will be applied to the water front lots; and, second, that, if any part of the cost is applied to the interior area, such part should be substantially less than the ratable proportion measured solely by the percentage of area. The respondent held that since the interior area was 14.45 per cent of the whole, the cost was properly to be allocated by applying the same ratio.
*735 There is no support for the petitioner's first contention that no part of the cost should be applied to the interior area. This area was not permanently and irrevocably dedicated to the public, but may later be sold by petitioner. The possibility of gain has only been postponed. It is unlike the area used for public streets, which is permanently beyond the possibility of sale and gain, the cost of which must be absorbed in the salable lots. See Oak Woods Cemetery Association,6 B.T.A. 1003">6 B.T.A. 1003.
But it does not follow that the cost should be allocated according to the ratio of area. The regulations have recognized an equitable apportionment, Reg. 45 and Reg. 62, art. 43, and this has been construed by the Commissioner as not restricted*1844 to a ratable apportionment. I.T. 1843; C.B. II-2, p. 72; cf. J. S. Cullinan,5 B.T.A. 996">5 B.T.A. 996; D. C. Clarke,22 B.T.A. 314">22 B.T.A. 314. The evidence makes it clear that the water front lots were far more desirable and valuable than the interior lots, the ratio, generally speaking, approximating three to one. We are of opinion that of the total cost basis of $1,114,683.29, the amount of $53,705.69 should be allocated to the interior area, and that this should be substituted for the figure used by respondent.
3. The petitioner kept its accounts and made its returns on the so-called installment sales method. Whether or not this was sanctioned at the time, it was subsequently sanctioned in section 1208, Revenue Act of 1926, and to the extent of the installment transactions, the installment method used by petitioner is to be used in the determination of its tax liability for the years in question. Thus all transactions involving a payment within the first year of less than 25 per cent of the purchase price are properly treated as installment sales under section 212(d), Revenue Act of 1926. The facts of *1845 Key Largo Shores Properties, Inc.,21 B.T.A. 1008">21 B.T.A. 1008, were entirely different, for the factual hypothesis upon which the installment method was predicated proved wholly false before the end of the first year of its adoption, and the method was therefore held to be unsupported. Cf. Morrow, Becker & Ewing Co.,21 B.T.A. 1013">21 B.T.A. 1013; Morgan Rundel,21 B.T.A. 1019">21 B.T.A. 1019.
4. As to those transactions carrying an initial payment of more than 25 per cent, respondent included the entire agreed price in the petitioner's income of the year of contract, upon the theory that the vendees' contractual promises were property of full value. We have found from the evidence that the future promises were without fair market value when received.
But, in any event, these were not exchanges of property for property requiring a valuation of the property received. Nor were they present sales. They were agreements to sell, part of the agreed price being received in the year of agreement and part in future. No part *736 of the future payments can be said to have accrued in the first year, and the respondent erred in including them in such income.
5. As*1846 to the last item of alleged depreciation, auto expense and truck repairs, the evidence is inadequate to establish error.
Judgment will be entered under Rule 50.