1930 BTA LEXIS 2417">*2417 Basis for determining gain in 1919 upon the sale of property received in exchange for other property in 1918 determined.
19 B.T.A. 371">*371 The Commissioner determined a deficiency of $22,716.11 in the petitioner's income-tax liability for the calendar year 1919. The petitioner alleges that the Commissioner erred in including in income for 1919 as a profit from the sale of 1,902.23 acres of land, the entire amount received as the selling price without allowing any deduction for the cost of the land and without taking into consideration the fact that 1,055.69 acres of the land were sold and paid for in 1918. The only other error alleged was waived. Thus, no errors are urged as to the Commissioner's determination of a deficiency of $3,577.20 for 1920 and a deficiency of $869.78 for 1921.
FINDINGS OF FACT.
The petitioner is an individual residing at Sacramento, Calif.
Under date of November 3, 1917, P. B. Cross entered into an agreement with the Superior California Farm Lands Co. whereby he agreed to buy and1930 BTA LEXIS 2417">*2418 it agreed to sell, some land in Colusa County, California, for $12 an acre upon the recording of a good and sufficient deed. Cross paid $3,000 down, with the understanding that the 19 B.T.A. 371">*372 amount would be returned to him if the company were unable to give a good and marketable title to the land. Not less than one-half of the entire purchase price was to be paid in cash and the balance in adjustment mortgage bonds of the Superior California Farm Lands Co. at par. Cross was to take possession of the property on December 1, 1917. The land to be conveyed was described in the instrument. The agreement also contained other provisions not deemed material hereto.
Under date of March 2, 1918, P. B. Cross wrote to the petitioner as follows:
I hereby transfer and assign to you an undivided five-twentieths (5/20) interest in that certain contract entered into by and between the Superior California Farms Lands Company and P. B. Cross dated the 3rd day of November, 1917, and a copy of which said contract is attached hereto.
It is understood that this assignment is made conditionally and on the understanding that you accept same subject to all the expenses of every kind and nature1930 BTA LEXIS 2417">*2419 incurred or expended in connection with the acquirement and handling of said property to the date hereof and that you understand and agree that said property is to stand its pro-rata share of the value and cost of the irrigation system of the Provident Irrigation Project and the acquirement thereof, which said system is to be available for use by said lands and that you as one of the owners of the property described in said contract attached hereto, are to pay your pro-rata of the cost thereof.
P. B. Cross and his wife executed a deed dated April 27, 1918, conveying to the petitioner an undivided five-twentieths of certain lots, therein described, consisting of a tract of 658.28 acres, more or less, situated in Glenn County, California, and four tracts containing, respectively, 4,737.15 acres, more or less, 570.8 acres, 527.52 acres, and 1,021.41 acres, all situated in Colusa County, California. The tract of 4,737.15 acres, more or less, above mentioned was included in the land covered by the agreement dated November 3, 1917, above mentioned. The record does not disclose whether or not the other three tracts in Colusa County described in the deed of April 27, 1918, were included1930 BTA LEXIS 2417">*2420 in the land described in the agreement of November 3, 1917. At some time undisclosed in the record, about 1,900 acres of some of the land described in the above mentioned instruments were allotted to the petitioner.
The petitioner owned 400 shares of the capital stock of the Colonial Improvement Co. and 125 shares of the capital stock of the Colonial Investment Co. In connection with some one or more of the above mentioned transactions with Cross, and as consideration therefor, the petitioner, in the spring of 1918, turned over the certificates for the above mentioned stock, endorsed in blank, to the secretary of the two companies with instruction that the shares be transferred to Cross. At some time undisclosed in the record, Cross gave the petitioner a receipt for these certificates. Cross requested the secretary 19 B.T.A. 371">*373 of the companies to issue new certificates for this stock in the name of Mary E. Ward, his secretary.
Each of these companies owned some land near Sacramento which had been subdivided. The petitioner and four others each owned one-fifth of the stock of each of these companies. Originally these five men had purchased certain land in Sacramento County, 1930 BTA LEXIS 2417">*2421 California, as tenants in common, each owning an undivided one-fifth interest therein and agreeing to pay one-fifth of the purchase price and of all money borrowed or paid in connection therewith. Later, for convenience, they formed a corporation under the laws of California, known as the Colonial Improvement Co., to which title to this land was conveyed. This company issued one-fifth of its capital stock to each of the individuals, with the understanding that each would pay one-fifth of all indebtedness that might be contracted by the corporation which could not be met by the corporation itself. Thereafter the indebtedness of the company grew to the amount of $238,100.
The company refused to transfer the shares of stock to Cross or his nominee and thus relieve the petitioner of his liability as a stockholder until after April 11, 1919, when the petitioner wrote an officer of the company as follows:
With reference to the transfer of my stock in the Colonial Investment Company and the Colonial Improvement Company to Mr. P. B. Cross, of Oakland, to whom I have sold my stock, or his assignee, I hereby express my knowledge of the fact that those companies owe money and in all probability1930 BTA LEXIS 2417">*2422 the standing of the stockholders of the company, of whom I am one, along with yourself, Mr. Geo. W. Peltier, Mr. Herbert and Mr. Mortimer Fleishhacker, might be responsible for the credit extended.
I realize that you are not acquainted with Mr. Cross as well as I am, and, therefore, that there may be no thought of avoidance of stockholders' liability on debts previously contracted by those companies on my part, I hereby advise you, and agree with yourself, and the other stockholders with whom I was associated in the company, that on any assessments of said companies that might be levied, in case Mr. Cross, or his assignee, does not pay same, that I will see that such assessments are paid, or will pay them myself, on request from you, as long as the company is conducted as heretofore and any levied assessments are paid by the other stockholders.
On April 12, 1919, a certificate for the Colonial Improvement Co. shares was issued to Mary E. Ward, and on May 5, 1919, a certificate for the Colonial Investment Co. shares was issued to her.
In confirmation of the petitioner's letter of April 11, 1919, above referred to, the petitioner on December 22, 1919, entered into an agreement1930 BTA LEXIS 2417">*2423 with his four original associates in the Colonial Improvement Co. whereby he agreed to pay one-fifth of the indebtedness of the company amounting to $238,100, together with all interest charges thereon after deducint one-fifth of the net amount of the 19 B.T.A. 371">*374 proceeds realized from the sale of any of the assets of the company and all sums paid by Mary E. Ward on assessments. The other four individuals also agreed to pay their share of the indebtedness and assessments.
Under date of June 17, 1919, the Colonial Investment Co. acknowledged receipt of $2,500 from the petitioner for the account of P. B. Cross, being the amount of the assessment on his stock in the Colonial Investment Co. due July 1, 1919. The petitioner paid this assessment on the stock in accordance with his agreement because Cross was not financially able to pay it.
The Colonial Investment Co. operated at a loss for each of the years as shown in the following table:
| Year | Amount of loss |
| 1915 | $1,653.43 |
| 1916 | 16,992.85 |
| 1917 | 10,254.14 |
| 1918 | 10,023.17 |
| 1919 | 16,398.55 |
The stock of the Colonial Improvement Co. had no fair market value either in the spring of 1918 or at any time since then. 1930 BTA LEXIS 2417">*2424 The same is true of the stock of the Colonial Investment Co. Neither company ever paid any dividends.
In 1918 the petitioner sold 1,055.67 acres of the land he had acquired from Cross to W. H. O'Bear, and in 1918 received in part payment therefor, $55,000 par value of the bonds of the Provident Irrigation District worth par. The land was sold at $55 an acre, but the balance of the purchase price over and above $55,000 was deducted to pay the amount which the petitioner owed as his share of the cost of an irrigation plant for the district.
In June, 1919, the petitioner sold the balance of the land which he had acquired from Cross, being 846.56 acres, to Cross, taking therefore Cross' notes of the face amount of $55,000 due on various dates up to June, 1920.
Water, for purposes of irrigation, was brought on the land described in the deed of April 27, 1918, at some time in May, 1918, upon completion of an irrigation plant. Thereafter, the fair market value of this land was on the average from $50 to $60 an acre. Before the water was put on this land its fair market value was $10 an acre.
The Commissioner determined that the petitioner received a profit in 1919 from the1930 BTA LEXIS 2417">*2425 above transactions of $75,696.70, consisting of $55,000 in bonds received in 1918 and $55,000 in notes received in 1919 less a profit on operations for 1918 of $2,682.34 and a profit for 1918 of $31,620.96 on the transfer of an irrigation system to the municipal district in exchange for bonds.
19 B.T.A. 371">*375 OPINION.
MURDOCK: The petitioner now claims no error in the Commissioner's determination of deficiencies for 1920 and 1921, and these deficiencies are hereby approved.
The Commissioner erred in including the value of the bonds received in 1918 in his computation of the petitioner's income for 1919. The Commissioner's counsel never made his position clear either by oral statement or brief, but there is no theory of the case consistent with the facts which would justify this action of the Commissioner.
The petitioner contends, in regard to the profit from the sale made in 1919, that since he exchanged stock for the land in 1918, at which time the land had an alleged fair market value of $50 or $60 an acre, his profit in 1919 from the sale of part of the land so acquired was the difference between the sale price received and the fair market value of the land when acquired1930 BTA LEXIS 2417">*2426 in 1918. He called a number of witnesses to testify as to the value of the land in question in 1918. Their qualifications were not questioned. These witnesses agreed that the fair market value of the land after the water was on it, was from $50 to $60 an acre. But the evidence shows that the water did not come on this land until May, 1918, whereas the petitioner acquired the land a month or two prior to that time. Thus, the evidence fails to show that the land was worth from $50 to $60 at the time the petitioner received it in exchange for his stock.
The evidence shows that the land was not nearly so valuable before the water came on as it was thereafter. One witness placed this lower value at from $10 to $15 an acre and thought that $10.50 was fair, while another thought $10.50 was a little low. Cross was to pay only $12 an acre when he contracted to buy from the Superior California Farm Lands Co., and was permitted to pay one-half in bonds of the vendor at par. We do not know the fair market value of these bonds. Cross, in turn, exchanged the land for stock which had no fair market value and which may even have been a liability instead of an asset. The burden of1930 BTA LEXIS 2417">*2427 proving the proper value of the land was upon the petitioner, and in this state of the record we hold that, for the purpose of computing his 1919 profit, the fair market value of the land at the time he received it in exchange was $10 an acre. His profit in 1919 from the resale to Cross of 846.51 acres was $46,534.90 ($55,000 less $8,465.10). . Cf. Commissioner's Regulations 45, art. 1564.
Reviewed by the Board.
Judgment will be entered under Rule 50.
LOVE dissents.