*2088 1. Where a vendor of real estate sold for a price consisting of a cash payment, a first mortgage assumed, and deferred payments secured by a purchase-money mortgage, exchanged the latter obligation in the year of sale for an obligation of equal amount on open account of a corporation, a stranger to the original sale, the amount of which, together with the cash payment, exceeded one-fourth of the purchase price, it is unnecessary to consider whether the vendor may return income from the sale by the installment method.
2. The first transaction can on no theory be projected into the later entirely separate transaction so as to exclude the open account from income of the vendor on the grounds that it was not cash, or that it had no market value, since the gain or loss on each transaction must be separately computed, the disposition of the purchase-money mortgage was an exchange the gain from which was measurable by the market value of the open account, and the evidence respecting the assets and liabilities of the corporation and the payments made by it on the account within the same year indicates that the account was entirely sound and of full value.
*570 Respondent determined a deficiency of $3,847.65 in petitioner's income tax for 1924 by treating as income for that year the gain from the sale of two pieces of real property. Petitioner in contesting this urges that the gain should be spread over several years by the installment method or that the apparent gain was shown by the end of the year not to have been realized.
FINDINGS OF FACT.
Petitioner, on or about April 10, 1924, sold for a price of $96,000 a piece of real estate known as 545 West 156th Street, New York City, the cost of which was $64,425 less sustained depreciation of *571 $2,000, the net cost being $62,425 and the profit $33,575. The selling price consisted of cash $15,000, first mortgage assumed by purchaser $38,000, and purchase-money second mortgage $43,000, payable $500 quarterly for eight years and the balance on April 10, 1932, all with interest. During 1924 petitioner received cash $1,000 in payment on this mortgage.
On or about May 1, 1924, petitioner sold for a price of $32,000 a piece of real estate known as 220 West 83rd Street, *2090 New York City, the cost of which was $24,604.17 and the profit $7,395.83. The selling price consisted of cash $5,000, first mortgage assumed by purchaser $15,000, and purchase-money second mortgage $12,000, payable $1,200 semiannually for five years, including May 1, 1929, all with interest. During 1924 petitioner received $1,200 in cash in payment on this mortgage.
The C.W.G. Realty Corporation, of which petitioner was secretary and a substantial one of three stockholders, desired in August, 1924, to buy from the Wynlow Realty Co. certain real property on 125th Street, New York City. Petitioner at that time advanced to the C.W.G. Corporation $5,000 to enable that corporation to make the down payment. Later, on December 1, 1924, he, at the request of the C.W.G. Corporation, assigned to the Wynlow Co. the two aforesaid purchase-money mortgages in part payment of the purchase price of the 125th Street property. The amount of such mortgages was then $42,000 and $10,800. The C.W.G. Corporation promised to repay to petitioner the amount of these advances, no definite time of payment being fixed, the understanding being that the corporation would pay when it could spare the money. *2091 No note was given. The corporation entered the amount of the advances, together with other amounts which it owed petitioner, all aggregating $62,834.06, as a liability to petitioner on its books of account. On December 30, 1924, petitioner received from the corporation as payment on this account a check for $20,000, which was paid January 2, 1925. During 1925 a further payment was made of $17,005.
OPINION.
STERNHAGEN: The petitioner in 1924 sold two properties for more than their cost, the price consisting of three items of payment, cash, the assumption of the first mortgage, and a promise to make deferred payments, secured by a purchase-money mortgage. Had the petitioner retained his position for the remainder of 1924, it would be necessary to consider whether his income from these sales was taxable in 1924 or spread by the installment method recognized by *572 section 212(d), Revenue Act of 1926, made retroactive by section 1208, and the regulations pursuant thereto. . But petitioner changed his position by disposing of the purchase-money mortgages and receiving instead the obligation on open account of the C.W. *2092 G. Corporation.
Petitioner seeks to have these two sets of transactions tied together and to have the open account excluded from his income because it was not cash, or, if not for that reason, because it was without market value. Each of these contentions must fail. The first transactions were completed in April and May. By no theory can they be projected into the later entirely separate transaction. Even if there had been a loss within the year from the later transaction, its only place in net income would be as an offsetting deduction against the gain already included in gross income. Unless there was some such deduction, the sales profit would remain in gross income to measure the net.
We find nothing in the evidence to establish a loss or other deduction. Treating the disposition of the purchase-money mortgages as an exchange for the open account of the C.W.G. Corporation, as for the purpose of the present problem it was, it can not be said that such account had no market value. It was a perfectly sound claim, upon which the corporation paid $20,000 within the year, and under section 202 its market value measures gain. From the balance sheet of December 1, 1924, introduced*2093 in evidence by petitioner, the corporation appears to have had assets of $298,619.59 with which to pay liabilities (including that of petitioner and excluding capital stock of $8,500) of $275,325.36, or over $85,000 with which to pay petitioner. There is no evidence of any weak or worthless items on the balance sheet. Two witnesses employed in the credit departments of large New York banks were shown the bare balance sheet and asked whether they would recommend loans to petitioner on the security of this claim. They testified that they would not, and this is said to prove a lack of market value. Without disregarding this testimony, we think it has not the significance which petitioner attributes to it. A bank employee might indeed disapprove a bank loan after a superficial investigation consisting only of this balance sheet with no description or analysis of its items, and yet the account may properly be regarded as entirely sound and of full value. This is more apparent when the valuation is being made as of December 31, a month later than the date of the balance sheet and after a payment has been made of $20,000.
Judgment will be entered for the respondent.