1931 BTA LEXIS 1758">*1758 Upon the transfer of property held in a joint venture, with the distribution of the resulting proceeds a taxable transaction occurs upon which gain or loss should be computed, even though the joint adventurers remain liable on their purchase money mortgage.
23 B.T.A. 1148">*1148 This is a proceeding for the redetermination of a deficiency of $2,726.69, income and profits taxes for the calendar year 1925. The petitioner alleges that the respondent erred, (1) in determining that she realized any taxable gain from the sale of certain real estate, and (2) in determining that there was any deficiency in tax due from petitioner for the year 1925.
In computing the deficiency respondent assumed that the stock of the Amaread Holding Company had no readily realizable market value, and that petitioner's taxable gain was the difference between the cash paid in and the cash she received on the sale, namely, $18,142.05.
FINDINGS OF FACT.
The parties have filed a stipulation of facts and from this stipulation we set forth verbatim only such1931 BTA LEXIS 1758">*1759 facts as are essential to the determination of the issue in controversy, as follows:
* * *
The petitioner is a citizen of the United States and a resident of the city of Milwaukee, State of Wisconsin, having her post office address in care of Charles F. Fawsett, 425 East Water Street, Wilwaukee, Wisconsin.
* * *
In the early part of the year 1925, the petitioner and the firm of Flower Brothers, real estate brokers of Orlando, Florida, entered into a joint adventure for the purchase and resale of 10,474.82 acres of unimproved land in Orange County, Florida, at the price of $10 per acre upon the terms that they would contribute equally to the purchase price, and share equally in the profits or losses of the transaction. In carrying out the undertaking H. K. Flower of the firm of Flower Brothers acted throughout the transaction for both parties.
The undertaking was carried out and resulted as follows:
An agreement was entered into by said H. K. Flower with the Orange Naval Stores Company, the owner of the property, to purchase said property upon terms of not less than one-fourth cash, to balance to be secured by a mortgage on the property. The agreement was consummated1931 BTA LEXIS 1758">*1760 on or about May 7, 1925, by a conveyance by said Orange Naval Stores Company as grantor to H. K. Flower, trustee, as grantee, * * * upon the terms that $29,748.20 23 B.T.A. 1148">*1149 was paid in cash and the balance of the purchase price $75,000 was secured by mortgages on the property.
Of the cash payment of $29,748.20 made at or about the time of the conveyance to the said H. K. Flower, trustee, $25,548.20 was provided by the petitioner and Flower Brothers in equal shares, and $4,200 was the proceeds of the sale of 280 acres of said land which was sold by H. K. Flower for the benefit of petitioner and his said firm before the time for the conveyance and afterwards paid and applied on the purchase price. Of the mortgages assumed to secure the payment of the balance of the purchase price, the principal sum of $35,000 was the balance remaining unpaid on a mortgage dated the 15th of July, 1924, and $40,000 was a purchase money mortgage dated May 7, 1925, given by the grantee H. K. Flower individually and as trustee to the grantor Orange Naval Stores Company contemporaneously with said conveyance, to secure four promissory notes in the sum of $10,000 each, dated May 7, 1925, bearing interest1931 BTA LEXIS 1758">*1761 at the rate of 7 per cent. Both the notes and mortgage were signed H. K. Flower individually and as trustee.
Thereafter to effect the resale of the property, a corporation was promoted and organized by the said H. K. Flower under the laws of Florida entitled the Amaread Holding Company with an authorized capital stock of 1,400 shares of the par value of $100 per share of which 1,000 shares at $100 per share were subscribed and paid for by others than the petitioner and the concern of Flower Brothers upon the understanding that the property referred to would forthwith be conveyed to the corporation for $85,000 cash, subject to the mortgages above stated upon which there remained unpaid the principal sum of $75,000, and the issuance to the petitioner and Flower Brothers as full paid stock the 400 shares of said property to said corporation. Upon the consummation of the conveyance of said property to said corporation its sole assets consisted of the property so conveyed to it and the balance of the proceeds of a subscription to its capital stock which amounted to approximately $11,000, and as stated above its entire authorized stock was then issued as fully paid and nonassessable1931 BTA LEXIS 1758">*1762 stock.
After payment of commissions and other expenses in connection with the sale of said property to said corporation, the petitioner's share of the net proceeds of said sale was $30,916.15 in addition to 200 shares of stock in said corporation issued to and received by her as part of the purchase price of said property by said corporation as aforesaid.
No further returns or payments whatsoever have been received by the petitioner from said transaction. The sum of $12,774.10 being one-half of said sum of $25,548.20 was paid by the petitioner in the month of May, 1925, as her share of the cash payment required for the purchase of said property, and said sum of $30,916.15 was received by the petitioner in or about the month of July, 1925, as her distributive share of the cash payment made for said property on the resale thereof to it as aforesaid.
23 B.T.A. 1148">*1150 Said land so purchased by said corporation was wholly unimproved, was wild and uncultivated, and was acquired by the corporation at the price stated during a period of inflation of real estate values throughout the state of Florida, and it is agreed that the 200 shares of stock of the corporation received by the petitioner1931 BTA LEXIS 1758">*1763 in 1925 was speculative and had no fair or determinable market value.
Shortly after the acquisition of said property by said corporation, to-wit, within one year thereafter, the activity in real estate sales and the inflation in the values or real estate which had theretofore generally prevailed throughout the state of Florida collapsed without any of said property having been sold by the corporation.
After payment for said property in the manner aforesaid and other expenses incurred in connection with the promotion and organization of said corporation, said corporation had on hand only about the sum of $11,000 from the proceeds of the issuance and sale of said 1,000 shares of stock before referred to, and no other property or assets whatsoever excepting said land which was subject to said mortgages, aggregating the principal sum of $75,000, a portion of which bore interest at the rate of 6 per cent and the remainder at the rate of 7 per cent. All of the stock of said corporation had been subscribed and issued as fully paid and non-assessable as aforesaid and it had no other available resources to meet the carrying charges of said property including taxes and interest, or instalments1931 BTA LEXIS 1758">*1764 of the principal as the same became due and payable under said mortgages. The entire amount of the balance of the proceeds from the issuance and sale of said stock, to-wit, about the sum of $11,000 as above stated was exhausted sometime in the year 1926 in the payment of taxes, interest and carrying charges of said property. During the years 1926 and 1927 to provide the necessary funds to pay the carrying charges of said land such as interest, taxes, etc., and to prevent the foreclosure of said mortgages, assessments were from time to time made upon the stockholders of said corporation in proportion to their holdings for which they were not legally liable but which they were requested to voluntarily pay. Such assessments so made against the petitioner on account of the stock held by her in said corporation and the date of the payment thereof by her are as follows:
| Amount of assessment | Date paid |
| $800.00 | July 30, 1926 |
| 1,204.00 | January 20, 1927 |
| 300.00 | May 20, 1927 |
| 900.00 | July 12, 1927 |
| 1,600.00 | April 26, 1927 |
Such assessments were voluntarily paid by the petitioner as her ratable proportion of the assessments made upon the stock of said corporation solely1931 BTA LEXIS 1758">*1765 to avoid the foreclosure of said mortgages.
After the year 1927 a number of the stockholders of said corporation were unable or refused to respond to any further or additional assessments and as all of the stock had been issued as fully paid and non-assessable stock, said corporation was unable to collect, or receive any further assessments from the stockholders and was left entirely without means or resources to pay further instalments of interest or principal or taxes as the same accrued and became due under said mortgage with the result that in the spring of 1930 a suit to foreclose both of said mortgages was instituted and on the 21st of April, 1930, at which date the principal of said $75,000 mortgages had been curtailed by payments to $45,000 a decree of foreclosure and sale was entered in said suit 23 B.T.A. 1148">*1151 for the sum of $45,000 principal, $14,402.52 interest and $6.48 court costs, and thereafter on the 2nd of June, 1930, said property was sold at foreclosure sale under said decree for the sum of $59,755.59, the amount of said foreclosure judgment with interest to the date of sale, with the result that there was no deficiency and consequently no grounds for a deficiency1931 BTA LEXIS 1758">*1766 judgment.
The said H. K. Flower who took the title to said property in said conveyance thereof from the Orange Naval Stores Company in his own name as trustee acting for the petitioner and his firm as aforesaid and who as the grantee in said deed assumed and agreed to pay said mortgage dated July 15, 1924, as part of the purchase price of said property, and who also as a part of the purchase price of said property made, executed and delivered the four notes of $10,000 each, and the purchase money mortgage on said property dated the 7th of May, 1925, as aforesaid executed by him individually and as trustee, was never at any time prior to said foreclosure sale released from such liability on said mortgages or said notes as resulted from the facts hereinbefore stated, but was released from all such liability by the sale of said property at foreclosure sale for the amount of the mortgage debt with interest and costs as aforesaid.
Said corporation, the Amaread Holding Company was promoted and organized as aforesaid solely for the purpose of acquiring and of reselling said property and it was never at any time engaged in any other business and never at any time had any property, assets1931 BTA LEXIS 1758">*1767 or resources except as above stated, and upon the foreclosure of said mortgage as aforesaid said corporation was left wholly without assets.
In taking the conveyance of said property in his own name as trustee and in assuming individually and as trustee as aforesaid to pay said mortgage of July 15, 1924, and in giving said purchase money mortgage of May 7, 1925 as a part of the purchase price of said property taken by the said H. K. Flower in his own name as trustee, the said H. K. Flower acted for the petitioner and his said firm as the parties in interest to said joint adventure as first above stated, and it was at all times understood and agreed between the petitioner and the said H. K. Flower that the petitioner had an equal one-half interest in said undertaking with the said firm of Flower Brothers, and that the petitioner as between her and the said H. K. Flower and said Flower Brothers was liable for and agreed to assume and pay one-half of any liability assumed by the said H. K. Flower in connection with the transactions above referred to.
Said mortgage dated July 15, 1924, was originally for the sum of $45,000 and the payments of principal made thereon prior to the foreclosure1931 BTA LEXIS 1758">*1768 thereof with the dates of such payments were as follows:
| 2/ 9/25 | $5000.00 |
| 7/16/25 | 5000.00 |
| 1/15/26 | 5000.00 |
| 7/23/26 | 5000.00 |
| 1/28/27 | 5000.00 |
| 7/10/27 | 4000.00 |
| 10/22/27 | 1000.00 |
The only payment made on said mortgage dated May 7, 1925, was $10,000 made May 7, 1926, being one of the four promissory notes above referred to for which said mortgage was given to secure and which said note matured on the 7th of May, 1926.
* * *
23 B.T.A. 1148">*1152 As to all other facts we find them to be as set forth in the stipulation, which is on file in this proceeding and is incorporated herein by reference as if set forth fully.
OPINION.
MCMAHON: The petitioner contends that the above facts show that the joint adventure "was not closed until the 2nd day of June, 1930, during all of which time the amounts paid and liabilities incurred in the adventure exceeded the returns therefrom and until the adventure was closed it could not be known or determinable whether there would be a profit or loss in the adventure," and that "there was therefore no determinable taxable gain to the petitioner in 1925 or until the adventure was closed in 1930." In her argument petitioner points1931 BTA LEXIS 1758">*1769 out that she contributed $12,774.10 in cash toward the purchase price "and $20,000 of absolute unconditional liability on the notes making the sum of $32,774.10 which continued unabated throughout the year 1925, * * *"; and that since the latter sum is in excess of the amount she received, that is, $30,916.15, "there can be no net profit or taxable gain from a sale of property until" she "has received more than" she "paid including the amount" she "is obligated to pay."
Questions of postponing tax liability until transactions have been concluded in later years have been before the Board in numerous cases and we have uniformly held that the income tax is imposed on an annual basis, and its imposition can not await the winding up of a business, but is imposed annually upon the gains which arise from transactions from year to year. ; ; ; ; 1931 BTA LEXIS 1758">*1770 ; ; affd., ; and .
In the last mentioned case the Board, in speaking of the principle for which petitioner is now contending, said (p. 197):
* * * Upon the petitioner's theory its tax liability can be projected indefinitely into the future and, in effect, the Government must assume the hazards of the business with no share in its management and must await collection of its revenue until it is the petitioner's pleasure to conclude its operations. Speaking of an analogous contention, the Board said, in , that it "would enable a taxpayer to postpone indefinitely the return of income which has actually been received, which result in our opinion, is inconsistent with the theory of the tax laws."
There can be no doubt in this case that petitioner realized a taxable profit of $18,142.05, nor is there any doubt about the year 1925 being the year in which such profit was actually received. Since there is no evidence to show whether petitioner1931 BTA LEXIS 1758">*1771 operated upon the 23 B.T.A. 1148">*1153 cash receipts and disbursements or upon the accrual basis, we must assume that she operated upon the former basis. , and . The only question is whether the liability of the petitioner upon the notes and the mortgages is such as to prevent us from holding that a taxable transaction occurred in July, 1925. We think the stipulated facts amply support and corroborate the conclusion that the transaction was closed and completed for income-tax purposes in 1925. After July, 1925, there was a possibility that petitioner would have to meet her pro rata share of the promissory notes given in purchase of the real estate, since the mortgagee could waive the mortgage and sue on the notes. ; . However, this possibility at the end of the calendar year 1925 was so remote that the respondent was justified in holding that a taxable transaction resulted then upon the transfer to the corporation. 1931 BTA LEXIS 1758">*1772 . If we are to look to the facts occurring subsequent to the taxable year, then the conclusion is inescapable that petitioner realized her gain in 1925, because the proceeds of the foreclosure sale were sufficient to satisfy the unpaid balances on the mortgages.
We have examined , cited by petitioner in her brief, which was reversed by the U.S. Court of Appeals, Sixth Circuit, March 6, 1931, and we are satisfied that it is distinguishable from the instant proceeding.
Decision will be entered for the respondent.