*697 This proceeding was brought to redetermine deficiencies in the income tax of the petitioners for the years 1923 and 1924 in the sums of $14,594.42 and $4,240.54, respectively.
The petitioners allege the following errors on the part of the respondent:
(1) Determination of an increase in rents from 72 houses and failure to allow proper depreciation thereon.
(2) Allowance of 2 per cent depreciation rate on the said 72 houses and one other building, a former saloon.
(3) Determination that the value of such 72 parcels of property and one other as of March 1, 1913, was $581,914.34, instead of $765,500 as claimed by the petitioners.
By his amended answer the respondent asserts that the proper measure of value of the 72 houses is their cost on March 28, 1913, and of the former saloon, its cost in August, 1918.
FINDINGS OF FACT.
Claus Doscher was one of a group of six men who formerly had been engaged in the sugar industry, but whose business had been *698 absorbed by the American Sugar Refining Company. *1485 In about 1892 they organized the German American Improvement Company, a corporation, for the purpose of acquiring a large tract of unimproved land in the New Lot Section of Brooklyn, New York. Promptly upon securing possession of that property the company proceeded to improve it by laying out streets and avenues, paving streets, constructing sidewalks, installing a water and sewer system, securing gas service and obtaining and supplying other comforts and conveniences desirable in the development of urban residential property. The company also built houses and disposed of them in order to stimulate the sale of lots. In 1900 the six stockholders of the German American Improvement Company divided the remaining unsold lots among themselves. Claus Doscher received 1,000 unimproved lots in exchange for his interest in the company. He and two of his sons, John and Charles, undertook to sell the lots and proceeded to do so with rather indifferent success until 1907, when he became convinced that he could dispose of his remaining holdings, consisting of 200 lots, only by erecting houses and other buildings on the lots. Thereupon he negotiated with one Edward W. Lauer, a building contractor*1486 who had built a few houses for lots owners in the neighborhood. Doscher and Lauer entered into an agreement which provided that Doscher would provide the land and advance the money necessary to construct dwellings and stores on the lots; that Lauer would erect the buildings thereon; that the legal title would be conveyed to Lauer's wife; that Lauer, through his wife, would give Doscher a first mortgage on the several lots to cover the value of the land itself and a second mortgage for the balance due on the construction cost; and that at the close of the operations Lauer would account for all sales, the profits thereon being divided equally between Doscher and Lauer, and would either give Doscher a second mortgage on the unsold houses and lots to cover the amount due him or would reconvey such unsold property to Doscher. The 200 lots were conveyed to Mrs. Lauer without the payment of any consideration or the execution of notes by her or her husband and a mortgage was executed by the Lauers to Doscher. No written contract covering such agreement could be found. This agreement was not carried out strictly according to its terms, especially with respect to the giving of second mortgages*1487 or the reconveyance of title to Doscher on termination.
The profits accruing from the first sales were reinvested in the enterprise, new buildings were constructed and the profits derived from their sale were in turn used to develop the remainder of the lots.
Claus Doscher died in July, 1910. At that time Lauer had built and sold 128 houses and the remaining 72 buildings were completed *699 in August, 1910. No accounting with Doscher had been made by Lauer before the former's death. Doscher had implicit confidence in Lauer's ability and integrity and had advanced large sums to finance their venture merely on Lauer's request. Doscher's books showed $190,614.34 so paid to Lauer. Doscher was extremely liberal and indulgent with Lauer and their business relations were on a very informal basis.
Upon Doscher's death representatives of his estate conferred with Lauer for the purpose of securing an accounting and effecting a settlement of the business affairs of Doscher and Lauer. At first Lauer denied that he owed Doscher anything and repudiated the terms of his agreement, but later consented to submit a statement of profits "at the proper time." Shortly thereafter Lauer*1488 transferred 22 of the best houses to persons unknown to the Doscher interests. J. Stewart Ross, Lauer's attorney, stated that Lauer had undertaken his own scheme of adjustment and would do nothing further in the case. Thereupon, about December 22, 1910, Doscher's executors began a suit for specific performance, which resulted, during February, 1912, in a judgment for the executors. Lauer appealed. It was found that he was judgment-proof and the case was finally settled in November, 1912, by Lauer's agreement to reconvey the 72 houses to the executors in consideration of a general release of all claims against him, including the $190,614.34 advanced by Doscher and $30,000 interest thereon, and the payment by the executors of $15,000 in legal expenses and disbursements, $301,300 to extinguish the first mortgage and $45,000 interest thereon, or a total of $581,914.34, and also the payment of three years back taxes in an undetermined amount. The execution of the deed from Lauer and his wife to the executors was delayed on account of difficulty encountered by Lauer in securing the reconveyance of one of the houses sold by him and accordingly was not accomplished until March 28, 1913.
*1489 In 1923 the 72 buildings were sold at public auction for $697,500. The purchasers of 10 houses, however, failed to comply with the terms of sale and the said 10 houses were resold in January or February, 1924, for $114,200. Therefore, the petitioners accounted for $583,300 in their return for 1923 and $114,200, in their return for the year 1924.
In the petition appear the following statements:
The excutors, acting on the advice of the six devisees and legatees under the will of Claus Doscher, who desired to avoid further expense of litigation, accepted the transfer of the houses to the estate and abandoned all efforts to collect anything by way of profits from the Lauers. The result was that in taking over these houses according to the transaction above outlined, the executors of the estate expended $581,914.34 as follows:
| Lauer claim | $190,614.34 |
| Interest on same | 30,000.00 |
| Legal expenses and disbursements | 15,000.00 |
| Amount of first mortgages | 301,300.00 |
| Interest due on same | 45,000.00 |
*700 The transfer and conveyance of the seventy-two houses by the Lauers to the executors of the Estate of Claus Doscher were made on March 28, 1913. Thus the*1490 executors in their income tax return for 1923 and 1924 stated that the property cost them said sum, namely, $581,914.34.
Charles Doscher, son of Claus Doscher, and one of the executors managed the estate of his father with the assistance of H. F. Cochrane, an attorney. Charles Doscher died in 1922. Henry Doscher, his brother, filed returns for the estate for the years 1923 and 1924. In 1925 he acquiesced in a depreciation rate of 2 per cent on a valuation of $286,208.79, used by the respondent in the computation of the tax for those years. He understood that such valuation was for depreciation purposes only, was based on the cost to the estate of repossessing the 72 houses, and did not represent either the original cost to Claus Doscher or the March 1, 1913, value of such property.
The fair market value of the 72 buildings on March 1, 1913, was $750,000.
The former saloon property on Myrtle and Hamburg Avenues was purchased in 1918 by the petitioners from the trustee in bankruptcy for the Franklin Brewing Company for $15,000 and sold in 1923 for $28,000.
OPINION.
VAN FOSSAN: The petitioners presented no evidence to support their allegations of error (1) and (2) and*1491 their counsel made no reference thereto in his brief. Therefore, we conclude that they have abandoned such issues and we approve the action of the respondent in respect thereto. The petitioners concede that the former saloon situated at Myrtle and Hamburg Avenues was assigned a proper cost of $15,000 and that a profit of $13,000 was realized upon its sale in 1923.
The only issue remaining in controversy is that respecting 72 parcels of improved real estate situated in the New Lot Section of Brooklyn, New York.
It is unnecessary to recount the circumstances under which Claus Doscher acquired his property. In 1907 he owned 200 lots which he had difficulty in selling as unimproved real estate. Thereupon he entered into an agreement with Edward W. Lauer, a building contractor, in whom he had the utmost confidence, whereby he and Lauer would engage in the project of erecting dwellings and other buildings on all the 200 lots and selling for profit the parcels of real *701 estate thus improved. Doscher was to furnish the land and to advance the money required to finance the operations. Lauer was to have complete charge of constructing the buildings, keep all accounts, make*1492 all sales, arrange all details of sale and collect all amounts due from the purchasers. The profits derived from the enterprise were to be divided equally and Lauer was to make a full accounting therefor after all buildings were erected and sold. As a matter of convenience and to relieve him of the unavoidable details incident to conveying title to purchasers, the possible necessity of repossession, etc., Doscher conveyed title to the entire 200 lots to Lauer's wife. This conveyance was without consideration and no purchase money notes were given. A first mortgage covering the land was given by the Lauers to Doscher.
Pursuant to the agreement, up to July, 1910, 128 houses and other buildings had been constructed and sold. The proceeds and profits therefrom had been used as a revolving fund to aid in the building of the remaining 72 structures. Claus Doscher died in that month. Shortly thereafter the 72 buildings were completed, but Lauer made no move to account for the profits, and, on being approached, at first refused to recognize any liability to Doscher's estate. In December, 1910, Doscher's executors were forced to bring suit for specific performance. They were successful*1493 in the trial court and obtained a judgment. Lauer appealed. When it was discovered that a judgment against him could not be enforced, the case was compromised in November, 1912, by his agreeing to reconvey the property in controversy to the petitioners upon their releasing all claims against him, including the profits made on the 128 houses but unaccounted for by him. Due to difficulty in securing a reconveyance of one house, the formal conveyance was not made until March 28, 1913.
In order to clear the property of all liens and charges against it, including the advances made by Doscher to Lauer and legal expenses and disbursements, the petitioners were compelled to pay $581,914.34 and a certain amount for back taxes. The respondent has assumed that such sum was the actual cost to petitioners of the 72 parcels of improved real estate and has computed the alleged deficiency on that basis. In this we believe him to be in error.
But, assuming the correctness of respondent's theory, patently the sum of $581,914.34 used by the respondent in his computation in determining profit could not be the true cost. That amount represents merely the sum required to discharge obligations*1494 against the property and to settle the matters in controversy between the petitioners and Lauer. It does not include back taxes nor does it take into account the profit due to the Doscher estate from the sale of *702 the 128 buildings previously erected and disposed of by Lauer. No accounting of the cost of construction of the 200 structures or any of them built by Lauer was ever made by him.
From the facts heretofore set forth, however, it is obvious that the transaction by which Mrs. Lauer acquired title to the lots in question was in no sense a sale to her. No consideration for the transfer was paid by either Lauer or his wife. She held the record title solely to facilitate and expedite their real estate operations. Likewise, the formal return of the record title to the petitioners under the compromise settlement with Lauer, whereby they relinquished all claims for profits due to Doscher's estate and paid a definite sum to clear the encumbrances thereon, except taxes, was not an acquisition of property as contemplated by the statute. The real ownership of the property had never left Claus Doscher or his successors. *1495 He contributed to the project the land and funds necessary to conduct the contemplated operations, while Lauer supplied his ability and skill as a builder and contractor, superintended construction, made sales, collected balances due from purchasers and managed the undertaking generally. Though record title was transferred to Lauer's wife, she became only a nominal owner, the transfer to her being charged with a trust in favor of Doscher, who was the real owner of the property. . At most, the entire settlement proceedings, from the institution of the action by the petitioners to formal reconveyance made on March 28, 1913, served only to restore to the petitioners the record title to property of which Claus Doscher, and hence the petitioners as representatives of his estate, had at all times been the real owners. Thus, we may disregard March 28, 1913, the date of the deed from Mrs. Lauer to the petitioners, as forming the basis of calculating the gain or loss resulting from the sale of the property in 1923 and treat the transaction as one in which title existed in petitioners prior to March 1, 1913.
Consequent on the above*1496 reasoning, we hold that the correct basis of calculating gain or loss on the subsequent sale of the 72 parcels is their fair market value as of March 1, 1913. This we have found to be $750,000. Since the property was sold for $697,500 there is no gain for the years 1923 and 1924.
Reviewed by the Board.
Judgment will be entered under Rule 50.