*2072 1. Petitioner and the Ford Realty & Construction Co. held not to be affiliated corporations, where from 19 to 24 per cent of the stock of the latter company was owned by those who were not stockholders in the petitioner.
2. The fair market value of certain land contracts taken upon sale of subdivided realty held to be 65 per cent of their face amount.
*608 The above proceedings were, without objection, heard together. They involve deficiencies in income tax for the years 1923, 1924, 1925, and 1926, in the respective amounts of $14,627.85, $4,207.79, $6,446.25, and $65.17. The errors alleged are (1) that for the years 1923, 1924, and 1925 the respondent has refused to compute the tax liability on the basis of the consolidated net income of petitioner and the Ford Realty & Construction Co., and (2) that respondent failed to compute the taxable profit from sales where land contracts were received for a large part of the selling price, on the basis of the fair market value of said land contracts, and erroneously considered said land contracts*2073 worth par or face value.
At the hearing the petition in Docket No. 37850, which relates to the year 1923, was amended to allege that said land contracts had no readily realizable market value.
*609 Upon motion of the parties it was ordered that the hearing be restricted to proof upon the issues of affiliation and market value of the land contracts involved, reserving for settlement under Rule 50 of the Board or for further hearing any controversy as to the detailed computation of the income of the alleged affiliated corporations.
FINDINGS OF FACT.
Petitioner is an Ohio corporation organized in 1922 with its principal office in the city of Cleveland. During the years in question its business was the subdivision of real estate which it sold in lots on a deferred payment basis, and the sale on commission and on a similar plan of deferred payments of lots of other corporations, including those of the Ford Realty & Construction Co., hereafter referred to as the Ford Co. It was the sole selling agent of the Ford Co., with which it maintained a joint office. The office force of both corporations was the same. During the years 1923, 1924, and 1925, all of the stock of*2074 petitioner was owned by S. S. Ford, E. H. Komlos, C. E. Sherry, and P. Miner, in equal amounts. The Ford Co. is an Ohio corporation organized in 1919, with a capital stock of $50,000, divided into 500 shares of the par value of $100 each. In November, 1919, all of the stock of the Ford Co. was issued to S. S. Ford, E. H. Komlos, C. E. Sherry, P. Miner, and J. R. Kraus, 95 shares each, and 25 shares to L. A. Kraus. On June 16, 1924, the stock owned by L. A. Kraus was transferred to P. Miner, S. S. Ford, E. H. Komlos, and C. E. Sherry in equal shares.
Practically all the sales of the lots owned by petitioner and the Ford Co. were made on a form of contract which was in general use in Cleveland and the material parts of which read:
PARTIES:
THIS AGREEMENT, made at Cleveland, Ohio, this day of A.D., 192 , by and between , a Corporation organized under the laws of the State of Ohio, hereinafter known as the "COMPANY," all reference herein to which shall be held to include its successors and assigns, and hereinafter known as the "PURCHASER," all reference herein to whom shall be held to include his, her or their respective heirs, executors, administrators, devisees and assigns:
*2075 DESCRIPTION:
WITNESSETH: That the COMPANY hereby agrees to sell and convey unto the PURCHASER subject to the terms and conditions hereinafter set forth, the following described premises:
PRICE:
The said PURCHASER agrees to buy said premises, and to pay therefor, the sum of Dollars as follows: Dollars in hand, the receipt whereof the Company hereby acknowledges, and the balance of Dollars.
*610 PAYMENTS:
In equal, consecutive monthly installments of not less than Dollars each, beginning one month after the date hereof, and continuing thereafter until the entire purchase price, together with the interest on the deferred portion thereof, is paid in full. The deferred balance of the purchase price shall bear interest at the rate of six per cent ( %) per annum, computed and payable semi-annually on the Fifteenth day of June and December of each year.
Overdue payments of principal or interest are to bear interest at the rate of eight per cent (8%) per annum.
Salesman or agent is hereby authorized to collect down payment only. All other payments due under this agreement are payable at the office of the Company, or such other place or places as it may designate.
*2076 TAXES:
The PURCHASER agrees to pay all taxes and assessments, and all other public charges, payable upon and for said lot due in 192 and thereafter.
GUARANTEE:
Now if the said Purchaser, heirs, executors, administrators or assigns shall well and truly pay the said purchase money, interest, taxes and special assessments, if any, named in this agreement, as the same become due and upon surrender to the Company of the duplicate contract of Purchaser, the said Company or its successors or assigns will well and truly make, execute and deliver unto the said Purchaser or said Purchaser's legal representative, a good and sufficient warranty deed and certificate of title of land aforesaid showing title to the said premises to be good in the grantor in said deed, subject to any mechanics liens or incumbrances caused by the acts of Purchaser and subject to the restrictions and stipulations herein named, otherwise free and clear from all incumbrances save taxes and assessments due and to become due which the Purchaser assumes and agrees to pay.
The usual cash payment was 25 per cent of the purchase price and the balance was payable 1 per cent per month. In its income-tax returns*2077 for 1923, 1924, and 1925 petitioner computed its gain from such sales on the installment sales basis. In its return for 1926 it computed such gain upon the basis of including such contracts in gross income at 65 per cent of their face value. The Commissioner recomputed income for all of the years involved by including such contracts in gross income at their face value. Such contracts when received had a fair market value of 65 per cent of their face value.
OPINION.
PHILLIPS: The petitioner claims to have been affiliated with the Ford Realty & Construction Co. during the years 1923 to 1925, inclusive, and entitled to have its tax computed upon the basis of a consolidated return of its income with that of the Ford Co. It appears that during the year 1923 the four persons who owned the stock of the petitioner also owned 76 per cent of the stock of the Ford Co. The remaining 24 per cent was owned by J. R. Kraus and L. A. Kraus. The claim for affiliation in 1923 is based upon *611 the contention that this minority stock was controlled by the four individuals owning the stock of the petitioner. Section 240(c), Revenue Act of 1921. The evidence fails to show any such*2078 control. On the contrary, it indicates that J. R. Kraus played a very important part in the affairs of the Ford Co.
The Revenue Act of 1924, section 240, omits all reference to control of stock for the purpose of determining affiliation and bases affiliation upon ownership of 95 per cent by the same interests. The petitioner contends that prior to 1924 J. R. Kraus had surrendered his stock in the Ford Co. and that during subsequent years the stock of that company was owned by the same individuals who owned the stock of petitioner. The oral testimony offered to support the view that there was a surrender of the stock is very indefinite and uncertain and is flatly opposed to the written records of the Ford Co. These records show that J. R. Kraus continued as a director and officer of the corporation until 1926 and attended and took an active part in the meetings of the directors. They also show that until 1926 he signed waivers and certificates as a stockholder of the company. It also appears that the formal affairs of the corporation were largely attended to by his nephew, L. A. Kraus, a lawyer, who, it is testified, was careful in handling details. In his testimony, given*2079 in 1930, J. R. Kraus is very indefinite in his recollection of the date when he terminated his connection with the company. Considering the testimony as a whole, it seems quite probable that there was no surrender of his stock by Kraus before 1926 and certainly the testimony is insufficient to justify an affirmative conclusion to the contrary. The claim for affiliation is denied.
The second question concerns the value at which certain land contracts are to be included in the computation of gross income. Some of the testimony would indicate that these contracts had no fair market value when received. An analysis of the evidence submitted, however, shows that during the years 1923 to 1925, inclusive, the petitioner made sales of some $331,000 upon which it collected $197,000 in cash, leaving an unpaid balance of $133,000 due upon such contracts at the close of 1925. Of the amount due, only $19,500 was delinquent for more than six months. Apparently there had been but few cancellations. These figures indicate a very small percentage of defaults and tend to establish financial responsibility on the part of those to whom the property was sold. They lend some support to the action*2080 of the Commissioner in valuing the contracts at their face amount. There is much testimony from qualified witnesses that these contracts could have been sold or used as collateral only at a substantial discount; a situation which we recognize as general in the case of junior liens on unimproved, *612 or even improved, realty. Considering the whole record, we reach the conclusion that these contracts had a fair market value of 65 per cent of their face. Although the sale of such contracts presents difficulties, the evidence indicates that such discounted value was readily realizable by the use of the contracts as collateral.
Decision will be entered under Rule 50.