1931 BTA LEXIS 1695">*1695 1. Life insurance premiums held not deductible.
2. Loss from employee's misappropriation of funds determined.
3. Commissioner did not err in including evidences of indebtedness at face value in computing gain from sales of real estate.
24 B.T.A. 98">*99 The Commissioner determined a deficiency of $10,930.56 for the year 1920 (Docket No. 24446) and deficiencies of $674.47 and $388.62 for 1922 and 1923, respectively (Docket No. 31769). The errors assigned and not waived are:
(1) The disallowance of premiums paid in each year on life insurance on the petitioner's life.
(2) Disallowing a loss of $9,000 in 1920 on uncollectible items owed the petitioner.
(3) Incorrect computation made by the Commissioner of taxable income for 1920 from sales of real estate not on the installment plan by taking evidences of indebtedness at full face value.
The Commissioner made claim at the hearing to increase the deficiencies for 1922 and 1923 if any reduction in the value of notes was made for 1920.
FINDINGS OF FACT.
The petitioner is an individual who resides1931 BTA LEXIS 1695">*1696 in Washington, D.C. During the years 1920 to 1923, inclusive, he conducted a general real estate business in Washington.
During the years 1920, 1922 and 1923 the petitioner paid $1,209.75, $2,592.25 and $3,975.41, respectively, as annual premiums on life insurance policies taken out on his life in which his estate was named as beneficiary. He never assigned the policies as collateral on any loans during these years. He included the policies in his financial statements for the purpose of obtaining credit. He deducted these amounts in his income-tax returns as ordinary and necessary expenses of his real estate business and the Commissioner disallowed the deductions.
The petitioner began business as an individual in March, 1919. From that time until May 6, 1920, he had in his employ a woman, named Mack, who took more than $10,000 of his money by various illegal means. She took at least $2,975.35 in 1919 and at least $7,560.66 in 1920. On May 6, 1920, she was caught in an attempt to raise one of the petitioner's checks from $50 to $350, admitted that she had taken at least $10,000 from him, promised to try to repay him, and transferred a piece of property to him for this purpose. 1931 BTA LEXIS 1695">*1697 The fair market value of this property in 1920 was $2,000. The petitioner sold it in 1921 for $1,961.03. She had no other property and the petitioner never recovered any more of the amount taken from him. In 1920 the petitioner sustained a loss of $7,560.66 in this connection. The Commissioner allowed a deduction of only $1,000 of this loss in 1920.
24 B.T.A. 98">*100 In 1920 the petitioner made the following sales of real estate:
| Notes received | |||
| Property sold | Original trust | Balance due | Term |
| 12/31/20 | |||
| 1919 Kenyon Street | $3,500.00 | $2,924.47 | 4 yrs. 4 mo. |
| 1929 Kenyon Street | 5,279.56 | 2,916.16 | 3 yrs. |
| 6517 Eighth Street | 3,350.00 | 2,992.69 | 3 yrs. 5 mo. |
| 6516 Eighth Street | 1,250.00 | 1,250.00 | 4 yrs. 1 mo. |
| 703 Van Buren Street | 3,840.00 | 3,403.54 | 6 yrs. 2 mo. |
| 725 Florida Avenue | 800.00 | 558.38 | 2 yrs. 5 mo. |
| 402 15th Street | 1,650.00 | 1,011.44 | 3 yrs. |
| 2112 4th Street | 4,041.11 | 1,233.53 | 6 yrs. 6 mo. |
| 1 (a) 2,753.00 | 9 yrs. 11 mo. | ||
| 4015 14th Street | 996.31 | 2,637.63 | 4 yrs. 8 mo. |
| 630 Irving Street | 960.31 | 912.65 | 4 yrs. 10 mo. |
| 523 Logan Street | 1,150.00 | 1,084.27 | 8 yrs. 1 mo. |
| 3726 Northampton Street | 1,625.00 | 1,448.48 | 9 yrs. 2 mo. |
| 312 13th Street | 1,900.00 | 1,639.35 | 5 yrs. 10 mo. |
| $200 1 yr. | |||
| Lots 27 and 28, square | (b) 1,600.00 | 1,100.00 | $200 30 mo. |
| 3165 | $700 3 yrs. | ||
| $150 18 mo. | |||
| Lots 63 and 64, square | (b) 1,600.00 | 1,050.00 | $300 2 yrs. |
| 3164 | $300 30 mo. | ||
| $300 3 yrs. | |||
| $100 3 mo. | |||
| $100 9 mo. | |||
| $100 12 mo. | |||
| $100 15 mo. | |||
| Lots 67-68, square 3164 | (b) 1,800.00 | 1,233.33 | $100 21 mo. |
| $100 27 mo. | |||
| $33.33 30 mo. | |||
| $100 33 mo. | |||
| $700 36 mo. | |||
| $1,000 18 mo. | |||
| $350 24 mo. | |||
| Lots 35-36-37, square | |||
| 3197 | |||
| Lots 26-27-28, square | (b) 6,200.00 | 4,050.00 | $1,000 30 mo. |
| 3194 | |||
| $1,700 36 mo. | |||
| $100 3 mo. | |||
| $100 9 mo. | |||
| $100 15 mo. | |||
| $100 21 mo. | |||
| Lots 72-73, square 3196 | (b) 2,100.00 | 1,500.00 | $100 24 mo. |
| $100 30 mo. | |||
| $200 33 mo. | |||
| $700 36 mo. | |||
| $100 15 mo. | |||
| $230 18 mo. | |||
| $100 21 mo. | |||
| Lot 18, square 3170 | (b) 1,600.00 | 1,230.00 | $100 24 mo. |
| $100 27 mo. | |||
| $100 33 mo. | |||
| $500 36 mo. | |||
| $250 18 mo. | |||
| $160 24 mo. | |||
| Lots 14-15, square 5170 | (b) 2,300.00 | 1,710.00 | $250 30 mo. |
| $1,050 36 mo. | |||
| $345 12 mo. | |||
| Lots 55-56, square 2970 | (b) 3,000.00 | 2,345.00 | $1,000 24 mo. |
| $1,000 36 mo. |
In the case of all sales except some of those marked "(b)" the notes were payable monthly.
In computing the income from the above sales, the Commissioner included all notes at full face value.
The parties entered into a stipulation as follows:
In connection with twenty-two transactions of real estate on the so-called deferred payment sales plan, which sales were the subject of testimony by the 24 B.T.A. 98">*101 petitioner's witness, the total amount outstanding on second and third trust notes as at December 31, 1920 was $38,176.76.
Of the above amount of $38,176.76 collections were made as follows:
| 1921 | $20,278.99 |
| 1922 | 2,106.60 |
| 1923 | 6,661.79 |
Of the notes referred to above all except one were second trust notes. The one third trust note was collected in full during 1921, so that all of the collections for 1922 and 1923 referred to above pertain to second trust notes.
Inasmuch as the years 1920, 1922 and 1923 are before the Board, it is agreed that should the Board find that the fair market value of the second trust notes on hand as1931 BTA LEXIS 1695">*1699 at December 31, 1920 was less than their face value, then the percentage by which the face value of such notes is discounted to arrive at their market value as at December 31, 1920, should be applied to the collections thereon for 1922 and 1923 to ascertain the amounts by which taxable income for 1922 and 1923 should be increased.
OPINION.
MURDOCK: The petitioner is not entitled to deduct the insurance premiums. ; ; ; certiorari denied, . But he is entitled to deduct $7,560.66, instead of $1,000, as a loss sustained in 1920. Section 214(a)(4) of the Revenue Act of 1918.
The only other issue relates to the proper way of reporting the profit from 22 sales of real estate made in 1920. The Commissioner included certain notes in the computation at full face value. The petitioner contended that these notes were not worth full face value, and should only be included in the computation of profit at their fair market value, which was, he claims, 75 per cent of their face value. After some testimony had been received, 1931 BTA LEXIS 1695">*1700 counsel for the respondent, as an alternative in case any change was made in this connection, made claim for increased deficiencies for 1922 and 1923, based upon collections made in those years on notes taken in the 1920 transactions. He stated that it would then make little difference in the total deficiencies whether the notes were included in 1920 at face or less than face value. The presiding Member suggested that the parties consider the figures and settle the whole case by agreement. They have not filed any such agreement. No brief has been filed and no argument has been made on behalf of the petitioner. Perhaps he is satisfied with the Commissioner's treatment of these notes.
The petitioner did not sell or part with any of the notes in question in 1920. He said he did not have to and would not sacrifice them in that year. He preferred to hold them and collect on them. They were secured by the properties sold. The purchasers had substantial 24 B.T.A. 98">*102 equities in the properties by the end of 1920. Over 50 per cent of the unpaid balance of the second and third trust notes at the end of 1920 was paid in 1921 and by the end of 1923 over 76 per cent of this balance1931 BTA LEXIS 1695">*1701 had been paid. Some were not then due. As payments were made, the equity of a purchaser increased and the security for the note improved. We do not know that the petitioner ever lost one cent on any of the notes in question. The evidence is not convincing that under the Revenue Act of 1918 the computation made by the Commissioner of the profits on these sales was erroneous.
Judgment will be entered under Rule 50.
Footnotes
1. All notes were second trust notes except that one marked "(a)" was third and those marked "(b)" were first. ↩