*1819 In February, 1926, petitioner sold two parcels of real estate receiving cash payments not in excess of one-fourth of the purchase price and later in that year distributed the installment obligations, together with other assets of a lesser value, to its sole stockholder in payment of a liquidating dividend and a debt owing to the stockholder. The amounts received from the vendees during the year increased by the proportionate part of the installment obligations applied to the indebtedness exceeded one-fourth of the purchase price. Held, that the petitioner is not entitled to report the profits from the sales upon the installment basis.
*797 This proceeding involves a deficiency in petitioner's income tax for the year 1926 in the amount of $16,172.08. At the hearing, respondent confessed error with respect to the inclusion in petitioner's income of an item of $2,589.96 representing an accrued interest item. The only remaining issue as raised in the amended petition*1820 and answer is whether the petitioner is entitled to report the gain from sales of real estate in 1926 upon the installment basis.
FINDINGS OF FACT.
The petitioner was a New York corporation. A certificate of dissolution was issued to it under the Stock Corporation Law of that State on August 25, 1926. During 1926 its sole stockholder was the estate of Rudolph Simon.
The petitioner on February 10, 1926, sold a certain parcel of real estate, referred to as parcel No. 1, for a total consideration of $205,000, receiving a cash payment of $40,000 and two purchase money mortgages of $82,500 each, payable $625 on May 10, 1926, and quarterly thereafter until August 10, 1929, when both mortgages were to become due and payable. Interest at the rate of 6 per cent was payable on May 10, 1926, and quarterly thereafter. During 1926 the petitioner received further cash payments from the vendee upon the purchase money mortgages aggregating $2,500. The cost of the property to the petitioner was $76,697.50. The total profit to be realized was $128,302.50. At the time of the sale the estate of Rudolph Simon held mortgages on the property of a face value of $47,500, which the estate released*1821 in order that the petitioner might convey a clear title.
On February 15, 1926, the petitioner sold another parcel of real estate, referred to as parcel No. 2, for a total consideration of $19,000. It received a cash payment of $4,750 and a purchase money mortgage for the balance, payable on February 11, 1929, with interest at 6 per cent payable May 11, 1926, and quarterly thereafter. The cost of this property to the petitioner was $16,000 and the total profit to be realized from the sale was $3,000. At the time of the sale the estate of Rudolph Simon held a first mortgage on the property of the face value of $8,000 which it likewise released in order for the petitioner to convey clear title.
The petitioner treated the amounts of the aforesaid mortgages released by the estate of Rudolph Simon as accounts payable by *798 it to the estate. On May 12, 1926, it made a cash payment to the estate in the amount of $20,000 on account of the parcel No. 1 mortgages.
The petitioner in November, 1926, paid to its sole stockholder, the Rudolph Simon estate, a liquidating dividend of $150,833.40 and a debt of $41,758.71 with the following assets:
| Mortgage received in connection with the sale of real estate designated as parcel No. 1 (face value $82,500 less installment payments paid of $1,250) | $81,250.00 |
| Mortgage received in connection with the sale of real estate designated as parcel No. 1 (face value $82,500 less installment payments paid of $1,250) | 81,250.00 |
| Mortgage received in connection with the sale of real estate designated as parcel No. 2 | 14,250.00 |
| Loans receivable | 10,000.00 |
| Accounts receivable | 5,842.11 |
| Total | 192,592.11 |
*1822 The above mentioned debt paid of $41,758.71 consisted of:
| Balance due estate of Rudolf Simon on account of release of mortgage on parcel No. 1 | $27,500.00 |
| Interest to September 30, 1926 | 5,218.71 |
| Balance due estate of Rudolf Simon on account of release of mortgage on parcel No. 2 | 8,000.00 |
| Interest to September 30, 1926 | 1,040.00 |
| Total | 41,758.71 |
A schedule of liquidation filed with the petitioner's 1926 income-tax return shows an undistributed balance, after payment of the aforesaid liquidating dividend and the debt, of $14,534.36.
In its return for 1926 the petitioner reported its profits from the aforesaid sales of real estate upon the installment basis. The respondent has included the entire amount of profits to be realized from the sales in petitioner's income for 1926.
OPINION.
SMITH: The only question for our determination in this proceeding is whether the sales of the parcels of real estate in question in 1926 were installment sales within the meaning of section 212 of the Revenue Act of 1926, the profits from which may be reported upon the installment basis, or whether, as the respondent contends, the entire profits from the sales are taxable*1823 to the petitioner in 1926. Section 212(d) of the 1926 Act reads as follows:
Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable *799 year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.
The respondent*1824 contends that the sales were not installment sales for the reason that the petitioner received initial payments in each instance of more than 25 per cent of the total purchase price; that in addition to the cash received directly from the vendee, which was not in excess of 25 per cent of the purchase price, the petitioner received in 1926 cash or property other than evidence of indebtedness of the purchaser "when it transferred the mortgages received from the sales under consideration to its debtor in the payment of its debts."
We held in , and , that taxpayers who sold automobiles originally on the installment plan but during the year of the sales assigned the installment contracts to finance companies for value received were not entitled to report the profits from the sales on the installment basis. We think that the same principle must apply in this case. During the taxable year 1926, the year of the sales here, the petitioner definitely disposed of the installment obligations in question and wound up its business affairs. Thereafter, it was to receive no further payments*1825 on the installment obligations. It had passed on its rights in the installment contracts to its stockholder in the form of a liquidating dividend and in payment of an indebtedness.
The facts to which the parties have agreed are that the petitioner "paid a liquidating dividend to its stockholder of $150,833.40" and "paid" a debt of $41,758.71 with the mortgages and installment obligations and other assets of a face value of $15,842.11. There is no evidence before us as to the actual value of any of the assets so distributed in the schedule and we must therefore assume that they were worth their face value at the time they were distributed by the petitioner. If the petitioner had sold the installment obligations in question to a third party for cash and with a part of the proceeds had paid the debt owing to the stockholder, it clearly would not be entitled to report on the installment basis under the provisions of the 1926 Act.
*800 For the purpose of ascertaining the amount of the initial payments here, we think that the payment by the petitioner of a part of the installment obligations in satisfaction of an outstanding indebtedness is the equivalent of receipt by the*1826 petitioner of that amount. It will be seen that with the additions of the proportionate part of the installment obligations applicable to the payment of the debt of $41,758.71 the initial payments on the sales in question exceed one-fourth of the purchase price.
The installment sales provisions of the 1928 Act, section 44(d), recognize the sale or other disposition of installment obligations as separate taxable transactions, but these provisions of the 1928 Act do not apply retroactively to the sales here which were made in 1926. Upon the facts shown in this case, however, the result would be the same if the disposition of the installment obligations were treated as a separate taxable transaction, since there is no evidence before us as to the value of the installment obligations at the time they were distributed to the stockholder.
Upon the facts before us we find no error in the respondent's determination of the petitioner's tax liability for 1926.
Judgment will be entered under Rule 50.