*4205 The respondent mailed a deficiency notice to the petitioner asserting deficiencies for 1919 and 1920. The petitioner filed its petition seeking a redetermination as to the year 1919 only. Held, that the Board has no jurisdiction to determine the deficiency as to the year 1920.
*57 By this proceeding the petitioner seeks the redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $41,461.03. The deficiency letter also asserts a deficiency in income and profits taxes for the year 1920 in the amount of $10,342.13. The deficiency for the year 1919 and certain other material facts have been stipulated by the parties hereto and the question to be determined is whether, under the facts, the Board has jurisdiction to redetermine the deficiency asserted for the year 1920.
FINDINGS OF FACT.
The petitioner is a West Virginia corporation with its principal office at 350 North Clark Street, Chicago, Ill., engaged in operating restaurants in the larger cities of the United States. *4206 The petitioner filed an income and profits-tax return for the year 1919 on a date not shown by the record herein, and on April 14, 1921, it filed an income and profits-tax return for the year 1920. On November 22, 1924, it filed a waiver consenting to the assessment and collection of the amount of income, excess-profits and war-profits taxes due from it for the year 1919, and on October 16, 1925, it filed a second waiver consenting to the assessment of such taxes due for the year 1919. Petitioner had not, at any time, filed a waiver or consent for the year 1920.
On August 11, 1924, the respondent by registered mail and in
On August 11, 1925, the respondent by registered mail and in of 1924, notified the petitioner of deficiencies in income and profits taxes in the amounts of $41,461.03 for the year 1919, and $10,342.13 for the year 1920.
On October 9, 1925, petitioner filed with this Board the petition herein, which, omitting the capition, is as follows:
I.The taxpayer is a West Virginia corporation, with principal office at 350 North Clark Street, Chicago, Illinois.
*58 II.
The deficiency letter, a copy of which is attached, was mailed to the taxpayer*4207 on August 11, 1925.
III.The taxes in controversy are income and profits taxes for the calendar year 1919, amounting to, to-wit, $41,461.03.
IV.The determination of tax contained in said deficiency letter is based upon the following errors:
(a) The Commissioner erred in including in income for the year 1919 a profit of $52,280.33 arising from the sale of a leasehold covering the property located at 146 Woodward Avenue, Detroit, Michigan, and which was acquired by the taxpayer on April 21, 1916.
(b) The Commissioner erred in treating the notes received for said leasehold as the equivalent of cash and income for the year 1919.
V.The facts upon which the taxpayer relies as the basis of its appeal are as follows:
The taxpayer, John R. Thompson Company, on April 21, 1916, acquired a certain leasehold covering the property located at 146 Woodward Avenue, Detroit, Michigan. This leasehold was sold by the taxpayer to Ernst Kern Company of Detroit under an agreement dated April 3, 1919. The consideration involved in this sale was $75,000 and the terms of settlement were as follows:
| Cash | $10,000.00 |
| Note, dated Apr. 1, 1919, due on or before Apr. 1, 1920 | 13,000.00 |
| Note, dated Apr. 1, 1919, due on or before Apr. 1, 1921 | 13,000.00 |
| Note, dated Apr. 1, 1919, due on or before Apr. 1, 1922 | 13,000.00 |
| Note, dated Apr. 1, 1919, due on or before Apr. 1, 1923 | 13,000.00 |
| Note, dated Apr. 1, 1919, due on or before Apr. 1, 1924 | 13,000.00 |
*4208 The cost of this property after deducting amortization of $828.33 was $20,773.92, or a profit of $52,280.33 on the sale, after deducting $1,945.75 of the selling price applicable to fixtures.
The notes received as evidence of the deferred payments were ordinarily unsecured notes signed by the Ernst Kern Company. When the sale of said leasehold was negotiated, it was the understanding and agreement of the parties that the notes were not to be discounted by the John R. Thompson Company, but were to be held until maturity. This understanding was carried out.
There was no assurance that the taxpayer would collect these payments in full until he had actually received the money. The notes were not negotiable because of the agreement of the parties. The notes had, in 1919, no readily realizable or fair market value, and were not the equivalent of cash. They could not be discounted at a bank. The taxpayer, on filing its return, for the year 1919, reported as income a portion of the profit, $5,544.99, resulting from the leasehold sale, apportioned on the basis of the actual cash received. The Treasury Department has included as income for 1919 the balance of the profit, represented*4209 by said notes which were neither negotiable in themselves nor discountable, nor the equivalent, in 1919, of cash.
*59 VI.
The taxpayer in support of its appeal relies upon the following proposition of law:
(a) That no profit, gain or income was realized in 1919 on the sale of the Detroit leasehold by the taxpayer to the Ernst Kern Company under section 213(a) of the Revenue Act of 1918;
(b) The notes received in exchange for said leasehold had no readily realizable or fair market value, nor were they the equivalent of cash, and the gain or profit on said leasehold was not determinable in 1919 under the provisions of section 202(a), and 202(a)(2) of the Revenue Act of 1918.
WHEREFORE, the taxpayer respectfully prays that this Board may hear and determine its appeal.
On November 13, 1925, the respondent filed the following answer to the petition:
The Commissioner of Internal Revenue, by his attorney, A. W. Gregg, Solicitor of Internal Revenue, for answer to the petition of this taxpayer, admits and denies as follows:
(1) Admits the allegations of paragraphs I and II of the petition.
(2) Admits that the taxes in controversy are income and profits taxes for*4210 the calendar year 1919 and amount to more than $10,000.00
(3) Denies that the Commissioner erred in including in gross income of the taxpayer for 1919 a profit of $52,280.33 derived from the sale of a leasehold covering property located in Detroit, Michigan. Denies that the Commissioner erred in treating the notes received for said leasehold as the equivalent of cash.
(4) Admits that the taxpayer acquired the leasehold in question at a cost of $21,602.25 and that said cost was properly reduced by amortization amounting to $828.33, leaving a balance of $20,773.92; that in 1919, the taxpayer sold said lease, together with certain furniture and fixtures, for $75,000, and that the amount applicable to said furniture and fixtures was $1,945.75, leaving a balance of $73,054.25; that the total profit resulting from the transaction amounted to $52,280.33; and that said selling price was paid by the purchaser in cash amounting to $10,000 and in notes of the purchaser amounting to $65,000.
Denies that said notes were not negotiable and denies they had no fair market value in 1919 and denies that they were not the equivalent of cash.
Admits that the taxpayer reported only that portion*4211 of the profit applicable to the cash payment, and that the Commissioner has included as income for 1919 the entire profit resulting from the transaction.
(5) Denies generally and specifically each and every allegation contained in the taxpayer's petition not hereinbefore admitted, qualified or denied.
On April 2, 1926, upon leave duly granted, the petitioner filed an amendment to the petition, adding to paragraphs IV, V, and VI, of the petition, the following:
To Paragraph IV on page 2, the following paragraph:
(c) The Commissioner erred in denying the taxpayer the right to report the profit received from the sale of said leasehold on the installment sales basis.
To Paragraph V on page 4, the following paragraphs:
In the sale of said leasehold referred to heretofore the initial payment of $10,000 was less than one-fourth of the purchase price. The balance of the *60 purchase price was to be paid in installments during the years 1920 to 1924, inclusive.
Obviously, the taxpayer does not know at this time what regulations will be prescribed by the Commissioner of Internal Revenue with regard to income received from property sold on the installment basis. It*4212 believes, however, that its case will comply with the provisions of said regulations when issued by the Commissioner of Internal Revenue.
To Paragraph VI on page 4, the following paragraph:
(c) In the sale or other disposition of property where the initial payment does not exceed one-fourth of the purchase price and the balance is paid in installments, the taxpayer may return as income therefrom in any taxable 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. Sections 1208 and 2112(d), Revenue Act of 1926.
On June 5, 1926, the respondent filed the following answer to the amendment to the petition:
The Commissioner of Internal Revenue by his attorney, A. W. Gregg, General Counsel, Bureau of Internal Revenue, for answer to amendment to petition of this taxpayer, admits and denies as follows:
(1) Admits that the petitioner has the right, under Sections 212(d) and 1208 of the Revenue Act of 1926, to return the income from the sale of said leasehold on the "installment basis" under regulations prescribed by the Commissioner with the*4213 approval of the Secretary.
(2) Admits that in the sale of said leasehold, the initial payment of $10,000 was less than one-fourth of the purchase price, and that the balance of the purchase price was to be paid in installments.
States that the regulations referred to in Section 212(d) of the Revenue Act of 1926 have not yet been issued by the Commissioner.
(3) Denies generally and specifically each and every allegation contained in the taxpayer's amendment to petition not hereinbefore admitted, qualified or denied.
WHEREFORE, it is prayed that the appeal of the taxpayer be denied.
On April 3, 1919, the petitioner sold a leasehold located in Detroit, Mich., for $75,000, of which $10,000 was paid in cash and the remainder in five notes of $13,000 each, due April 1, 1920, April 1, 1921, April 1, 1922, April 1, 1923, and April 1, 1924, respectively. The sale was one on the installment basis and the profit therefrom realized by the petitioner in 1919 was $7,156.37, and the profit therefrom realized in 1920 was $9,303.28. The deficiency in tax for the year 1919 is $20,842.02. If the Board has jurisdiction to redetermine a deficiency in tax for the year 1920 the amount thereof*4214 is $13,467.22. The deficiencies for the years 1919 and 1920 have not been assessed.
OPINION.
MARQUETTE: The parties hereto have stipulated that there is a deficiency in tax for the year 1919 in the amount of $20,842.02, which *61 should be assessed. They also are in agreement as to the amount of the petitioner's tax liability for the year 1920, but not as to the jurisdiction of the Board to redetermine the deficiency asserted for that year. The petitioner contends that it has not appealed from the respondent's determination of a deficiency for 1920 and that therefore that year is not involved in this proceeding. The respondent on the other hand takes the position that although the petitioner has not in express terms appealed from the determination of a deficiency for the year 1920 as set forth in the deficiency letter of August 11, 1925, it has in substance appealed therefrom in that the relief sought for the year 1919 necessarily affects the petitioner's income for 1920, and that therefore the Board has jurisdiction to determine a deficiency as to that year.
Upon consideration of the record we are unable to agree with the respondent that the petitioner's tax liability*4215 for the year 1920 is involved herein. The deficiency letter sets forth deficiencies for both the years 1919 and 1920, but the petitioner took issue only as to the determination relative to the year 1919, and in express terms limited its appeal to that year. The only error assigned by the petitioner in its petition is that the respondent included in income for the year 1919 the full amount of profit realized from the sale of a certain leasehold. The respondent has admitted that he was in error in including the full amount of such profit in income for 1919 and that the deficiency determined by him for that year should be adjusted accordingly. It necessarily follows that if a certain profit was realized by the petitioner from the sale mentioned, and only part of it was income for 1919, the remainder was income for some other year or years. However, that fact does not in itself bring the other year or years into issue. The deficiency letter sets forth deficiencies for two years. The petitioner had the right to appeal as to either or both of those years, as it saw fit, and it chose to appeal only as to the year 1919. We can not perceive that because the relief sought and granted*4216 as to the year 1919 affects income for some other year, we have for that reason jurisdiction to determine a deficiency as to such other year. Suppose that the respondent, instead of asserting the deficiencies for 1919 and 1920 in a single deficiency letter, had sent out two deficiency letters, one for 1919 and one for 1920, and that the petitioner had appealed only from the letter relative to 1919. Could it be successfully contended that because the relief sought by the appeal as to 1919 would, if granted, affect income and tax liability for 1920, we would have jurisdiction as to the latter year although no formal appeal had been filed? We think not. Nor do we believe that it makes any difference in the principle because the deficiencies for both years are set forth in a single deficiency letter. We are of the opinion that under the *62 facts herein we have no jurisdiction to determine any deficiency for the year 1920.
The deficiency for the year 1919 is $20,842.02, and an order will be entered accordingly.