*1473 1. Held that the sale of property by the petitioner was not a sale on the installment plan within the meaning of section 212 of the Revenue Act of 1926.
2. Respondent's determination of the fair market value of a purchase money first mortgage received by the petitioner in connection with the sale of its property sustained.
*792 This proceeding is for the redetermination of a deficiency in income tax of $7,531.64 for the fiscal year ended June 30, 1927. The matters in controversy are the correctness of the respondent's action (1) in determining that the sale of certain real and personal property by the petitioner was a completed transaction instead of a sale on the installment plan within the meaning of section 212 of the Revenue Act of 1926 and (2) in determining that a purchase-money *793 first mortgage received by the petitioner in connection with the sale had a fair market value equal to its face value at the time of its receipt.
FINDINGS OF FACT.
The Reliable Coal Company was incorporated under the laws of Pennsylvania*1474 on August 31, 1921, and was dissolved on October 19, 1927. During the years of its existence the corporation was engaged in the business of selling coal, having its yards and principal place of business at Philadelphia. Max B. Shubin and Sara C. Shubin, the petitioners herein, were the officers, and were the only officers elected by the board of directors at the last meeting held for such purpose.
In 1921, prior to the formation of the Reliable Coal Company, Max B. Shubin purchased for $21,000 about 2 1/3 acres of land situated in the vicinity of Ashdale and Second Streets, in the City of Philadelphia. During 1921 and after the formation of the corporation Shubin conveyed the land to it, in consideration of the payment to him of one dollar and the assumption by the corporation of a $20,000 mortgage then existing on the land. Thereafter the corporation sold approximately 80 per cent of the land for $19,000. It retained for use in its business a lot 123 feet 10 1/8 inches wide and 177 feet 4 inches deep, situated and fronting on the south side of Ashdale Street and commencing 68 feet east of Second Street. The land thus retained by the corporation was on a hill, was adjacent*1475 to a railroad on one side and was situated on a back street.
The corporation constructed certain improvements on the land consisting of an office building, garage, trestles, paving, etc., at a cost of $23,834.72. During the period from 1921 until the sale of the property in 1927 the corporation was actively engaged in carrying on the coal business, having at the latter date approximately 5,000 customers. Throughout this period the corporation consistently advertised generally. The business proved profitable, producing an average profit from $10,000 to $12,000 per year.
Under date of April 22, 1927, the Reliable Coal Company and Arthur Silverman entered into an agreement whereby Silverman agreed to purchase the corporation's assets and business. The agreement provided in part as follows:
AGREEMENT made this 22nd day of April, 1927, by and between RELIABLE COAL COMPANY, a Pennsylvania corporation, party of the one part, (hereinafter called "SELLER") and ARTHUR SILVERMAN of the City of Philadelphia, Party of the other part (hereinafter called "BUYER")
WITNESSETH:
SELLER agrees to sell and convey unto BUYER, who agrees to buy all that certain lot of ground with the coal*1476 yard, improvements and other buildings thereon erected, including the railroad siding and tressel, SITUATE on the *794 Southerly side of Ashdale Street (70 feet wide) in the Forty-second Ward of the City of Philadelphia, a true and correct description of which is hereto attached, marked Schedule A, and hereby made a part hereof; together with the following personal property: -
1 - three-ton Pierce-Arrow Truck.
1 - two-ton Packard Truck.
2 - Portable Wagon Loaders.
Wheelbarrows, screens, brooms, shovels, scales and other equipment now on the premises used in connection with the coal business thereon conducted, including the office furniture and office equipment located in the buildings upon the said premises, the trade name "Reliable Coal Co." and the good will of the business conducted by SELLER and all coal that may be on the premises at the time of settlement hereinafter fixed but not including accounts receivable or the books and other records of SELLER. BUYER, however, shall be entitled to receive the original records containing the names and addresses of customers of SELLER.
The BUYER agrees to pay the sum of $95,000.00 payable as follows:
| Cash at signing of this agreement | $5,000.00 |
| Cash at settlement | 10,000.00 |
| First mortgage to be created by BUYER as hereinafter provided | 50,000.00 |
| Second mortgage to be created by BUYER | 30,000.00 |
| $95,000.00 |
*1477 The first mortgage shall be in the usual and customary form of similar mortgages used in the City and County of Philadelphia, accompanying the usual bond and warrant of attorney and shall be for a term of five years from the time of settlement, with interest at the rate of 6% per annum, payable semi-annually. The second mortgage shall be in a Building & Loan Association and shall be in the usual and customary form of similar mortgages used in the City and County of Philadelphia upon not more than one hundred fifty shares of the capital stock of the said Association and a premium not exceeding thirty cents ($.30) per share with interest at the rate of 6% per annum. The amount of fire insurance to be required with both mortgages shall not exceed the sum of $15,000.00. The SELLER agrees to procure a person and/or a corporation willing to lend to the BUYER the amounts of the mortgages upon the security of the said premises and the costs and expenses of procuring such lender shall be borne and paid by the SELLER.
* * *
Electric fixtures, heating and plumbing systems annexed to the buildings and improvements are included in this sale.
* * *
As a further consideration to the*1478 BUYER, SELLER agrees within three months to cease all its corporate activities and go out of business. SELLER agrees that neither it nor MAX B. SHUBIN will, either directly or indirectly, or as stockholder, clerk, servant or employee, engage in the retail coal business for a period of ten years from the date of settlement within a radius of seven (7) miles of the herein-described premises; provided, however, and it is hereby agreed that the SELLER and/or MAX B. SHUBIN shall be permitted such use of the office located on the said premises as may be necessary in and about the collection of the accounts receivable owned and retained by SELLER or that may *795 be assigned to the said MAX B. SHUBIN, and the BUYER agrees that if, as and when he receives any moneys or remittances from persons, which moneys or remittances belong to the SELLER or to MAX B. SHUBIN, the same will be turned over to it or him. MAX B. SHUBIN shall execute this agreement in order to be bound by the provisions and obligations by him intended to be assumed. In the event that the real estate hereinabove mentioned shall be the subject of foreclosure under proceedings on either of the mortgages hereinabove mentioned*1479 and shall result in the sale thereof to a person or persons other than the BUYER herein, the foregoing covenant shall cease and determine and be of no effect. The provisions of this paragraph shall survive the settlement under this agreement.
The agreement was carried out by the parties and on May 4, 1927, Arthur Silverman gave the Reliable Coal Company a mortgage for $50,000 on the ground with the buildings and improvements thereon. The mortgage recited that the indebtedness of $50,000 was payable within five years from the date thereof and bore interest at the rate of 6 per cent per annum, payable semiannually.
On the same day Arthur Silverman gave to the Charles Lipshutz Building and Loan Association a second mortgage on the same property for $30,000. This mortgage recited that the indebtedness secured thereby was payable within one year from the date thereof. Pursuant to the terms of the agreement of April 22, 1927, Max B. Shubin, who was president of the Reliable Coal Company, had made the arrangements with the Building and Loan Association of which he was a stockholder and director, for placing this mortgage with it. As a condition precedent to making the loan of $30,000*1480 and accepting the mortgage the Building and Loan Association required that the Reliable Coal Company give to the Association its bond for $30,000 as collateral. It also required Max B. Shubin to give his bond for a like amount and in addition assign to the Association as further collateral 40 shares of stock in the Colonial Trust Company, then having a market value of about $300 per share. It further required that Leo Silverman, the father of Arthur Silverman, furnish the association a letter of guarantee for $10,000. Shubin and the Reliable Coal Company were each good for the amount of their bonds at the time given. While the association was satisfied with the bond of Max B. Shubin as collateral for the mortgage, it desired to have as much collateral as possible, and, feeling that it could get the collateral furnished, it made demand therefor. The association did not regard Arthur Silverman's financial responsibility very highly and would not have considered loaning $30,000 to him on a second mortgage on the property without a substantial amount of collateral.
In settlement for the sale of the property the Reliable Coal Company on May 5, 1927, received $15,000 paid by Arthur*1481 Silverman and also received $30,000 representing the proceeds of the loan by the *796 Building and Loan Association to Silverman. Mortgages of approximately $18,000 existed on the property at the time of its sale to Arthur Silverman and a portion of the amounts received by the corporation from the sale of the property was used in paying off such mortgages.
Under date of July 25, 1927, Max B. Shubin submitted a letter to the Reliable Coal Company, reading as follows:
I hereby offer to assume the following liabilities of your company:
| Corporation Guarantee-Second mortgage Charles Lipschutz Building and Loan Assn | $30,000.00 |
| Deficit | 1,470.32 |
| Total | $31,470.32 |
and deliver 400 shares of the capital stock of your company, fully endorsed, in consideration of the transfer to me of the following assets:
| Cash | $206.14 | ||
| Accounts Receivable - Trade | 862.98 | ||
| Loans Receivable - M. B. Shubin | 16,000.00 | ||
| $17,669.12 | |||
| Fund for payment of Federal and State Taxes and Liquidating expenses | 1,000.00 | ||
| Less Reserve for Taxes and Liquidating Expenses | 1,000.00 | ||
| First Mortgage | $50,000.00 | ||
| Second Mortgage | 30,000.00 | ||
| $80,000.00 | |||
| Less Reserve for Unrealized Profit | 53,789.94 | ||
| 26,210.06 | |||
| Crystal Building and Loan shares - paid in | 4,650.50 | ||
| 30,860.56 | |||
| $48,529.68 |
*1482 Thereafter on July 29, 1927, and as a part of the process of dissolution the Reliable Coal Company assigned to Max B. Shubin the purchase-money mortgage of $50,000 given to it by Arthur Silverman. Under date of October 3, 1927, the Charles Lipshutz Building and Loan Association, upon request of the Reliable Coal Company, released its bond of $30,000 given to the association in connection with the second mortgage loan of $30,000 by the Association to Arthur Silverman. This request was made by the Reliable Coal Company in order that it could effect dissolution and was complied with by the Association, inasmuch as it held the personal bond of Max B. Shubin as security for the same loan.
At some undisclosed time during 1927 or subsequently Shubin attempted to dispose of the mortgage. He went to every mortgage broker he knew and offered to sell it at a discount of 20 per cent, but was unable to sell it. On some undisclosed dates in 1927 and in *797 1928 he attempted to borrow money and use the mortgage as collateral. The greatest amount offered him was $20,000. On December 2, 1929, Shubin assigned the mortgage to the Pennsylvania Company for Insurances on Lives and Granting*1483 Annuities as additional collateral for indebtedness owing by him to it.
The Building and Loan Association still holds Shubin's bond for $30,000 which he gave as security for the mortgage of that amount given by Arthur Silverman to the Association. On January 1, 1929, Arthur Silverman turned over to his father the business which he had purchased from the Reliable Coal Company. The business at this time was heavily burdened with liabilities. The father continued the business until about March, 1930, when he went into bankruptcy. The Building and Loan Association brought foreclosure proceedings under its mortgage and Shubin bought the property in at the sheriff's sale for $100, thereby wiping out entirely the second mortgage.
In determining the deficiency of the Reliable Coal Company the respondent determined that it realized a profit of $63,875.55 from the sale of its property and business, computed as follows:
| Assets sold: | Cost | Prior Year Depreciation |
| Land | $2,030.42 | |
| Building | 23,834.72 | $5,799.40 |
| Fixtures | 993.48 | 441.24 |
| Loader | 1,300.00 | 461.20 |
| Packard Truck | 5,334.48 | 5,334.48 |
| Pierce Arrow Truck | 5,120.00 | 1,706.33 |
| Total Cost and Depreciation | 38,613.10 | 13,742.65 |
| Net Book Value of Assets Sold | 24,870.45 | |
| Selling price | 95,000.00 | |
| Cost | 24,870.45 | |
| Gross Profit | 70,129.55 | |
| Less: Expense of Sale | 6,254.00 | |
| Net Profit | 63,875.55 |
*1484 The respondent also determined that since the amount of cash received was in excess of 25 per cent of the selling price the transaction was to be treated as a completed transaction and not a sale on the installment plan. As the corporation had reported a profit of $10,085.61 from the transaction, the respondent added to that amount $53,789.94 representing the remainder of the net profit of $63,875.55 computed by him.
OPINION.
TRAMMELL: The petitioners contend that the sale by the Reliable Coal Company of its property and business under the circumstances set out in our findings of fact was a sale on the installment plan *798 within the meaning of the Act. The respondent contends that it was a completed transaction and not a sale on the installment plan.
Section 212(d) of the Revenue Act of 1926 provides 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 year that proportion of the installment payments actually received in that year which the total profit realized or to be realized*1485 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.
In the instant case the Reliable Coal Company sold its property and business for $95,000. In payment therefor the corporation received back a purchase-money first mortgage for $50,000 on the ground, buildings and improvements. In addition it received $15,000 in cash representing money furnished by the purchaser, and $30,000 in cash representing the proceeds from a second mortgage placed on the property by the purchaser with a building and loan association*1486 and as collateral for the payment of which the corporation gave its bond for a like amount.
The petitioners contend that since the Reliable Coal Company was liable on its bond to the building and loan association for the payment of the $30,000 loaned to the purchaser and paid by him to the corporation the amount is to be considered as in the nature of a loan to the Coal Company by the building and loan association on the credit of the Coal Company and consequently was not part of the "initial payments" within the meaning of the Act. While a copy of the bond given by the Reliable Coal Company to the building and loan association was not put in evidence, the Coal Company apparently had no liability thereunder except in event the maker of the second mortgage or the purchaser of the property in this case failed to make payment. The transaction, therefore, was not unlike that where a seller receives in payment for property the promissory notes of the purchaser and thereafter endorses the notes and sells them. In the latter type of cases we have consistently held that the entire amount of the proceeds from the notes was to be included in determining taxable income. *1487 ; ; . The expression "initial payments" is defined *799 in the above quoted section of the statute as payments in cash or property other than evidences of indebtedness of the purchaser. The $30,000 paid to the taxpayer in cash, derived from the second mortgage to the building and loan association was clearly something other than evidence of indebtedness of the purchaser. This mortgage was not received by the taxpayer, but by the building and loan association. The taxpayer received the cash. Accordingly we are of the opinion that the $30,000 received by it as the proceeds from the second mortgage given by the purchaser of the property to the building and loan association, is to be considered as part of the "initial payments" received during the year of sale.
Since the $30,000 is to be considered as part of the "initial payments," such payments received by the Coal Company during the taxable period amount to $45,000, or considerably in excess of one-fourth of the selling price of $95,000. The sale therefore was not one on*1488 the installment plan within the meaning of the Act. ;; The respondent's action in treating the sale as a completed transaction is therefore sustained.
The petitioners contend that the respondent erred in determining that the purchase-money first mortgage of $50,000 received back by the Coal Company had a fair market value equal to its face value and allege in the petition that the fair market value of the mortgage was not in excess of 80 per cent of its face value at the time of its receipt on May 4, 1927. In support of the contention the petitioners submitted evidence relating to the value of the property covered by the mortgage and to attempts made by Max B. Shubin to dispose of the mortgage and to obtain loans thereon. Shubin testified to a fair market value of the property in May, 1927, of $30,000. Another witness named Goodrich who was a real estate agent in Philadelphia from 1923 to 1927, testified to the same value. Goodrich also testified that in 1927 a short time before the property was sold he obtained an offer to purchase it at $30,000*1489 but when he submitted the offer to Max B. Shubin the latter rejected it, stating that the property was worth $60,000, the price desired for it. The petitioners make no attempt to reconcile Shubin's testimony as to a value of only $30,000 with the statement as to value he made to Goodrich in rejecting an offer of that amount. If, as Shubin testified, the property was worth only $30,000, it is difficult to see why he rejected the offer to purchase it at that amount. His action speaks louder than his words.
In testifying as to his method of valuing property, Goodrich stated: "I don't go into obtaining the value of property so much by making an examination * * * if I had a property offered to me I would usually submit it to one or two customers, and I would take it for granted that these people looking for properties knew their *800 own business and knew what it would be worth to them." The opinion testimony of a witness who arrives at values in this manner might or might not correctly reflect the fair market value of the property about which he testifies, but an opinion which has no sounder basis than this is not entitled to very great weight, especially where the owner refused*1490 to sell on the basis of value stated by the witness on the ground that the property was worth twice that amount.
Shubin stated that during 1927 or subsequently - just when is not shown - he attempted to sell the mortgage to every mortgage broker he knew at a discount of 20 per cent, but was unable to sell it. The record does not disclose whether his attempts were made in 1927 or subsequently. It very well may have been in 1930 before any such attempt was made, for all the record discloses. It is further open to the objection that the record is silent as to whether any of the mortgage brokers to whom the mortgage was offered were dealers in mortgages on the class of property covered by this mortgage. The record does not disclose to what extent the witness had acquaintance among brokers. He may not have known the brokers who were in the market for such securities. Shubin also testified to attempts made in 1927 and 1928 to borrow money and use the mortgage as collateral, and that the greatest amount offered to him was $20,000. The fact that $20,000 was the largest amount Shubin could have borrowed on the mortgage as collateral is not indicative of what the fair market value*1491 of the mortgage was. It may have been that the particular banks to which he applied for a loan did not make loans in larger amounts. The respondent has determined that the fair market value of the mortgage was equal to its face value of $50,000. From a consideration of the entire record we are unable to hold that the evidence is sufficient to overcome the prima facie correctness of that determination.
Judgment will be entered for the respondent.