Rusk v. Commissioner

*138 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1923 in the amount of $9,738.91.

It is alleged that the respondent erred in determining that the March 1, 1913, fair market value of property sold by the petitioner in 1923 was only $100,000, instead of $200,000, and in determining that petitioner realized a profit of $147,295.48 from the sale.

On July 7, 1928, which was after the petition in this proceeding was filed, the petitioner, Margaret Rusk, died and Charles Rusk, Anna Bairstow and John A. Rusk were duly appointed executors*2194 of her estate. At the hearing of this proceeding, counsel for the respondent moved to substitute the executors as petitioners instead of Margaret Rusk. This motion is herewith granted.

FINDINGS OF FACT.

On March 1, 1913, Margaret Rusk owned real estate known as Block 12, Ogden's Subdivision, Chicago, Ill., which she had acquired prior thereto by gift from her husband. The property was triangular in shape, having a frontage of about 550 feet on Lincoln Avenue, a frontage of about 425 feet on Robey Street, and a frontage of a little more than 200 feet on Belle Plaine Avenue. The property on March 1, 1913, was vacant land except for two old buildings. One of these, a three-story brick building, was located on the corner of Lincoln Avenue and Robey Street. It had a store on the first floor, a flat on the second floor, and a dance hall on the third floor. The other building was a two-story frame building located on the corner of Lincoln Avenue and Belle Plaine Avenue. It contained a store and some flats. The improvements, such as paving, sewers, water and gas, had been made by March 1, 1913, although these were not paid for until after that date.

*139 The important*2195 street, so far as the property in question was concerned, was Lincoln Avenue. At March 1, 1913, Robey Street was not built up and it has never been a business street, and there were no buildings on Belle Plaine Avenue opposite the Rusk property except a frame cottage. At that time there were, on Lincoln Avenue opposite the Rusk property about eight buildings, of which five were one-story buildings.

Edmund Abrahamson, who has been engaged in real estate operations in the vicinity of the property in question since 1906, negotiated a large number of leases and sales of property in that vicinity about 1913.

The March 1, 1913, fair market value of the property owned by Margaret Rusk was not greater than $100,000.

On January 15, 1923, Margaret Rusk sold the property in question to Jacob Horwitz, who was acting on behalf of himself and his partner, Norman Peters. The purchase price was $250,000. An amount of $1,000 which Horwitz and Peters had deposited in 1922 as earnest money was applied as a cash payment. There was also paid, on January 15, 1923, to Margaret Rusk, an additional $29,000 in cash. Jacob Horwitz and his wife, Lucy Horwitz, executed notes in favor of Margaret*2196 Rusk in the amount of the balance due, $220,000. Horwitz and his wife also gave Margaret Rusk a mortgage on the entire property as security for the notes in the amount of $220,000. There were 5 notes, one for $20,000 maturing 6 months after date, and 4 for $50,000 maturing on or before 3 years after date.

Later, a corporation called the North Center Building Corporation was organized for the purpose of promoting the construction of a store and office building upon the first section of the property in question. Horwitz and his partner, Norman Peters, in 1923 controlled all the capital stock of this corporation, amounting to $550,000 par value. Construction loans totaling $400,000 were obtained in anticipation of the building program. The building had already been planned and a number of desirable tenants secured. The parties loaning the money required that Margaret Rusk release her mortgage on the part of the property on which the building was to be constructed, that is, the part facing Irving Park Boulevard, in order that they might take a first mortgage on it. On June 14, 1923, Horwitz paid Margaret Rusk, out of the $400,000 loan which had been obtained, an amount of $120,000*2197 in cash, leaving an amount of $100,000 due from Horwitz to Margaret Rusk. Jacob Horwitz and his wife executed two notes dated May 1, 1923, to cover the balance due. One was in the amount of $35,000 and was due on or before one year after date, and the second was in the amount of $65,000 and was due on or before two years after date. Margaret *140 Rusk then released her mortgage upon the property. In lieu thereof, and as security for the notes totaling $100,000, she accepted a mortgage on the north 225 feet of block 12, which was a triangularshaped lot of vacant land. This mortgage was executed by Jacob Horwitz and his wife. The original notes for $220,000, which Horwitz and his wife had executed and delivered in January, 1923, were delivered to them and were canceled.

Shortly thereafter another corporation, called the Lincoln-Robey Building Corporation, was organized for the purpose of developing the north 225 feet of block 12. This corporation raised $1,200,000 for the purpose of improving this section of the property. A first mortgage of $900,000 and a second mortgage of $300,000 were placed on this section of the property. On November 5, 1924, $90,000 of the $100,000*2198 owing to Margaret Rusk was paid and she released the mortgage on the north 225 feet of block 12. Jacob Horwitz and his partner, Norman Peters, executed a note to Margaret Rusk for the remainder due her upon the property and she took as security $20,000 face value second mortgage bonds. On December 31, 1924, there was due to Margaret Rusk, on the notes, including interest, the amount of $16,090, which was secured by these second mortgage collateral bonds.

In her return for the year 1923, which was rendered upon the cash receipts and disbursements basis, Margaret Rusk claimed a profit of $43,413.72 upon the sale of the property in question, calculated as follows:

The respondent held that the March 1, 1913, value of the property was $100,000, and calculated a profit of $147,295.48 from the sale.

OPINION.

MCMAHON: The question to be decided is whether the respondent erred in including in the taxable income of Margaret Rusk for the year 1923*2199 an amount of $147,295.48 as the gain derived by her upon the sale in that year of certain property located in Chicago, Ill., which had been given to her by her husband prior to March 1, 1913.

Section 202 of the Revenue Act of 1921 provides:

(a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired *141 after February 28, 1913, shall be the cost of such property; except [exceptions not material]

(b) The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a); but -

(1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to be included in the gross income shall be the excess of the amount realized therefor over such fair market price or value;

* * *

(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market*2200 value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized -

(1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade or other property held primarily for sale), is exchanged for property of a like kind or use;

* * *

(e) Where property is exchanged for other property which has no readily realizable market value, together with money or other property which has a readily realizable market value, then the money or the fair market value of the property having such readily realizable market value received in exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess; but when property is exchanged for property specified in paragraphs (1), (2), and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the money or the fair market value of such other property received in exchange shall be applied against and reduce*2201 the basis, provided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess.

The respondent found that the property on March 1, 1913, had a value of $100,000. The petitioners contend that the March 1, 1913, value of this property was $200,000. A witness, Edmund Abrahamson, called by the respondent testified that the land alone had a value on March 1, 1913, of about $87,000 to $90,000 and that the buildings thereon had a value on March 1, 1913, of $9,600 to $10,000. This witness has for many years been engaged in the real estate business in the neighborhood in which the property in question was located, and was well qualified to testify as to the value of this property. From all the evidence presented to us, we believe and have found as a fact, that the March 1, 1913, value of the property was not greater than $100,000.

The agreed selling price of the property was $250,000. In 1923 the purchaser of the property, Jacob Horwitz, who, so far as we can determine from the confused state of the testimony, was acting on behalf of himself and his partner, Norman Peters, paid to Margaret Rusk a total of $150,000 in cash, *2202 and notes in the amount of $100,000. *142 These notes were signed by Jacob Horwitz and his wife, and Margaret Rusk was given a mortgage upon the north 225 feet of the property as collateral to the notes. The mortgage was signed by Jacob Horwitz and his wife.

It is the contention of the petitioners that these notes received in 1923 had no readily realizable market value during that year and that they are, therefore, not to be considered in the computation of gain derived in the year 1923 by Margaret Rusk upon the sale of the property.

Jacob Horwitz testified that neither the notes totaling $220,000 executed in January, 1923, nor the notes totaling $100,000 executed in June, 1923, had any readily realizable market value, because neither he nor his wife had tangible assets or cash which could be levied upon for collection of the notes and because the land was not sufficient security. However, the burden of proof in this proceeding is upon the petitioners and it is our opinion that they have not shown that these notes did not have a readily realizable market value. Nor can we determine from the meager evidence before us the real value of the notes. The witness' testimony*2203 as to whether the notes had a readily realizable market value has been considered, but we are not convinced by it.

The petitioners contend that the transaction in June, 1923, whereby the notes of Horwitz and his wife in the amount of $220,000 were exchanged by Margaret Rusk for their notes for $100,000 and for cash in the amount of $120,000, was such a transaction as is contemplated by section 202(c)(1) or 202(e) of the Revenue Act of 1921.

It is the contention of the petitioners that notes are investment property, and that, even if the notes for $100,000 which were received by Margaret Rusk in 1923 did have a readily realizable market value, they would not enter into the calculation of gain derived because they were exchanged together with $120,000 in cash, for other notes in the amount of $220,000. Petitioner relies upon . In that case we were dealing with an exchange, by trustees, of shares of stock for Federal, State, municipal and railway bonds. All these securities were held for the investment purposes of a trust. In the instant proceeding, the exchange in question amounted to no more than a refinancing of the original*2204 deal, as a result of which Margaret Rusk received payment for $120,000 of the original notes. Margaret Rusk certainly was not holding the notes for investment or for productive use in trade or business. We are of the opinion that this contention of the petitioner is without merit.

*143 It follows that the respondent's determination of the taxable gain derived by Margaret Rusk upon the sale in 1923 must be approved.

Reviewed by the Board.

Judgment will be entered for the respondent.