McCrimmon v. Commissioner

*385 This proceeding involves a deficiency in income tax as determined by the Commissioner for 1925 in the amount of $796.72. The issue presented is whether commissions and transfer charges which were paid in connection with the sales of certain real estate, the profit from which sales was reported on the installment basis, should be allowed as deductions in their entirety in the year when paid, or should be added to the cost of the property in determining the amount of profit which is to be reported in the several years when collections are made.

FINDINGS OF FACT.

*2141 The petitioner is an individual with his place of residence at Miami, Fla.

In 1914 a partnership, composed of petitioner and one George N. Mathews, Jr., was formed under the name of McCrimmon & Mathews, for the purpose of engaging in farming operations. The partnership owned a substantial acreage of farm lands and continued to farm these lands from 1914 to about April 30, 1925. The principal crop raised was tomatoes, the season for which ends approximately the latter part of April. Little work in this type of farming is done during the summer, but preparations, including the making of seed beds and plowing the land, are started in the early fall for the crop which is to be harvested the next spring. In some years the partnership lost money and in other years made money in its farming operations. The profit from this source in 1925 was approximately $22,000.

About April, 1925, at the close of the tomato season, the partnership ceased farming operations and sold its mules and farming equipment. At that time the boom in real estate was in progress in Florida and many people were finding it advantageous to deal in real estate rather than carry on farming operations. The*2142 partnership accordingly offered its farm lands for sale and in 1925 sold two of its farms and buildings located thereon. The only real estate dealing had by the partnership in 1925, outside of the sales of its own property, was the purchase of a lot in or near Orlando, Fla., which it sold in 1926. In 1926 the partnership repossessed the farm lands which it sold in 1925 and in September, *386 1926, resumed its farming operations. From the end of the farming season in 1925 (approximately April 30) until the resumption of farming operations about September, 1926, the only activities of the partnership were the real estate dealings referred to above, which included much time spent in seeking to collect and adjust amounts due on these real estate transactions, as well as to sell the real estate which had not been disposed of.

One of the partners, Mathews, had a real estate broker's license, but the other partner, petitioner in this proceeding, did not have such a license. The sales which were made in 1925 were made through brokers. In the sales made by the partnership in 1925 the commissions, which were deducted by the brokers from the initial payments, amounted to $32,316.66, *2143 and the revenue stamps were in the amount of $325.

In addition to the foregoing sales by the partnership, the petitioner sold some 40 acres of land at a sale price of $10,000, and received an initial payment thereon in cash of $2,347. The cost of such land to the petitioner was $2,400. In connection with the sale the petitioner paid in 1925 a commission of $1,000 and abstract, legal and stamp costs of $20.35.

The partnership rendered its returns on the basis of cash receipts and disbursements. The profits from the foregoing sales, both by the partnership and the petitioner, were reported on the installment basis. In the determination of the deficiency here in question, the Commissioner added commissions and transfer charges to the cost of the property in arriving at the amount to be realized on a given sale, whereas the petitioner contends that the profit to be realized is the difference between cost and selling price without any reduction for commissions and transfer charges and that such commissions and transfer charges are proper deductions from gross income in the year in which paid.

OPINION.

SEAWELL: As indicated from our findings of fact, the issue here involved*2144 is the proper treatment of commissions which were paid for negotiating certain sales of real estate, the income from which is reported on the installment basis. Both parties are agreed that the petitioner is entitled to report his income from the transactions in question on the installment basis, and (leaving commissions and transfer charges out of consideration) agree as to the amount of income to be reported on account of each transaction. Their disagreement arises by reason of the fact that the Commissioner contends that the petitioner and the partnership of which he was a member were not engaged in the real estate business in 1925 and therefore should not be allowed deductions for commissions as an ordinary and *387 necessary expense paid in carrying on a trade or business, but that such commissions should be offset against the selling price of the property at the date of sale, or as an increase of cost, in determining the profit to be reported in the several years as payments are made. On the other hand, the petitioner contends that he and the partnership were engaged in the real estate business in 1925 and therefore the commission paid by him individually, as well as*2145 those paid by the partnership, were ordinary and necessary expenses of carrying on a trade or business in 1925 which should be allowed as deductions in computing net income for that year, rather than be used in reducing the profit which would be allocated to the several years.

From a consideration of the entire record we are unable to agree that sufficient evidence has been introduced to overcome the Prima facie correctness of the Commissioner's finding that the petitioner and/or the partnership were not engaged in the real estate business. The word "business" is often defined in a very broad sense as "That which occupies the time, attention and labor of men for the purpose of livelihood or profit" (1 Bouvier's Law Dictionary, p. 273), which definition was quoted with approval in , but even in a case such as the foregoing, where a liberal interpretation of the term might be applicable, we are of the opinion that more evidence of business activity is required than we have here. The most that can be said is that the partnership gave up a business - that of farming - and sought to dispose of the assets with which they*2146 had carried on that business. The sale which they made in 1925 were of this property and even these sales were made through brokers. The record does not show that the petitioner, individually, or the partnership held itself out as a real estate operator. It is true that both the petitioner and the other partner, who were the only witnesses, testified that they were in the real estate business from April, 1925, to September, 1926, but we do not understand these statements to be other than conclusions which the Board itself is asked to find from the facts presented. One purchase of property was made in 1925 and a sale of this same property made in 1926, but as far as the record goes this transaction may well have been handled through brokers just as any individual not engaged in business might do.

A more reasonable view of the case would seem to be that the partners were engaged in going out of business when they considered they could do so at a profit, rather than in carrying on a real estate business in the usually accepted meaning of the term. Under such circumstances we are of the opinion that if our issue were, as it was in *2147 , whether an excise tax should be imposed upon the petitioner because he was engaged in carrying on or doing business, we should have to say that we are not satisfied that the evidence presented justifies the imposition of such a tax. *388 Likewise we are unwilling to say here that the evidence establishes that the petitioner was engaged in carrying on a business in the sense contemplated under the provision of the statute which allows ordinary and necessary expenses as a deduction in computing net income.

Since we are of the opinion that the petitioner and the partnership were not engaged in the real estate business, the petitioner's contention that the commissions and transfer charges should be allowed as deductions in their entirety in the year when paid must be denied. .

Judgment will be entered for the respondent.

STERNHAGEN dissents.