Ripley Realty Co. v. Commissioner

*1248 The Commissioner determined a deficiency of $5,801.10 in the petitioner's tax liability for the calendar year 1926. Several errors are assigned but they all relate to the question of how much profit should be reported in 1926 from a certain real estate transaction.

FINDINGS OF FACT.

The petitioner is a New York corporation having its principal place of business in New York City.

On June 22, 1926, the petitioner granted to Thomas J. Smith an option to purchase certain vacant property at College Point, Long Island, for $75,000. Smith paid $250 covering this option, which was refunded to him when the property was later sold. Smith was a real estate broker.

Thereafter, Smith told an officer of the petitioner that he had a purchaser for the property*1746 who would pay $85,000 for it. On July 8, 1926, a contract for the sale of this property was executed by the petitioner as seller and Alexander Hirsch as purchaser, which provided for a purchase price of $85,000. Eighty-five thousand dollars was paid on July 8, 1926. The petitioner paid Smith $3,500 from this payment. On October 13, 1926, Hirsch assigned his rights under the contract to the Goldhirsch Holding Corporation, and on or about that day the petitioner transferred the property to the Goldhirsch Holding Corporation by deed upon the payment by the Goldhirsch Holding Corporation of $15,000 and the delivery of a purchase money mortgage for $55,000. At the same time Smith gave his receipt to the petitioner for the additional $6,500 to which he was entitled. Some adjustment was made for interest and taxes at this time.

Later, the petitioner released certain lots from the lien of the mortgage upon payment to it of $7,340 of the principal.

On or about May 11, 1927, the Goldhirsch Holding Corporation brought suit in the Supreme Court of New York against Thomas J. Smith, the petitioner, three officers of the petitioner and certain attorneys for $35,000 damages, alleging conspiracy*1747 to defraud Hirsch and the Goldhirsch Holding Corporation in the sale of the College Point property by having Smith misrepresent its value and otherwise mislead Hirsch. The case was tried in April, 1928, was dismissed as to the attorneys, and resulted in a verdict of $10,000 against Smith and in a jury disagreement as to the petitioner and its officers. The case was again called for trial on May 7, 1928, but before a jury was impaneled, a conference of the parties and their counsel was held in the presence of the judge, which resulted in a settlement of the suit. Smith was a party to the settlement.

*1249 The agreement of settlement provided that releases be exchanged; the petitioner should pay to the Goldhirsch Holding Corporation $13,000 and discharge its bond and mortgage for $55,000 and a foreclosure suit which it had begun; the Goldhirsch Holding Corporation should reconvey part of the property at College Point to the petitioner, satisfy its judgment against Smith and withdraw and retract the allegations of fraud and deceit. This agreement was carried out.

The amount of $13,000 paid by the petitioner was a round figure arrived at as follows:

*1748 The cost to the petitioner of the entire property conveyed to the Goldhirsch Holding Corporation was, for the purposes of this case, $15,400.

OPINION.

MURDOCK: The petitioner argues that the sale which took place in 1926 was rescinded in 1928 except as to forty-eight lots, which could not be returned since they had been sold or encumbered by the Goldhirsch Holding Corporation; that the 1926 sale, instead of being what it then appeared to be, was in fact only a sale of the forty-eight lots, and the only profit from the sale was a certain profit on these lots. The petitioner has not shown what the Commissioner has done in regard to determining the income from the transaction in question. But assuming that he has considered the entire profit, as it appeared in 1926, to be income for 1926, we approve of his action.

Usually it is to the interest of both the taxpayer and the Government to have tax liability determined on an annual basis in the light of facts known at the end of each year. Perhaps if a certain transaction, seemingly valid, is some years later discovered to have been void ab initio, that fact may affect the tax liability of the earlier year. But in this*1749 case the evidence does not show that the transaction in question was void ab initio or that the sale was rescinded. *1250 The suit was not one for rescission of the contract, but was a suit for damages based on fraud. No verdict was over rendered against the petitioner. The suit was settled as to all parties and the plaintiff withdrew the fraud charges. This settlement was a new transaction, for tax purposes, which had no effect upon the petitioner's tax liability for 1926. Apparently, the Commissioner has merely refused to permit a restatement of the profit originally returned by the petitioner.

Judgment will be entered for the respondent.