Under § 212(d) of the Revenue Act of 1924, where real estate is
sold on the installment plan and the initial payments do not exceed
one-fourth of the purchase price, the vendor is permitted, under
regulations to be prescribed by the Commissioner with the approval
of the Secretary, to return as income 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."
Held:
Page 288 U. S. 407
1. That a Treasury regulation providing that, as to property
sold subject to an existing mortgage payable in installments which
the purchaser assumes, the amount of such mortgage, "to the extent
that it does not exceed the basis to the vendor of the property
sold," shall be included as part of the purchase price in finding
the vendor's profit, but shall not be considered as part of the
initial payments or of the total "contract price," is a valid
application of the statute. P.
288 U. S.
412
2. An excess of the assumed mortgage over the base or
depreciated cost of the property to the vendor was properly treated
as if received in money by the vendor in the year of sale. P.
288 U. S.
414.
60 F.2d 719 reversed.
Certiorari,
287 U. S. 93, to
review the reversal of a ruling of the Board of Tax Appeals, 19
B.T.A. 788, sustaining deficiency income tax assessments.
Page 288 U. S. 408
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
The respondent building corporation sought redetermination of
deficiency income taxes for 1924 and 1925. The Board of Tax Appeals
sustained the Commissioner's final action of June 17, 1930; the
court below reversed its judgment. 60 F.2d 719. The point now in
controversy has relation to the distribution for taxation of income
derived from sales on the installment plan of two pieces of real
estate on Eighty-Second and Eighty-Third streets, New York City.
Each was covered by one or more mortgages which the purchaser
assumed.
Page 288 U. S. 409
The Revenue Act 1926, c. 27, 44 Stat. 9, 23, 39, 41, § 230, lays
a tax upon the net income of corporations. Section 232
provides:
"In the case of a corporation subject to the tax imposed by
section 230, the term 'net income' means the gross income as
defined in section 233 less the deductions allowed by sections 234
and 206, and the net income shall be computed on the same basis as
is provided in subdivisions (b) and (d) of section 212 or in
section 226."
"Sec. 212. (b) The net income shall be computed . . . in
accordance with the method of accounting regularly employed in
keeping the books of such taxpayer, but . . . if the method
employed does not clearly reflect the income, the computation shall
be made in accordance with such method as in the opinion of the
Commissioner does clearly reflect the income."
"
* * * *"
"(d) 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 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 "
Page 288 U. S. 410
"Sec. 1208. The provisions of subdivision (d) of section 212
shall be retroactively applied in computing income under the
provisions of . . . the Revenue Act of 1924. . . ."
Treasury Regulations 69, Article 44, promulgated August 28,
1926, as amended in 1929:
"Art. 44. Sale of Real Property Involving Deferred Payments. --
Under section 212(d), deferred-payment sales of real property fall
into two classes when considered with respect to the terms of sale,
as follows:"
"(1) Sales of property on the installment plan, that is, sales
in which the payments received in cash or property other than
evidences of indebtedness of the purchaser during the taxable year
in which the sale is made do not exceed one-fourth of the purchase
price."
"(2) Deferred payment sales not on the installment plan, that
is, sales in which the payments received in cash or property other
than evidences of indebtedness of the purchaser during the taxable
year in which the sale is made exceed one-fourth of the purchase
price."
"Sales falling within class (1) and class (2) alike include(a)
agreements of purchase and sale which contemplate that a conveyance
is not to be made at the outset, but only after all or a
substantial portion of the purchase price has been paid, and (b)
sales where there is an immediate transfer of title, the vendor
being protected by a mortgage or other lien as to deferred
payments."
"In the sale of mortgaged property, the amount of the mortgage,
whether the property is merely taken subject to the mortgage or
whether the mortgage is assumed by the purchaser, shall be included
as a part of the 'purchase price,' but the amount of the mortgage,
to the extent it does not exceed the basis to the vendor of the
property sold, shall not be considered as a part of the 'initial
payments' or of the 'total contract price' as those terms are used
in section 212(d), in articles 42 and
Page 288 U. S. 411
45, and in this article. Commissions and other selling expenses
paid or incurred by the vendor are not to be deducted or taken into
account in determining the amount of the 'initial payments,' the
'total contract price,' or the 'purchase price.'"
"Art. 45. Sale of Real Property on Installment Plan. -- In
transactions included in class (1) in article 44, the vendor may
return as income from such transactions 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
property is paid for bears to the total contract price."
In 1924, respondent sold the Eighty-Second street property then
under mortgage which it had executed to secure a loan of
$1,100,000, payable in semiannual installments of $22,000 until
1933, when the balance would become due. The purchaser assumed the
mortgage, paid $300,000 in cash, agreed to pay $700,000, and
secured this by a purchase money mortgage. Upon the latter
mortgage, $30,000 was paid in 1924 and $36,250 in 1925. In 1924 and
1925, respectively, the purchaser paid upon the assumed mortgage
$22,000 and $24,000.
The Commissioner estimated the depreciated cost of the property
at.$1,541,323.48. Subtracting this from the total sale price,
$2,100,000, he ascertained realized profit, $558,676.52.
He ruled that, for 1924, the taxable sum was the same proportion
of the amount actually received during the year ($330,000) as the
entire profit ($558,676.52) was of the total ($1,000,000) payable
directly to the taxpayer, 55% plus. He excluded the assumed
mortgage from the total used for determining the applicable
percentage, and held "total contract price" was what the purchaser
agreed to pay directly to the vendor -- the whole amount which the
taxpayer expected to receive in money.
Payments received by respondent during 1925 were likewise
assessed.
Page 288 U. S. 412
In 1925, respondent sold the Eighty-Third street property then
subject to two mortgages which it had executed to secure loans of
$1,100,000 and $500,000, respectively, payable in installments, six
and three months, until 1933 and 1934, when the balance would
become due. The purchaser assumed both mortgages, paid $300,000 in
cash, and agreed to pay $265,000, and secured this by a purchase
money mortgage. On the latter obligation, $2,000 was paid in 1925.
During 1925, the purchaser paid on the assumed second mortgage
$22,500.
The Commissioner fixed the depreciated cost of the property at
$1,522,035. Subtracting this from the total sale price, $2,165,000,
he found the realized profit, $642,967. He ruled that the
difference ($77,967) between the base or depreciated cost
($1,522,033) and the total of the assumed mortgages ($1,600,000)
should be treated as if received in money by the taxpayer during
1925; also that the sum subject to taxation in 1925 was the same
proportion of what the taxpayer received, actually and
constructively, during the year ($302,000 plus $77,967) as the
realized profit ($642,967) was of the total amount ($565,000) which
the purchaser agreed to pay directly to the taxpayer, 100%
plus.
He excluded the amount of the assumed mortgages from the totals
used to determine the applicable percentage, and payments on them
were not regarded as received by the vendor. He also treated as if
cash received by the vendor in 1925 the difference between the
depreciated cost and the total of the assumed mortgages. "Total
contract price" was held to be the total amount payable directly to
the vendor.
The respondent maintains that the assumed mortgages should be
regarded as part of the contract price, and payments upon them by
the purchaser should be treated as money received by the vendor. In
this way, it is said
Page 288 U. S. 413
the tax would be spread over the entire life of the assumed
mortgage. And it further insists that the excess of the assumed
mortgages over the depreciated value of the Eighty-Third street
property should not be regarded as if money actually received by
the vendor during 1925.
Respondent's books were kept upon the accrual basis, but all
agree that, in the circumstances, the Revenue Act of 1926 permitted
assessments upon the installment basis. The Commissioner undertook
to act according to his prescribed regulations.
Prior to the Act of 1926, the Revenue Acts definitely recognized
only two bases for tax returns -- cash and accrual. Where sales
were upon the installment plan, application of either of these
bases led to hardship; payment of the total tax on ascertained
profit was often required in a single year. By regulations, the
Commissioner offered some alleviation; the vendor was allowed to
distribute the profit through the years during which purchase money
was actually received. The general principal underlying these
regulations was to make division of partial payments and apply part
as return of capital and part to profit. In 1926, the Board of Tax
Appeals disapproved of the earlier regulations and pointed out that
the statutes permitted returns only upon the cash or accrual basis.
Thereupon, Congress enacted § 212(d), above quoted. The end in view
was to permit the Commissioner to make assessments according to the
general principle theretofore followed under regulations deemed
appropriate to the varying situations. The new plan was optional;
taxpayers were allowed to elect whether to make returns under the
regulations upon the new basis or upon one of the old bases.
The Conference Report to the House, on Revenue Act of 1926, p.
32, House Reports, Vol. I, 69th Congress, 1st Session, 1925-1926,
declares concerning § 212(d): "This amendment
Page 288 U. S. 414
writes into the bill the basic principles of the installment
method authorized by prior regulations."
See Report Senate
Committee on Finance, No. 52, 69th Congress.
Installment sales of real estate incumbered by liens give rise
to many complications which Congress could not readily foresee.
Accordingly, it intrusted to the Commissioner wide discretion in
respect of details. And, considering the practical requirements of
the taxing system, we think the regulations now challenged
constitute a fair attempt to effectuate the legislative intent.
They are within the broad discretion granted to the Commissioner,
and violate no definite provision of the statute.
The amounts which respondent realized as profits are not in
question. These were subject to taxation either upon the accrual
basis or, at the taxpayer's option, on the installment basis.
Generally, the Commissioner's regulations permitted the tax
payments to be spread over the period during which the taxpayer
would receive funds, and divided these partly into return of
capital and partly into profits actually collected. The method
suggested by the respondent would inevitably lead to many practical
difficulties, might postpone collection far beyond the time when
the vendor would receive any direct payments, and probably would
render impossible determination from the taxpayer's books of what
he should account for.
The Commissioner's treatment of the excess of the mortgages on
the Eighty-Third street property over the base cost followed the
general purpose to place reasonable limitation upon the spread of
the tax. It was appropriate in the unusual circumstances presented,
certainly not prohibited. It was a practical way to accomplish the
end. Some possible departure from the method prescribed for
ordinary circumstances is not enough to destroy what he deemed
necessary to meet unusual conditions.
The excess of $77,967 under the sale agreement would never
actually come into the vendor's hands, but it represented
Page 288 U. S. 415
part of the admitted profits, and was subject to taxation. No
positive provision in the statute required that it be spread over
subsequent years, and we think there was nothing illegal or
oppressive in treating this as if an actual payment. The taxpayer
has been treated more leniently than if required to report upon the
accrual basis. The Regulations were not contrary to any positive
provisions of the statute, and, as said by the Board of Tax
Appeals, were "both equitably and legally sound."
Since 1926, the Board has consistently upheld the Commissioner's
regulations as to profits on installment sales. Frank J. Bosshardt,
4 B.T.A. 1262; Dalriada Realty Co., Inc., 5 B.T.A. 905; Pacheco
Creek Orchard Co., 12 B.T.A. 1358; Katherine H. Watson, 20 B.T.A.
270; Fifty-Three West Seventy-Second Street, Inc., 23 B.T.A. 164;
Metropolitan Properties Corporation, 24 B.T.A. 220. And the Revenue
Acts of 1928 and 1932 substantially reenacted the pertinent
provision of the act of 1926.
The Commissioner and Board of Tax Appeals have practical
knowledge of the intricate details incident to tax problems, and
their determination in circumstances like those under consideration
here should be given effect when not clearly contrary to the will
of Congress.
Reversed.