OPINION.
Morris:
The Commissioner has not asserted a deficiency in tax for the year 1921; on the contrary, he has determined that there is an overassessment for that year. Consequently, upon authority of the decisions of this Board in the Appeals of Cornelius Cotton Mills, 4 B. T. A. 255, and R. P. Hazzard Co., 4 B. T. A. 150, we have no jurisdiction as to that year.
Since the hearing of this appeal, Congress has enacted the Revenue Act of 1926, and in section 212 (d) thereof provision is made for installment sales and the rule to be applied in computing the income therefrom. By the provisions of section 1208 of the same Act, the provisions of section 212 (d) are to be retroactively applied in computing income under the Revenue Acts of 1918 and 1921, as well as other acts. Section 212 (d) 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 when the payment is completed, bears to the total contract price. In the ease of a sale or other disposition of real property, if 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 thes 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.
The Commissioner has promulgated his regulations for the enforcement of the above provisions of the statute. These are embodied in articles 42 to 46, inclusive, of Regulations 69, and include, together with the rules laid down in the Act for computing-income from installment sales, a construction of the terms " initial payments," " total contract price," and " purchase price." There the Commissioner has ruled that 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 not be considered as a part of the " initial payments " or of the " total contract price," but shall be included as a part of the " purchase price." While we express no opinion as to whether the rule laid down in the Commissioner's regulations may be properly applied to and generally followed in all cases involving sales of real property on the installment plan, we believe that his construction of the terms " initial payments," " total contract price," and " purchase price," and the rule for computing the income from installment sales to be returned in any taxable year, as they are laid down in the regulations, are, when applied to the facts in this particular case, and considered in the light of the intent and purpose of the Congress in enacting the provisions of section 212 (d) of the Revenue Act of 1926, both equitable and legally sound.
The total contract price, in the transaction which we have under consideration, is the consideration named in the original agreement, to wit, $750,000, less the Insurance Company's mortgage of $443,000, or $307,000; the initial payment, meaning the total payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale was made, is $58,500; and the purchase price is $750,000. Therefore, since the initial payment received by the petitioner during the year in which the sale was made is less than one-fourth of the purchase price, it is clear that the provisions of section 212(d) of the Revenue Act of 1926, and the regulations promulgated pursuant thereto, are applicable to the facts in this case, and the petitioner is entitled to return the income from the transaction in question on the installment basis.
This brings us to a consideration of the amount of the income which the petitioner should have returned in its return for the year 1920. The rule laid down in the statute is that the petitioner shall return as income from an installment sale that proportion of the installment payments actually received within the year which the total profit realized or to be realized when payment is completed bears to the total contract price. The total contract price, computed in the manner heretofore indicated, is $307,000. The total profit to be realized when payment is completed is $221,839.48, computed as follows:
Consideration named in contract_$750, 000.00
Deduct:
Cost of property_$575, 000.00
Less: Depreciation_ 60, 682.98
- $505, 317.02
Selling expenses- 22, 843. 50
- 528,160.52
Total profit to be realized_ 221, 839.48
The total profit of $221,839.48 is 72.2604 per cent of the total contract price of $307,000. The total payments received in the year 1920 is $58,500; therefore, the income from this transaction to be returned for the year 1920 is 72.2604 per cent of $58,500, or $42,272.33.
The agreement made in 1922 between the purchaser and the petitioner, which resulted in a reduction of $82,571.42 in the purchase-money mortgage, can have no bearing whatever on the computation of the income to be returned for the year 1920. The sale in 1920 was one transaction, and the agreement to reduce the purchase price made in 1922, though involving the same subject matter, was another transaction. The income to bo returned for the year 1920 must be computed in accordance with the terms of the original agreement, and that to be returned for the year 1922 and subsequently must be computed in accordance with the terms of the agreement had in 1922.
Judgment will be entered on 15 days' notice, under Rule 50.
Milliken concurs in result only.