Before BUFFINGTON, DAVIS, and THOMPSON, Circuit Judges.
This is a petition to review an order of redetermination of the Board of Tax Appeals, sustaining the determination of the Commissioner of Internal Revenue that there is a deficiency in the income tax for 1927 of the Reliable Coal Company, a dissolved corporation, for whose obligations the petitioners, Max Shubin and his wife, Sara, are responsible.
In 1921 Max Shubin purchased approximately two and one-third acres of land for $21,000. He formed a corporation called the Reliable Coal Company for the purpose of engaging in the business of selling coal. He transferred the land to the company in consideration of $1 and the assumption of a $20,000 mortgage then existing on the property. The coal company sold about 80 per cent. of the land for $19,000, and retained the rest upon which it constructed an office building and garage, and made other improvements, at the cost of $23,834.72.
The coal company did an active business with annual profits of from $10,000 to $12,000. In 1927 it had approximately 5,000 customers.
In April, 1927, the corporation sold its business to one Silverman for $95,000, payable as follows: $5,000 in cash upon signing the agreement; $10,000 at its settlement; a first mortgage for $50,000 on the business and property for five years; a second mortgage for $30,000 to a third party to be secured by the seller.
The cash payments of $5,000 and $10,000 were made, and the first mortgage was executed by Silverman. Shubin arranged with a building and loan association for the second mortgage, which Silverman gave to the association. At the time the cash payments were made, the coal company received $30,000 representing the proceeds of the loan secured by the second mortgage.
Apparently, the building and loan association would not loan $30,000 to Silverman on a second mortgage without substantial collateral. It required both the coal company and Shubin to give bonds in the sum of $30,000 as collateral for the mortgage. It also obtained securities from Shubin of a value of $12,000 and a letter of guaranty for $10,000 from Silverman's father.
After the sale to Silverman, the coal company was dissolved, and Shubin assumed all of its liabilities. The building and loan association released the coal company's bond retaining Shubin's bond for $30,000.
Silverman proved unable to conduct the coal business successfully, and on January 1, 1929, he turned it over to his father, who subsequently became a bankrupt.
In computing the tax liability of the coal company for the year 1927, the Commissioner of Internal Revenue determined that it realized a profit of $63,875.55 from the sale of the business to Silverman. This was arrived at by deducting from the selling price of $95,000, the cost of the assets and the expenses of the sale, the sums of $24,870.45 and $6,254, respectively. The Commissioner also determined that the transaction was not an installment sale within the meaning of section 212 (d) of the Revenue Act of 1926 (26 USCA § 953 (d), since the amount of cash received as initial payments upon the sale of the property was in excess of 25 per centum of the selling price. The Board of Tax Appeals agreed with the Commissioner.
The petitioners contend that the proceeds of the second mortgage obtained from the building and loan association were not a payment in cash of part of the purchase price of the property, but a loan made on the basis of the security furnished by the coal company. They say that the only initial payments were the two payments of $15,000 in cash that Silverman paid to the coal company.
Section 212 (d) of the Revenue Act of 1926 provides that, in the case of a casual sale of personal property for more than $1,000 or of a sale of real property, "if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations * * * be returned on the basis and in the manner above prescribed [that is, the installment plan]. * * * 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 record does not contain a copy of the bond, but the facts show that the liability of the coal company was secondary and subordinate to that of Silverman, the mortgagor. The Board considered the transaction to be similar to one in which a seller receives promissory notes from the buyer in payment for property, and thereafter the seller indorses and sells them. Grace T. Mytinger v. Com'r, 4 B.T.A. 896; Packard Cleveland Motor Company v. Com'r, 14 B.T.A. 118. However true that may be, the result that the Board reached is correct. The coal company received cash, to be used as it saw fit, in exchange for its property. It was obligated to repay the money ...