mediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments. (Art. 44.) Obligations of purchaser excluded. REGULATION. . . . . 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 part of the "purchase price," as those terms are used in section 212 (d). (Art. 44.) .... To illustrate: Suppose A sells property in 1926 for $100,000. He receives an initial payment in 1926 of $25,000, the balance of $75,000 being secured by mortgage of the purchaser payable in two years. This is an installment sale because the mortgage is not considered in computing the initial payment which in this case is not more than one-fourth of the purchase price. Also, where mortgages are assumed by the vendee, or where the vendee takes subject thereto, such mortgages are eliminated in the computation. To illustrate: Commissions and selling expenses might be added to the cost of the property sold, or if paid in cash, deducted as expenses of the year in which the sale is made. Commissions and other selling expenses excluded.20 REGULATION. . . . . 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. 44.) Inclusive of mortgages assumed by purchaser. Under section 214 (a-11), in the case of a casual sale of real property, a deduction is allowed for future expenses incurred under the contract of sale. See Chapter 30. Such expenses may be used, however, in determining the percentage of profit in each installment payment. RULING. In the case of sales of real estate by persons not regularly engaged in that business, commissions paid, while they do not reduce or otherwise affect the amount of the selling price, may be offset against the selling price in determining the amount of gain or loss realized from such sales, and in cases of installment sales in determining the percentage of profit in each installment payment which is to be included in gross income. (V-39-2917; I. T. 2305.) If not added to the cost of the property sold expenses can be deducted from other income. (See page 547.) Gain or loss on repossession. REGULATION. If for any reason the purchaser defaults in any of his payments, and the vendor returning income on the installment basis repossesses the property, the entire amount received on installment payments and retained by the vendor, less the sum of the profits previously returned as income and an amount representing proper adjustment for exhaustion, wear and tear, obsolescence, amortization, and depletion of the property while in the hands of the purchaser, will be income of the vendor for the year in which the property is repossessed, and . . . . (Art. 45.) Basis on repossession. REGULATION. the basis of the property in the hands of the vendor will be the original basis at the time of the installment sale. (Art. 45.) Deferred payment sales. REGULATION. (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. .. (Art. 44.) .... WHEN FIRST PAYMENT EXCEEDS 25 PER CENT. If A sells property in 1926 for $100,000 and takes in payment: Cash.... Notes of B (payable in 3 years). $30,000.00 The sale is not an installment sale but on deferred payments and the profit is not postponed. OBLIGATIONS OF PURCHASER MAY BE INCLUDED. REGULATION. In transactions included in class (2) in article 44 the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash to the amount of their fair market value in ascertaining the profit or loss from the transaction. . . . If the obligations received by the vendor have no fair market value, the payments in cash or other property having a fair market value shall be applied against and reduce the basis of the property sold, and, if in excess of such basis, shall be taxable to the extent of the excess. Gain or loss is realized when the obligations are disposed of or satisfied, the amount being the difference between the reduced basis as provided above and the amount realized therefor. . . . . (Art. 46.) COMMISSIONS AND OTHER SELLING EXPENSES INCLUDED.-Where the transaction is closed and the entire profit thereon is required to be reported, all expenses, of course, may be deducted. GAIN OR LOSS ON REPOSSESSION.2 REGULATIONS. . . . . If the vendor had retained title to the property and the purchaser defaults in any of his payments, and the vendor repossesses the property by agreement or process of law, the difference between (1) the entire amount of the payments actually received on the contract and retained by the vendor and (2) the sum of the profits previously returned as income in connection therewith and an amount representing proper adjustment for exhaustion, wear and tear, obsolescence, amortization and depletion of the property while in the hands of the purchaser, will constitute gain or loss, as the case may be, to the vendor for the year in which the property is repossessed, ... (Art. 46.) If the vendor had previously transferred title to the purchaser, and the purchaser defaults in any of his payments and the vendor reacquires the property, such repossession shall be regarded as a transfer by the vendor, in exchange for the property, of so much of the face value of the purchaser's obligations as are applied by the vendor to the purchase or bid price of the property. Such an exchange will be regarded as having resulted in the realization by the vendor of gain or loss, as the case may be, for the year of repossession, measured by the difference between the fair market value of the property and the face value of those obligations of the purchaser which were applied by the vendor to the purchase or bid price of the property to the extent that the fair market value thereof was previously recognized in computing income. The fair market value of the property shall be presumed to be the amount for which it is bid in by the vendor in the absence of clear and convincing proof to the contrary. . . . . (Art. 46.) BASIS ON REPOSSESSION. REGULATION. . . If the vendor had retained title. . . . the basis of the property in the hands of the vendor will be the original basis at the time of the sale. "For gain or loss on repossession of personal property sold on the installment plan, see Art. 42, page 542. If the vendor had. . . . transferred title. . . . . If the property so acquired is subsequently sold, the basis for determining gain or loss is the fair market value of the property at the date of acquisition. . . . . (Art. 46.) Sale of real property in lots. REGULATION. . . . . Where a tract of land is purchased with a view to dividing it into lots or parcels of ground to be sold as such, the cost or other basis shall be equitably apportioned to the several lots or parcels and made a matter of record on the books of the taxpayer, to the end that any gain derived from the sale of any such lots or parcels which constitute taxable income may be returned as income for the year in which the sale is made. This rule contemplates that there will be a measure of gain or loss on every lot or parcel sold, and not that the capital in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction, and gain or loss computed accordingly. (Art. 43.) RULING. The word "equitably" as used in article 43 of Regulations 45, relating to the apportionment of the cost of a tract of land to the parcels sold, does not mean "ratably." When a taxpayer has purchased a tract of land containing acreage so varied in character that he would not pay the same price for the poorer quality of land as he would for that which was more tillable, the taxpayer should be permitted to show by competent evidence the actual proportion of the cost of the entire tract which is properly allocable to the portion sold. (C. B. II-2, 72; I. T. 1843-) The method usually followed is to allocate the cost on the basis of established selling prices. ESTIMATED DEVELOPMENT WORK MAY BE INCLUDED IN COST. RULING. Profit realized on the sale of lots, the selling price of which includes the cost of certain development work already made or to be made in accordance with the contract of sale, should be based on the cost of the land to the vendor, or its fair market value as of March 1, 1913, if acquired prior to that date, plus the actual and estimated future expenditures for development. If the estimated future expenditures should be subsequently ascertained to be incorrect, amended returns should be filed as the basis for an adjustment of the tax for the years affected. The cost of such development having been taken into consideration in determining profit, expenditures for this purpose can not be deducted from gross income in subsequent returns. (C. B. 3, 108; O. D. 567.) The subject of carrying charges is discussed in Chapter 18. Lease of real estate with option to purchase.-In the case of ninety-nine year lease with option to purchase at the end of fifty years for a nominal amount and where it was alleged that "the arrangement was intended at the time of making as a contract for purchase and sale of the land," the Treasury held "that the annual payments received under the terms of the lease should be considered as rent, and not as installments on the purchase price of the property." (C. B. II-2, 73; I. T. 1819.) Effect of death of holder of installment notes.-The death of the holder of notes covering an installment sale changes the computation of profit. (C. B. I-1, 78; I. T. 1192.) The ruling would work out as follows: The value on March 1, 1913, was $75,000, and the sale price in 1919, $100,000. The gross profit is 25 per cent. The down payment is $20,000. There would be reported in A's 1919 return onefourth thereof, or $5,000. The balance of the purchase price ($80,000) is represented by four notes of $20,000 each. A having bequeathed the notes to B, the latter collects each note and reports only the difference between $20,000 and the discounted value thereof at A's death. [Section 204 (a-5).] The Treasury loses the tax on the difference between the balance of profit on the sale of $20,000 ($25,000 profit on the entire transaction less $5,000 reported in A's 1919 return) and the discount on the notes applicable to the period between the date of testator's death and the maturity of the notes. Capital gains on installment sales.-The Treasury has now definitely held that the profits on installment sales of real estate by other than dealers in real estate may be subject only to the 122 per cent tax on capital gains. (C. B. II-2, 44; I. T. 1737; as to dealers in real estate, see Chapter 21.) The rule will also apply to sales of stocks or personal property when partial payments are made and which are not deemed to be closed transactions. |