Atlantic Coast Realty Co. v. Commissioner

                  United States Board of Tax Appeals

FINDINGS OF FACT.

The Atlantic Coast Realty Co. owns all except four shares of the stock of the Virginia-Carolina Land Corporation. For 1918 the two corporations filed a consolidated return.

The Virginia-Carolina Land Corporation purchased on April 18, 1918, a tract of land at Nitro, W. Va., at a cost of $ 103,338.25. The directors placed a value on this tract of $ 37,500 as of December 31, 1918. It was sold in 1923 for $ 22,374.95.

On March 20, 1917, it purchased 41 lots at Hopewell, Va., at a cost of $ 4,250. Shortly after December 31, 1918, the directors ascertained that the title was defective and the total amount of the cost was charged off as of December 31, 1918.

On June 26, 1917, it purchased a lot in Durham, N.C., at a cost of $ 4,250. The directors valued it as of December 31, 1918, at $ 3,250. It was sold August 30, 1919, for $ 5,341.22.

On October 20, 1917, it purchased a lot at Henderson, N.C., at a cost of $ 1,300. The directors valued it as of December 31, 1918, at $ 800. It was sold in July, 1919, for $ 1,274.50.

On November 23, 1916, it purchased a parcel of land at Holliston, N.C., at a cost of $ 1,186. The directors valued it as of December 31, 1918, at $ 600. It was sold December 23, 1921, for $ 600.

On August 4, 1917, it purchased a parcel of land at Roanoke, Va., at a cost of $ 1,140. The directors valued it as of December 31, 1918, at $ 700. Two lots were sold November 18, 1919, for $ 626.79, and the balance in October, 1922, for $ 667.67.

Sometime before 1918, it purchased a parcel of land at Rocky Mount, N.C., at a cost of $ 575. The directors valued it as of December 31, 1918, at $ 400. It was sold in November, 1920, for $ 792.09.

On April 24, 1918, it purchased a parcel of land at Smithfield, N.C., at a cost of $ 452.50. The directors valued it as of December 31, 1918, at $ 375. It was sold in May, 1919, for $ 452.50.

The rest of the land owned by the Virginia-Carolina Land Corporation was left at its cost price.

The original tax return for 1917 was made on the basis of actual receipts and disbursements. The books of account have since then been kept on the accrual basis.

OPINION.

STERNHAGEN: The taxpayer with its affiliated corporation was engaged in buying and selling land for profit. When it filed its consolidated return for 1918 it claimed for the first time that its income should be determined by the use of a so-called inventory of its lands at market value, and upon that basis it reported net income of $ 14,204.39 and paid a tax of $ 1,464.53. The Commissioner treated the so-called inventory as a "charge down of real estate" and disallowed it, together with several other items not in dispute. He added $ 72,962.75 to the income by reason of such disallowance, and, by applying the method of tax computation set forth in section 328, Revenue Act of 1918, he determined a tax of $ 30,745.29 and notified the petitioner of his determination of a deficiency of $ 29,280.76. This notice of deficiency states, "The Bureau further holds that a taxpayer engaged in the real estate business is not permitted to inventory real estate which is held for sale for the purpose of calculating net income subject to Federal income tax," which was an application by the Bureau of its Office Decision 848, published in 1921, in Cumulative Bulletin No. 4, at page 47: "A taxpayer engaged in the real estate business is not permitted to inventory real estate which is held for sale for the purpose of calculating net income subject to Federal income tax."

The taxpayer in this proceeding attacks this ruling as contrary to law. It claims the right under section 203, Revenue Act of 1918, to use an inventory of its lands and to price such lands, not necessarily at cost, but, as merchandise traders are permitted at their election to do, at cost or market whichever is lower. Assuming such right, it has introduced the opinions of witnesses for the purpose of proving the market value of some of its lands below cost.

We are of opinion that the petitioner has no such right as it claims, that it may not determine its income by revaluing its lands from year to year, and therefore that there is no occasion for findings of fact as to market value of the parcels in question at the close of 1918.

Income is not ordinarily determined by the fluctuations in value of property upward or downward during the continuating of the same ownership. Increment is not added to, nor is a drop in value deducted from, earnings until it has been realized by a sale, loss or other cognizable disposition of the property. Section 203 is a departure from this and it must be limited to its apparent intendment as disclosed in its terms and if necessary in its history. It provides:

That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

It was first enacted in the Revenue Act of 1918 and has remained unchanged in each of the later Acts of 1921, 1924, and 1926. In the report on the proposed 1918 Act made by the House Committee on Ways and Means, the Committee said:

     In many cases the only way that the net income can be determined