Morris v. Commissioner
This text of 1963 T.C. Memo. 139 (Morris v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
Memorandum Findings of Fact and Opinion
FAY, Judge: The respondent determined a deficiency in the petitioners' income tax for the year 1957 in the amount of $9,319.90.
The only issue for decision is whether a partnership in which the petitioners were partners was required to include the income from certain sales of real property in taxable income for the year at issue.
Findings of Fact
All of the facts are stipulated and are found as stipulated.
The facts as stipulated by the parties are as follows:
Petitioners are husband and wife with principal residence at 3806 South Allegheny Avenue, Tulsa, Oklahoma.
Petitioners filed their 1957 income tax return with the district*207 director of internal revenue, Oklahoma City, Oklahoma.
Morris Construction Company, hereinafter referred to as Construction, a copartnership engaged in the business of building and selling houses, consisted of the following partners (petitioners herein) for the taxable year ended April 30, 1957:
| Share of Profit or | |
| Name of Partner | Loss |
| Warren G. Morris | Two-thirds |
| Nina Kay Morris | One-third |
During the fiscal year ended April 30, 1957, Construction entered into an arrangement with Home Federal Savings and Loan Association, hereinafter referred to as Home Federal, Tulsa, Oklahoma, a lending agency, whereby Home Federal would provide financing for purchasers of homes that Construction had for sale.
When a prospective purchaser for a house was found by Construction, Home Federal would inspect the property and decide how much of the selling price it would lend in cash.
After making a downpayment the buyer would execute a mortgage note to Home Federal for the balance of the full purchase price.
Construction would receive the amount of the cash Home Federal was willing to lend, plus a "Collateral Certificate" evidencing a savings share account in Home Federal*208 for the difference between the amount of the mortgage note and the cash received from Home Federal. Home Federal and Construction would immediately enter into a collateral agreement whereby the savings share account was pledged as collateral on the purchaser's loan until the purchaser had paid an amount on the mortgage loan equal to the amount of the savings deposit. At this latter time, Home Federal would again appraise the property. If the reappraised value was sufficient to cover the balance of the outstanding loan, the amount in the savings share account would be paid to Construction.
A pass book for the savings share account was made out for each loan in the name of Construction but was retained by Home Federal. Interest was credited to the account by Home Federal, of which amount $530.89 was not reported as income on the partnership return for the fiscal year ended April 30, 1957.
During the fiscal year ended April 30, 1957, Construction received as part of its sales price of homes, certificates of savings share accounts in the amount of $45,650, which amount was recorded on its books and reported as income on its income tax return.
In its income tax return filed for the*209 fiscal year ended April 30, 1957, Construction claimed a deduction for operating expense of $71,614.88 which included an item "Reduction of Value of Collateral to Market" in the amount of $22,825, which was 50 percent of the amount of the certificates of savings share accounts received from Home Federal.
Construction kept its books on the accrual basis of accounting for its taxable year ended April 30, 1957, and reported on its Federal income tax return ordinary income for that year in the amount of $42,490.88.
On their joint income tax return filed for the year 1957 the petitioners reported income from the partnership, Construction, as follows:
| Warren G. Morris | $28,327.25 |
| Nina Kay Morris | 14,163.63 |
| $42,490.88 |
After audit the Commissioner increased petitioners' income from Construction in the amount of $23,169.40 with the following explanation in the notice of deficiency:
Schedule 1-A
Explanation of Adjustments
(a) Examination of the books and records of the partnership Morris Construction Company disclosed that your share of the distributable income for the fiscal year ended April 30, 1957, is in the amount of $65,660.28. Inasmuch as you reported $42,490.88*210 your taxable income has been increased by the difference of $23,169.40, computed as follows:
| Ordinary net income for partner- | ||
| ship return | $42,490.88 | |
| Add: Unallowable deductions | ||
| 1. Reduction in value | ||
| of certificate | ||
Free access — add to your briefcase to read the full text and ask questions with AI RelatedSpring City Foundry Co. v. Commissioner 292 U.S. 182 (Supreme Court, 1934) Key Homes, Inc. v. Commissioner of Internal Revenue 271 F.2d 280 (Sixth Circuit, 1959) Key Homes, Inc. v. Commissioner 30 T.C. 109 (U.S. Tax Court, 1958) E. J. Gallagher Realty Co. v. Commissioner 4 B.T.A. 219 (Board of Tax Appeals, 1926)
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