SCOTUS Reports

Tag: Mortgage Assumption

  • Joe Kelly Butler, Inc. v. Commissioner, 87 T.C. 734 (1986): Bulk Sale Installment Reporting and Mortgage Assumption

    Joe Kelly Butler, Inc. v. Commissioner, 87 T. C. 734, 1986 U. S. Tax Ct. LEXIS 44, 87 T. C. No. 44 (1986)

    In a bulk sale of assets, the mortgage assumed in excess of the aggregate basis of all assets sold is considered a payment in the year of sale for installment reporting purposes.

    Summary

    Joe Kelly Butler, Inc. sold various assets, including encumbered real property, to Mitchell Energy Corp. for a total consideration including cash, a promissory note, and the assumption of a mortgage exceeding the basis of the real property alone. The issue before the U. S. Tax Court was whether the excess of the mortgage over the real property’s basis constituted a payment in the year of sale, potentially disqualifying the sale from installment reporting. The Court held that the mortgage assumption should be compared against the aggregate basis of all assets sold, not just the real property, allowing the taxpayer to use the installment method as the mortgage did not exceed the total basis.

    Facts

    Joe Kelly Butler, Inc. sold its operating assets to Mitchell Energy Corp. for $6,401,345 on October 1, 1974. The consideration included $246,900 in cash, a promissory note of $5,357,538, and the assumption of a $796,907 mortgage on the real property sold. The real property had a basis of $14,676, and total assets sold had an aggregate basis of $831,183. The taxpayer elected to report the gain on the sale using the installment method, treating only the cash received as income in the year of sale.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the taxpayer’s federal income tax for the years 1974, 1975, 1977, and 1978, arguing that the mortgage assumption in excess of the real property’s basis was a payment in the year of sale, disqualifying the sale from installment reporting. The taxpayer challenged this determination in the U. S. Tax Court, which ultimately ruled in favor of the taxpayer, allowing the use of the installment method based on the comparison of the mortgage to the total basis of all assets sold.

    Issue(s)

    1. Whether, in a bulk sale of assets, the mortgage assumed by the buyer, when it exceeds the basis of the real property alone, should be treated as a payment in the year of sale for the purpose of determining eligibility for the installment method of reporting gain.

    Holding

    1. No, because the mortgage should be compared to the aggregate basis of all the assets sold, not just the real property. The Court determined that since the mortgage did not exceed the total basis of all assets sold, there was no payment in the year of sale in excess of basis, allowing the taxpayer to use the installment method.

    Court’s Reasoning

    The Court’s decision was based on the purpose of the installment method, which is to relieve taxpayers from paying the full tax on anticipated profits in the year of sale when they have received only a small portion of the sales price. The Court rejected the Commissioner’s argument to segregate assets for installment sale purposes, reasoning that the relevant percentage of initial payments to selling price remains the same whether analyzed as a whole or by component. The Court also considered the history and purpose of the relevant regulation, concluding that it should be applied narrowly to avoid unintended disqualification of transactions under the 30% test. The Court’s approach was consistent with the Fifth Circuit’s reasoning in Irwin v. Commissioner, which compared assumed liabilities against the basis of all assets sold in a bulk sale.

    Practical Implications

    This decision clarifies that for bulk sales of assets, the entire transaction should be considered when determining eligibility for the installment method, rather than segregating assets into classes. This allows taxpayers to potentially qualify for installment reporting even when a mortgage assumed exceeds the basis of the real property alone. Legal practitioners advising on asset sales should consider the aggregate basis of all assets when structuring transactions to maximize tax benefits. This ruling may impact business planning and tax strategies for companies disposing of multiple asset types in a single transaction. Subsequent cases applying this ruling have reinforced the importance of a holistic approach to bulk sales in tax analysis.

  • Goodman v. Commissioner, 74 T.C. 684 (1980): When Trusts Can Be Used for Installment Sales Without Tax Recharacterization

    Goodman v. Commissioner, 74 T. C. 684 (1980)

    A sale of property to a trust followed by a sale by the trust to a third party can be recognized as separate transactions for tax purposes if the trust acts independently and in the best interest of its beneficiaries.

    Summary

    In Goodman v. Commissioner, the U. S. Tax Court ruled that the sale of an apartment complex by Goodman and Rossman to their children’s trusts, and the subsequent sale by the trusts to a third party, were two separate transactions for tax purposes. The court emphasized that the trusts, managed by Goodman and Rossman as trustees, operated independently and in the beneficiaries’ best interests. The ruling allowed the sellers to defer tax under the installment method, rejecting the IRS’s argument that the transactions should be collapsed into a single sale. Additionally, the court held that the trusts took the property subject to an existing mortgage, impacting the tax calculation under the installment method.

    Facts

    William Goodman and Norman Rossman, experienced in real estate, owned the Executive House Apartments through a partnership. They sold the property to six trusts set up for their children’s benefit, with Goodman and Rossman serving as trustees. The trusts then sold the property to Cathedral Real Estate Co. the following day. Both transactions were structured as installment sales. The IRS argued that these should be treated as a single sale directly to Cathedral, and that the trusts took the property subject to a mortgage, affecting the tax treatment.

    Procedural History

    The IRS issued a deficiency notice to the Goodmans and Rossmans, asserting that the transactions should be treated as a single sale to Cathedral, increasing the taxable income for 1973. The taxpayers petitioned the U. S. Tax Court. The IRS later amended its answer to argue that the property was sold subject to a mortgage, further increasing the deficiency. The Tax Court ruled in favor of the taxpayers on the issue of the two separate sales but held that the trusts took the property subject to the mortgage.

    Issue(s)

    1. Whether the sale of the apartments by Goodman and Rossman to the trusts, followed by the trusts’ sale to Cathedral, should be regarded as a single sale from Goodman and Rossman to Cathedral for federal income tax purposes.
    2. Whether the trusts, in purchasing the apartments, assumed the existing mortgage or took the property subject to the mortgage, affecting the tax treatment under the installment method.

    Holding

    1. No, because the trusts operated independently and in the best interest of the beneficiaries, making the sales bona fide separate transactions.
    2. Yes, because the trusts took the apartments subject to the mortgage, as the payment structure indicated that the mortgage payments were made directly by the trusts to the mortgagee, affecting the tax calculation under the installment method.

    Court’s Reasoning

    The court analyzed whether the transactions should be collapsed into a single sale, applying the substance-over-form doctrine. It found that the trusts were independent entities with substantial assets and that Goodman and Rossman, as trustees, acted in the trusts’ best interests. The trusts had the discretion to keep or sell the property, and the sales were advantageous to the trusts. The court also considered the trusts’ broad powers under Florida law, which allowed transactions between trustees and themselves as individuals, provided they were in the trust’s interest. On the mortgage issue, the court found that the trusts took the property subject to the mortgage because the payment arrangement effectively directed mortgage payments from the trusts to the mortgagee, aligning with the IRS’s regulation on installment sales of mortgaged property.

    Practical Implications

    This decision clarifies that trusts can be used as intermediaries in installment sales without collapsing the transactions into a single sale for tax purposes, provided the trust acts independently and in its beneficiaries’ best interests. It emphasizes the importance of trust independence and the fiduciary duties of trustees. Practitioners must carefully structure such transactions to ensure the trust’s independence and beneficial action. The ruling on taking property subject to a mortgage impacts how installment sales are calculated, requiring attorneys to consider existing mortgage obligations in planning. Subsequent cases have followed this precedent, reinforcing the use of trusts in tax planning for installment sales, while also highlighting the need to address mortgage assumptions explicitly in sales agreements.

  • Voight v. Commissioner, 68 T.C. 99 (1977): When a Mortgage is Considered Assumed for Installment Sale Purposes

    Voight v. Commissioner, 68 T. C. 99 (1977)

    A mortgage is considered assumed within the meaning of section 1. 453-4(c), Income Tax Regs. , if the buyer is obligated directly to the mortgagee for the mortgage indebtedness, even without a formal promise to assume.

    Summary

    In Voight v. Commissioner, the Voights sold a Holiday Inn property under an installment contract where the buyer, Madison Motor Inn, Inc. , made payments directly to the mortgagee, First Federal Savings & Loan Association, and guaranteed the mortgage payments. Despite no formal assumption, the court held that the mortgage was assumed because the buyer was directly liable to the mortgagee and intended to pay the mortgage directly. Consequently, the excess of the mortgage over the Voights’ basis was considered a payment in the year of sale, disqualifying them from using the installment method under section 453 because it exceeded 30% of the selling price. This ruling clarified that the substance of the transaction, not just its form, determines whether a mortgage is assumed for tax purposes.

    Facts

    In 1968, Floyd J. Voight and Marion C. Voight sold a Holiday Inn property in Madison, Wisconsin, to Madison Motor Inn, Inc. , under an installment contract for $1,250,000. The property was subject to three mortgages totaling $1,136,698. 72 held by First Federal Savings & Loan Association. The Voights’ adjusted basis in the property was $625,696. 22. The contract allowed the buyer to make mortgage payments directly to First Federal, and a separate agreement between the buyer, the Voights, and First Federal required the buyer to guarantee payment of the mortgage debt. The buyer made all mortgage payments directly to First Federal, and the Voights received cash payments of $35,814. 95 in 1968.

    Procedural History

    The Voights reported the sale on the installment method, but the Commissioner determined they received payments exceeding 30% of the selling price in the year of sale, disqualifying them from using the installment method. The Tax Court consolidated the cases and ruled that the buyer assumed the mortgages, requiring the Voights to recognize the full gain in the year of sale.

    Issue(s)

    1. Whether the buyer’s obligation to pay the mortgage directly to the mortgagee constitutes an assumption of the mortgage within the meaning of section 1. 453-4(c), Income Tax Regs.

    Holding

    1. Yes, because the buyer’s direct obligation to the mortgagee and the intent to make direct payments to the mortgagee constituted an assumption of the mortgage under the regulation.

    Court’s Reasoning

    The court analyzed the transaction’s substance over its form. It found that despite the absence of a formal promise to assume the mortgage, the buyer’s obligation to the mortgagee and the direct payment of mortgage installments by the buyer to First Federal constituted an assumption. The court cited Stonecrest Corp. v. Commissioner but distinguished the case due to the buyer’s direct liability to the mortgagee and the intention for direct payments. The court emphasized that the regulation’s purpose is to prevent spreading the tax over time when the excess of the mortgage over the basis would not actually come into the seller’s hands, as supported by Burnet v. S&L Building Corp.

    Practical Implications

    This decision impacts how installment sales of mortgaged property are structured and reported for tax purposes. Sellers and buyers must carefully consider the implications of direct mortgage payments and guarantees when planning installment sales. The ruling emphasizes that the substance of the transaction, including the buyer’s obligations to the mortgagee, is critical in determining whether a mortgage is assumed. Practitioners should advise clients to structure transactions to reflect their intended tax treatment accurately. Subsequent cases, such as Waldrep v. Commissioner, have applied this principle to similar transactions. Businesses selling property with existing mortgages must ensure compliance with tax regulations to avoid unexpected tax liabilities.

  • Kirschenmann v. Commissioner, 57 T.C. 524 (1972): When Mortgage Assumptions Affect Installment Sale Eligibility

    Kirschenmann v. Commissioner, 57 T. C. 524 (1972)

    The excess of an assumed mortgage over the seller’s basis in property sold must be included in the payments received in the year of sale for determining eligibility for installment sale treatment under IRC Section 453.

    Summary

    In Kirschenmann v. Commissioner, the Tax Court addressed whether a partnership could report the gain from a real estate sale under the installment method when the buyer assumed a mortgage exceeding the partnership’s adjusted basis. The court held that the excess of the mortgage over the basis must be treated as a payment received in the year of sale, which disqualified the partnership from using the installment method as it exceeded the 30% limit of the selling price. Additionally, the court ruled that selling expenses could not be added to the basis for this calculation, affirming the IRS’s position and denying the installment sale treatment to the partnership.

    Facts

    In 1965, A-K Associates, a family partnership, sold a farm for $432,000. The farm had an adjusted basis of $98,509. 36 after depreciation, and selling expenses totaled $23,378. 42. The buyer assumed an existing $160,000 mortgage, paid $80,011. 54 in cash, and issued a note for the balance. A-K attempted to report the gain under the installment method, treating the mortgage assumption as not affecting their eligibility. The IRS challenged this, arguing that the excess of the mortgage over the basis should be treated as a payment received in the year of sale, thus exceeding the 30% limit of the selling price and disqualifying A-K from installment reporting.

    Procedural History

    The case originated with the IRS’s determination of deficiencies in the partners’ federal income taxes, leading to a dispute over the applicability of the installment method under IRC Section 453. The Tax Court, after consolidation of related petitions, heard the case and issued its opinion on January 26, 1972, ruling in favor of the Commissioner.

    Issue(s)

    1. Whether the amount by which an assumed mortgage exceeds the seller’s basis must be included in the payments received in the year of sale for determining eligibility for the installment sale provisions of IRC Section 453.
    2. Whether selling costs must be offset against gross profit or may be added to the seller’s basis for determining eligibility for the installment sale provisions of IRC Section 453.

    Holding

    1. Yes, because Section 1. 453-4(c) of the Income Tax Regulations mandates that the excess of an assumed mortgage over the seller’s basis be included as a payment received in the year of sale for determining installment sale eligibility.
    2. No, because selling expenses are not properly chargeable to capital account and thus cannot be added to the seller’s basis; they must be offset against gross profit.

    Court’s Reasoning

    The Tax Court upheld the validity of the regulations, noting that Congress had given the IRS wide discretion in implementing IRC Section 453. The court found that treating the excess of the mortgage over the basis as a payment in the year of sale was a reasonable measure to prevent evasion of the 30% limit on year-of-sale payments. The court also rejected the argument that selling expenses could be added to the basis, stating that these are not capital expenditures but rather should be offset against gross profit, consistent with prior rulings and regulations. The court’s decision was influenced by the need to maintain the integrity of the installment sale provisions and to prevent manipulation through mortgage assumptions.

    Practical Implications

    This decision has significant implications for tax practitioners and taxpayers involved in real estate transactions. When a buyer assumes a mortgage in excess of the seller’s basis, this excess must be treated as a payment received in the year of sale, potentially disqualifying the transaction from installment sale treatment if it exceeds the 30% threshold. Taxpayers and their advisors must carefully consider the structuring of sales involving mortgage assumptions to ensure compliance with the installment sale rules. This ruling also reaffirms that selling expenses cannot be added to the basis for these calculations, impacting how such costs are treated in determining taxable gain. Subsequent cases have continued to apply this ruling, shaping the practice of tax law in real estate transactions.

  • Kent Homes, Inc. v. Commissioner, 55 T.C. 820 (1971): When Gain from Condemnation Is Taxable

    Kent Homes, Inc. v. Commissioner, 55 T. C. 820 (1971)

    Gain from condemnation is taxable in the year the condemning authority assumes the mortgage, even if the taxpayer remains secondarily liable until later released.

    Summary

    Kent Homes, Inc. , faced a condemnation of its Wherry military housing project, with the U. S. Army assuming its mortgage in March 1958. The company received an initial deposit and later a supplemental one, but did not report the gain until 1963. The Tax Court held that the gain was taxable in fiscal year 1959, when the mortgage was assumed, despite Kent Homes not being formally released from liability until 1963. The court also found that the statute of limitations did not bar the adjustment for 1959 because Kent Homes had maintained an inconsistent position in prior litigation regarding the tax year of the gain.

    Facts

    In 1951, Kent Homes, Inc. , constructed a Wherry military housing project at Fort Leavenworth, Kansas, financed by a mortgage to New York Life Insurance Co. On December 18, 1957, the U. S. Army initiated condemnation proceedings and deposited $83,000 as an estimate of Kent Homes’ equity. Effective January 1, 1958, possession transferred to the Army, which began making mortgage payments. In March 1958, the Army assumed the mortgage, but Kent Homes was not released from liability. Kent Homes withdrew the $83,000 in March 1958. In August 1961, commissioners determined the equity’s value exceeded the initial deposit, leading to a supplemental deposit in December 1961. Kent Homes received its share in May 1962. The company was formally released from mortgage liability in October 1962. Kent Homes reported the gain in fiscal year 1963.

    Procedural History

    Kent Homes paid a deficiency for fiscal year 1958 and sued for a refund, asserting the gain was not taxable in 1958. The U. S. District Court for the District of Kansas ruled in favor of Kent Homes, stating the gain was taxable in fiscal year 1959. The Tax Court then considered whether the gain was taxable in 1959 or 1963, and whether the statute of limitations barred adjustments for 1959.

    Issue(s)

    1. Whether the gain from the condemnation of Kent Homes’ interest in the Wherry project was realized and taxable in its fiscal year ended January 31, 1959.
    2. If gain was realized in fiscal 1959, whether an adjustment in that year is authorized under sections 1311-1315, despite the expired statute of limitations under section 6501.
    3. Whether the gain and interest income from the December 18, 1961, deposit were properly reportable in fiscal year 1963.

    Holding

    1. Yes, because the gain attributable to the mortgage assumption was realized when the Army assumed the mortgage in March 1958, which was within Kent Homes’ fiscal year 1959.
    2. Yes, because Kent Homes maintained an inconsistent position in prior litigation by arguing the gain was not taxable in 1958, which was adopted by the District Court, allowing for an adjustment under sections 1311-1315.
    3. Not addressed, as the issue was abandoned by the petitioners.

    Court’s Reasoning

    The Tax Court applied the rule that gain from condemnation is realized when the mortgage is assumed, not when the taxpayer is released from liability. The court cited Crane v. Commissioner and other cases to support this principle. It found that under Kansas law, the Army’s assumption of the mortgage made it primarily liable, with Kent Homes secondarily liable, and thus the gain was realized in fiscal year 1959. The court also held that Kent Homes maintained an inconsistent position in prior litigation by arguing against taxability in 1958, which allowed for an adjustment under sections 1311-1315, overriding the statute of limitations. The court noted the legislative intent of these sections to prevent taxpayers from exploiting the statute of limitations by taking inconsistent positions. The issue regarding the 1961 deposit was deemed abandoned by the petitioners.

    Practical Implications

    This decision clarifies that gain from condemnation is taxable in the year the condemning authority assumes the mortgage, even if the taxpayer remains secondarily liable. It impacts how similar condemnation cases should be analyzed, emphasizing the importance of the mortgage assumption date over the release date for tax purposes. Legal practitioners must consider this when advising clients on the timing of reporting gains from condemnation. The ruling also reinforces the application of sections 1311-1315 to prevent taxpayers from benefiting from inconsistent positions across different tax years, potentially affecting how taxpayers approach litigation involving multiple tax years. Subsequent cases like Likins-Foster Honolulu Corp. v. Commissioner have further explored these issues.

  • Waldrep v. Commissioner, 52 T.C. 640 (1969): Mortgage Assumption and Installment Sale Eligibility

    Waldrep v. Commissioner, 52 T. C. 640 (1969)

    The assumption of a mortgage by a buyer is treated as a payment for the seller in determining eligibility for installment sale treatment under IRC Section 453.

    Summary

    In Waldrep v. Commissioner, the Tax Court held that the Waldreps were not entitled to use the installment method for reporting the gain from the sale of land because the buyer, Motels, Inc. , assumed their existing mortgages, which constituted more than 30% of the selling price in the year of sale. The court also determined that the improvements on the land were not sold to the buyer as the sellers retained the right to remove them. This case clarifies that mortgage assumptions must be included in the calculation of payments received in the year of sale, impacting the eligibility for installment reporting.

    Facts

    The Waldreps owned two adjacent tracts of land in Birmingham, Alabama. They sold one 5-acre tract to Motels, Inc. , for $200,000, with $55,000 paid at closing and the balance due within a week. The sale included an option for the Waldreps to remove the building and improvements within 60 days, which they exercised. The property was subject to a mortgage held by the Exchange Security Bank and additional mortgages held by the Coffeys, which Motels, Inc. , assumed by executing new notes and mortgages for the same amounts.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the Waldreps’ income taxes for 1962 and 1963, asserting that they received over 30% of the selling price in the year of sale due to the mortgage assumptions, disqualifying them from installment sale treatment. The Waldreps petitioned the U. S. Tax Court, which upheld the Commissioner’s determination.

    Issue(s)

    1. Whether the improvements on the land were sold to Motels, Inc. , as part of the transaction.
    2. Whether Motels, Inc. , assumed the Waldreps’ mortgages, affecting their eligibility to report the sale on the installment method under IRC Section 453.

    Holding

    1. No, because the Waldreps retained the right to remove the improvements, which they exercised, indicating that the improvements were not part of the sale.
    2. Yes, because Motels, Inc. , assumed the mortgages, and under IRC Section 453 and the regulations, the excess of the mortgage amount over the basis of the property sold is considered a payment received in the year of sale, disqualifying the Waldreps from installment sale treatment.

    Court’s Reasoning

    The court determined that the improvements were not sold because the Waldreps retained effective control over them and exercised their right to remove them without any rebate or additional consideration. Regarding the mortgage assumption, the court found that Motels, Inc. , became personally liable for the mortgage amount, which constituted an assumption under the tax regulations. The court emphasized that the excess of the mortgage over the land’s basis must be included as a payment received in the year of sale, citing Section 1. 453-4(c) of the Income Tax Regulations. The court rejected the Waldreps’ argument that the mortgage was merely taken subject to, not assumed, by the buyer, as the new liability created was equivalent to an assumption.

    Practical Implications

    This decision underscores the importance of carefully structuring real estate transactions to qualify for installment sale treatment. Sellers must be aware that any mortgage assumption by the buyer will be treated as a payment received in the year of sale, potentially disqualifying them from installment reporting if it exceeds 30% of the selling price. Legal practitioners should advise clients on the implications of mortgage assumptions and the necessity of clearly defining the assets included in the sale. The ruling has been applied in subsequent cases to clarify the treatment of mortgage assumptions in installment sales, impacting how similar cases are analyzed and reported for tax purposes.

  • Lansdale Structural Steel & Machine Co. v. Commissioner, 14 T.C. 1428 (1950): Defining ‘Paid-In’ Surplus for Invested Capital

    14 T.C. 1428 (1950)

    For purposes of calculating equity invested capital under the Internal Revenue Code, property transferred to a corporation by its stockholders as paid-in surplus is included at its cost to the transferors, less any liabilities, such as a purchase money mortgage, assumed by the corporation.

    Summary

    Lansdale Structural Steel acquired a steel fabricating plant from its stockholders, assuming a mortgage on the property. The company sought to include the full cost of the property in its equity invested capital for excess profits tax purposes, without reducing it by the amount of the mortgage. The Tax Court held that the property should be included at its cost to the transferors less the mortgage assumed by the corporation. The court reasoned that the corporation only received the equity in the property as paid-in surplus, not the unencumbered asset. The mortgage was properly included in borrowed invested capital.

    Facts

    Joseph Roberts and Norman Farrar formed Lansdale Structural Steel in 1933, each contributing cash for stock.

    Roberts and Farrar transferred a steel fabricating plant they owned to the corporation as paid-in surplus, subject to a purchase money mortgage, which the corporation assumed.

    The corporation recorded the property on its books at a value exceeding its cost to Roberts and Farrar.

    For depreciation, the IRS allowed the corporation a cost basis equal to Roberts and Farrar’s original cost.

    In its excess profits tax returns, the corporation included the mortgage in borrowed invested capital and the original cost of the property in equity invested capital.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the corporation’s income, declared value excess profits, and excess profits taxes for the years 1941-1943.

    The corporation petitioned the Tax Court, contesting the Commissioner’s calculation of invested capital.

    The Tax Court ruled in favor of the Commissioner, determining the correct amount to be included in equity invested capital.

    Issue(s)

    Whether property transferred to a corporation by its stockholders as paid-in surplus, subject to a mortgage assumed by the corporation, should be included in equity invested capital at its full cost to the transferors, or at that cost less the amount of the mortgage.

    Whether the respondent erred in failing to include certain postwar refund credits in equity invested capital.

    Holding

    No, because the corporation only received the equity in the property as paid-in surplus, not the full unencumbered value; assuming the mortgage created an offsetting obligation. The mortgage was properly classified as borrowed invested capital.

    No, because the petitioner failed to provide sufficient evidence to support the claim that the postwar refund credits should have been included.

    Court’s Reasoning

    The court reasoned that the term “paid in,” as used in reference to invested capital, means property transferred to a corporation free and clear of any obligation, except as may be represented by capital stock. The court cited La Belle Iron Works v. United States, 256 U.S. 377, stating that invested capital excludes borrowed money or property against which there is an offsetting obligation affecting the corporation’s surplus.

    The court stated, “What Roberts and Farrar actually paid in to petitioner was not the whole property, free and unencumbered, but only their interest, or equity, in it. The petitioner was itself a purchaser of the property to the extent that it assumed liability for the purchase money mortgage.”

    Regarding the postwar refund credits, the court found that the petitioner failed to present sufficient evidence to support its claim. The court noted that the stipulated facts did not contain any reference to postwar refund credits, and the petitioner did not produce any evidence on the issue.

    Practical Implications

    This case clarifies the meaning of “paid-in surplus” for purposes of calculating equity invested capital. It establishes that when property is transferred to a corporation subject to a liability, the corporation only receives the equity in the property as paid-in surplus. This means the asset’s value for equity invested capital calculations is reduced by the amount of the assumed liability.

    The ruling impacts how businesses calculate their excess profits tax liability. By clarifying which assets qualify as equity versus borrowed invested capital, it provides a clearer framework for tax planning and compliance.

    This case highlights the importance of providing sufficient evidence to support claims made in tax court. A taxpayer must present adequate documentation and factual support to substantiate any deductions or credits claimed.