Petition by Charles A. Rusk and others, as executors of the estate of Margaret Rusk, against the Commissioner of Internal Revenue, to review an order of the Board of Tax Appeals.
Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.
This is a petition for review of an order of the Board of Tax Appeals pursuant to sections 1001, 1002, and 1003 of the Revenue Act of 1926, c. 27, 44 Stat. 9, 109, 110 (26 USCA §§ 1224-1226). This order affirmed a determination of the Commissioner that there was a deficiency in income due from Margaret Rusk for the year 1923 in the sum of $9,738.91.
The Board of Tax Appeals found that on March 1, 1913, Margaret Rusk owned certain real estate in Chicago, Ill. It was triangular in shape, having the following approximate frontages: 550 feet on Lincoln avenue, 425 feet on Robey street, and 200 feet on Belle Plaine avenue. It was vacant land except for two old buildings. One was a three-story brick building located on the corner of Lincoln avenue and Robey street, having a store on the first floor, a flat on the second, and a dance hall on the third. The other was a two-story frame building located on the corner of Lincoln and Belle Plaine avenues, and contained a store and some flats. The improvements, such as paving, sewers, water, and gas, had been made prior to March 1, 1913, although these were not paid for until after that date.
Of the three streets named, Lincoln avenue was the most important so far as the property referred to was concerned. On March 1, 1913, there were on Lincoln avenue, opposite the Rusk property, about eight buildings, of which five were only one story each. At that time there were no buildings on Belle Plaine avenue except a frame cottage, and Robey street was not built up, nor has it ever been a business street.
The Board further found that the fair market value of the property which is in controversy was, on March 1, 1913, not greater than $100,000.
On January 15, 1923, Margaret Rusk sold this property to Jacob Horwitz, who was acting on behalf of himself and his partner, Norman Peters, for $250,000. An amount of $1,000, which Horwitz had deposited with Mrs. Rusk in September, 1922, as earnest money, was at the time of the sale applied on the purchase price. At the same time she received from Horwitz an additional sum in cash of $29,000, and also a mortgage and five notes -- one for $20,000, maturing six months after date, and four for $50,000 each, maturing on or before three years after date. A mortgage on the entire property was given by Horwitz and his wife to Mrs. Rusk. Later the North Center Building Corporation was formed for the purpose of promoting the construction of a store and office building upon a part of the ground. Horwitz and Peters in 1923 controlled all the capital stock of this corporation, amounting in par value to $550,000.
Construction loans totaling $400,000 were obtained in anticipation of the building program, and the parties loaning the money required that Margaret Rusk release her mortgage on that part of the property on which the building was to be constructed, in order that they might take a first mortgage on it, which she did.
On June 14, 1923, Horwitz paid Mrs. Rusk, out of the $400,000 loan which had been obtained, an amount of $120,000 in cash; and he and his wife executed to Mrs. Rusk two notes, dated May 1, 1923, in the aggregate sum of $100,000 -- one for $35,000, due on or before one year after date, and the other for $65,000, due on or before two years after date. They also executed to Mrs. Rusk a mortgage on the north 225 feet of the tract of land in controversy securing said two notes. Thereupon the five original notes calling for $220,000 were delivered to Horwitz by Mrs. Rusk and canceled.
Shortly thereafter the Lincoln-Robey Building Corporation was organized for the purpose of developing the north 225 feet of the real estate in controversy, and this corporation raised $1,200,000 for that purpose. A first mortgage of $900,000 and a second mortgage were placed on it. On November 5, 1924 $90,000 of the $100,000 owing to Margaret Rusk was paid to her, and she released the mortgage thereon which had been given to her by Horwitz and his wife. In lieu thereof she accepted the note of Horwitz and Peters for the remainder due her, and received as security therefore second mortgage bonds of Lincoln-Robey Corporation of the par value of $20,000.
On December 31, 1924, there was due Margaret Rusk on the note of Horwitz and Peters, including interest, the sum of $16,090.
In her tax return for the year in controversy, which was rendered upon the cash receipts and disbursements basis, Margaret Rusk claimed a profit of $43,413.72 upon the ...