Burnet v. S. & L. Building Corp.

Background

A building company sold two New York City parcels on 82nd and 83rd Streets under installment contracts, and each sale involved mortgages that the buyers assumed. The company received cash and gave purchase‑money mortgages, while existing mortgages remained on the properties. The Commissioner of Internal Revenue applied Treasury regulations that excluded the assumed mortgages from the vendor’s "total contract price" and treated an excess of assumed mortgage amounts over the vendor’s depreciated cost as if received in cash; the company's tax returns were adjusted and assessed. The Board of Tax Appeals had sustained the Commissioner, the lower court reversed, and the question came here on review.

Reasoning

The Court focused on the 1926 statute that allowed the Commissioner to prescribe rules for reporting income from installment sales. The Treasury Regulations (Articles 44 and 45) distinguish sales on the installment plan and say assumed mortgages are part of the purchase price but are excluded when computing the vendor’s initial payments and the "total contract price;" they also permit treating certain mortgage excesses as constructive receipts. The Court held these regulations to be a reasonable exercise of the broad discretion Congress conferred, not in conflict with any positive statutory provision, and appropriate to the practical problems of taxing installment sales.

Real world impact

The ruling lets the tax agency apply its installment‑sale rules to mortgaged real estate, limiting how far sellers can spread taxable profit over the life of an assumed mortgage. It enforces the Commissioner’s practical approach to dividing payments between return of capital and taxable profit and reverses the lower court’s contrary decision.