774 F.

2d 644
56 A.F.T.R.2d 85-6119, 85-2 USTC P 9733

John Howard BURBAGE, Appellant,

and
Rosalind A. Burbage, Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Appellee.
No. 84-2224.

United States Court of Appeals,

Fourth Circuit.
Argued April 3, 1985.
Decided Oct. 10, 1985.

William S. Glading, Washington, D.C. (D. Paul Alagia, Jr., Richard A.

Gladstone, Barnett & Alagia, Washington, D.C., on brief), for appellant.
Steven Frahm, Washington, D.C. (Glenn L. Archer, Jr., Asst. Atty. Gen.,
Michael L. Paup and Robert A. Bernstein, Washington, D.C., on brief),
for appellee.
Before WIDENER, WILKINSON and SNEEDEN, Circuit Judges.
WIDENER, Circuit Judge:

Taxpayer appeals the decision of the Tax Court, 82 T.C. 546, in which the court
determined that pursuant to a notice of deficiency sent to taxpayer in 1979,
within six years of his 1972 tax return filing, an assessment of deficiency for
1972 was not barred by the general three-year statute of limitations because
taxpayer omitted from gross income an amount properly includible therein
which was in excess of 25 percent of the amount of gross income stated in the
1972 return. We affirm.

John Howard Burbage (taxpayer) filed his 1972 income tax return on April 15,
1973 and listed $267,340.05 as gross income. The Commissioner of Internal
Revenue issued taxpayer a notice of deficiency on April 13, 1979, stating that

taxpayer was liable for an additional income tax of $51,367.27 for 1972
because he had failed to take into account $144,180 in long-term capital gain
realized in a 1972 taxable exchange of property. The Tax Court found that the
exchange was taxable and that the fair market value of the property received by
taxpayer in the exchange was $180,000. Considering taxpayer's basis of
$35,820, the court found that taxpayer had omitted $144,180 in gross income in
1972 and that this amount was in excess of 25 percent of his total gross income
of $267,340.05. Accordingly, the court held that while the assessment action
was barred under the three-year statute of limitations, see IRC Sec. 6501(a) (26
U.S.C.), the action was proper under the six-year statute of limitations
applicable to cases in which the taxpayer has omitted from gross income an
amount that is in excess of 25 percent of the amount stated in the return. See id.
Sec. 6501(e)(1)(A).
3

The central issue before the Tax Court and before us on appeal concerns the
fair market value of the property taxpayer received in the 1972 taxable
exchange. Taxpayer argues that the Tax Court erroneously placed a value on
the property that was too high and that, as a result, the Commissioner failed to
meet its burden of proof under IRC Sec. 6501(e)(1) to show that taxpayer
omitted greater than 25 percent of the amount of gross income stated in his
1972 return. Notwithstanding taxpayer's attempt to couch the issue of this
appeal in terms of burden of proof, the substance of this dispute turns on
whether or not the Tax Court's finding that the fair market value of the property
was $180,000 is clearly erroneous. The Tax Court did not discuss, discreetly,
burden of proof, and we have no reason to think it applied the rule erroneously.

The facts which gave rise to this tax dispute briefly follow. In 1969, taxpayer
acquired for $35,820 a fee simple interest in two oceanfront lots in Ocean City,
Maryland. Some time thereafter, Larmar Corporation (Larmar) began plans for
the development of a 1.25 million dollar oceanfront condominium project.
Taxpayer's property, however, was located directly between the ocean and the
property on which Larmar intended to build the condominiums. Because
Larmar did not want taxpayer's oceanfront property to be developed, Larmar
and taxpayer entered into a long-term lease agreement characterized by the
parties as a redeemable ground rent lease under Maryland law. See Md.Real
Prop.Code Ann. Sec. 8-110(b). Under the terms of the lease, the parties agreed
that it would run for 99 years and that it would be perpetually renewable. The
annual rent under the lease was $10,800. Taxpayer retained only the right of
reentry upon Larmar's failure to comply with the terms of the lease. Larmar
additionally had the right to terminate the lease by exercising its option of
redemption under Maryland law. When the parties executed the lease,
Maryland law then provided that the redemption price for a redeemable ground

rent was determined by capitalizing the annual ground rent at a rate of 6

percent. See Md.Ann.Code art. 21, Sec. 8-102(b) (1957) (recodified at Md.Real
Prop.Code Ann. Sec. 8-110(b)) Accordingly, by exercising its redemption
option, Larmar, under the terms of the agreement, could purchase the property
outright1 by paying taxpayer $180,000, irrespective of the amounts previously
paid as annual rent.
5

The Tax Court determined that taxpayer's transfer of the oceanfront property
for the redeemable ground rent lease constituted a taxable sale or exchange
under IRC Sec. 1055(a) and Treas.Reg. Sec. 1.1055-1-4 (26 C.F.R.) and, in
accordance with those provisions, taxpayer was deemed to have sold the
oceanfront property on the date of the lease subject to a mortgage in the face
amount of $180,000, the redemption price of the land. While taxpayer
contested below whether or not the lease transaction was taxable under IRC
Sec. 1055(a), he has conceded on appeal that the exchange was taxable. As
stated earlier, the central issue before us concerns the fair market value of the
redeemable ground rent lease that taxpayer received in the exchange.

For the purpose of ascertaining gain (or loss) recognized on the receipt of a
ground rent, Treas.Reg. Sec. 1.1055-2 provides that the general recognition
provisions of IRC Sec. 1001 shall apply. Treas.Reg. Sec. 1.1055-2. Under IRC
Sec. 1001, gain from a sale or exchange is the amount by which the amount
realized exceeds the adjusted basis. IRC Sec. 1001(a). The amount realized
includes the sum of any money received plus the fair market value of the
property (other than money) received. Id. Sec. 1001(b). Since taxpayer received
only the ground rent in the exchange, his amount realized is equal to the fair
market value of the ground rent.

The determination of the fair market value of the ground rent, treated as a
mortgage under IRC Sec. 1055(a), was a question of fact, see Wells
Amusement Co. v. Commissioner, 70 F.2d 208, 212 (4th Cir.1934), and we
must affirm the Tax Court's finding in this regard unless it was clearly
erroneous. Commissioner v. Duberstein, 363 U.S. 278, 291 & n. 13, 80 S.Ct.
1190, 1200 & n. 13, 4 L.Ed.2d 1218 (1960). A finding is clearly erroneous if,
after a review of the entire evidence, the reviewing court is left with a definite
and firm conviction that a mistake has been committed. United States v. United
States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948).

Upon consideration of the entire record, we do not have a definite and firm
conviction that a mistake has been made. The Tax Court found that the ground
rent treated as a mortgage had a fair market value equivalent to its face amount
(redemption price) of $180,000. Although taxpayer contends that based on the

testimony of his expert witness the fair market value of the ground rent was
$32,800, we believe there is sufficient evidence to support the Tax Court's
finding on this issue. In making its determination, the court considered the fair
market value of the oceanfront property which taxpayer gave up in the
exchange as indicative of the fair market value of the ground rent received. The
court found that the fair market value of the property securing the payments
under the ground rent lease was $180,000 since this was the price at which
Larmar could purchase the property outright or the price at which the property
could be sold in full satisfaction of Larmar's obligations under the lease in the
event of default. Additionally, the Tax Court noted that it was unlikely that
Larmar would default since Larmar could not afford to lose its hold over the
oceanfront property. Based on the foregoing, the court found that it was highly
probable that taxpayer would receive all payments under the ground rent lease
and that the mortgage (lease) had a fair market value equal to its face amount
(redemption price).
9

Taxpayer asserts that while the fair market value of the oceanfront property was
relevant on the issue of the fair market value of the ground rent which taxpayer
received, it should not have been the determinative factor. In this respect,
taxpayer argues that the Tax Court should have focused on several factors
concerning the fair market value of the ground rent rather than having confined
its inquiry to the value of the oceanfront property. He claims further that
despite the court's reliance on its oceanfront property valuation, there is no
evidence to support its finding that the property was worth $180,000 since he
takes the position that the Commissioner's expert testified that the fair market
value of the property was only $109,000.

10

Whether or not it was proper for the Tax Court to base its valuation of the
ground rent primarily upon its valuation of the oceanfront property is an issue
we need not decide since we think there is sufficient evidence in the record to
support the finding that the ground rent had a fair market value of $180,000.

11

While the Commissioner's expert testified that the oceanfront property was
worth $109,000, between parties with no other interests to protect, rather than
$180,000, the court nevertheless found the higher valuation based on its
consideration of the fact that since the property was ideally located between the
ocean and the condominium project, the seller could receive a premium on the
price of the property. This, we believe, is a determination of market value
which was within the discretion of the court, viewing all the circumstances of
the case.

12

Apart from the inquiry regarding the market value of the oceanfront property

exchanged, we think there is other evidence which supports the $180,000

ground rent valuation. Various terms of the lease indicate the value the parties
placed on taxpayer's right to receive $10,800 annually. The parties agreed that
the capitalized value of the lease was $180,000, and that in the event of
condemnation, taxpayer would be entitled to any condemnation award up to an
amount of $180,000. The parties further agreed that if condemnation should
occur, the capitalized value of the lease would be reduced by the amount of the
award and rental payments would be reduced by 6 percent of the amount of the
award. We think these provisions are strong indications the parties agreed that
taxpayer's right to receive $10,800 annually was worth $180,000.
13

Accordingly, we hold that the Tax Court's finding of fair market value of the
ground rent was not clearly erroneous.

14

We also hold the Tax Court correctly adopted the Commissioner's computation
of taxpayer's 1972 tax deficiency in the amount of $51,367.27 because taxpayer
was not entitled to elect the installment method of reporting gain under IRC
Sec. 453. After the Tax Court filed its decision holding the ground rent
transaction to be taxable exchange, taxpayer made an election under IRC Sec.
453 to report the gain from the exchange under the installment method,
claiming no deficiency for 1972. Without deciding whether this election was
timely or otherwise allowable, we do not think that taxpayer is entitled to
installment sales treatment because the ground rent, viewed as a mortgage, calls
for a single lump-sum payment, if any, of the sales price in the future. Since the
annual rental payments are interest rather than principal and in no way accrue
toward the purchase price, see IRC Sec. 163(c), and since the ground rent calls
for only one payment of principal at the time of redemption, installment sales
treatment is not available to taxpayer. See IRC Sec. 453(a), (b) prior and
subsequent to 1980 amendment. Prior to the 1980 amendment, which provides
that only one payment need be made in a year after the close of the taxable year
in which the disposition occurred, more than one payment was required. A
minimum of two payments were required for an installment sale. Baltimore
Baseball Club v. United States, 202 Ct.Cl. 481, 481 F.2d 1283, 1286 (1973).

15

The judgment of the Tax Court is accordingly

16

AFFIRMED.

Under Maryland law, Larmar could exercise the redemption right at any time
after the expiration of three years from the date the lease was executed.

Md.Ann.Code art. 21, Sec. 8-102(c) (1957) (recodified at Md.Real Prop.Code

Ann. Sec. 8-110(c))