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Parties Involved:
Commissioner of Internal Revenue
Appellant
Joe E. Faris
Appellee
Mary A. Faris
Appellee

Document Text:

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

JOE E. FARIS, MARY A. FARIS, ) 

) 

Petitioners-Appellees, ) 

FILED 

United States Court of Appeals 

Tenth Circuit 

JUL 2 3 1991 

ROBERT L. HOECKER 

Clerk 

) 

vs. ) 

No. 89-9010 

(T.C. No. 6635-85) 

) 

COMMISSIONER OF INTERNAL REVENUE, ) 

) 

Respondent-Appellant. ) 

ORDER AND JUDGMENT* 

Before BARRETT, BALDOCK and BRORBY, Circuit Judges. 

Petitioner-appellee Joe E. Faris is a rancher and a real 

estate broker in southeastern Colorado. 1 In the mid-1970's, 

petitioner discovered that the United States Army was interested 

in acquiring a large tract of land in his region for use as a tank 

training site. Petitioner arranged for a land package deal 

whereby several ranches, consisting of 220,000 acres, would be 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppel. 10th Cir. R. 

36.3. 

1 Petitioner-appellant Mary A. Faris is involved in this case 

solely by virtue of the joint tax returns filed by her husband, 

Joe Faris. 

Appellate Case: 89-9010 Document: 010110129467 Date Filed: 07/23/1991 Page: 1 
offered for sale to the Army, and upon sale petitioner would 

receive part of the proceeds as compensation for brokering the 

transaction. All of the agreements, including the one concerning 

the 47,200 acre Kitch Ranch, granted petitioner a right of first 

refusal. 

Petitioner became concerned about preserving the contiguity 

of the Army land package when the Kitch Ranch owners received 

another purchase offer for $42.50 per acre with a five-percent 

commission to be paid to the brokers. Instead of exercising his 

right of first refusal, petitioner forestalled the offer by 

negotiating with the owners and their brokers for a three-year 

option whereby his son, Nicholas H. Faris, and a family friend, 

Don J. McDavid, could purchase the ranch for $45 per acre. The 

agreement provided for three annual payments of $100,000 to be 

applied against the purchase price and granted the brokers a 

ten-percent commission on the option payments and the ultimate 

purchase price. The procuring broker in turn agreed to pay 

petitioner two-thirds of her seventy-five-percent share in the 

ten-percent commission on both the option payments and the 

ultimate purchase. In sum, petitioner was to receive one-half of 

the overall ten-percent commission (two-thirds of procuring 

broker's seventy-five-percent share in the option payments and 

ultimate purchase price). 

After McDavid paid his share of the first two $100,000 dollar 

option payments, petitioner acquired his interest in the 

agreement. After paying the last option payment, petitioner and 

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his son exercised the option and purchased the ranch for 

$2,124,000 (47,200 acres at $45 per acre). The $300,000 option 

payments were applied against the $2,124,000 total price and the 

remaining $1,824,000 balance was paid from the proceeds of a 

$2,000,000 loan from the Federal Land Bank of Wichita (FLBW). In 

accordance with the agreement, the brokers were paid a ten-percent 

commission. The procuring broker then remitted $114,000 to 

petitioner -- approximately two-thirds of her seventy-five percent 

share of the total commission. 2 Petitioner did not report the 

$114,000 receipt as income, and when he later sold a portion of 

the ranch to a third party, he reported his basis at $45 per acre. 

The Commissioner maintains that the $114,000 was a sales 

commission, and, as such, was gross income. 

The tax court, after considering testimony regarding the 

events surrounding the transaction, found that $104,000 of the 

$114,000 receipt was excess borrowed capital from the $2,000,000 

FLBW loan, not a sales commission. 3 In making this determination, 

the court reasoned as follows: 

Petitioners could have purchased the Kitch Ranch for 

$42.50 per acre and a 5-percent commission would have 

been paid to real estate agents. Under those terms, 

none of the 5-percent commission would have been 

channeled to petitioners. Instead, petitioners 

2 Although $114,000 differs from the exact calculation of the 

amount owed petitioner per the agreement, the tax court accepted 

the figure as accurate. 

3 The remaining $10,000 represented the commissions petitioner 

was to receive for two of the $100,000 option payments. The tax 

court found that these commissions were accretions to income to 

petitioner, and were therefore gross income. The parties do not 

dispute this determination. 

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convinced the seller to accept $2.50 more or $45 per 

acre with an apparent 10-percent commission, half of 

which ($2.25 per acre -- $45 x .05), was to be channeled 

back to petitioners. Accordingly, petitioners were not 

receiving a commission from the third-party-seller, but 

were instead increasing the price they had to pay in 

order to generate additional or excess capital from the 

borrowing on the transaction. 

Petitioners here were entitled to purchase the Kitch 

Ranch for $42.50 per acre and we find that, in 

substance, they did pay only $42.50 per acre. The 

additional amounts, except to the extent found to be 

part of the ... $10,000 commissions determined above 

[see supra note 3], represent proceeds of a loan which 

petitioners remained obligated to repay [the $2,000,000 

FLBW loan]. 

Faris v. Commissioner, 56 T.C.M. (CCH) 319, 326 (Sept. 26, 1988) 

[1988 WL 98352] (emphasis supplied) (footnote omitted). In other 

words, petitioner agreed to pay the sellers a higher gross price 

on the condition that sellers would pay petitioner an offsetting 

commission. With this arrangement, the net price would remain 

roughly the same, but petitioner could borrow more funds from FLBW 

for use in his business. The tax court found that the substance 

of this transaction did not amount to gross income under I.R.C. 

§ 61 as interpreted in Commissioner v. Glenshaw Glass Co., 348 

U.S. 426 (1955). The Glenshaw Court characterized gross income as 

including "instances of undeniable accessions to wealth, clearly 

realized, and over which the taxpayers have complete dominion." 

Id. at 431. In this case, the tax court found that this 

transaction did not amount to an accession to wealth because the 

"commission" represented loan proceeds which would have to be 

repaid. Faris, 56 T.C.M. at 326. The court correctly stated that 

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loan proceeds are not accessions to wealth and are therefore not 

gross income. See Commissioner v. Tufts, 461 U.S. 300, 307 

(1983). 

The Commissioner argues that the tax court erred in 

concluding that the "commissions" involved in this case were loan 

proceeds. We review de novo because the Commissioner points to 

legal error, and we agree with the Commissioner's interpretation 

of the relevant law. Specifically, Hamlin's Trust v. 

Commissioner, 209 F.2d 761 (10th Cir. 1954), stands for the 

proposition that a taxpayer must accept the tax consequences of 

the form of transaction which he chooses. In Hamlin's Trust, we 

stated that "where parties enter into an agreement with a clear 

understanding of its substance and content, they cannot be heard 

to say later that they overlooked possible tax consequences." Id. 

at 765. 

The option agreement in this case clearly and unambiguously 

provides for a ten-percent commission to be paid to the brokers, 

and such commissions are taxable under I.R.C. § 61(a)(l). The 

fact that petitioner ultimately became the purchaser does not 

affect the taxability of the commission receipts; commissions 

received by a broker for real estate purchases made on the 

broker's own account are considered gross income because they 

represent compensation for the service of finding a buyer. See 

United States v. Allen, 551 F.2d 208 (8th Cir. 1977); Commissioner 

v. Daehler, 281 F.2d 823 (5th Cir. 1960). See also Commissioner 

v. Minzer, 279 F.2d 338 (5th Cir. 1960) (insurance commission); 

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Ostheimer v. United States, 264 F.2d 789 (3d Cir.) (same), cert. 

denied, 361 U.S. 818 (1959). 

On its face, the transaction in this case appears identical 

to those in the Allen and Daehler, that is, petitioner appears to 

have received compensation for the service of brokering the 

transaction. Both parties accounted for the transaction as if it 

involved a true sales commission. For example, the Kitch Ranch 

owners reported the gross sales proceeds at $45 per acre and 

deducted the ten-percent commission as a sales expense. It is 

uncontroverted that petitioner paid the full $45 per acre price. 

In return, petitioner received his "commission" from the procuring 

broker, and he later reported his basis in the property at $45 per 

acre. 

The tax court, however, distinguished this case from Allen 

and Daehler, noting that the substance of this case involved an 

increase in borrowed funds whereas the latter cases involved true 

accretions to the wealth of the taxpayers by virtue of 

compensation for services rendered. To arrive at this conclusion 

the tax court had to ignore the plain language of the option 

agreement and rely on petitioner's explanation regarding his true 

intent. In essence the tax court rewrote the agreement to effect 

petitioner's true intention of borrowing excess money. In so 

doing, the court ignored not only the form of the agreement, but 

also the actual transaction including the transfer of funds among 

the petitioner, the sellers and the brokers. We think that 

Hamlin's Trust presents a legal barrier preventing petitioner from 

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controverting the plain, unambiguous form of the transaction. 

Petitioner, as far as we can discern from the record, entered into 

the agreement with an understanding of its content; he may not now 

controvert the agreement simply because he "overlooked possible 

tax consequences." Hamlin's Trust, 209 F.2d at 765. We therefore 

REVERSE and REMAND this case to the tax court for a determination 

of petitioner's deficiency relating to the Kitch Ranch 

"commission. 114 

Entered for the Court 

Bobby R. Baldock 

Circuit Judge 

4 The tax court noted that petitioner was engaged in a 

partnership with his sons, J. Ray Faris, Michael A. Faris and 

Nicholas H. Faris, and that the activities surrounding the Kitch 

Ranch transaction were attributable to the partnership. Ray, 

Michael, Nicholas and their wives were all party to this case in 

the tax court, but only the petitioner appealed. On remand the 

tax court is instructed to determine the portion of the Kitch 

Ranch commission which is attributable to petitioner. 

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