Court Opinion

ID: 4634061
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:15:14.434613+00
Date Added: 2024-06-11T07:59:58.222006
License: Public Domain

IVAN A. GREENWOOD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  WALTER P. GREENWOOD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Greenwood v. CommissionerDocket Nos. 36514, 36515.United States Board of Tax Appeals22 B.T.A. 1187; 1931 BTA LEXIS 2003; April 10, 1931, Promulgated *2003  1.  Held that by the terms of a certain agreement the parties thereto became joint venturers.  2.  Held, further, that an agreement constituted an executory contract of sale and payments pursuant thereto did not become income until an unconditional liability was created on the part of the vendee.  Irvin W. Stillinger, Esq., for the petitioners.  Hartford Allen, Esq., for the respondent.  VAN FOSSAN *1187  These proceedings were brought to redetermine deficiencies in the income tax of the petitioners for the year 1923.  In Docket No. 36514 the respondent asserted a deficiency against Ivan A. Greenwood in the sum of $891.13.  The petitioner admits a liability of $148.67.  In Docket No. 36515 the respondent asserted a deficiency against Walter P. Greenwood in the sum of $860.62.  The petitioner admits a liability of $143.83.  The cases were consolidated for hearing and report.  The sole issue common to both cases is whether or not the sum of $5,500 received by each petitioner during the year 1922 under the terms of a contract with S. Chester Crobaugh and Edward C. Daoust constituted taxable income for the year 1922 or for the year 1923, *2004  when the remainder of the purchase price of a lease was received by Crobaugh and the proportionate shares thereof paid by him to the petitioners.  FINDINGS OF FACT.  From 1915 to the date of the hearing Ivan A. Greenwood was a real estate dealer in Cleveland, Ohio.  During the period from 1920 to 1923 he was engaged in the business of a real estate broker with his brother, Walter P. Greenwood, under the firm name of Greenwood and Greenwood.  The firm specialized in commercial business property.  On November 1, 1919, Frank C. Caine executed a 99-year lease with S. Chester Crobaugh as lessee, covering real estate at the northeast corner of Superior Avenue and Euclid Avenue in East Cleveland, *1188 Ohio.  At that time there were erected on the property one old frame house, a gasoline station and some signs.  The rentals under the lease were on a sliding scale ultimately reaching $19,000 a year.  The lease provided that Crobaugh could not assign his rights thereunder without the consent of the lessor until a building of the value of at least $50,000 should have been erected on the leased land.  Prior to November 1, 1920, Crobaugh had been trying to sublet the property, but*2005  without success.  He had sustained a loss of $6,898.63 in carrying the enterprise up to that time.  Finally he and Daoust approached the petitioners for the purpose of inducing them to undertake the handling of the property.  They were led to do so by the petitioners' experience and skill in handling real estate of that character.  Thereupon negotiations between the parties resulted in the execution of the following contract: MEMORANDUM OF AGREEMENT made at Cleveland, Ohio, this 1st day of November, 1920, by and between S. CHESTER CROBAUGH, First Party, EDWARD C. DAOUST, Second Party, IVAN GREENWOOD, Third Party, and WALTER GREENWOOD, Fourth Party.  WITNESSETH: THAT WHEREAS, as of November 1, 1919, Frank C. Caine as Lessor, demised and let unto First Party certain real property, situated at the northerly angle of the intersection of Euclid Avenue and Superior Avenue, in the City of East Cleveland, Ohio, for a period of ninety-nine (99) years, and thereafter renewable forever, upon certain terms and conditions contained in an indenture of lease, recorded in the office of the Recorder of Cuyahoga County, Ohio, Volume 93, Page 132, of the Records of Leases, and which lease provides*2006  that the Lessee shall not assign or transfer any interest therein, except upon certain conditions; and First Party entered into an agreement with Second Party, under date of January 14, 1920, whereby First Party agreed to account to Second Party for one-half of all benefits and profits which may be derived from any sale, sub-lease, or other disposition of said demised property, in consideration whereof, Second Party agreed to indemnify First Party for one-half of all charges incident to the carrying of said demised property; and First Party, in order to secure the loan of $27,500 face amount of Liberty Bonds, which were required to be deposited by First Party with said Lessor to secure the performance by First Party of certain covenants of said indenture of lease, executed and delivered unto Frank L. Crobaugh his promissory note, endorsed by Second Party, and secured by a mortgage upon said leasehold estate, and WHEREAS, First Party and Second Party have agreed to an arrangement with Third Party and Fourth Party jointly, whereby Third Party and Fourth Party shall be entitled to receive one-half of all benefits and profits which may be derived from any sale, sub-lease, or other disposition*2007  or permanent use of said demised property, and all income from the temporary use thereof, in consideration of the assumption by Third Party and Fourth Party of all carrying charges payable under or by virtue of said lease until such sale, sublease, or other disposition thereof shall be made, or said permanent use thereof effected, as hereinafter stipulated, and WHEREAS, said Frank L. Crobaugh has requested said First Party to redeliver said $27,500 Face Amount of Liberty Bonds, and for such purpose, the *1189  parties hereto have made arrangements with The Cleveland Realization Company to borrow, for a period of one year from the date hereof, a like amount of Liberty Bonds, such loan of Liberty Bonds to be secured by assignment to said The Cleveland Realization Company of said promissory note and mortgage of First Party, endorsed by the other parties hereto, and, as compensation to said The Cleveland Realization Company for said loan, the parties hereto have agreed to pay said Company (the parties hereto being entitled to retain the coupons thereof) each three months a sum equal to one and one-half per cent (1 1/2%) of the face amount of said bonds, and in addition thereto, *2008  the sum of Two Hundred Seventy-five Dollars ($275.00) upon the delivery of said bonds, which obligation to return said bonds at the maturity of said loan and to pay compensation for their use as aforesaid is assumed by the parties hereto, share and share alike, Now, THEREFORE, the parties hereto, in consideration of their mutual promises, hereby agree as follows: (1) First Party will, on demand of any of the other parties hereto, at any time after the lessee shall, by the terms of said lease, have the right to assign said leasehold estate, assign to each of the other parties hereto, or their respective nominees, an undivided one-fourth interest therein.  (2) Concurrently with the execution hereof, the parties hereto will procure from said The Cleveland Realization Company, said $27,500.00 Face Amount of Liberty Bonds and deliver the same to said Frank L. Crobaugh, and procure from him an assignment of said promissory note and mortgage to The Cleveland Realization Company, and to cause said Company to endorse thereon an extension of maturity thereof to November 1, 1921, and deliver said promissory note and mortgage to said assignee.  Said promissory note shall be endorsed by Second*2009  Party, Third Party and Fourth Party, and the liability of the parties hereto on the obligation evidenced by said promissory note shall be limited to one-fourth each.  (3) Concurrently with the execution hereof, Third Party and Fourth Party will pay to First Party and Second Party, one-half each, the sum of $4,586.26.  (4) Third Party and Fourth Party will, promptly and as the same fall due, pay to said Frank C. Caine, Lessor, or his assigns, all ground rent accruing on and after the date hereof by virtue of said lease, except as hereinafter expressly provided, and will pay all taxes, assessments, insurance premiums, and other charges payable by the Lessee by virtue of said lease until the said lease shall have been sold or the demised property sublet, or shall have been otherwise disposed of, or until permanent use of said demised premises shall have been effected, as hereinafter provided.  (5) Third Party and Fourth Party will assume entire supervision, care, and management of said demised premises, including the collection of rents, payment of charges, and maintenance of insurance, and will further deal with all prospective purchasers, tenants and others with relation to the*2010  sale, sub-lease or other disposition or use of said premises, without charge for their said services.  (6) Third Party and Fourth Party will be entitled to collect, receive, and retain, as their own property, all income derived from said premises, including the rents paid by tenants thereof; provided, however, that in case the income so received shall exceed the carrying charges required to be paid by Third Party and Fourth Party, as herein provided, then such excess shall be divided between the parties hereto, share and share alike.  *1190  (7) In the event that the parties hereto decide to make any additional capital investment, the amount of such investment shall be borne by the parties hereto, share and share alike; and in the event that the parties hereto decide to liquidate any part of their present capital investment or any additions thereto, the proceeds of such liquidation shall be distributed between the parties hereto, share and share alike.  The erection of any permanent improvement, including any building upon the demised premises shall be deemed a capital investment.  The sale of any improvements, sand, gravel, or soil now or hereafter situated on the demised*2011  premises shall be deemed a liquidation of capital.  (8) Third Party and Fourth Party will not permit any default to be made in the payment of any ground rent, taxes, insurance premiums, or other charges payable by the Lessee under said lease, and under the terms hereof payable by them, which might, or could, be grounds for forfeiture by said Lessor.  (9) In the event that the parties hereto shall decide to erect a permanent structure upon said demised premises, upon the commencement thereof, Third Party and Fourth Party shall be relieved from their obligation hereunder to pay carrying charges as aforesaid, and thereafter, all net income derived from said premises, after the carrying charges shall have been paid, shall be divided between the parties hereto, share and share alike.  (10) When a building shall have been erected upon said demised premises complying with the requirements of said lease, so that the Lessor will surrender the $27,500 Face Amount of Liberty Bonds held by him as security under said lease, said bonds shall be delivered to said The Cleveland Realization Company to discharge the obligation to it aforesaid.  In the event that said obligation shall have been*2012  discharged by the parties hereto, then and in such case, said Liberty Bonds so surrendered by said Lessor shall be divided between the parties hereto, share and share alike.  (11) In the event that there shall be any default under the terms of said lease by reason of which said Lessor of his assigns shall forfeit or sequester said $27,500 Face Amount of Liberty Bonds, or any part thereof, it is understood that any loss resulting from said forfeiture or sequestration shall be borne by the parties hereto, share and share alike.  (12) It is understood that any losses which may result from the ownership or use of said demised premises, other than carrying charges, as aforesaid, will be borne by the parties hereto, share and share alike.  (13) It is understood that no use, sale, sub-lease, or other disposition of all or any part of said demised premises shall be made without concurrence of at least three of the parties hereto, their personal representatives or assigns.  (14) It is understood that for any sub-lease, sale or other disposition of said demised premises, none of the parties hereto shall be entitled to collect or receive any commission for his services therein.  (15) *2013  It is anticipated that the parties hereto will request said Lessor to permit them to cause said lease to be assigned to a corporation, and in the event that said Lessor shall so consent, then it is understood that said lease shall be so assigned in exchange for the capital stock of said corporation, and that the capital stock so issued shall be divided between the parties hereto, share and share alike.  In such event, Third Party and Fourth Party shall enter into an agreement with said corporation whereby they shall assume payment and performance of all moneys and obligations on their part to be paid and performed hereunder.  *1191  The rights and obligations of the parties hereto shall benefit and bind the heirs, personal representatives and assigns of the parties hereto.  IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day and year first above written.  (Signed) S. CHESTER CROBAUGH.  EDWARD C. DAOUST.  IVAN A. GREENWOOD.  WALTER P. GREENWOOD.  Signed and acknowledged in the presence of (Signed) JOHN I. SCHULTZ.  D. R. WICKIN.  Early in 1921 the petitioners succeeded in subletting the property to the Superior-Euclid Market Company*2014  which agreed to erect thereon a market house containing storerooms.  The rents under that lease were on a sliding scale, reaching ultimately $19,000 a year.  Later, the lease was assigned to the Encor Realty Company.  Crobaugh sold his leasehold to John McMyler in accordance with the following offer: CLEVELAND, OHIO, September 26th, 1922.S. CHESTER CROBAUGH, Cleveland, Ohio.DEAR SIR: I hereby offer to purchase your leasehold estate created by ninety-nine year lease from Frank C. Caine, dated November 1st, 1919, recorded in Volume 93, Page 132 of Cuyahoga County Lease Records, subject to sublease held by The Encor Realty Company created by Indenture dated April 1st, 1921, recorded in Volume 109, Page 452, of said Records, for the sum of $110,000.00.  Of said purchase price I will pay you the sum of $25,000.00 when you shall have deposited in escrow with The Guarantee Title and Trust Company of Cleveland a proper instrument of assignment of said leasehold to me with instructions to the escrow agent that such assignment is to be delivered to me when by the terms of said ninety-nine year lease, or with the consent of said Caine, the said leasehold estate may be so assigned*2015  and upon payment by me to it for your account of the balance of $85,000.00, plus or minus the ground rent and interest adjustments hereinafter mentioned.  It is understood that in case such assignment is not tendered to me before May 1st, 1923, the sum of $25,000.00 theretofore paid to you is, at my option, to be repaid to me on demand with 5.46 per cent interest thereon from the date of payment to you.  As security for the repayment of said $25,000.00 with interest as provided in the preceding paragraph, in event you are unable to tender the said assignment to me on or before May 1st, 1923, or in event I shall thereafter demand re-payment thereof, you will deliver to E. C. Daoust of Cleveland, Ohio, in escrow, preferred and/or common stock of The Investors Mortgage Company of Cleveland, Ohio, of the par value of $35,000.00, and authorize, direct and empower him to sell said stock or so much thereof as may be necessary to provide for the re-payment of said $25,000.00 and interest, and the charges and expenses incident thereto, at public or private sale.  It is understood that I will not pay the sum of $25,000.00 until you shall have had Abstract of Title No. 278956 issued by*2016 The Guarantee Title and Trust Company extended from June 12th, 1922, to date, so as to show no *1192  changes in the condition of the title to said leasehold estate, and that I will not pay the remainder of said purchase price in escrow until such abstract shall have been extended to show no changes in the condition of said title from the date of the last extension to the date of delivery of such instrument of assignment.  It is understood that such assignment is to take effect as between us as of October 1st, 1922, and that the net rental thereafter accruing is to be credited to me, but that I am be charged with 5.46 per cent interest on the unpaid portion of said purchase price from the date of such deposit in escrow to the date of payment.  Please note your acceptance of this proposal by signing below.  Very truly yours, (Signed) JOHN MCMYLER.  CLEVELAND, OHIO, September 27, 1922.I hereby accept the above and foregoing offer.  (Signed) S. CHESTER CROBAUGH.  In November, 1922, McMyler paid to Crobaugh the $25,000 stipulated in his agreement and Crobaugh thereupon paid $5,500 to each petitioner.  In April, 1923, McMyler paid Crobaugh the balance due, or*2017  $85,000, and Crobaugh paid to each of the petitioners the sum of $19,924.72 during the year 1923.  On September 26, 1922, a building costing approximately $250,000 was being erected on the leased land.  It was not completed until April, 1923.  The petitioners were on the cash receipts and disbursements basis during the year 1923.  OPINION.  VAN FOSSAN: The petitioners contend that the $5,500 payments received by each of them in 1922 from S. Chester Crobaugh were in part payment of compensation for services under the agreement dated November 1, 1920.  The respondent maintains that the said sums did not become the property of the petitioners during 1922, but constituted taxable income for the year 1923, when the petitioners became vested with the absolute ownership of the cash with no conditions or contingencies as to repayment.  We are of the opinion that by the execution of the memorandum of agreement of November 1, 1920, the four parties thereto became joint venturers, and that their subsequent actions are to be viewed accordingly.  We are of the further opinion that the offer to purchase, dated September 26, 1922, and the acceptance thereof the following day, limited as*2018  they were by their terms, constituted an executory contract of sale under which unconditional liability was not created until final compliance with the terms in April, 1923.  ; affirming . *1193  By the terms of the offer the payment of $25,000 was subject to be returned in event the assignment was not tendered by May 1, 1923.  The memorandum of agreement of November 1, 1920, provided that no sale could be effected without the concurrence of at least three of the parties thereto.  In the absence of evidence to the contrary, we assume that the contract was complied with and, though the acceptance bore only the name of Crobaugh, it was a valid contract so far as the joint ventures were concerned.  The acceptance of the offer and the receipt of the payment of $25,000 by Crobaugh were for and on behalf of the four parties in interest and the limitations bore equally on all.  Thus, when Crobaugh paid petitioners $11,000 out of the $25,000 received by him, they accepted it subject to such limitations.  Petitioners in their brief concede that they would have been obliged to return the payment*2019  if the transaction had not been closed in 1923.  This, as well as the express provision of the contract against commissions, negatives the interpretation asked by petitioners that these payments to them were in the nature of payments for services or commissions.  There is no evidence that the sale was accomplished through the efforts of petitioners.  Crobaugh, being the titular and legal owner of the lease, was a proper person to make the contract of sale and to execute the assignment of the lease.  So far as these cases are concerned, however, it is immaterial who was the legal owner of the lease or who negotiated the sale.  As joint venturers the petitioners would share equally in the benefits and burdens.  The contract, being an executory contract of sale as to Crobaugh, was equally so as to petitioners.  The fact that petitioners kept their books on a cash basis is not conclusive evidence of the fact that every payment of money coming into their possession was income.  The decision in , relied on by petitioners, is clearly distinguishable.  In that case we dealt not with an executory contract of sale, but with*2020  a completed sale subject only to a possible future condition.  There the parties to the contract had fully performed all conditions.  The only reservation was the possibility of certain adverse action by a third party.  As between the parties the contract was complete.  In the instant case a very different situation is presented.  Here the parties to the agreement had not completed their obligations in 1922 and might never fully perform them.  It follows that petitioners did not receive income until April, 1923, when the unconditional liability of the vendee was created.  Decision will be entered for the respondent.