Court Opinion

ID: 4623950
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:54:07.260304+00
Date Added: 2024-06-11T07:56:27.042371
License: Public Domain

Brooks Griffin and Josephine Griffin, Petitioners v. Commissioner of Internal Revenue, RespondentGriffin v. CommissionerDocket No. 3487-65United States Tax Court49 T.C. 253; 1967 U.S. Tax Ct. LEXIS 5; December 19, 1967*5 Decision will be entered for the Respondent.  1. On Jan. 3, 1961, petitioners conveyed by deed 1,115.96 acres of farmland in Phillips County, Ark., to Radcliffe Investment Co. in exchange for two Arkansas farm properties located in Phillips County, a farm in Missouri, and $ 5,683.60 in cash.  The value of the Missouri farm at time of the exchange was $ 110,550.  On July 13, 1960, during earlier negotiations with Radcliffe relating to the disposition of petitioners' farm, petitioners agreed in writing to sell the aforesaid Missouri farm to B. A. Craig for $ 110,550, the sale to take place on or before Jan. 10, 1961, but not before Jan. 2, 1961.  On Jan. 3, 1961, petitioners consummated this sale for $ 110,550.  Held, that the Missouri farm received in the exchange was other property held primarily for sale and did not come within the nonrecognition-of-gain provisions of sec. 1031(a), I.R.C. 1954, 1 and the entire gain of $ 86,631.92 realized by petitioners upon the disposition of their 1,115.96-acre farm must be recognized.2. Petitioners, who reported their income and claimed*6  expenses on the cash basis of accounting, deducted payments of interest for the taxable year 1962 in the aggregate amount of $ 32,709.29 included in four checks dated Jan. 1, 1963.  These checks were mailed on Dec. 31, 1962, and were paid and canceled by the drawee bank from January 9 through 10, 1963.  Held, that petitioners are not entitled to deduct said payments of interest in the taxable year 1962.  *7 E. J. Ball, for the petitioners. Robert S. Leigh, for the respondent.  Turner, Judge.  TURNER *254  Respondent determined income tax deficiencies against petitioners as follows:YearDeficiency1961$ 40,946.10196217,626.9858,573.08The issues for decision are as follows:(1) Whether, on January 3, 1961, the exchange by petitioners of 1,115.96 acres of farmland for cash and three smaller farms was, except as to the cash, a tax-free exchange within the meaning of *8 section 1031 of the Internal Revenue Code of 1954, and (2) whether the petitioners, who kept their books and records and made their income tax returns on the cash basis, are entitled to deduct in 1962 payments of interest made by checks dated January 1, 1963, mailed to the payee on December 31, 1962, and paid and canceled by the bank on which they were drawn in January 1963.FINDINGS OF FACTSome facts and some evidence have been stipulated by the parties and the facts so stipulated are found as stipulated.Petitioners are husband and wife residing at Ratio, Phillips County, Ark.  They filed their joint United States income tax returns for the calendar years 1961 and 1962 with the district director of internal revenue, Little Rock, *9  Ark.  They kept their books and made their returns on the cash basis.During the taxable years 1961 and 1962 petitioners were engaged in the business of farming in Phillips County.  The principal crops were cotton and soy beans, although small amounts of rice crops were also produced and sold.Petitioner Brooks Griffin, sometimes referred to herein as Griffin or petitioner, personally operated his farms, using his own employees.*255  During the taxable years involved, petitioner was also engaged in the cotton gin business at Ratio, Ark.  In addition, he operated a merchandise store in a rented building at Ratio, where he maintained his office.On July 13, 1960, petitioners and Radcliffe Investment Co., an Arkansas corporation, sometimes referred to as Radcliffe, entered into a contract entitled "Agreement For Exchange of Real Estate" whereby petitioners agreed to convey by warranty deed certain farmland, sometimes called Howe land, consisting of 1,115.96 acres and located in Phillips County, in exchange for Radcliffe's agreement to convey by warranty deed to petitioners a farm property located in New Madrid County, Mo., plus $ 156,536.45 in cash to be paid to petitioners as boot*10  on the exchange, the transactions to take place on or before January 10, 1961, but not prior to January 2, 1961.On the same date, July 13, 1960, petitioners entered into a contract entitled "Real Estate Sales Agreement" whereby they agreed to sell the Missouri farm property they were to receive in the above exchange to B. A. Craig for a cash consideration of $ 110,550, the sale to take place on or before January 10, 1961, but not before January 2, 1961.On December 3, 1960, petitioners and Radcliffe entered into contracts providing for the recision of the July 13, 1960, agreement for exchange of properties and the substitution of a new agreement for exchange of real estate.  Under the substituted agreement, petitioners were to receive the Missouri farm property, two farm properties located in Phillips County, Ark., known as Earls Farm and Loveless Farm, and $ 5,683.60 in cash, in exchange for their Howe land.  It was provided that the exchange was to take place on or before January 10, 1961, but not before January 2, 1961.Petitioners and B. A. Craig did not at any time rescind or revise their sales agreement of July 13, 1960, pursuant to which petitioners were to sell to B. A. Craig*11  the Missouri farm property for $ 110,550 on or before January 10, 1961, but not before January 2, 1961.  The agreement continued in full force and effect from July 13, 1960, until the property was acquired from Radcliffe on January 3, 1961, and sold to Craig on the same date.On December 1, 1960, Radcliffe entered into an agreement for the purchase of the Earls Farm property for a consideration of $ 75,000 for the purpose of using it in the prospective January 1961 exchange of properties with petitioners.On December 17, 1960.  Radcliffe entered into an agreement for the purchase of the Loveless Farm property for a consideration of $ 72,000 for the purpose of using it in the prospective January 1961 exchange of properties with petitioners.On January 3, 1961, the following transactions were closed pursuant to the various agreements:*256  A. By warranty deed petitioners conveyed Howe land, consisting of 1,115.96 acres of land and improvements, to Radcliffe free and clear of its prior indebtedness of $ 117,000 secured by a first mortgage on the property.B. Radcliffe closed the purchase of the Earls Farm and the Loveless Farm, conveying them by warranty deed free and clear of encumbrances*12  to Griffin.C. By warranty deed Radcliffe conveyed its Missouri farm property free and clear of a prior mortgage indebtedness of $ 36,000 to Griffin.D. Radcliffe issued its check payable to the order of Griffin in the amount of $ 5,683.60 and delivered it to him.E. A settlement sheet bearing acceptance signatures of Radcliffe by E. M. Radcliffe as president and Griffin was given to these parties in connection with their exchanges of properties reflecting the following:Settlement SheetExchange of Real Estate Between:Radcliffe Investment CompanyOsceola, ArkansasandBrooks GriffinElaine, ArkansasDeed from Brooks Griffin to Radcliffe Investment Company 1115 [n1]  acres of land situated in Phillips County -- value$ 265,040.50Deeds from Radcliffe Investment Company toBrooks Griffin:1. Missouri land -- value$ 110,550.002. Loveless land -- value73,806.903. Earls land -- value75,000.00Check from Radcliffe Investment Company toBrooks Griffin as boot5,683.60265,040.50265,040.50January 3, 1961Accepted:Radcliffe Investment CompanyBy E. M. RadcliffePresidentBrooks GriffinBrooks GriffinThe acreage in Howe land, as shown *13  by the exchange agreements with Radcliffe, was 1,115.96 acres.F. By warranty deed petitioners conveyed the Missouri farmland to B. A. Craig receiving therefor a consideration of $ 110,550 represented by $ 5,000 in cash received as earnest money in connection with the execution of the sales agreement on July 13, 1960, and a cash payment to petitioners on January 3, 1961, of $ 105,550.*257  On January 3, 1961, immediately prior to the exchanges, petitioners' adjusted basis in the 1,115.96 acres of land and improvements known as Howe land was as follows:Cost$ 180,195.60Depreciation allowed2,560.02Basis adjusted177,635.58In disposing of the Howe land, petitioners incurred and paid selling expenses in the amount of $ 773.In the exchange of Howe land for the three farms and $ 5,683.60 cash, the parties are agreed that petitioners realized gain in the amount of $ 86,631.92.  In arriving at the gain in that amount the values shown for the three farms received were the same as those shown on the settlement sheet, plus the cash payment of $ 5,683.60, reduced by the above-stated basis of $ 177,635.58 for Howe land and the expenses of sale in the amount of $ 773. *14  In reporting their income for 1961, the petitioners treated the disposition of its Howe land as an exchange of property for property of a like kind within the meaning of section 1031(a) of the Internal Revenue Code of 1954 to the extent of the three farms acquired.  It computed and reported a long-term capital gain of $ 7,383.60.  2 On the sale of the Missouri land to Craig petitioners reported long-term capital gain in the amount of $ 34,235.92.  In arriving at that amount he used $ 76,314.08 as his basis for the Missouri land.The respondent, *15  in his determination of deficiency, determined that the Missouri land was other property within the meaning of section 1031(b) of the Code and included it in his computation at $ 110,550, its agreed value on January 3, 1961, when it was received in exchange.  With respect to the sale of the Missouri land to Craig, he used the said value of $ 110,550 as petitioners' basis and determined that no gain was realized on the sale of the land to Craig.Petitioners were indebted to the Northwestern Mutual Life Insurance Co. of Milwaukee, Wis., on four notes on which payments of both principal and interest were due on January 1, 1963.  Payments were made of the principal and interest due on the said notes by checks dated January 1, 1963, and drawn on petitioners' account with the Merchants and Farmers Bank, West Helena, Ark.  The details of interest, *258  principal, and total payments made by the four checks were as follows:Note No.Amount ofAmount ofTotal amount ofprincipalinterestcheck paymentF 281 617$ 4,500$ 4,860.00$ 9,360.00F 292 87012,50015,000.0027,500.00F 293 9852,0002,000.064,000.06F 294 91111,00010,849.2321,849.23Total30,00032,709.2962,709.29*16  The four checks were paid and canceled by the Merchants & Farmers Bank of West Helena as follows:Check in amount of --Date of cancellation$ 27,500.00Jan. 9,  196321,849.23  Jan. 9,  19639,360.00   Jan. 10, 19634,000.06   Jan. 10, 1963On or about the first of September 1962 petitioner employed a new secretary and bookkeeper.  Toward the end of the year he advised her that it was his practice to pay his outstanding bills on or before the end of the year.  Sometime toward the end of December 1962 she prepared the four checks listed above in payment of the principal and interest due to the Northwestern Mutual Life Insurance Co. of Milwaukee and placed them on petitioner's desk for his signature. She dated the checks January 1, 1963, the due date of the principal and interest payments.  Petitioner didn't sign the checks right away but did sign them a few days later.  His secretary thereafter placed them in an envelope addressed to the insurance company and on December 31, 1962, took them to the postoffice, which was in the back of the same building in which petitioner's store and office were located, asking the postmistress to be sure to get them in the mail*17  that day.  The outgoing mail at the Ratio postoffice is picked up around 4:30 in the afternoon.  The envelope containing the checks was delivered to the postmistress on December 31, prior to the 4:30 pickup of the mail that day.In signing the checks, petitioner did not examine them to determine the dates shown thereon.At December 31, 1962, petitioner's balance in his bank account was insufficient to clear all of his checks written and outstanding on that date.  In addition to a line of credit of $ 100,000 with the bank, he had an arrangement whereunder his bank account would be credited with an amount sufficient to clear checks drawn on the account when presented for payment.  One method of handling such cases was by the signing of a blank note, leaving it to the bank to fill in the amount of the loan on the date of the loan.*259  On January 11, 1963, there was deposited to petitioner's account an amount of $ 30,000 representing the proceeds of a loan which was sufficient to cover payment of the checks on his account clearing the bank that day.  The bank interest on the said $ 30,000 loan began to run from January 11, 1963.Through normal bank channels it would take about 10*18  days for checks mailed by a party from West Helena, Ark., to Milwaukee, Wis., to get back to a bank in West Helena.  Ratio, Ark., is about 30 miles from West Helena.The checks in question were deposited or cashed by the Northwestern Mutual Life Insurance Co. at the First Wisconsin National Bank of Milwaukee and the earliest legible date shown on the back of any of the checks is January 3, 1963.In their 1962 income tax return petitioners deducted the $ 32,709.29 of interest paid as shown above to Northwestern Mutual Life Insurance Co.  The respondent in his determination of deficiency for 1962 disallowed the deduction so claimed.OPINIONUnder section 1031(a)3 no gain or loss is to be recognized if property held for productive use in a taxpayer's trade or business or for investment is exchanged solely for property of a like kind "to be held either for productive use in trade or business or for investment." If, however, in the exchange the property received consists not only of property permitted under section 1031(a) to be received without recognition of gain but also of other property or money, then under section 1031(b)4 the gain realized by the recipient is to be recognized*19  up to the sum of the money and the fair market value of the "other property."*20  The decisive question here is whether or not the Missouri farm, one of the properties received by petitioners in exchange for their Howe land, is other property within the meaning of subsection (b) as determined *260  by the respondent or is property of a like kind to be held for productive use in petitioners' trade or business or for investment within the meaning of subsection (a) as contended by petitioners.The resolution of that question in our opinion requires very little discussion and there is really no need to go beyond the words of the statute and their plain meaning.  When related to the Missouri farm, it and Howe land were of a like kind in that they were farm properties.  It is a fact, however, that the Missouri farm was not to be held and could not have been held for productive use in petitioners' trade or business or by them for investment.  Prior to the exchange on January 3, 1961, they had a binding contract and obligation with B. A. Craig to sell the property to him for $ 110,550 no more than 8 days from their acquisition of the land, and the facts show that the sale of the Missouri farmland to Craig was actually made on the same day that they acquired it from*21 Radcliffe.  The decision on this issue must be for the respondent.  See and compare Regals Realty Co. v. Commissioner, 127 F. 2d 931, affirming 43 B.T.A. 194">43 B.T.A. 194, and Ethel Black, 35 T.C. 90">35 T.C. 90.Section 163(a) 5 of the Code provides for the allowance as a deduction of all interest paid or accrued within the taxable year on indebtedness. Section 461(a) 6 provides that the amount of any deduction or credit shall be taken for the taxable year which is the proper year under the method of accounting used in computing taxable income. The parties have stipulated that petitioner kept his books of account and made his income tax returns on the cash basis.*22  The evidence shows, and we have found as a fact, that the checks covering the interest in question, showing the Northwestern Mutual Life Insurance Co. as payee, were mailed by petitioner to the insurance company in Milwaukee, Wis., on the afternoon of December 31, 1962.  It was the testimony of the president of the Merchants & Farmers Bank in West Helena, on which the checks were drawn, that a check mailed from West Helena to Milwaukee would in the ordinary course require approximately 10 days to reach the bank in West Helena for payment.  There is no claim or contention that the checks could, under any circumstances, have been in fact delivered to the payee in Milwaukee on the day they were mailed. Stamps on the back of two of the checks indicate that most likely they were deposited or cashed at the First Wisconsin National Bank of Milwaukee on January 3 and that the remaining two were similarly presented a day or two *261  thereafter.  In any event, two of the checks cleared the bank in West Helena and were charged to the petitioners' account therein on January 9 and the other two on January 10, 1963.The petitioner contends that the mailing of the checks on December 31 constituted*23  payment of interest on that date within the meaning of the above sections of the Code.  He relies on such cases as Flint v. United States, 237 F. Supp. 551">237 F. Supp. 551; Commissioner v. Bradley, 56 F. 2d 728, affirming 19 B.T.A. 49">19 B.T.A. 49; Estate of Modie J. Spiegel, 12 T.C. 524">12 T.C. 524; and Clark v. Commissioner, 253 F. 2d 745, remanding a Memorandum Opinion of this Court, for the proposition that under the facts herein the placing of the checks in the mail on December 31, 1962, constituted delivery and their subsequent payment in the succeeding year related back to that date for the purpose of the deduction claimed.Although there are variations in the facts as to the actual physical delivery of the checks and the cashing thereof, in the cases cited they do generally appear to offer some support for petitioners' contention.  In one case, Witt's Estate v. Fahs, 160 F. Supp. 521">160 F. Supp. 521 (S.D. Fla. 1956), it was held that in such cases delivery of the checks is effected when mailed in a properly addressed envelope.In the *24  case at hand, however, there is another critical factor which is not present in any of the cited cases.  Here, the checks, although properly drawn and mailed to the payee on December 31, 1962, were dated January 1, 1963.  It is clear that the bookkeeper-secretary dated these checks January 1, 1963, because that was the date when the interest was payable on certain notes to Northwestern Mutual Life Insurance Co.; that Griffin did not instruct her as to the specific date to be placed on these checks; and that in signing the checks he did not concern himself as to the dates shown on the checks.  7*25 A postdated check is not a check immediately payable but is a promise to pay on the date shown.  It is not a promise to pay presently and it does not mature until the day of its date, after which it is payable on demand the same as if it had not been issued until that date although it is, as in the case of a promissory note, a negotiable instrument from the time issued.  Commonwealth v. Kelinson, 184 A.2d 374">184 A.2d 374*262  (Pa. Super. Ct. 1962); see also Uniform Commercial Code, sec. 3-114.  8*26 Generally, a bank may be held liable for prematurely paying a postdated check. Montano v. Springfield Gardens National Bank, 207 Misc. 840">207 Misc. 840, 140 N.Y.S. 2d 63 (1955). It has been held that if a postdated check is presented in advance of its date the drawee bank, even though it has funds of the drawer on deposit sufficient to pay it, should not make payment, certify the check, or set aside any fund for that purpose.  If the bank does pay the check or withhold money for that purpose and, by reason of its action, other checks drawn by the depositor are dishonored, the bank subjects itself to an action for damages at the instance of the depositor.  Smith v. Maddox-Rucker Banking Co., 8 Ga. App. 288">8 Ga. App. 288, 68 S.E. 1092">68 S.E. 1092 (1910). Although the president of Merchants & Farmers Bank in West Helena was not sure if payment on a postdated check was prohibited by banking laws, he testified that his bank would normally turn back a postdated check even if it were dated one day after presentment.A postdated check is essentially a promissory note, and a taxpayer reporting his income on a cash basis is not entitled*27  to deduct as interest paid during the taxable year the amount of a promissory note given in discharge of an interest obligation.  The requirement of section 163, supra, as to payment is not satisfied by the issuance of a note promising to pay in the future.  Eckert v. Burnet, 283 U.S. 140">283 U.S. 140; Hart v. Commissioner, 54 F. 2d 848. The postdated checks under review were merely a promise to pay the Northwestern Mutual Life Insurance Co. the amounts specified thereon on or after January 1, 1963, and did not constitute payment of the interest on December 31, 1962.  It is obvious that the checks when mailed were subject to a very substantial restriction as to the time of payment, and that under ordinary circumstances the drawee bank would refuse to make payment on them.In L. M. Fischer, 14 T.C. 792">14 T.C. 792, the taxpayer, on the cash basis, received a check in payment of legal services rendered on December 31, 1942.  He had agreed verbally with the payor that he would not deposit the check until the first of the year, and therefore it was not deposited for collection until February 10, 1943.  Fischer*28  sought to include the payment on the check in his 1942 taxable income, contending *263  that the payment on the check in February 1943 related back to the time the check was delivered to him.  We held that the check was not income to him in 1942, because the oral condition imposed at the time of delivery of the check restricted the time when the proceeds of the check could be collected.In the instant case there is a stronger factual situation.  Here, we are confronted with a restriction on the face of the checks in question imposed at the time the checks were mailed limiting the time when the proceeds of the checks might be collected.  Under the circumstances, we cannot say that the interest was deductible by petitioner in 1962 within the intendment of section 163(a), supra.Decision will be entered for the Respondent.  Footnotes1. Unless otherwise indicated, all references are to the Internal Revenue Code of 1954, as amended.↩2. This amount exceeds the $ 5,683.60 of cash received by $ 1,700, and the record is not clear how the amount of $ 7,383.60 was arrived at.  Petitioners' counsel, in par. 2 under the heading "Conclusions of Law" which accompanied his proposed findings of fact, took note of the $ 1,700 difference between the two figures but offered no explanation.  In any event, it is now his contention that the amount of recognizable capital gain is limited to the cash payment of $ 5,683.60.↩3. SEC. 1031. EXCHANGE OF PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT.(a) Nonrecognition of Gain or Loss From Exchanges Solely in Kind.  -- No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.↩4. SEC. 1031. EXCHANGE OF PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT.(b) Gain From Exchanges Not Solely in Kind.  -- If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.↩5. SEC. 163. INTEREST.(a) General Rule. -- There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.↩6. SEC. 461. GENERAL RULE FOR TAXABLE YEAR OF DEDUCTION.(a) General Rule. -- The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.↩7. Respondent, on cross-examination, asked petitioner to explain his instructions, given to his bookkeeper, relating to the checks in question (Tr. 24):Q. Now, Mr. Griffin, would you tell us again what happened in December 1962 with respect to these checks?  Did you tell her to make them out prior to the end of the year and date them January 1, '63, or did you tell her to date them December 1, '62, or did you tell her not to even date them, or what?A. I didn't mention the date on them.  I said, Let's pay them before the end of the year.Q. She wasn't authorized to sign checks, was she?A. No.Q. And you signed $ 60,000 worth of checks and didn't notice they were dated January 1, '63?A. That is correct.↩8. The Uniform Commercial Code, adopted by the State of Arkansas, Jan. 1, 1962, Ark. Stat. Ann. secs. 85-1-101 to 85-9-507, states as follows:85-3-114.  Date -- Antedating -- Postdating.  -- (1) The negotiability of an instrument is not affected by the fact that it is undated, antedated or postdated.(2) Where an instrument is antedated or postdated the time when it is payable is determined by the stated date if the instrument is payable on demand or at a fixed period after date.(3) Where the instrument or any signature thereon is dated, the date is presumed to be correct.↩