Court Opinion

ID: 4610193
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:46:20.932376+00
Date Added: 2024-06-11T07:54:01.353137
License: Public Domain

HAROLD R. SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Smith v. CommissionerDocket No. 90142.United States Board of Tax Appeals39 B.T.A. 892; 1939 BTA LEXIS 957; May 18, 1939, Promulgated 1939 BTA LEXIS 957">*957  In 1929 petitioner purchased two parcels of real estate under land contracts.  In one instance petitioner was the original vendee, while in the other he was assignee of the vendee.  Under the terms of the contracts he was entitled to possession of the properties and he agreed to enter them for taxation in his own name.  After making certain principal payments on the contracts during that year, he defaulted.  In 1935 he surrendered the contracts and his interest in the properties to the vendor in consideration of the vendor's cancellation of his debts under the contracts.  Held, that the transactions constituted sales or exchanges of capital assets and the losses thus sustained by petitioner are capital losses.  Following Betty Rogers,37 B.T.A. 897">37 B.T.A. 897. John M. Hudson, Esq., for the petitioner.  Vernon F. Weekley, Esq., for the respondent.  TURNER 39 B.T.A. 892">*892  This proceeding involves a deficiency in income tax for the year 1935 in the amount of $375.85.  The question presented is whether certain losses sustained by petitioner resulting from the surrender or reconveyance of his vendee's interest in the two parcels of real estate acquired1939 BTA LEXIS 957">*958  under land purchase contracts in consideration of the vendor's cancellation of his debts under the contracts constituted ordinary losses deductible under section 23(e) of the Revenue Act of 1934, or capital losses subject to the limitations of section 117.  FINDINGS OF FACT.  Petitioner is an individual, residing at Grosse Pointe Farms, Michigan.  He filed his income tax return for the year 1935 with the collector of internal revenue in Detroit, Michigan.  On March 1, 1929, the Joy Realty Co., as vendor, and Frank J. Towar, as vendee, entered into a written contract for the sale of a certain parcel of real estate situated in the village of Grosse Pointe Farms, Michigan.  The contract recited consideration in the sum of $8,200, of which amount $820 was paid by the vendee upon the execution of the contract, and he agreed to pay the balance of $7,380, with interest, in semiannual installments of $492 each.  Under the terms of the contract the vendee agreed to enter the property for taxation in his own name and to pay or cause to be paid all taxes or assessments levied or assessed against it, and in the event he failed to do so, the vendor had the right to pay or discharge the1939 BTA LEXIS 957">*959  same and the amounts so paid would be added to and become a part of the principal sum secured by the contract.  The vendor agreed that upon the receipt of payment in full of the principal and interest 39 B.T.A. 892">*893  and any other sums chargeable in its favor, and upon the surrender of the contract, it would furnish at its own expense a Union Title & Guaranty Co. title policy, except as to any liens and encumbrances which may have accrued on the land subsequent to the date of the contract by or through the acts or negligence of the vendee, or his assigns, and also to execute and deliver to the vendee, or to his assigns, a good and sufficient conveyance of the property by warranty deed.  It was agreed that the vendee would have possession of the property upon the execution of the contract and be entitled to retain possession as long as there was no default on his part in carrying out the terms of the contract.  The contract provided that if the vendee failed to perform any of the covenants of the contract, the vendor might, in addition to any other remedies at law or equity, declare the entire amount unpaid to be due and payable forthwith, and proceed to collect the same by an action1939 BTA LEXIS 957">*960  at law, or foreclose the contract in equity, or declare the contract void and retain whatever might have been paid thereon as stipulated damages for nonperformance, in which case the right of the vendee to possession would cease and the vendor might, without notice to vendee, reenter upon and take possession of the property and remove therefrom the vendee or any person claiming through or under him and to treat such person or persons as tenants holding over without permission.  The parties agreed that the vendee could not assign the contract or any interest therein without the written permission of the vendor endorsed or affixed to the assignment.  The vendor reserved the right to mortgage the property pending the complete performance of the contract by the vendee.  A rider attached to the contract provided that when the principal had been reduced to a figure equivalent to 80 percent of the original sale price the vendor would give a deed to the vendee and take back a second mortgage for the ten unpaid balance, but this agreement was not to be binding on the vendor in the event the vendee sold or assigned his interest in the contract.  On June 6, 1929, the vendee in the above contract, 1939 BTA LEXIS 957">*961  in consideration of $1 and other valuable consideration, sold, assigned, and transferred all his right, title, and interest in the above contract to petitioner.  This assignment contained a written endorsement of the vendor, giving its consent to the assignment, and it also contained an endorsement by petitioner, accepting the assignment, and providing that he agreed of their consent above given, to assume, perform and carry out with them all the conditions therein contained on the part of Vendee therein to be performed. the principal balance of the contract the amount of $233.70, thereby 39 B.T.A. 892">*894  reducing the balance due to $7,146.30.  Thereafter no payments of principal or interest were made on the contract.  On March 1, 1929, the Joy Realty Co., as vendor, and petitioner, as vendee, entered into a written contract for the sale of a parcel of real estate situated in the village of Grosse Pointe FarmsMichigan.  This agreement was executed on a printed form identical with that used by the parties in the contract of March 1, 1929, described above, and the provisions of the two contracts were substantially the same.  This contract recited a consideration in the sum of $15,000, 1939 BTA LEXIS 957">*962  of which amount $1,500 was paid by petitioner upon the execution of the contract and the balance of $13,500 was payable in semi-annual installments of $900 each.  On December 14, 1929, petitioner paid on the principal of the contract the amount of $495, thereby reducing the balance due to $13,005.  Thereafter no payments of principal or interest were made on the contract.  Petitioner's total investment in the two parcels of real estate above referred to aggregated $3,048.70, and after 1929 there was a balance due on the two contracts in the total amount of $20,151.30.  On October 28, 1935, petitioner, being in default, surrendered the two contracts to the vendor and they were canceled.  On the same date petitioner and his wife executed and delivered to the vendor quitclaim deeds covering the two parcels of real estate.  Both of the deeds provided that the petitioner and his wife grant, bargain, sell, remise, release and forever quit-claim vendor the properties in question.  On October 28, 1935, the vendor wrote petitioner a letter acknowledging receipt of the two quitclaim deeds, and stating that it released him from all further claims and responsibility under the two contracts. 1939 BTA LEXIS 957">*963  In 1935 the fair market value of the two parcels of real estate was not in excess of the balance due under the contracts.  In his income tax return for 1935 petitioner deducted as an ordinary loss the full amount of $3,048.70, representing the sums paid under the two contracts.  Respondent treated the loss as a capital loss and held that the deduction thereof was subject to the limitation provided in section 117 of the Revenue Act of 1934.  OPINION.  TURNER: The respondent contends that the petitioner's surrender of the two land contracts and his conveyance of his interest in the properties to the vendor by quitclaim deeds, in consideration of the vendor's cancellation of his debts under the contracts, constituted 117 of the Revenue Act of 1934.  He states on brief that we have 39 B.T.A. 892">*895  already held in , that a transaction substantially the same as the transactions here involved constituted a loss.  Petitioner contends that nothing was sold or exchanged by him but that the transactions in question were surrender of the contracts and a release of the properties for which he received nothing in return. 1939 BTA LEXIS 957">*964 Upon the execution of one of the land contracts on March 1, 1929, and the assignment of the other on June 6, 1929, petitioner became the equitable owner of two parcels of real estate. ; ; and ; . He took possession of the properties and entered them for taxation in his own name.  In ; , it was said that vendee, and may be sold, devised or encumbered by him, and on his death will descend to his heirs. Misc. 824; . The vendor retains bare legal title to secure the performance of the contract.  . debt, secured by the contract. of the parties is somewhat analogous to mortgagor and mortgagee.  Williston on Contracts, vol. II, par. 791; ; Conners v. Winans, supra.Accordingly, we think there can be no doubt that petitioner's rights to and interests in the two parcels of real estate were capital assets and the losses sustained resulted from the parting1939 BTA LEXIS 957">*965  with those capital assets.  Our next question is whether the transactions herein constituted sales or exchanges within the meaning of section 117 of the statute.  Under the terms and conditions of the contracts the vendor, upon petitioner's default, had the right (1) to treat the contracts as continuing in force and sue at law for the principal amount, (2) to bring action in equity for foreclosure of its vendor's lien and for a deficiency decree, or (3), to declare the contracts forfeited.  See . The vendor did not exercise any of those alternatives, however, and the contracts were terminated by mutual consent and agreement of the parties, whereby petitioner voluntarily surrendered his rights to and in the lands to the vendor in consideration of the cancellation by the latter of the remaining indebtedness.  Petitioner also executed and delivered to the vendor quitclaim deeds to the two parcels of real estate, wherein it was recited that petitioner and his wife these presents grant, bargain, sell, remise, release and forever quitclaim the said parcels of real estate unto the vendor. 1939 BTA LEXIS 957">*966  As to the lack of necessity in such case for a conveyance in writing, see ; . Petitioner argues that he merely the transactions.  The petitioner being in default, the vendor had the right to treat such default as an abandonment by the petitioner of his rights under the contracts, ; , but it did not do so.  Petitioner was obligated to make further payments and we know of no way in which an attempt at abandonment of the contracts would have been effective.  He would at the election of the vendor still have been subject to a suit at law for the balance of the principal amount, or to an action in equity for foreclosure of the vendor's lien on the two parcels of real estate and for a deficiency decree for the unsatisfied portion of the indebtedness.  By a new agreement between the parties, however, the vendor reacquired the two parcels of real estate previously sold to petitioner, in one instance to petitioner's assignor, and petitioner satisfied his additional personal liability under the contracts as effectively as if1939 BTA LEXIS 957">*967  he had received payment for the two properties in cash and used such cash in paying the balance of his liability under the contracts.  we conclude therefore that the transactions here in question were sales or exchanges within the meaning of the statute.  See also , wherein we held there was an exchange of property for other property under substantially similar circumstances. The petitioner contends that the facts in , are distinguishable from the facts in the instant case, and, further, that if the two cases are not distinguishable the former is unsound and should be overruled.  He relies principally on ; ; affd., ; ; and . While there are some minor distinctions in form between the instant case and the Betty Rogers case, the results sought by the parties and the effect of their acts are precisely1939 BTA LEXIS 957">*968  the same.  In , the debt in question was secured by a deed of trust rather than a land contract. The vendor retained a lien on the property as security for the balance of the purchase price, the legal title being placed in a trustee.  In the instant case the vendor retained bare legal title as security for the payment of the balance of the purchase price and the petitioner became the equitable owner of the property.  In both cases, by agreement of the parties, the properties were reconveyed to the vendor.  In the Betty Rogers case that was accomplished by having the trustee convey legal title to the vendee, who in turn conveyed the property to the vendor.  In the present case the same result was accomplished by the surrender and cancellation 39 B.T.A. 892">*897  of the contracts.  See In both cases the consideration flowing to the vendee was his release from his obligation to pay the balance of the purchase price.  Petitioner further contends that 1939 BTA LEXIS 957">*969 , is distinguishable from the instant case in that the fair market value of the properties herein at the time of the transactions involved was less than or not in excess of the vendee's debts under the contracts, whereas in the Betty Rogers case the deed recited that the consideration received by the grantor was equal to the fair market value of the grantor's interest in the land.  The important thing is that the vendee, in consideration for his interest in the two parcels of real estate, received valuable consideration, namely, the release from his personal liability under the contracts.  The record here does not show whether the petitioner was financially able to pay the debts or whether the vendor might have collected the full amount of the debts by appropriate legal action.  The record does show, however, that the vendor was willing to and did accept the properties in lieu of its claims under the contracts and that petitioner agreed to accept the cancellation of his indebtedness in lieu of his interests in the properties.  The settlement was reached by agreement of the parties, and whether the ultimate result was in fact favorable to the vendor1939 BTA LEXIS 957">*970  or to the petitioner appears of little significance.  The possibility that one of the parties might, and in most sales or exchanges probably does, obtain a better bargain than the other does not serve to make a transaction any the less a sale or exchange.  , and , are altogether different from the instant case and from  In neither of those cases did the vendee assume the mortgage liability and upon the conveyance of the property in the one case and its sale under foreclosure in the other, the vendee, being subject to no further liability, received no consideration.  , was discussed and distinguished in our opinion in , and the reasoning there is equally applicable here.  , is obviously not in point.  That case involved a question of the realization of gain, while in the instant case we are merely concerned with the nature of a loss.  Furthermore, the decision in that case turned on the fact that the debtor1939 BTA LEXIS 957">*971  was insolvent.  No such facts are present in the instant case.  We accordingly conclude that the transactions herein constituted sales or exchanges of capital assets and sustain the respondent's determination that the losses were capital losses.  Reviewed by the Board.  Decision will be entered under Rule 50.