Court Opinion

ID: 4602011
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:28:48.758754+00
Date Added: 2024-06-11T07:52:35.719899
License: Public Domain

BLAINE L. STONER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stoner v. CommissionerDocket No. 67525.United States Board of Tax Appeals29 B.T.A. 953; 1934 BTA LEXIS 1446; February 1, 1934, Promulgated *1446  During the taxable year the petitioner sold certain corporate stock and received payment in full therefor.  Pursuant to the contract under which the stock was sold the petitioner deposited a portion of the selling price in a bank to insure the fulfillment of certain obligations assumed by him in the contract of sale.  Held, that the full amount of the profit received from the sale of the stock constituted income taxable to the petitioner for the year in which received.  J. Henry O'Neill, Esq., for the petitioner.  Dean P. Kimball, Esq., and Edward C. Adams, Esq., for the respondent.  TRAMMELL*953  This is a proceeding for the redetermination of a deficiency in income tax for the year 1929 in the amount of $2,870.98.  The question involved is whether the sum of money received from the sale of securities and deposited by the seller as security for the carrying out of certain contractual provisions constituted income when received.  The facts were stipulated, and we find all the facts as stipulated.  FINDINGS OF FACT.  (1) Blaine L. Stoner made his income tax return for the year 1929 upon the basis of cash receipts and disbursements. *1447  (2) On April 3, 1929, Blaine L. Stoner, acting on behalf of himself and other stockholders of The Suburban Water Company of Allegheny County, Pennsylvania, a Pennsylvania corporation, entered into a written agreement with the American Utilities Service Company, a Delaware Corporation, whereby the said Blaine L. Stoner, therein designated as Seller, agreed to sell or cause to be sold, and the said American Utilities Service Company, therein designated as Buyer, *954  agreed to purchase all, and not less than 85%, of the outstanding common stock of the said The Suburban Water Company of Allegheny County, Pennsylvania, at the gross price of approximately $96.34 per share, or a total gross price of $1,250,000.00 if there was sold to Buyer all the outstanding shares of common stock of said The Suburban Water Company of Allegheny County, Pennsylvania, upon the conditions set forth in said Agreement.  (3) A copy of said Agreement of April 3, 1929, is attached hereto [to the stipulation], made part hereof, and marked Exhibit "A." Pertinent provisions of the agreement are as follows: (c) The Seller agrees to indemnify and hold harmless the Buyer and the Company against any and*1448  all liability for the payment of Federal income tax on the part of the Company and/or Unity Water Company and/or Moore Water Company for each and all years prior to the year 1929, and against any libility at law or in equity created by any acts or omissions on the part of any one or more of said companies occurring before the closing date hereunder, which liability is not disclosed on the balance sheet contained in Exhibit 1, and the aggregate of which liability, whether arising out of one or more acts and/or omissions on the part of any one of said companies shall be in excess of $500, and which liability or claims therefor shall be presented to said companies or any of them within the period of two years from the closing date hereunder.  (d) To insure the fulfillment of the Seller's obligations created in the next preceding subparagraph hereof, Seller agrees to deduct from the amount of the purchase price payable hereunder a sum which shall not be less than $50,000, and to deposit said sum in a bank of the Seller's selection, which sum shall be designated and deposited as "Suburban Water Company Indemnity Account", or by some similar appropriate name, and which shall be maintained*1449  intact for the term of two years from the closing date hereunder, except as to withdrawals from said fund made by the Seller in order to enable Seller to fulfill his obligations under said paragraph.  Seller agrees to devote all or any part of said sum to the fulfillment of any of his obligations to the Buyer or the Company which may hereafter from time to time arise under the terms of said subparagraph.  (4) Pursuant to said Agreement of April 3, 1929, there was sold to Buyer on May 27, 1929, all the outstanding common stock of The Suburban Water Company of Allegheny County, Pennsylvania, consisting of 12,975 shares.  On said May 27, 1929, the Seller received a total consideration of $1,237,439.27, of which the sum of $50,000.00 was paid to and received by the said Blaine L. Stoner pursuant to the provisions of subparagraph (d) under heading "Various Agreements" of the said Agreement of April 3, 1929, and forthwith deposited by him in an account designated "Blaine L. Stoner - Suburban Water Company Indemnity Account" at the First National Bank of Verona, Pennsylvania, in accordance with the requirements and for the purposes set forth particularly in subparagraphs (c) and (d) under*1450  said heading "Various Agreements" of the said Agreement of April 3, 1929; from the sum of $1,187,439.27 (that is, $1,237,439.27 minus $50,000.00), Seller paid expenses and commissions of $49,907.62 and distributed pro rata among the shareholders, including himself, $1,137,531.65.  (5) Pursuant to the said Agreement of April 3, 1929, Blaine L. Stoner sold and delivered to American Utilities Service Company, for his own account, 3,553 shares of the common stock of The Suburban Water Company of Allegheny County, Pennsylvania, being all the common stock he owned therein.  His proportionate share of the fund of $1,137,531.65 mentioned in paragraph (4) hereof (that is, $1,237,439.27 minus $49,907.62 minus $50,000.00) was $311,420.45.  *955  (6) Blaine L. Stoner, in his income tax return for the year 1929 , reported the sale of his 3,553 shares of The Suburban Water Company of Allegheny County, Pennsylvania common stock, as aforesaid, and showed a capital net gain thereon of the difference between the cost of said stock and $311,420.45.  (7) Blaine L. Stoner did not report as income, in his income tax return for the year 1929, the sum of $13,695.04, representing that percentage*1451  of the said deposit of $50,000.00 which his 3,553 shares of stock bore to the total shares of common stock of The Suburban Water Company of Allegheny County, Pennsylvania sold to The American Utilities Service Company pursuant to the Agreement of April 3, 1929.  (8) On June 1, 1931, Blaine L. Stoner paid to himself individually from the fund "Blaine L. Stoner - Saburban Water Company Indemnity Account", the said sum of $13,695.04, together with his pro rata share of the interest that had accumulated on the said deposit of $50,000.00 until that date, and reported said sum of $13,695.04 and interest in his income tax return for the year 1931.  (9) The Commissioner in the notice of deficiency increased petitioner's 1929 net taxable income in the amount of $13,695.04 on account of said sale of Suburban Water Company stock.  OPINION.  TRAMMELL: It is the contention of the petitioner that $50,000 of the total consideration received by the seller from the buyer on May 29, 1929, was turned over to the seller impressed with a trust or restriction imposed by the buyer and for that reason it did not constitute a part of the gross income until it was released from the restriction.  Under*1452  the terms of the contract it was agreed that the seller would deduct from the purchase price a sum not less than $50,000 and would deposit such sum in the bank, subject to the conditions of the contract.  This provision of the contract was carried out and the $50,000 was actually paid to the seller and thereafter the seller deposited $50,000 in a bank, subject to the conditions of the quoted provision of the contract.  That sum was for the purpose of guaranteeing that certain things would be done.  The petitioner relies upon the case of ; affd., . In that case there was a contract which provided that a municipality should withhold from the consideration payable to the contractor upon completion of a paving contract a certain sum to secure the contractor's obligation to guarantee maintenance of the paving for a period of years.  We held that the contractor did not have an unqualified right to receive the full consideration upon the completion of the contract and that therefore the amount withheld was not income to him at that date.  But in this case the seller of the property actually received*1453  the full consideration, including the $50,000, and after receiving it deposited it in the bank.  It became the seller's money and not the money of the purchaser.  The taxpayer, that is, the seller, received interest on the money.  *956  In the case of , the taxpayer received in 1917 certain moneys the right to which was then being litigated in court.  Though the taxpayer's title was uncertain and contingent and the outcome of the litigation, it had the use of the moneys and the court held that they were taxable income in 1917, when received.  In the case of , where a contractor had a contract with a municipality for pavement construction, the contract provided that the contractor after completion of the work should give the municipality a certain indemnity undertaking in the form of city bonds, United States bonds, or cash, at the option of the contractor.  When cash was used it was withheld from moneys due the contractor.  In deciding that the full contract price was income we said: If, in the present appeal, the contractor in fact received the*1454  contract price and in fact transferred cash or bonds to the city for deposit as required, the contract price would have been income notwithstanding the deposit or pledge for proper maintenance.  But the procedure was simplified and the city retained the deposit fund in the first instance.  The fact that it did so with the heavy hand of its municipal power does not change the taxpayer's contractual right to the full compensation and its obligation to make deposit.  The legal effect is quite the same.  The petitioner in this proceeding argues that the case at bar is distinguishable from the Mead Construction Co. case, supra, because in the Mead case there was no restriction on the right of the taxpayer to receive compensation in full.  However, we can not overlook the fact that the taxpayer in this case did actually receive compensation in full and was required to provide an indemnity fund after receipt of full compensation.  In the case of , there was a sale of real estate and the seller promised to oust a tenant within a certain period.  Title to the property was passed and the consideration paid, except $50,000 which*1455  was retained by the purchaser to guarantee the performance of the seller's agreement to oust the tenant.  As in the case at bar, interest on the $50,000 was paid to the seller.  We held that this sum of $50,000 was taxable income to the seller, although, unlike the case at bar, it was not actually paid to the seller within the taxable year.  In that case we said: The fact that in concluding the transaction the Federal Reserve Bank, instead of paying over the entire amount of the purchase price and then receiving back a deposit of $50,000 from petitioner, retained that sum from the total makes no difference.  The result is the same in any event.  The retaining of this amount was a use of it as funds of the petitioner in carrying out the latter's obligation to make a deposit.  The sum was held from that time forward as money belonging to petitioner, interest being paid the latter for the time it was held.  The fact that one who sells property guarantees the purchaser against some contingency arising in a future year and makes a *957  deposit as security for the guarantee does not lessen by the amount of the guarantee or the amount of the deposit the profit which he had made on*1456  the sale.  If in such case the happening guaranteed against takes place in the following year and a portion of the deposit is in consequence lost, the result is one affecting income for that year to the extent of the loss.  In view of the authorities aforesaid it is our opinion that the $50,000 received by the petitioner as a part of the purchase price of the property and deposited by it to guarantee against the happening of certain contingencies should be included in the gross income of the petitioner for the year involved.  Cf. . Judgment will be entered under Rule 50.