Court Opinion

ID: 4601161
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:27:01.816103+00
Date Added: 2024-06-11T07:52:26.230370
License: Public Domain

C. A. COCHRAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Cochran v. CommissionerDocket Nos. 37774, 45081.United States Board of Tax Appeals23 B.T.A. 616; 1931 BTA LEXIS 1848; June 8, 1931, Promulgated *1848  The petitioner under his father's will took a vested remainder interest in certain real estate subject to a life estate in favor of petitioner's mother.  Petitioner's father died April 12, 1913.  On January 11, 1919, the petitioner and his mother entered into an agreement to sell the real estate upon a deferred payment plan.  Petitioner's mother died June 9, 1921.  Held, that the petitioner acquired his interest in the real estate upon his fathers' death on April 12, 1913, and that the value thereof on that date is the correct base to be used in computing petitioner's taxable gain.  Held, further, that petitioner's gain in each of the years 1924, 1925, and 1926 was correctly computed by the respondent upon the basis of an installment sale in 1919.  John E. Hughes, Esq., and William Cogger, Esq., for the petitioner.  J. Arthur Adams, Esq., and Frank A. Surine, Esq., for the respondent.  SMITH *616  The respondent has determined deficiencies of $4,365.69 for 1924, $839.85 for 1925 (Docket No. 37774), and $887.19 for 1926 (Docket No. 45081).  The issue in these proceedings is the amount of taxable gain received by the petitioner in*1849  the years 1924, 1925, and 1926 from the sale of certain real estate.  The petitioner alleges that the respondent has erroneously computed the profit upon the basis of an installment sale in the year 1919 and has used an incorrect basis.  FINDINGS OF FACT.  The petitioner's father died testate April 12, 1913, and was survived by the petitioner and the petitioner's mother.  After making certain specific bequests not here material, the decedent, in his will, disposed of the residue of his estate as follows: ITEM 12.  I give, devise and bequeath all the residue and remainder of my Estate, both real and personal, to my good wife, MARY ISABELLA COCHRAN, to have, use and enjoy during the remainder of her lifetime, and at her decease said residue of my Estate shall go absolutely and in fee simple to my son, CHAUNCEY A. COCHRAN.  Chauncey A. Cochran is the petitioner herein.  Mary Isabella Cochran, now deceased, was the petitioner's mother.  There fell into the residue of the estate of the decedent, subject to the above quoted item of his will, certain real estate which later was disposed of by the petitioner and others, as hereinafter set forth.  The proceeds from the sale of a part*1850  of such real estate comprise the items of income in *617  controversy in these proceedings.  On January 11, 1919, the petitioner and his mother and the petitioner's wife entered into a so-called option agreement with the Realty Security Company, hereinafter referred to as the Realty Company, to sell certain of the real estate passing under the aforesaid will upon terms and conditions which, so far as material here, are briefly stated as follows: The real estate in question comprised a tract of 121.17 acres situated in the south section of the city of Youngstown, Ohio.  The Realty Company agreed to pay a total consideration of $165,000 for the entire tract.  It made a cash payment of $10,000 upon execution of the agreement.  Interest was to be paid thereafter on the balance of the purchase price at stipulated rates.  The total purchase price was to be paid on or before July 1, 1925, at the rate of not less than $20,000 per year, payable on or before July 1 of each year.  With exceptions not here material, the Realty Company was to have immediate possession and use of the entire tract.  It was to pay all taxes and assessments on the property falling due after June 20, 1919; *1851  make certain street improvements thereon at a cost of $25,000 on or before July 1, 1920; and "proceed forthwith to plat, improve and sell said lands as rapidly as conditions will warrant." The parties were later to have forms of contracts and deeds prepared to be used in selling the lots.  It was agreed that such contracts should require a cash payment on the purchase of each lot of not less than 10 per cent and further monthly payments of not less than $10 per month.  These payments were to be deposited in a designated bank to the account of "The Realty Security Company, Cochran Option" and, except as the parties might agree, used for no other purpose than the payment of the purchase price of the land or the cost of improvements thereon and expenses of selling the lots.  The petitioner and others were to deliver warranty deeds to the Realty Company or its nominees for the platted lots as long as the option agreement was in force and the Realty Company not in default in its payments or other obligations thereunder.  The Realty Company had the right at any time to pay the balance due on the purchase price of $165,000 and receive a deed to the remainder of the property.  The Realty Company, *1852  however, was not to be entitled to the deeds until it had made installment payments, in addition to the initial payment of $10,000, at the rate of $15,000 per acre for the first 30 lots and $20,000 per acre for the remaining lots.  Upon default by the Realty Company of any of the covenants of the option agreement for a period of six months the petitioner and others were authorized to "re-enter and take possession" of all the land not already deeded.  Upon execution of this agreement the Realty Company took immediate possession and began subdividing the property and selling the *618  lots.  Warranty deeds to the lots sold were issued to the purchasers as agreed, executed by the petitioner, the petitioner's mother, and the petitioner's wife.  The petitioner's mother died June 9, 1921.  On July 8, 1925, the petitioner and his wife executed a written agreement extending the agreement of July 11, 1919, for an additional period of one year, or to July 1, 1926.  On August 6, 1926, the agreement was further extended to October 1, 1926.  The respondent has computed the petitioner's taxable gain in 1924, 1925, and 1926 from the sale of the real estate in question upon the basis*1853  of an installment sale made in 1919 and has used as a cost basis the value of the property at April 12, 1913, the date of the petitioner's father's death.  OPINION.  SMITH: The respondent has treated the transaction in question as an installment sale made in 1919 and in computing the petitioner's gain thereon has used as a cost base the value of the petitioner's interest in the real estate at the date of the death of the petitioner's father, April 12, 1913.  The respondent's position is that the petitioner acquired the property at that time under the provisions of his father's will.  The petitioner contends that he acquired the property upon the death of his mother on June 9, 1921, and that the value at that date is the proper base to be used in computing the gain, if any, realized by him upon the sale.  The petitioner further contends that his taxable profit in the years involved should be computed under the capital gain provision of the Revenue Act of 1924.  Construing Item 12 of the will, it seems to us that the plain intent of the testator and the import of the words used by him in his will was to leave the petitioner's mother a life estate only in the residue of his estate, *1854  with the remainder over to the petitioner.  The fee to the real estate in question, which fell into the residue of the estate, therefore vested in the petitioner at the date of his father's death.  . The mother was to "have" and "enjoy" the property during her lifetime.  These words indicate a limitation of her estate to a life interest only.  We do not think that she could have dissipated or disposed of the property for her own advantage to the detriment of the petitioner's vested remainder interest.  Upon her death the "said residue" was to go "absolutely and in fee simple" to the petitioner.  The rule is stated in Thompson on Real Property, vol. 2, p. 207, that "courts are inclined to construe estates as vested unless there appears a clear intention that the testator meant otherwise" and *619  that an early vesting of the remainder is favored.  The laws of the State of Ohio, as applied in the cases cited by the respondent, seem to favor this construction.  See ; *1855 . We think that the petitioner acquired his interest in the real estate in question upon his father's death under the above quoted clause of the will and that the value of such interest on that date is the base to be used in computing the gain or loss upon its subsequent sale.  We think that the respondent is also correct in his determination that the sale of the real estate in question took place in 1919 when the so-called option agreement was executed and its performance undertaken.  While the agreement is styled "Option" it does not differ materially from an ordinary sales contract.  In substance the Realty Company agreed to pay a total purchase price of $165,000 for the entire tract of land in yearly installments of not less than $20,000 for a period of six years.  The petitioner and others agreed to convey title to a proportionate part of the land each year.  This they were bound to do as long as the Realty Company made its agreed yearly payments.  The retention of title to a portion of the land by the vendors merely afforded them a more direct method of protection in case of*1856  default by the Realty Company.  The effect was the same as if they had conveyed the entire property to the Realty Company and had retained a first trust or mortgage to secure full payment of the purchase price.  The provision that the Realty Company might elect to pay the entire purchase price and secure a deed to the remainder of the property at any time while the agreement was in force was in the nature of an option, since it permitted an acceleration of the performance of the contract, but this did not in any way affect the other provisions of the agreement.  We have held in a number of cases involving similar questions that agreements not materially different from the one here under consideration evidenced an installment sale.  See ; ; . In , we said: With respect to the contract to sell the real property, the buyer agreed to pay $2,500,000 to the taxpayer.  Six hundred thousand dollars was paid on the execution of the contract and the balance was to be paid in installments*1857  within a period of three years.  The contract had the usual provisions reserving the title in the seller until all payments were made, gave the seller the right of repossession in case of failure to make payments, and provided for forfeiture of all rights and all money paid as liquidated damages in case of default.  The buyer had the right of possession and the right to remove timber.  He could not assign the contract without the written consent of the seller.  There were no notes, mortgages, or other securities given by the buyer other than the provisions of the contract.  Payments subsequent to the initial payment of $600,000 were made as set out in the findings of fact.  *620  Cf. ; affd., ; ; affd., . Even regarding the agreement as an option to purchase, we think that such option was exercised during the year 1919 when the Realty Company took possession of the property and commenced the performance of its part of the agreement. *1858  It is evident, of course, that if the petitioner and his mother sold their respective interests in the real estate in 1919 the petitioner gained no additional interest therein upon his mother's death in 1921.  The petitioner's remainder interest was conveyed before it ripened into an absolute fee, since he sold such interest prior to the termination of the intervening life estate.  The record before us does not show whether the respondent in his computation of the petitioner's profits from the sale of the property has made proper allowance for the value of the life tenant's interest, nor do we have the facts necessary for such determination.  However, at the hearing counsel for the petitioner admitted that the respondent has correctly computed the petitioner's taxable gain upon the sale of his interest in the property in question upon the installment sale basis, subject the the questions raised as to the date of petitioner's acquisition of his interest and the date of the sale.  We therefore hold that the respondent has correctly computed the petitioner's tax liability for the years 1924, 1925, and 1926.  Judgment will be entered for the respondent.