Court Opinion

ID: 4591586
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:06:08.380394+00
Date Added: 2024-06-11T07:59:17.963608
License: Public Domain

D. M. STEVENSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stevenson v. CommissionerDocket No. 14698.United States Board of Tax Appeals9 B.T.A. 552; 1927 BTA LEXIS 2574; December 9, 1927, Promulgated 1927 BTA LEXIS 2574">*2574  Where petitioner and three others, each owning an undivided one-fourth interest in real estate, contract to sell the property for more than cost, but the cash received is less than cost, and the contract has no readily realizable market value, petitioner held entitled to recover his share of the cost of the property before any taxable gain arises from his share of the selling price.  Charles E. McCulloch, Esq., and Ivan F. Phipps, Esq., for the petitioner.  Warren F. Wattles, Esq., for the respondent.  ARUNDELL9 B.T.A. 552">*552  The Commissioner determined a deficiency in income tax for the calendar year 1920 in the amount of $1,791.90.  Petitioner alleges that the Commissioner erred in treating the deferred payments under a contract to sell real estate as the equivalent of cash and in computing petitioner's taxable income on that assumption.  FINDINGS OF FACT.  On May 3, 1920, petitioner was the owner of an undivided one-fourth interest in a piece of property known as the Caledonia Ranch, consisting of 2,560.2 acres of land in Klamath County, Oregon, which property was acquired subsequent to March 1, 1913.  The cost of the property to petitioner1927 BTA LEXIS 2574">*2575  and his associates was $53,748.40.  The cost to petitioner of his one-quarter interest in such property was $13,437.10.  On that date petitioner, together with the owners of the remaining three-fourths undivided interest in the Caledonia Ranch, entered into 9 B.T.A. 552">*553  a written contract for the sale of the property to John N. Davies.  A copy of the contract, insofar as it is material here, reads as follows: THIS AGREEMENT made this 3rd day of May, 1920, between RUTH S. ADDISON and ARTHUR D. ADDISON, her husband, of Eugene, state of Oregon, D. M. STEVENSON and ANGELINE W. STEVENSON, his wife, of Portland, state of Oregon, AGNES S. HOATSON and CALVIN D. HOATSON, her husband, of Sutter Creek, state of California, and GEORGE E. STEVENSON, unmarried, of Klamath Falls, state of Oregon, parties of the first part, hereinafter called the "SELLERS," and JOHN N. DAVIES of Independence, state of Oregon, party of the second part, hereinafter called the "PURCHASER," WITNESSETH: That in consideration of the mutual agreements herein contained to be performed by the respective parties, the Sellers agree to sell and the Purchaser agrees to purchase the following described real property situated1927 BTA LEXIS 2574">*2576  in the county of Klamath, state of Oregon, to wit: [Here follows a description of the property.] The Purchaser agrees to pay for the said real property the sum of ninety-six thousand dollars (96,000.00), of which amount the sum of ten thousand dollars ($10,000.00) has been paid either heretofore or simultaneously with the execution and delivery of this agreement.  The Sellers acknowledge receipt from the Purchaser of the said sum of ten thousand dollars ($10,000.00).  The balance of said purchase price, namely, eighty-six thousand dollars ($86,000.00), is to be paid to the First National Bank of Klamath Falls, Oregon, for the account of the Sellers at the times and in the amounts hereinafter set forth, that is to say: On or before October 1, 1920, twenty thousand dollars [20,000.00), On or before October 1, 1921, twenty-two thousand dollars ($22,000.00), On or before October 1, 1922, twenty-two thousand dollars ($22,000.00), On or before October 1, 1923, twenty-two thousand dollars ($22,000.00), All deferred payments shall bear interest at the rate of six per cent. per annum from and after October 1, 1920.  The Sellers agree to pay all taxes now a lien on said real1927 BTA LEXIS 2574">*2577  property and also the taxes assessed or to be assessed thereon for the year 1920, and payable in 1921.  All of said taxes are to be paid seasonably and before the same become delinquent.  The Sellers shall remain in possession of said real property until October 1, 1920, at which date they will give possession of said real property to the Purchaser, provided the Purchaser shall not be in default on said date in respect of the payment of twenty thousand dollars (20,000.00) provided by this agreement to be paid on October 1, 1920, by the Purchaser to the Sellers.  * * * For the purpose of carrying into effect this agreement, the Sellers agree to deposit in escrow with the FIRST NATIONAL BANK of Klamath Falls, Oregon, within thirty (30) days from the date hereofA deed conveying said real property to the Purchaser, said deed to contain the usual covenants of warranty against any and all liens and incumbrances except such as may hereafter be or become a lien upon said real property.  The Sellers shall also deposit with said bank an abstract of title brought down to date showing good title to said real property in Ruth S. Addison, D. M. Stevenson, Agnes S. Hoatson and George E. Stevenson, 1927 BTA LEXIS 2574">*2578  and said abstract may be withdrawn from the bank by the Purchaser at any time for purposes of examination or reference upon receipting for the same.  The said deed and abstract shall be deposited with said bank with instructions to deliver them to the Purchaser upon the payment in full of the purchase price of said real property as herein provided, but with the 9 B.T.A. 552">*554  further instructions that should the Purchaser fail to make any payment herein provided to be made by him promptly when the same becomes due the said deed and abstract shall be returned forthwith to the Sellers.  In the event that the Purchaser shall fail to make the payments aforesaid or any of them punctually and in accordance with the strict terms of this agreement and at the exact times above specified, time of payment and the exact performance of all of the agreements herein contained on the part of the Purchaser to be kept and performed being hereby declared to be of the essence of this agreement, then the Sellers shall have the right at their option to declare this agreement null and void, and in such event all the right and interest hereby created or then existing in favor of the Purchaser in said real1927 BTA LEXIS 2574">*2579  property or existing or derived under this agreement shall cease and determine, and the said real property shall revert and revest in the Sellers without any declaration of forfeiture or act of re-entry or without the performance of any other act by said Sellers and without any right of the Purchaser to compensation for any money paid or for improvements made on said real property, as absolutely and fully as if this agreement had never been made, and in the event of such default on the part of the Purchaser and termination of this agreement by the Sellers, the Purchaser agrees forthwith upon receipt of notice of such termination to quit and deliver up the said real property and the whole thereof peaceably and quietly.  The right to forfeit and determine this contract reserved to the Sellers upon failure of the Purchaser to make any payment herein provided or to perform any agreement herein contained to be performed on his part, shall not be an exclusive right or remedy of the Sellers, but all rights of the Sellers shall be cumulative and the Sellers may at their option waive any default of the Purchaser and proceed to collect in such manner as they deem advisable any or all amounts1927 BTA LEXIS 2574">*2580  due under the contract, which amounts the Purchaser hereby expressly undertakes and agrees to pay.  IN WITNESS WHEREOF the parties above named have hereunto set their hands and seals as of the day and year first herein written.  No notes were given to the vendors for the balance of the purchase price, or any part thereof.  The total profit to be derived by petitioner and his associates from said sale when completed was $42,251.60, of which the petitioner's share was $10,562.90.  The installment of $20,000 due on October 1, 1920, was paid on that date in accordance with the terms of the contract, and the purchaser thereupon took possession of the property.  The purchaser did not make payment of the $22,000 installment due under the contract on October 1, 1921, but on October 10, 1921, by agreement with the petitioner and his associates, a tract of 370 acres was released from the contract of sale, and a credit of $10,200 upon the contract was given therefor to the purchaser.  A quitclaim deed was given by the purchaser, John N. Davies, to the vendors and the 370 acres so released from the contract of sale.  The purchaser at that time made payment to the vendors of $11,800, representing1927 BTA LEXIS 2574">*2581  the balance of the installment due on October 1, 1921.  The purchaser did not make payment of the installment of $22,000 due on October 1, 1922, in accordance with the terms of the contract.  9 B.T.A. 552">*555  No payment was made by the purchaser under the terms of the contract during 1922.  On April 30, 1923, the purchaser paid to the vendors the sum of $44,000, being the balance of the agreed purchase price, and received a deed to the property.  The property as conveyed to the purchaser did not include the 370 acres released from the contract on October 10, 1921.  The Caledonia Ranch consisted of 2,560.2 acres of reclaimed tule marsh, protected against overflow from the Klamath Lakes by artificial dikes.  The land was covered with a mat of dry and rotted tules, which caused the entire property to be highly subject to fire hazards.  A fire upon the property would have materially affected the value of the land.  The property was acquired by Davies with a view to the raising of mint.  This was the first attempt ever made in the vicinity to raise mint in commercial quantities or as a business.  Petitioner endeavored unsuccessfully during 1920 to sell or otherwise dispose of or borrow1927 BTA LEXIS 2574">*2582  money upon his interest in the contract of sale.  The difficulty in disposing of petitioner's interest in the contract was due in part to the fact that the purchase was of a speculative character, the purchaser was a man of limited financial responsibility, the lands sold were during the latter part of 1920 worth less than when the contract of sale was entered into, the lands were in danger from fire and floods, and the fact that petitioner had only a one-fourth interest in the contract of sale.  In his original income-tax return for 1920 petitioner reported as income on the installment basis a profit on the payments received in 1920 on account of the sale of the ranch.  In determining the deficiency involved herein the Commissioner held that the sale of the Caledonia Ranch was a closed transaction in the year 1920 and that petitioner's entire share of the profit on this sale was income of the year 1920 and taxable as such.  Petitioner kept his books of account and rendered his income tax returns for the year 1920 and subsequent years upon the cash receipts and disbursements basis.  OPINION.  ARUNDELL: If petitioner's one-fourth interest in the deferred payments under the contract1927 BTA LEXIS 2574">*2583  may be said to be the equivalent of cash, it would seem that the deficiency determined by the Commissioner must be approved, even though petitioner reports his income on a cash receipts and disbursements basis.  What the Commissioner has sought to tax as cash income is a contract right to receive one-fourth of certain deferred payments payable over several years in the future.  The fact that petitioner had but a one-fourth interest in the deferred payments and the known financial weakness of the purchaser and the 9 B.T.A. 552">*556  speculative character of his undertaking would in and of themselves give one pause in saying that the deferred payments were the equivalent of cash.  But we have here in addition the actual inability of petitioner to realize on his contract right by sale, nor was he successful in pledging his interest in the contract as collateral for a loan.  Income under the statute to one reporting on a cash basis is a much more real thing.  We believe under the circumstances here present petitioner was entitled to recover his capital before being charged with the receipt of a profit and we so hold.  1927 BTA LEXIS 2574">*2584 ; cf. . Reviewed by the Board.  Judgment will be entered on 15 days' notice, under Rule 50.STERNHAGEN dissents.