Court Opinion

ID: 9448424
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:35:35.755386+00
Date Added: 2024-06-11T17:31:25.764189
License: Public Domain

STALEY, Circuit Judge
(dissenting).
One of the reasons for adopting the installment plan of reporting income was to relieve taxpayers from having to pay an income tax in the year of sale based on the full amount of anticipated profits when in the tax year they received in cash only a small part of the sales price. Commissioner of Internal Revenue v. South Texas Lumber Co., 333 U.S. 496, 68 S.Ct. 695, 92 L.Ed. 831 (1948). Section 453 being remedial, “manifestly it is to be construed liberally in favor of the taxpayers to give the relief it was intended to provide.” Bonwit Teller & Co. v. United States, 283 U.S. 258, 263, 51 S.Ct. 395, 75 L.Ed. 1018 (1931) ; Kelly-Springfield Tire Co. v. United States, 81 F.2d 533 (C.A.3, 1935). The majority here is doing just the contrary.
Whether the instrument here in question should be construed as an option or contract of sale depends not on any particular words but on the manifested intent of the parties. “In determining whether a conveyance is, or is not, effective, and if effective, just what its effect is, the intent of the conveyor is always an important, and often the decisive factor.” Restatement, Property, § 11, comment d, (1936). Intent is, of course, a question of fact, and the Tax Court’s finding in this regard must be affirmed unless clearly erroneous. In the agreement here, the buyer expressly agreed to buy and the taxpayers to sell. The taxpayers disposed of all incidents of ownership in the land, and the right of the purchaser to exercise the incidents of ownership was absolute with certain exceptions which in themselves clearly show that the parties intended to enter into a binding agreement. During the year 1954, the buyer paid taxpayers $15,-000 as he was required to do by the agreement. The remainder was to be paid at the time of settlement. The taxpayers specifically reserved the right to harvest the crops during all of 1954 and part of 1955, and to remove all build*877ings and trees and to retain occupancy and use of the structures until 1955. Shortly after the agreement was signed, the taxpayers began looking for a new farm in New York and Maryland, and as early as February 1955 bought one in New Jersey. As one of the taxpayers testified, “The farm was sold and we hunted for a farm right away.” In 1954, the buyer sent numerous employees and heavy equipment on the land in order to prepare for construction. In accordance with the agreement the deed to the property was delivered in 1955. These facts clearly show that the parties intended a sale.
It is accepted that where an agreement is made in which there are mutual promises to buy and sell, such an agreement is not turned into an option by the fact that there is also a provision for forfeiture of down payment as liquidated damages in case of a failure by the purchaser to perform. 1 Corbin on Contracts § 274, pp. 921-922 (1950). The fact that the extent of purchaser’s liability in case of breach was to be determined by the liquidated damages clause is of itself unimportant, for the Commissioner’s own regulation under the section here involved, Treas.Reg. 1.453-5 (1958), establishes a procedure for reporting income in the event the purchaser fails to perform.
I do not think that Sooy v. Henkelman, 104 N.J.L. 540, 142 A. 17 (1928), and Wellmore Builders, Inc. v. Wannier, 49 N.J.Super. 456, 140 A.2d 422 (1958), which the majority cites, require a different conclusion. In Wellmore Builders, the question before the court was not whether the agreement was one of sale, for neither party so contended. The court there had to determine whether the writing constituted an option or a right of preemption. In Sooy, the court indicated that under the circumstances, the parties had agreed to an option, and at 142 A. 18, went on to say: “Now, the rule is that whether an instrument in writing transferring an interest in real estate shall be construed as an absolute contract for sale and purchase or only an option to purchase depends not on any particular words or phrases, but on the intention of the parties to be derived from the instrument itself by a consideration of its parts, and, when that is doubtful, from the circumstances attending it.” (Emphasis supplied.)
It was the Commissioner who, by regulation, first expressly authorized the use of installment reporting. In holding those regulations ultra vires, the Board of Tax Appeals in B. B. Todd, Inc., 1 B.T.A. 762 (1925), indicated that the regulations had been promulgated in order to reduce the over-all tax paid. Immediately thereafter, Congress, in the Revenue Act of 1926, § 212, authorized installment reporting. That provision was reenacted as § 44 of the Revenue Act of 1928 and the Internal Revenue Code of 1939, and § 453 of the Internal Code of 1954.1 See Commissioner of Internal Revenue v. South Texas Lumber Co., supra.
Here, one of the taxpayers testified that they intended to take advantage of the relief contained in § 453 and in fact adjusted the selling price in accordance with the tax savings that would result from payments on the installment plan. It appears that the taxpayers originally asked for a larger selling price, which was reduced because of a suggestion by the buyer’s counsel that since payments would be made on an installment basis, there would be a tax savings. The sale was consummated as agreed to. Under these circumstances, to hold as the majority does would negate the intent of Congress.

. The only substantive change worked by § 453 was that the taxpayer need not receive any .payment in the year the sale is agreed to, but can receive up to thirty per cent. 3 U.S.Code Cong. & Adm.News Serv., 83d Cong., 1st Sess., 1954, pp. 4299, 4943. See Gilbert v. Commissioner, 241 F.2d 491 (C.A.9, 1957).