Court Opinion

ID: 4588782
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:42:49.073642+00
Date Added: 2024-06-11T07:50:08.636393
License: Public Domain

SOPHIA M. GARRETSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Garretson v. CommissionerDocket No. 5818.United States Board of Tax Appeals10 B.T.A. 1381; 1928 BTA LEXIS 3885; March 15, 1928, Promulgated *3885  In the circumstances of this proceeding, it is held that petitioner received no taxable income from a payment made under a contract in 1919 to sell certain land.  F. O. Straight, C.P.A., for the petitioner.  J. E. Marshall, Esq., for the respondent.  LITTLETON*1381  The commissioner determined a deficiency in income tax against the petitioner for the calendar year 1919 in the amount of $2,259.40.  It is claimed that the Commissioner erred in including in income for 1919 the amount of $1,997.50 as an alleged profit derived in that year from the sale of certain land.  Petitioner claims that the sale did not take place until 1920.  It is further claimed by petitioner that if the sale occurred in the year 1919, it was an installment sale and the Commissioner erred in holding that the entire profit was taxable in the year 1919.  At the hearing of the proceeding, the Commissioner conceded that this was an installment sale and that he should have computed the profit in 1919 under the installment provisions of the statute.  He still insisted, however, that the sale occurred in 1919 and not in 1920, as claimed by petitioner.  The deficiency notice*3886  was dated July 8, 1925, was addressed to the petitioner, and showed the Commissioner's determination of a deficiency against the petitioner alone.  Lloyd Garretson, petitioner's husband, also signed and verified the petition, and the amended petition was styled "Lloyd Garretson and Sophia M. Garretson." At the hearing the proceeding was, upon motion of the Commissioner, dismissed as to Lloyd Garretson for want of jurisdiction, since the Commissioner had not mailed to him a notice of a deficiency for the year 1919.  FINDINGS OF FACT.  Petitioner is a resident of Yakima, Wash.  During the taxable year she was married and living with her husband, Lloyd Garretson.  On June 11, 1919, petitioner and her husband, as parties of the first part, and Jesse E. Bruce and his wife Almira E. Bruce, as parties *1382  of the second part, entered into the following written "Real Estate Contract." It is hereby mutually agreed by and between Lloyd Garretson and Sophia Margaret Garretson, his wife, parties of the first part, and Jesse E. Bruce, and Almira E. Bruce, his wife, parties of the second part, that said parties of the first part will sell to said parties of the second part, their heirs*3887  or assigns, and said parties of the second part will purchase of said parties of the first part, their heirs, executors or administrators, the following described property situate in Yakima County, Washington, to-wit: The west half of the southeast quarter of section 22, township 11 north, range 18 E.W.M., containing 80 acres, more or less, together with all the rights, privileges, immunities and appurtenances of whatsoever nature thereunto belonging and subject to a right of way thereon for ditches or canals constructed by the authority of the United States, on the following terms: the purchase price for said land is Sixteen Thousand Dollars ($16000.00), of which the sum of Four Thousand Dollars ($4000.00) has this day been paid as earnest, the receipt of which is hereby acknowledged, by said parties of the first part; and the further sum of Twelve Thousand Dollars is to be paid on or before June 11, 1924, in any amount at any time, with interest thereon at the rate of seven per cent per annum, interest payable annually.  The parties of the second part shall pay all taxes and special assessments which may become due, after the date of making this agreement.  A deed conveying*3888  the statutory covenants of warranty shall be forthwith executed by the first parties to second parties, conveying full and complete title to said real estate, to said second parties, to be executed upon the execution of this contract by the parties of the first part, and placed in escrow in the First National Bank of Yakima, Washington; said deed to be accepted by said First National Bank and held by said bank in escrow, until all of the moneys herein provided to be paid by the parties of the second part to the parties of the first part are paid; and when so paid the said bank shall deliver said deed to the second parties, as a full and complete consummation of this contract.  The parties of the first part guarantee to the parties of the second part that they, the parties of the first part, will deliver and cause to be delivered to the parties of the second part, peacable possession of said premises on or before March 4, 1920, and in the event of the failure of said first parties so to do, the parties of the second part shall, at their own election be entitled to rescind this contract, and receive back all moneys, with interest thereon at the rate of seven per cent which they have*3889  paid on and in virtue and because of this contract.  Time is of the essence of this contract, and in case of the failure of the parties of the second part to make either or any of the payments, and the whole thereof, of each and every one of said payments herein provided for, or to perform any of the covenants on their part to be performed, this contract shall be forfeited and determined at the election of said parties of the first part; and the said parties of the second part shall forfeit all payments made by them on this contract, and said payments made by them on this contract shall be retained by said parties of the first part in full satisfaction and liquidation of all damages by them sustained; and said parties of the first part in such event shall have a right to reenter and take possession of said land and premises, and every part thereof.  In event of the failure of the *1383  parties of the first part to give peaceable possession of said premises, to the parties of the second part on or before March 4, 1920, this contract shall be forfeited and determined, at the election of the parties of the second part, and they shall be entitled to recover and receive back from*3890  the parties of the first part, all moneys paid by them in virtue of and because of this contract, with interest thereon at the rate of seven per cent per annum.  Wherever the terms parties of the first part, or parties of the second part are used herein, it shall be construed to mean also their assignees or personal representatives.  This instrument was duly acknowledged by all of the parties thereto.  This document also contained the following: The First National Bank of Yakima, Washington, hereby acknowledges receipt of the deed referred to in the above contract, and also acknowledges the contents of said contract, and said bank agrees to and with the parties to this contract in consideration of the responsibility imposed by said parties, to hold said deed in escrow and to safely keep the same, and to forthwith deliver the same to the parties of the second part or to their assigns and legal representatives upon the payment of all the moneys provided to be paid by said contract, as the purchase price of said land, and in the event of said contract being forfeited the said bank agrees forthwith to deliver said deed to the first parties.  It is further provided as part of this*3891  agreement that all moneys paid under this contract shall be paid to the parties of the first part at the banking house of this bank, under the supervision of the cashier of said bank, or the president, in order that this bank may know and keep in touch with the manner in which the contract is being performed.  In witness whereof the undersigned officer of said bank has affixed the hand and seal of this bank, this day of A.D. 19 .  The cost of the land in question to petitioner and her husband in 1919 was $14,000.  At the time of the execution of the document above quoted, Bruce paid to petitioner and her husand $4,000.  The reason for the provision in the contract that Bruce might decline to make payment of the purchase price in the event that the lessee then on the property failed to surrender possession at the expiration of the lease was because this property was under lease to an Indian and it had sometimes happened that lessees would not surrender possession upon the expiration of the lease and legal process would have to be resorted to in order to get possession of the premises.  Bruce did not desire to be compelled to do this and he did not desire to purchase the property*3892  unless he could be assured of possession on or before March 4, 1920.  Bruce paid two water assessments against the property but it does not appear whether these payments were made before or after he was given possession of the property.  Upon the execution of the contract of June 11, 1919, all rights of the petitioner and her husband under the lease passed to Bruce.  Whatever rent was paid after that date went to Bruce.  Upon the execution of the contract, petitioner and her husband executed a *1384  warranty deed to the property to Bruce and his wife for the consideration mentioned, which deed, together with the contract, was placed in escrow with a bank to await compliance by the parties with the provisions of the contract.  February 16, 1920, Bruce paid an additional $2,000 on the purchase price.  June 15, 1920, he paid $795.28 interest to June 11, 1920, and on June 8, 1921, he paid $700 interest to that date.  Bruce made no further payments upon the purchase price or interest and the land was taken back by petitioner and her husband.  All amounts paid by Bruce upon the purchase price and as interest were forfeited and were retained by petitioner and her husband.  Upon her*3893  return for the calendar year 1919, petitioner reported this land as being sold in the year 1919 and showed profit as being $1,997.50 and her share thereof as being $499.40.  OPINION.  LITTLETON: At the time of the making of the contract hereinbefore quoted, and the placing of the same with deed to the property in escrow with a bank, the property in question was under lease, the expiration date of which was in the year 1920.  Bruce was desirous of not being compelled to resort to legal means to get possession of the property from the lessee in the event he should fail to quit the premises upon the expiration of the lease, and a contract was entered into between petitioner and her husband and Bruce, whereby Bruce agreed that he would purchase the property only in the event possession was delivered on or before March 4, 1920.  The contract also provided that if possession should not be delivered as agreed, all amounts paid by Bruce would be returned to him with interest at the rate of 7 per cent per annum.  Bruce was given possession of the property upon the expiration of the lease thereon in 1920.  The evidence does not show when petitioner and her husband took back the property*3894  and forfeited the payments of principal and interest which had been made by Bruce.  We are here dealing only with petitioner's tax liability for the calendar year 1919 and with the question whether the $4,000 earnest money paid to petitioner and her husband by Bruce upon the execution of the contract hereinbefore quoted was income in that year.  In that contract petitioner and her husband agreed to sell to Bruce and Bruce agreed to purchase, but his agreement to purchase was upon a specific contingency, namely that petitioner and her husband would give him peaceable possession of the land on or before March 4, 1920.  The sale was not consummated upon the execution of the contract and the placing of the same with the deed in escrow.  The *1385  contract wherein the petitioner and her husband agreed to sell and Bruce agreed to buy, provided that it was to be forfeited and determined in the event possession should not be delivered to Bruce on or before March 4, 1920.  Until Bruce got actual possession of the property, or until possession was tendered him, he did not purchase the property, nor had he parted with ownership of the $4,000 paid.  Until the happening of the event mentioned*3895  in the contract relative to possession, the sale was not completed.  Until 1920, Bruce was not obligated to make any further payment on the purchase price agreed upon, but on the contrary was entitled to receive back the earnest payment made, with interest at the rate of 7 per cent per annum, if petitioner and her husband did not deliver possession of the property within the time agreed upon.  In the opinion of the Board petitioner derived no taxable gain from this transaction in the year 1919.  Reviewed by the Board.  Judgment will be entered on 15 days' notice, under Rule 50.