Court Opinion

ID: 4613620
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:53:50.100962+00
Date Added: 2024-06-11T07:54:38.749531
License: Public Domain

THEODORE J. SWIFT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Swift v. CommissionerDocket No. 31477.United States Board of Tax Appeals20 B.T.A. 1099; 1930 BTA LEXIS 1973; September 30, 1930, Promulgated *1973  As relating to real property situated in California, deposit of deeds in escrow in March, 1921, in accordance with an agreement to sell real property, delivery of the deeds to await a final payment on the purchase price to be made in 1924 did not constitute "a sale consummated" prior to December 31, 1921.  Petitioner is entitled to have his tax liability by reason of a profit resulting from the transaction computed under section 208(a)(1) of the Revenue Act of 1924, relating to "capital gains." Virgil Y. Moore, Esq., for the petitioner.  Otis J. Tall, Esq., for the respondent.  LOVE *1099  This is a proceeding for the redetermination of a deficiency in income tax for the year 1924.  The deficiency letter asserted a deficiency in the amount of $7,850.04, of which approximately $5,100 is in controversy.  Petitioner alleges that the respondent "erred in finding that a certain sale by the petitioner and others of a capital asset was consummated prior to December 31, 1921, and in accordance with such error * * * further erred in refusing to permit the petitioner to apply the provisions of section 206 of the Revenue Act of 1921 and section 208 of the*1974  Revenue Act of 1924 to his income arising from the profit on said sale." FINDINGS OF FACT.  Petitioner is an individual with offices at Oceanic, Calif.On March 4, 1921, the petitioner and J. W. Jameson, both of the State of California, were the owners of an undivided three-fourths interest in and to certain lands in California.  On the date mentioned they agreed to sell the said undivided three-fourths interest to the Chanslor-Canfield Midway Oil Co., a California corporation.  The agreement to sell was made in writing and so far as material it provided as follows: AGREEMENT, Made this fourth day of March 1921, between T. J. SWIFT (formerly T. J. Wrampelmeier) and LODORSCA A. SWIFT, his wife, of the County of Alameda, State of California, and J. W. JAMESON and IDA M. JAMESON, his wife, of the County of Los Angeles, said State, first parties, and CHANSLOR-CANFIELD MIDWAY OIL COMPANY, a California corporation, second party.ARTICLE I.  IN CONSIDERATION of the covenants herein on the part of the second party and of the faithful keeping of them by it, the first parties hereby agree: *1100  1.  To sell and convey unto the second party, its successors and assigns, *1975  their undivided three-fourths interest in and to all of those certain lands situate in the Counties of Kern and San Luis Obispo, State of California, particularly described as follows: [Description of lands] * * * At and for the sum of nine hundred thousand dollars ($900,000.00), payable as follows: $180,000.00 on or before March 25, 1921 90,000.00 on March 15, 1922 90,000.00 on September 15, 1922 90,000.00 on March 15, 1923 90,000.00 on September 15, 1923 90,000.00 on March 15, 1924 90,000.00 on September 15, 1924 90,000.00 on March 15, 1925 90,000.00 on September 15, 1925.  All deferred payments to bear interest at the rate of six (6) per cent per annum from March 15, 1921, until paid, payable on March 15, 1922, and semiannually thereafter until all of said deferred payments have been paid in full.  That upon the execution and delivery of this agreement and the payment of the first installment above mentioned, the first parties will deposit with the bank hereinafter mentioned a grant deed conveying their said undivided three-fourths interest in and to the lands above described (except the unpatented lands above described, and as to those they will deposit*1976  in escrow at said time and place a quitclaim deed conveying their undivided three-fourths interest therein to the second party, its successors and assigns) free and clear of encumbrances but subject to * * * (leases, rights of way, etc., theretofore granted) with instructions to the said bank to deliver said deeds to the second party upon payment for said land in full as hereinbefore stated.  * * * [Provisions relating to certain existing leases for the production of oil from the lands involved.] 3.  That the right of the first parties or either of them to receive royalty from any of the land hereinbefore described, or any part thereof, under the terms of any and all of those certain leases and modifying agreements under which the second party now possesses and operates said land for the production of oil therefrom, wherein, T. J. Swift and J. W. Jameson, two of the first parties above named, are two of the lessors, and the second party is lessee, (for more specific description of said leases and agreements see Appendix "A" hereof), shall cease and be at an end on March 15, 1921; provided, however, that the second party shall account to the first parties for all royalty*1977  due them under the terms of said leases up to and including the fifteenth day of March 1921; and provided, further, that all installments and interest specified in paragraph 1 hereof are paid as herein provided.  4.  That this agreement and the sale evidenced hereby are intended to be and are a full and complete settlement of all claims and demands of every kind and nature which the first parties or either of them now has or may hereafter have against the second party and that the latter now has or may hereafter *1101  have against first parties on account of the leases above mentioned or the acts of either party hereto thereunder, or on account of the sale evidenced hereby, * * * * * * ARTICLE II IN CONSIDERATION of the covenants herein on the part of the first parties and of the faithful keeping of them the second party agrees to purchase the undivided three-fourths interest of the first parties in and to all the lands hereinbefore described, at and for the sum above stated, and to make payments thereof in the manner and at the times fixed in Article I hereof.  ARTICLE III FOR THE CONSIDERATION STATED, it is mutually agreed: 1.  That the bank in which the*1978  deeds above mentioned shall be deposited in escrow and into which the payments above mentioned shall be made is the Los Angeles Trust and Savings Bank of the City of Los Angeles, County of Los Angeles, State of California.  2.  That all payments to be made hereunder by the second party to the first parties shall be payable, one-half of each payment to T. J. Swift, his heirs or assigns, and one-half of each payment to J. W. Jameson, his heirs or assigns; that the second party shall pay said payments to said bank to the credit of each T. J. Swift and J. W. Jameson accordingly; and that payment of each installment when due shall be deemed to have been made in accordance with the terms of this agreement and the intention of the first parties if and when the second party shall pay the installments which it hereby obligates itself to pay, into said bank to the credit of the first parties as aforesaid.  3.  That the second party shall have ten (10) days grace on each installment which it hereby agrees to pay, if it shall so desire.  4.  That in the event that any installment of the purchase price heretofore specified shall not be paid as aforesaid when due in accordance with the terms*1979  hereof or within ten days thereafter, then and in such event the first parties, if they so elect, may terminate this agreement and be relieved of all obligations in law or in equity hereunder, by giving to the second party a notice in writing accordingly, and that in the event of such termination of this agreement the first parties shall have the right to retain for their own use and benefit and as liquidated damages all sums of money theretofore paid to them by the second party hereunder; * * * 5.  That this agreement shall apply, bind and inure to the benefit of the heirs, personal representatives, and successors and assigns of the parties hereto, as the case may be.  IN WITNESS WHEREOF, the parties hereto have duly executed this agreement the day and year first above written.  (Signed) T. J. SWIFT (formerly T. J. Wrampelmeier), LODORSCA A. SWIFT J. W. JAMESON IDA M. JAMESON First Parties.  CHANSLOR-CANFIELD MIDWAY OIL COMPANY, (By) E. O. FAULKNER, As its Vice-President, Second Party.  Immediately upon execution of the above quoted instrument and receipt of the first payment provided for thereunder, the parties *1102  executed the required deeds and delivered*1980  the same to the Los Angeles Trust & Savings Bank to be placed in escrow, delivering to the said bank at the same time written escrow instructions quoted as follows: ESCROW INSTRUCTIONS TO LOS ANGELES TRUST AND SAVINGS BANK, Los Angeles, California.  GENTLEMEN: The undersigned, T. J. Swift and J. W. Jameson, hand you herewith the documents following: 1.  Grant deed from T. J. Swift, Lodorsca A. Swift, his wife, and J. W. Jameson and Ida M. Jameson, his wife, grantors, to Chanslor-Canfield Midway Oil Company, a California corporation, grantee, dated March 4, 1921.  2.  Quitclaim deed from the same grantors to the same grantee dated March 4, 1921; and 3.  Assignment to Santa Fe Land Improvement Company, a California corporation, of all the rights of the undersigned in, to or under an application for prospecting permit under Act of Congress approved February 25, 1920, and any permit that may be issued pursuant to said application.  You are hereby instructed and authorized to deliver said documents to the said Chanslor-Canfield Midway Oil Company, its representative, or its successors or assigns, when payment shall have been made by it to you for us of the total sum of Seven*1981  Hundred Twenty Thousand Dollars ($720,000.00) in installments as follows: On March 15, 1922.  $90,000.00 together with interest on $720,000.00 at six per cent per annum from March 15, 1921, to March 15, 1922; one-half of said payment to be placed to the credit of T. J. Swift and one-half thereof to be placed to the credit of J. W. Jameson.  September 15, 1922.  $90,000.00 together with interest on $630,000.00 at six per cent per annum from March 15, 1922, to September 15, 1922; one-half of said payment to be placed to the credit of T. J. Swift and one-half thereof to be placed to the credit of J. W. Jameson.  On March 15, 1923.  $90,000.00 together with interest on $540,000.00 at six per cent per annum from September 15, 1922, to March 15, 1923, one-half of said payment to be placed to the credit of T. J. Swift and one-half thereof to be placed to the credit of J. W. Jameson.  September 15, 1923.  $90,000.00 together with interest on $450,000.00 at six per cent per annum from March 15, 1923, to September 15, 1923; one-half of said payment to be placed to the credit of T. J. Swift and one-half thereof to be placed to the credit of J. W. Jameson.  On March 15, 1924.  $90,000.00*1982  together with interest on $350,000.00 at six per cent per annum from September 15, 1923, to March 15, 1924; one-half of said payment to be placed to the credit of T. J. Swift and one-half thereof to be placed to the credit of J. W. Jameson.  September 15, 1924.  $90,000.00 together with interest on $270,000.00 at six per cent per annum from March 15, 1924, to September 15, 1924; one-half of said payment to be placed to the credit of T. J. Swift and one-half thereof to be placed to the credit of J. W. Jameson.  On March 15, 1925.  $90,000.00 together with interest on $180,000.00 at six per cent per annum from September 15, 1924, to March 15, 1925; one-half of said payment to be placed to the credit of T. J. Swift and one-half thereof to be placed to the credit of J. W. Jameson.  *1103  September 15, 1925.  $90,000.00 together with interest on $90,000.00 at six per cent per annum from March 15, 1925, to September 15, 1925; one-half of said payment to be placed to the credit of T. J. Swift and one-half thereof to be placed to the credit of J. W. Jameson.  Should the Chanslor-Canfield Midway Oil Company fail to make any of the payments above mentioned on the date when due*1983  or within ten (10) days thereafter, you are to deliver said documents to T. J. Swift and J. W. Jameson, or their heirs or assigns, or their order.  Time is of the essence hereof.  We hereby authorize and instruct you to affix any necessary internal revenue stamps to the said deeds upon delivery thereof to the Chanslor-Canfield Midway Oil Company, or its representative, or successors or assigns, and to deduct the cost of said revenue stamps from the payment to us which releases said deeds to said oil company.  The consideration for said grant deed is $890,000.00, and for said quitclaim deed is $10,000.00.  The said documents may be delivered to the said oil company, its representative, successors or assigns, at an earlier date than as above stated upon written assent for you to do so filed with you by the undersigned, T. J. Swift and J. W. Jameson, or their respective duly appointed agent, personal representative or assignee.  Compensation of Los Angeles Trust and Savings Bank to be $50.00 per year.  Dated at Los Angeles, California, Maych 18, 1921.  (Signed) T. J. SWIFT, Claremont Country Club, Oakland, Calif.J. W. JAMESON, 550 I. W. Hellman Bldg., Los Angeles,*1984 Calif.The foregoing instructions are hereby approved: CHANSLOR-CANFIELD MIDWAY OIL COMPANY, By (Signed) E. O. FAULKNER, Its Vice-President.The foregoing escrow accepted and the receipt of the above documents is hereby acknowledged this 18th day of March 1921.  LOS ANGELES TRUST AND SAVINGS BANK, By B. H. GRIGSLEY, Its Trust Officer.The payments provided for in the contract of March 4, 1921, were finally completed and the deeds were stamped and delivered to the purchaser during the year 1924.  The respondent has held that the sale was consummated at the time of execution of the contract of March 4, 1921, and accordingly he has refused to apply the "capital gain" provisions of the Revenue Act of 1924 to the profit received by the petitioner on the transaction.  OPINION.  LOVE: With the exception of the contract of March 4, 1921, and the escrow instrument of March 13, 1921, the facts in this proceeding have all been presented by the petition and admissions in the answer.  The petitioner complains that the respondent has refused to compute his tax liability upon a profit resulting from the sale of an undivided interest in certain lands in accordance*1985  with the capital *1104  gain provision of the Revenue Acts of 1921 and 1924.  Strictly speaking, we are concerned only with the capital gain provision of the Revenue Act of 1924, since the year 1924 is the only year covered by the appeal.  The capital gain provisions of the two acts, being sections 206(a)(1) and 208(a)(1) of the Revenue Acts of 1921 and 1924, respectively, are as follows: (1) The term "capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.  The respondent argues that in the instant case the sale was consummated in 1921 when the initial payment was made and executed deeds were placed in escrow.  The petitioner contends that the "consummation" did not occur until the vendee finally became entitled to delivery of the deeds from the escrow agent by reason of its final payment on the purchase price.  In effect the petitioner argues that the final payment was the "consummation" of the sale.  In , the capital gain provisions of the 1921 and 1924 Acts were considered at some length.  Adopting standard dictionary definitions of the verb "consummate," we*1986  held the word to mean "to bring to completion; to raise; bring or carry to the highest point or degree; to complete; to finish; to perfect; to achieve; to fulfill.  The word 'consummated' as used in the Act, is the past participle of the transitive verb above defined." Continuing, we said: Having in mind the definition of the word "consummated," we must next consider the word "sale," for the real difficulty in this case is to determine when the sale was consummated within the meaning of the sections in question.  This word "sale" has a well recognized legal significance.  The distinction between a contract to sell and a sale is fundamental in the law of sales, as is pointed out in Williston on Sales, Second Edition, Volume 1, in chapter 1, where the following definitions are given: A contract to sell goods is a contract whereby the seller agrees to transfer the property in goods to the buyer for a consideration called the price.  A sale of goods is an agreement whereby the seller transfers the property in goods to the buyer for a consideration called the price.  * * * The distinction is some times expressed by the terms "executory" and "executed" sales.  Whether a bargain*1987  between parties is a contract to sell or an actual sale, depends upon whether the property in the goods is transferred.  If it is transferred, there is a sale, an executed sale, even though the price be not paid.  We concluded: Although a contract to sell is consummated when the parties execute it, a sale, even where the subject of a contract, is incomplete and imperfect until title passes.  But a sale is complete when title passes. At that moment both parties to the sale achieve what they set out to accomplish by the sale.  A seller who formerly had property which he desired to sell, thereafter had that property *1105  no longer.  He thereupon exchanged his right and title to the property for the purchase price or the purchaser's promise to pay it.  The property thereafter belonged to the purchaser and he had what he did not have before, an obligation to pay for it.  The passing of title irrevocably and finally changes the rights of the parties to a sale.  A sale is then "consummated." (Italics added.) The decision above quoted related to a sale of personal property, but the principles involved are equally material herein.  We think that California decisions clearly*1988  establish that the sale involved was not consummated, i.e., that title to the property did not pass until 1924, as the petitioner contends.  In ; , the Supreme Court of California was considering the effect of an escrow agreement whereby a deed of bargain and sale was deposited with a bank to be delivered to the grantee upon the completion of stated payments therefor, and to be forfeited for failure to make such payments within 30 days after they became due, the court held: The placing of the deed in escrow did not make it an executed instrument.  There had been no delivery to the purchaser, no transfer of title.  Civ. Code Para. 1057; 3 Washburn on Real Property, 568; . It is said by this court () that an "escrow differs from a deed in one particular only, and that is delivery," but the lack of delivery is a very essential omission to the consummation of a conveyance. Section 1057 of the Civil Code, referred to in the above quotation, provides: SEC. 1057.  A grant may be deposited*1989  by the grantor with a third person, to be delivered upon performance of a condition, and on delivery by the depository it will take effect.  In ; , the court, discussing this provision, said: Under this rule no title passes until the condition is so far performed that the grantee is entitled to the possession of the deed.  In ; , the court held: The execution and the placing in escrow of a deed * * *, to be delivered upon making payment of the purchase price, did not have the effect of vesting title in "the vendee" until payment was made, and the deed delivered * * *.  The last mentioned decision was one in which a vendor of real property, whose deed was in escrow awaiting payment of the purchase price, brought an action to quiet her title as against a judgment creditor of her deceased husband.  The judgment creditor, asserting a lien on the property, pleaded that the plaintiff could not maintain an action to quiet title because she had no title due to the escrowed deed, and, further, that possession was necessary to maintain*1990 *1106  an action to quiet title, and that the vendee under the escrowed deed had possession.  In addition to holding that title had not passed by the escrow, the court pointed out that under section 738 of the Civil Code, possession was no longer necessary to maintain the action.  The respondent has cited , as supporting his contention.  That decision was upon an issue so foreign to that presented in this proceeding that we do not consider it necessary to discuss or distinguish it.  The respondent has presented no other material authority.  We are of opinion that under the circumstances of this case, and in view of the law of California upon the subject, the sale involved was not consummated, i.e., title to the property did not pass from the vendor, until 1924.  Accordingly, the respondent's action was in error and must be reversed.  Judgment will be entered under Rule 50.