Starr v. Commissioner , 9 B.T.A. 886 ( 1927 )

C. L. STARR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Starr v. Commissioner

Docket No. 12739.

United States Board of Tax Appeals

9 B.T.A. 886; 1927 BTA LEXIS 2490;

December 27, 1927, Promulgated

---

Petitioner contracted to sell real estate for an amount greater than cost to him, but received in cash an amount less than cost, the balance to be paid in subsequent years. The contract had no readily realizable market value. Petitioner held entitled to recover the cost of the property before any taxable gain arises.

I. F. Phipps, Esq., for the petitioner.

Warren F. Wattles, Esq., for the respondent.

---

ARUNDELL

A deficiency in income taxes for the calendar year 1923 in the amount of $1,675.19 has been determined by the Commissioner.

FINDINGS OF FACT.

During the year 1920 petitioner purchased certain timber lands situated in Lincoln County, Oregon. The total cost of the lands, including the cost of abstracts, filing fees and miscellaneous expenses, was $24,166.30.

On March 1, 1923, petitioner entered into a contract for the sale of these timber lands to the Multnomah Lumber & Box Co. of Portland, Oreg. The contract reads as follows:

THIS AGREEMENT, made and entered into on this 1st day of March, A.D., 1923, by and between C. L. Starr and Hallie E. Starr, his wife, herein called the parties of the first part, and Multnomah Lumber and Box Company, a corporation, incorporated, organized and existing under and by virtue of the laws of the State of Oregon, herein called the party of the second part, witnesseth:

That the parties of the first part for and in consideration of the convenants and agreements hereinafter contained, agree to sell unto the party of the second part that certain real property situate in the County of Lincoln and State of Oregon, described as follows, to-wit: [Description of the land] for the sum of Sixty Thousand ($60,000) Dollars in United States gold coin to be paid at United States National Bank, Portland, Oregon, as follows: Twenty-Three Thousand ($23,000) Dollars in cash, the receipt whereof is hereby acknowledged; Eighteen Thousand Five Hundred ($18,500) Dollars on or before June 1, 1924, and the further sum of Eighteen Thousand Five Hundred ($18,500) Dollars on or before January 1, 1925; deferred payments to bear interest from the date hereof at the rate of six and one-half per cent per annum, payable annually.

It is understood by the parties that portions of said described premises are encumbered by certain mortgages and taxes, which encumbrance the parties of the first part agree to pay out of the aforesaid cash payment.

The parties of the first part agree that when full payment and performance shall have been made by the party of the second part, as herein provided, they will make, execute and deliver to the party of the second part, its successors and assigns, a good and sufficient warranty deed, conveying all of the above described real property subject to any taxes existing against said premises subsequent to the taxes assessed for the year 1922, it being understood and agreed that the party of the second part shall pay the taxes assessed against said premises for the year 1923, and also all subsequent taxes against said property.

It is further understood and agreed that the parties of the first part shall retain the possession of said premises until said consideration shall be fully paid, and that if the party of the second part shall undertake to go upon said premises and cut and remove any timber therefrom before said consideration shall be fully paid, the balance of said consideration shall, at the option of the parties of the first part become immediately due and collectible.

It is further understood and agreed between the parties hereto that time is of the essence of this contract, and in case the party of the second part shall fail to make the payments above named, and each and every one of them punctually, within thirty days of the time limited and such default shall continue for a period of thirty days, then this agreement shall become null and void, and all rights and interests created or then existing in favor of the party of the second part as against the parties of the first part hereunder, or to any payments theretofore made, pursuant to this agreement shall utterly cease and determine, and any and all rights acquired by the party of the second part hereunder shall revert to and revest in the parties of the first part, without any act by them or either of them to be performed, and without any right of the party of the second part of return, reclamation or compensation for moneys paid on account of the proposed purchase or sale of said property, as absolutely, fully and perfectly as if this contract and such payments had never been made.

IN WITNESS WHEREOF, the parties of the first part have hereunto set their hands and seals, and the party of the second part, pursuant to a resolution of its Board of Directors, duly and legally adopted, have caused these presents to be executed by its President and Secretary and its corporate seal to be hereto affixed the day and year first above written.

C. L. STARR (SEAL)

HALLIE E. STARR (SEAL)

MULTNOMAH LUMBER AND BOX COMPANY

By F. A. DOUTY,

Its President

MULTNOMAH LUMBER AND BOX COMPANY

By H. G. PLATT,

Its Secretary

Made, Executed and delivered in the presence of:

M. A. ZOLLINGER

GERTRUDE ZOLLINGER

As to C. L. Starr and Hallie E. Starr.

C. B. ADAMS L. M. HENNING

As to Second Party.

Under the terms of the contract petitioner agreed to sell and convey title to the property to the Multnomah Lumber & Box Co. upon payment by the latter of the sum of $60,000. Petitioner was well acquainted with the affairs of the Multnomah Lumber & Box Co. and believed at the time the contract was made that the company was assuming more obligations than it could successfully bear. By reason of this fact and as a protection to himself petitioner required the payment to him in cash, at the time of the execution of the contract, of $23,000, of which amount it was understood between the parties that $11,700 was to be used by petitioner for the purpose of effecting payment of outstanding encumbrances against the land. This amount was in fact so used by petitioner for that purpose within a few days after its receipt.

Under the terms of the contract petitioner retained legal title to and possession of the timber lands described herein and the purchaser had no right of possession or use of the premises in any manner whatsoever until the final payment of the purchase price was made. Petitioner was required to deliver to the purchaser his warranty deed conveying the premises to the purchaser only upon payment of the entire purchase price. The contract has never been fully performed and the purchaser has never been given title to nor possession of the property.

Petitioner made several efforts to sell the contract, but was unable to secure a purchaser. He offered the contract for sale to men of ample means who were familiar with the value of the lands and were able to purchase the contract. He attempted to borrow money upon the contract, but was unable to secure a loan upon the security of the contract. The doubtful financial responsibility of the purchaser under the contract, the danger from fire upon the property due to the presence of logged-over lands in the vicinity of the timber lands covered by the contract and the fact that the sale price of the timber lands was greater than the intrinsic value of the lands were largely responsible for lack of a market for the contract.

In his original income-tax return for the year 1923 petitioner reported income from the sale of these lands in an amount representing a proportionate part of the total profit to be derived from the entire transaction upon the payment actually received by him in 1923.

The Commissioner held that the transaction entered into in 1923 was a completed one and that the entire profit to be derived from the sale of the property was taxable income to petitioner in that year.

Petitioner kept his accounts and reported his income on a cash receipts and disbursements basis.

OPINION.

ARUNDELL: The property in question cost $24,166.30; the sales price under the contract was $60,000 and the initial payment was $23,000, of which latter amount it was understood between the parties $11,700 would be used to pay off certain outstanding obligations against the land sold.

The Commissioner has determined a profit by the simple process of deducting from the sales price set forth in the contract of sale entered into by petitioner with the Multnomah Lumber & Box Co. the cost of the land. The remainder to obtained is said to constitute cash income on which a tax must be paid. This is, of course, true if the contract obligation, unevidenced as it is even by promissory notes, is the equivalent of cash. . However, efforts made to sell the contract were unsuccessful and efforts to hypothecate it for a loan were equally futile. The doubtful status of the obligee, the fact that the property was sold originally at a higher price than its intrinsic value, because of its strategic situation, and the hazards of fire in that particular locality all tended to make the contract obligation unmarketable. It is too much to say under such circumstances that petitioner at the date of entering into the contract was in receipt of cash income. We believe that petitioner is entitled to recover his capital before it may be said that he is in receipt of taxable income and we so hold. .

The parties presented and argued this case on the theory that the transaction between petitioner and the Multnomah Lumber & Box Co. served to effect as sale of the property and the foregoing opinion is based on that hypothesis. In view of the fact that both title and possession are reserved by petitioner until final payment, the question may well arise whether or not the contract is not one to sell rather than a contract of sale. In view of the fact that our conclusion would be no different if such were the case, we pass the matter with no more than this comment.

In view of the conclusion reached it becomes unnecessary to determine whether or not petitioner may resort to the installment sales method of reporting income.

Reviewed by the Board.

Judgment will be entered on 15 days' notice, under Rule 50.