Parker v. Commissioner , 13 B.T.A. 1239 ( 1928 )

W. D. PARKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

NORA D. PARKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Parker v. Commissioner

Docket Nos. 8646, 8647.

United States Board of Tax Appeals

13 B.T.A. 1239; 1928 BTA LEXIS 3078;

October 26, 1928, Promulgated

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Landlords' interest in growing crops of tenant classified.

R. C. McBee, Esq., for the petitioners.

W. H. Lawder, Esq., for the respondent.

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LANSDON

The respondent asserted deficiencies for the years 1919 and 1920, as to W. D. Parker and Nora D. Parker, in the respective amounts of $2,240.16 and $3,392.26, and $575.89 and $980.26. The income affected resulted from the sale of a plantation and equipment, together with various items of personal property. The parties have stipulated that the two proceedints be consolidated for hearing and decision.

FINDINGS OF FACT.

On August 1, 1919, the petitioner, W. D. Parker, was engaged in the operation of a cotton plantation in Sunflower County, Miss., on lands acquired prior to March 1, 1913. The holdings were known as the Klondike Plantation and embraced 6,400 acres, made up of separate parcels of land owned individually by himself and petitioner Nora D. Parker, his wife, the parts owned by him representing in value 83.8 per cent, and that of his wife 16.2 per cent of the whole. The actual planting, tending and harvesting of the crops grown on this plantation were carried on by tenants through a system of rentals the terms of which are not disclosed except that the landlord supplied the farm equipment and received an interest in the crops as rentals.

On August 1, 1919, after the crops for that year had been all laid by and nothing further was required by way of cultivation or attention before their complete maturity and harvest, petitioners through their agent W. L. Harrison sold the Klondike Plantation to W. J. Toler, Jr., and T. A. Stone for a fixed consideration of $695,000, payable as follows: $10,000 in cash; $40,000 on or before September 1, 1919; $50,000 on or before November 1, 1919; $150,000 on or before January 10, 1920; $60,000, December 31, 1920; $60,000, December 31, 1921; $65,000, December 31, 1922; $65,000, December 31, 1923; $65,000, December 31, 1924; $65,000, December 31, 1925, and $33,000, December 31, 1926; the last seven payments being represented by promissory notes and all deferred payments bearing interest at 6 per cent per annum from date. In the preliminary negotiations leading up to the sale of this property the petitioners were represented by W. L. Harrison, their agent, who priced the same to Toler at $750,000. This price was fixed upon the assumption that the interest of W. D. Parker in the growing crops had a value of $170,000 to $180,000. The value of this interest was an important factor in the negotiations, since it was from this source the purchasers expected to procure the funds with which to meet their first payments upon the purchase price. After going over the property with Harrison, Toler placed his estimate of Parker's interest in the crops at $102,500 and proposed a corresponding reduction in the sales price of the property. After some discussions the price was finally reduced to $695,000. A joint instrument in writing, styled "Warranty Deed," was executed by the petitioners which, after setting forth the foregoing payments together with certain reservations on the part of the sellers and assumptions of indebtedness by the purchasers, contained appropriate words of conveyance, giving legal description, etc., of the real estate embraced within the Klondike Plantation, and, in separate paragraphs, following, the further provisions, to wit:

For the considerations above named the grantors further convey all their interest in all crops of every kind and description now being grown upon said lands, all feed of every kind and character now on hand, all mules and horses, except as hereinafter provided, now owned by grantors and being not less than forty head of mules and horses; all gear, harness, plow, tools, farming implements and machinery of all kinds and description whatsoever, including all farming wagons and all hogs now owned by the grantors and now located and being on said lands; also all merchandise of every kind and character whatsoever; together with the store house and all fixtures therein, as well as all tenant accounts for all tenants now on said lands for the year 1919.

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The grantors herein retain a vendor's lien on all property herein conveyed to secure the balance of the purchase money thereon. It is also understood and agreed that a deed of trust of even date shall be executed by the grantees, which said deed of trust shall be taken and held as cumulative security to the vendor's lien retained, and it is also agreed by and between the parties hereto that the lien retained on the personal property hereinabove described shall be cancelled when the sum of $250,000.00 shall be paid on or before January 10, 1920, in accordance with the terms and provisions of this deed.

Excluding the interest in the growing crop, the value of the property conveyed by the foregoing paragraph was established by the respondent to be at the date of sale as follows: mules, $11,685.32; implements and gear, $4,018.34; machinery, $6,102.50. Excluded from respondent's computation were accounts in the aggregate sum of $27,000, due from tenants, transferred to the purchasers, as well as the cost of certain new farm machinery and merchandise which petitioner Parker had bought but not paid for, and which he intended to return to the seller, but which through error of the agent was not excepted from the deed and was, therefore, delivered with the other property. The cost of this farm machinery and merchandise is not shown by the record. The amount of $4,500 in cash was paid by petitioners to the agent on commission account of said sale. Purchaser paid $125,000 during 1919 and $125,000 in 1920 upon the purchase price of said property.

The respondent determined a profit to the petitioners of $324,367.09. The basis of respondent's computation was the determined 1913 value of the land to which was added the depreciated cost of the improvements and certain chattels conveyed, and the sum of $4,500 paid the agent as commission, making in all a total of $370,632.91. Neither the petitioner's interest in the growing crops, nor the tenants' accounts transferred were considered by the Commissioner in his computation of profit. There is no controversy as to the value of the land and buildings at March 1, 1913.

OPINION.

LANSDON: The petitioners claim that the respondent erred (1) in his disallowance of, as a sales cost, the $15,000 claimed as commissions paid; (2) in his determinations of depreciation to improvements and personal property conveyed; (3) in excluding from the value of the property sold a merchandise inventory of $4,895; (4) in his determination of profit realized on said sale during the taxable years; (5) in excluding from the value of the personal property the sum of $27,000, representing tenants' accounts; and (6) in excluding from the cost of property sold the amount of petitioner W. D. Parker's interest in the growing crops.

The evidence is deplorably lacking in many essential features of this case and the record leaves so much for conjecture that it is extremely difficult to arrive at a satisfactory conclusion. The meager evidence concerning the first three assignments of error supports the action of the Commissioner, which is approved.

In support of the fourth assignment, petitioners claim that that part of the gross sales price intended to represent consideration for the personal property conveyed was not, under the terms of the deed, included in the installment payments evidenced by the serial notes maturing after January 10, 1920, but was payable out of the first cash payment of $10,000, and the subsequent payments, aggregating $240,000, made during the taxable years; and that the Commissioner erred in classifying the sale of the personalty as an installment sale, and should have deducted its value from the payments made during these years, before reckoning the profits for such years. In support of this contention petitioners cite that part of the deed, hereinabove set forth, which provides "that the lien retained on the personal property shall be canceled when the sum of $250,000 shall be paid on or before January 10, 1920."

Construing the deed from its four corners, there is nothing within its provisions to indicate that such an intent as contended for by the petitioners was in the minds of the makers at the time of its execution; neither does the record support such an inference. The deed names the total consideration as "$695,000" in a lump sum, without any reference to apportionment. Two conveying clauses follow - one conveying the realty, the other the personal property, and each in specific terms declares this sum to be the consideration for the property conveyed. The liens created cover all of the property without apportionment or classification, and there is nothing in the entire deed from which a separate valuation for any of the property, whether real or personal, may be inferred. Release clauses, such as are found in this deed, are not unusual in conveyances of mixed property, or of real property subject to subdivision, where the purchaser desires to sell a part before having paid the entire purchase price. Such, from the evidence, would seem to have been the intention of the purchasers in this case, and the fact that the value of the property to be released from the liens was, accepting petitioners' highest valuation, but a slight margin over 25 per cent of the amount of the payments required to effect such release, is evidence that the provision of the deed cited bears no relationship whatever to the price of the personal property sold. The action of the Commissioner in this connection is, therefore, sustained.

Petitioners' further contention that there was no profit realized during the taxable years, on this sale, for the reason that the total payments received were less than the cost as determined by the Commissioner and also for the further reason that the notes received on the sales price were without value, is not supported by the record. The Commissioner correctly classified this transaction as an installment sale and properly apportioned the profits reportable thereunder as collected for the taxable years.

As to the tenants' accounts, the evidence shows that they were debts owing to the petitioner for merchandise sold and were to be paid after the crops were marketed, he in the meantime retaining a lien upon the tenants' crops to insure payment. The contention of respondent that they were a business expense of petitioner would have merit had the petitioner been in actual personal operation of the plantation and the tenants been in his employ at wages from which these accounts were deductible, but the evidence indicates that the tenants were farming on their own account and that Parker was their landlord and not their employer. These accounts were living expenses of the tenants and formed no part of the cost of Parker's interest in the crops. They were, therefore, subject to sale; were sold; and should have been included in the valuation of the property of petitioner W. D. Parker when sold, thereby reducing by the amount thereof the profits realized from the sale of the land.

The remaining question has to do with the action of the Commissioner in excluding the value of petitioner's interest in the growing crops from his calculation in determining the cost value of the property sold. Petitioners claim that the value of the interest in growing crops should have been excluded by the Commissioner in his determination of gain derived from the sale of the realty. This, however, would not change the tax liability of petitioners since they have shown no cost of these interests to them; and, if they are net rentals from the land, as indicated by the evidence, they are taxable as such, although reckoned separately. The respondent claims that inasmuch as growing crops are realty and belong to the land to which they are attached, their value is included in the appraised value of the real estate. There can be no question to the general proposition of law that growing crops belong to the freehold, and in case of a sale of the same pass to the purchaser, provided the seller owns both the land and the crops, but a different rule obtains where the interests of tenants intervene. The actual farming on this plantation was carried on by tenants, but upon what basis or terms we are not advised. There is sufficient evidence to show the relationship of landlord and tenant, also to indicate a sharing in the crops by each; but whether, under their contract there was a joint or several ownership in the crops until a division was made does not appear. Under similar conditions this Board held in , that the landlord's interests in the growing crops of his tenants were realty, that their value was properly included in the inventory made of the lands, and that it was error to classify them separately. Under the facts in this case the action of the Commissioner in so excluding them from the cost value of the property is approved.

Decision will be entered under Rule 50.