Ruprecht v. Commissioner , 16 B.T.A. 919 ( 1929 )

CHARLES C. RUPRECHT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Ruprecht v. Commissioner

Docket No. 22638.

United States Board of Tax Appeals

16 B.T.A. 919; 1929 BTA LEXIS 2491;

June 5, 1929, Promulgated

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The petitioner and one Gardner entered into an agreement to acquire and sell fuller's earth properties, they to invest in and share the profits therefrom equally. In connection with the sale of a certain tract in 1921 it was agreed that Gardner should, and he did, receive all of that portion of the initial payment representing profit from the transaction, the petitioner retaining for himself only his portion of the cost to them of the property. Held, the petitioner's portion of the initial payment aforesaid was taxable income to him in 1921. Held, further, the petitioner's portion of the deferred payments in the transaction aforesaid was not income to him in 1921.

G. S. Miller, Esq., for the petitioner.

E. W. Shinn, Esq., for the respondent.

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MORRIS

This proceeding is for the redetermination of a deficiency in income tax of $17,426.25 for the calendar year 1921.

While the issue presented has been phrased from every conceivable angle, the question for determination, briefly stated, is the amount of taxable profit, if any, derived by the petitioner from the sale of certain lands in 1921.

FINDINGS OF FACT.

The petitioner, now a resident of Orlando, Fla., was in 1921 a resident of Olmstead, Pulaski County, Ill., where he was associated with James H. Gardner, an oil producer and geologist, in the purchase and sale of fuller's earth properties, under a working agreement by which each should furnish one-half of the exploration and developmental expenses and receive one-half of the profits derived.

The petitioner and said Gardner entered into an agreement on June 28, 1921, with particular reference to the sale of fuller's earth properties to the Sinclair Refining Co., in which it was agreed that Gardner should deduct from the cash payment made by that company one-half of his investment in the fuller's earth land and the remaining one-half upon the payment of the notes evidencing the remainder of the deferred purchase price, that after deducting one-half of such investment from the cash payment the said Gardner should then pay over to the petitioner one-half of the remaining sum and when the notes evidencing the balance of the purchase price were delivered to Gardner he would divide them equally between the two parties. It was further agreed that the said parties should share equally in the expense incurred in acquiring and holding fuller's earth properties in Pulaski County, Illinois, as well as all expense in perfecting titles, securing abstracts, "excepting however, this provision does not apply to the original investment of the first party [Gardner]."

The only mention made in that contract of the so-called "Boyd" transaction, which is the one here in controversy, was contained in paragraph four, reading: "When the parties hereto decide to exercise the options to purchase the Thomas Boyd farm title shall be taken equally in the name of both parties and they shall share equally in the expense of acquiring same. Should either of the parties decide hereafter to acquire additional fuller's earth lands in Pulaski County, Illinois, then he hereby agrees to offer to the other party a one-half interest therein at one-half the cost of acquiring same."

At some time in 1921 the said Boyd tract was acquired at a cost of something like $21,000, upon which certain expenses were incurred, making the total purchase price and development thereof $23,560.68.

Contrary to paragraph four of the agreement of June 28, 1921, the Boyd tract was acquired in the name of the petitioner in order to facilitate the transaction, and was thereafter, still in 1921, by warranty deed, conveyed to the Standard Oil Co. in consideration of $123,560.68, $73,560.68 of which was paid in cash and the balance according to the terms of the deed was to be paid in five annual installments of $10,000, each, commencing January 1, 1922, and each year thereafter, "without interest."

The vendees having already purchased and applied revenue stamps to the deed to the extent of $124, and having theretofore made an advanced payment of $500 to the vendors on the purchase price, paid the petitioner on August 12, 1921, $72,936.68. Because of the fact that Gardner would not have consented to the sale of the land at that time without the receipt of a cash profit, it was agreed at the consummation of the transaction that Gardner should receive, and the petitioner distributed to him, about $61,500 out of the initial payment, representing $50,000 profit derived from the transaction plus one-half of the initial investment and developmental expenses.

The Standard Oil Co. made the following payments to the petitioner in addition to the initial cash payment just referred to:

January 3, 1922	$10,000
January 2, 1923	10,000
January 2, 1924	14,850
January 2, 1925	10,000
January 2, 1926	5,000

all of which the petitioner kept as his portion of the profits.

The reason for the payment of $14,850, instead of $10,000 as provided in the warranty deed, is that shortly before that remittance became due the petitioner was pressed for funds and he applied to the treasurer of the Standard Oil Co. for an advance of $5,000 on account of the deferred payments. The company agreed to make the advance provided it be allowed the usual rate of interest which could be secured on that amount from the bank. The petitioner accepted those terms and accordingly the discount of $150 was deducted from the advanced payment of $5,000, which advance was deducted by the Standard Oil Co. from the last regular remittance provided for in the deed.

The Standard Oil Co. transaction was handled in much the same way as the Sinclair, except that the petitioner handled the former, whereas, Gardner handled the latter and paid the petitioner's profit from the initial payment.

Gardner reported and paid an income tax upon the $50,000 received by him in 1921 and the petitioner reported and paid tax upon the amount of the deferred payments as and in the year when they were received by him.

No notes or other evidence of indebtedness were given by the Standard Oil Co. for the deferred payments aforesaid - in fact, the only mention of the terms of payment was in the deed of conveyance to the vendee.

The petitioner's accounts were kept upon the cash receipts and disbursements basis and his returns were prepared in accordance therewith.

In denying the petitioner's contention that no profit should be returned on the sale of the Boyd property to the Standard Oil Co. in 1921, the respondent held that the sale was made on the deferred payment basis and, therefore, taxable in the year in which it was made in accordance with articles 44 and 46 of Regulations 69.

OPINION.

MORRIS: The petitioner contends that, in view of the fact that in 1921 he received no cash nor the equivalent thereof in excess of his investment from the sale of fuller's earth properties to the Standard Oil Co., no taxable profit was derived from the transaction in that year, while the respondent contends that not only is the petitioner's one-half of the profit represented by the initial payment taxable to him in 1921, but that his portion of the deferred payments aggregating $25,000 is also taxable in that year on the theory that he received an obligation to pay equivalent in value to that amount of money.

While the question has been raised by argument of counsel, it is utterly impossible for us to say, from the meager facts before us, whether the petitioner was engaged in a copartnership or a mere joint adventure with Gardner, nor do we deem it necessary that we do so, since the income will, in either event, be taxable to the petitioner as an individual.

That $50,000 of the profit derived from the transaction in controversy was realized in 1921 has not been disputed, but it is contended by the petitioner that since that entire amount was paid to Gardner, plus his initial investment and developmental expenses, he received no taxable income in that year. The record shows that because of the fact that Gardner would not have consented to the sale of the land to the Standard Oil Co. without the receipt of a cash profit, it was agreed - and it does not appear that this agreement was for a consideration - that he should receive the amount distributed to him. We are satisfied that the petitioner's agreement with Gardner as to the equal division of profits arising from their joint undertakings was a legally enforceable one, and that he was entitled, as a matter of law, to one-half of the sum collected in 1921. The mere fact that he saw fit to surrender his rights to Gardner can not, in our opinion, defeat the rights of the Government to demand a tax from the petitioner upon his share of that payment. See , in which we held that the share of profit from a joint venture was income to the venturer notwithstanding the fact that it was transferred to another immediately upon its receipt. See, also, , and .

We do not consider, however, that the respondent's views with respect to the deferred payments are correct, for the reason that the obligation of the Standard Oil Co. to pay was not so evidenced that it could have been converted into cash, the only record thereof being in the deed of conveyance signed by the grantors. There was no contract in writing and no vendors' lien nor notes of any description which could have been discounted at the bank. In short, the obligation of the Standard Oil Co. amounted to nothing more than a mere noninterest-bearing account receivable. The case of , relied upon by the respondent, is clearly distinguishable and is not controlling here.

Reviewed by the Board.

Judgment will be entered under Rule 50.

MILLIKEN dissents.