Rogers v. Commissioner , 5 T.C. 818 ( 1945 )

W. E. Rogers, Petitioner, v. Commissioner of Internal Revenue, Respondent

Rogers v. Commissioner

Docket No. 3448

United States Tax Court

5 T.C. 818; 1945 U.S. Tax Ct. LEXIS 66;

September 28, 1945, Promulgated

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">*66 Decision will be entered under Rule 50.

On September 15, 1937, petitioner purchased for $ 16,500 cash certain real property in Tulsa, Oklahoma, and received a deed therefor on that date fully warranting title free and clear of all encumbrances and liens whatsoever except ad valorem taxes for the year 1936. On the date of the purchase the records of the county treasurer showed that the vendor paid all delinquent real estate taxes assessed on the property for the years 1930 to 1935, inclusive. The taxes for the years indicated had originally been assessed and levied in a larger amount. The board of county commissioners acting under section 184 (a), 68 Okla. Stat. Ann. 1937, canceled the original assessment upon which the delinquent taxes were based, reassessed the property, and thus reduced the amount of the delinquent taxes to that shown to be due and paid at the date of purchase. Subsequently the statute under which the original tax assessment was canceled was declared unconstitutional by the Oklahoma Supreme Court. Pursuant to that decision, the county treasurer revised the assessment in 1940 by adding thereto the amount by which the original assessment had previously been">*67 reduced and thereupon demanded payment of such added amount. In 1941 petitioner paid the amount of such delinquent taxes and demanded that the vendor repay him therefor. The vendor was then and at all times thereafter insolvent and unable to repay any part of such amount. In his income tax return for 1941 petitioner claimed a deduction for bad debt in the amount so paid. The deduction was disallowed. Held, that the failure of the vendor to discharge the lien of such delinquent taxes constituted a breach of its warranty and that upon petitioner's payment of such taxes in 1941 vendor became indebted to him in the amount so paid; held, further, that since such indebtedness was uncollectible from the vendor petitioner was entitled to a bad debt deduction therefor in the year 1941.

Coleman H. Hayes, Esq., for the petitioner.

">*68 E. G. Sievers, Esq., for the respondent.

Hill, Judge.

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HILL

">*819 This proceeding involves income tax deficiencies for the year 1940 in the sum of $ 1,031.43, and for the year 1941 in the sum of $ 14,250.44. The petition filed herein challenged the respondent's determination on two grounds. On brief petitioner has conceded, on the authority of Commissioner v. Harmon, 323 U.S. 44">323 U.S. 44, the correctness of respondent's determination that petitioner was taxable on that part of his income reported by his wife for each of the years 1940 and 1941 as community income. The remaining issue concerns the tax year 1941 and arises from the respondent's disallowance of a bad debt deduction claimed by petitioner in that year. Some of the facts have been stipulated and are so found. Facts necessary for an understanding of our decision which are not included in this stipulation are found from the evidence adduced at the hearing.

FINDINGS OF FACT.

Petitioner, an individual residing in Tulsa, Oklahoma, duly filed his Federal income tax returns for the years 1940 and 1941 with the collector of internal revenue for the district of Oklahoma.

Some time prior ">*69 to September 15, 1937, petitioner agreed to purchase from Foster Oil Co., a corporation, certain real property in the city of Tulsa for the sum of $ 16,500 cash, free of all encumbrances and liens, including liens for taxes for all years prior to 1936.

On that date the records of the county treasurer of Tulsa County showed that ad valorem taxes in a certain amount levied against the property for the years 1930 to 1935, inclusive, were unpaid and delinquent. Under the Oklahoma Session Laws of 1937, 68 Oklahoma Statutes Annotated, Title 68, section 184a, the board of county commissioners of any county in that state was authorized to hear and determine allegations of excessive assessments of ad valorem taxes for 1936 and prior years, provided that the taxes remained unpaid ">*820 at the time. Pursuant to such statute, and prior to September 15, 1937, the board of county commissioners of Tulsa County issued a certificate of error canceling the original assessment and reassessed the property to the county treasurer of Tulsa County, resulting in the adjustment and reduction of the taxes for the years 1930 to 1935, inclusive. The books of the county treasurer then reflected the following">*70 amounts:

Total taxes originally assessed for 1930 to 1935, inclusive	$ 12,637.81
Taxes reduced due to reassessment	8,026.27
Net taxes due	4,611.54

On September 15, 1937, petitioner paid the agreed purchase price of $ 16,500 for the property to Foster Oil Co., and the company executed and delivered to petitioner its general warranty deed conveying the property and warranted the title thereto to be free, clear, discharged, and unencumbered of and from all former and other grants, titles, charges, estates, judgments, taxes, assessments, and encumbrances of whatever nature and kind except the 1936 ad valorem taxes.

The above amount of net taxes for 1930 to 1935, inclusive, after reduction as indicated were then paid by the Foster Oil Co. out of the consideration of $ 16,500 above referred to, and the records of the county treasurer were adjusted to show that all taxes prior to 1936 had been paid and discharged.

On July 26, 1938, the Supreme Court of Oklahoma, in the case of Ivester v. State ex rel. Gillum, 183 Okla. 519">183 Okla. 519; 83 Pac. (2d) 193, held the Oklahoma statute referred to above, to be unconstitutional, ">*71 and on November 19, 1940, the Oklahoma Supreme Court in the case of State v. Board of County Commissioners of Creek County, 188 Okla. 184">188 Okla. 184; 107 Pac. (2d) 542, held that, where taxes had been reduced or adjusted by the board of county commissioners pursuant to the Oklahoma statute held unconstitutional in 183 Okla. 519">Ivester v. State ex rel. Gillum, supra, the taxpayer should be given credit for all sums paid pursuant to such adjustment and that the county treasurer should proceed to collect the balance. In accordance with this decision, the county treasurer of Tulsa County canceled the entries made pursuant to the certificate of error and reinstated the taxes for the years 1930 to 1935, inclusive, based on the original assessment, reduced by the amount of $ 4,611.54 representing the taxes for the period previously paid by Foster Oil Co., leaving the taxes unpaid in the amount of $ 8,026.27.

On June 13, 1941, petitioner paid the $ 8,026.27 remaining tax liability for 1930 to 1935, inclusive, which payment removed the tax lien from the property.

Thereupon petitioner, acting through his attorney, demanded">*72 reimbursement from the Foster Oil Co. for the amount so paid. The attorney for the Foster Oil Co. advised petitioner's attorney that the ">*821 financial condition of the Foster Oil Co. was such that it was impossible to pay or make any arrangement for payment.

In 1936 the Foster Oil Co. was indebted to the First National Bank & Trust Co. of Tulsa in an amount in excess of $ 200,000. At the insistence of bank examiners, a settlement was effected whereby this indebtedness was compromised. All the assets of the Foster Oil Co., excluding the property hereinabove referred to, were conveyed to the bank in such settlement. The property in question was returned to the Foster Oil Co. and subsequently purchased by petitioner. Thereafter the Foster Oil Co. had no assets and became inactive.

During 1941 and all times thereafter the Foster Oil Co. was insolvent and unable to repay petitioner the amount of taxes paid.

In his 1941 return petitioner claimed as a bad debt deduction the amount of $ 8,026.27. The deduction was disallowed.

OPINION.

Petitioner has conceded the correctness of respondent's position on the community property issue on the authority of Commissioner v. Harmon, 323 U.S. 44">323 U.S. 44.">*73 On this point, therefore, respondent is sustained.

The remaining issue concerns the proper treatment for tax purposes of the payment made by petitioner to the county treasurer of Tulsa County, Oklahoma, in June 1941, whereby the tax liens for earlier years on the property in question were satisfied. Respondent contends that this payment represents an additional cost of the property and is in the nature of a capital investment. Petitioner claims that upon the payment of these delinquent taxes, the Foster Oil Co. became indebted to him in the amount so paid by virtue of its warranty deed and that its failure to pay him makes this sum deductible as a bad debt.

We think petitioner's contention must be sustained. The purchase price of the property in question was definitely fixed at $ 16,500 cash. Conveyance of the property was made by deed executed September 15, 1937, specifically warranting title against encumbrances and liens for taxes for all years prior to 1936. The agreed purchase price was paid in cash when the deed was executed. Thereupon the vendor discharged all tax liens appearing of record which were covered by the warranty against tax liens and such taxes were marked">*74 paid on the official records. On the stipulated facts we think both the petitioner and the vendor were justified in assuming that the records of the county treasurer of Tulsa County afforded conclusive proof that all delinquent taxes had been paid and all prior tax liens satisfied. See Jackson Park Hospital v. Courtney, 364 Ill. 497">364 Ill. 497; N. E. (2d) 864.

">*822 The decision of the Oklahoma Supreme Court declaring unconstitutional the Oklahoma statute cited in our findings of fact was handed down on July 26, 1938, and the decision of that court, also cited in our findings of fact, directing the county treasurer to restore to the tax rolls the amount of the original assessment and to collect the amount of such assessment remaining unpaid, was handed down on November 19, 1940. The effect of these decisions was that the liens for taxes against the property for the years 1930 to 1935, inclusive, were not discharged until the payment by petitioner of the amount thereof in question in 1941.

The failure of the vendor to discharge liens for such taxes constituted a breach of the warranty in its deed. However, the payment of such delinquent taxes by petitioner">*75 in 1941 did not operate to increase by that amount the purchase price of the property, but operated merely to create a claim therefor against the vendor.

The facts show that the Fostor Oil Co. became inactive after the transfer of the property and that it was unable to make the payment pursuant to its contract. On the payment of the back taxes by petitioner the Foster Oil Co. became indebted to him in the amount so paid by virtue of its warranty deed. Under such circumstances we hold that the payment by petitioner in June 1941 was involuntary within the meaning of the rule outlined in Hamlen v. Welch, 116 Fed. (2d) 413. It follows that respondent erred in denying petitioner the right to deduct as a bad debt the amount paid to the taxing authorities in June 1941.

Decision will be entered under Rule 50.