DocketNumber： Docket No. 15398.
Citation Numbers： 23 B.T.A. 590, 1931 BTA LEXIS 1850
Judges： Love, Steenhagen, Smith
Filed Date： 6/5/1931
Status： Precedential
Modified Date： 11/21/2020
*1850 1. Upon the evidence,
2. No depreciation deduction is allowable upon property, title to which was not held by petitioner during the taxable years involved.
*590 This proceeding is for the redetermination of deficiencies in income tax for the calendar years 1919 and 1920, in the amounts of $92,298.91 and $62,901.32, respectively. The error assigned in the petition is that:
The fair market value on June 1, 1919, of property which was transferred to petitioner by Mr. A. F. Churchill on or about that date was not used as the basis for determining profit or loss from sale, but as the basis for determining the deduction for depreciation.
*1851 As an alternative, the petition was amended to assign an additional error as follows:
The date for determining the gain or profit, if any, to the petitioner should have been April, 1924, and not during the years 1919 and 1920.
A great friendship existed between petitioner and one A. F. Churchill, who was 25 years petitioner's senior. The friendship existed from the time they met in 1887 until Churchill's death in June, 1920. In June, 1919, Churchill offered to sell petitioner certain properties for about one-half what they were worth, and Churchill was, at the time, well acquainted with the value of such properties and knew what he was doing. Petitioner accepted Churchill's offer, *591 and thereafter sold some of the properties thus involved during the taxable years 1919 and 1920. Churchill died before his agreement with petitioner had been fully consummated, and Mrs. Churchill continued with the agreement under the same terms and conditions as made by her husband and petitioner, and such agreement was fully consummated in April, 1924.
The principal question involved as originally presented, was whether the agreement referred to was in legal effect a contract*1852 of sale between Churchill and petitioner, and, if so, whether, under the circumstances, the difference between the fair market value of the properties at the time of the contract of sale and the price for which Churchill offered such properties was in fact and in law a gift from Churchill to petitioner, thereby entitling petitioner to a larger basis for the purposes of determining gain or loss on the resale of the properties, and for the purpose of determining a reasonable allowance for exhaustion, wear and tear on all the depreciable properties until they were sold or otherwise disposed of.
The amended petitioner brought in another issue.
FINDINGS OF FACT.
Petitioner is an individual with his principal office at Fidelity Bank Building, Memphis, Tenn.
Petitioner first became acquainted with A. F. Churchill about 1887. He was then a young man about 25 years the junior of Churchill. Petitioner was connected with the Central of Georgia Railroad and lived at Eufaula, Ala. Churchill was living at Brunswick, Ga., and was a steamship broker. Shortly after their acquaintanceship began, petitioner moved to Savannah, Ga., and leased certain compress plants in that section and*1853 began to operate them. Much of the cotton from these plants was shipped through a steamship agency controlled by Churchill. Petitioner persuaded Churchill to move to Savannah in the early nineties. Their business and social relationship then became very intimate. The two of them, together with a third, Homer Dunn, who was connected with a railroad at Savannah, were together almost daily, having lunches in a private dining room, and were referred to as "the trinity."
Railroads operating out of Savannah, owning several compress plants, decided to organize a compress company for the operation of a number of these plants. They negotiated with petitioner to head this company. The negotiations took place in New York between petitioner and the presidents and other high officials of the Southern and the Central of Georgia. As petitioner was a very young man at that time, Churchill, on account of his friendly interest in him, voluntarily, at his own expense, went to New York several *592 times with petitioner during these negotiations for the purpose of advising and counseling with him. These negotiations resulted in the organization of the Atlantic Compress Company, with petitioner*1854 as president. This company operated a chain of compresses throughout the South Atlantic States. Petitioner moved his headquarters to Atlanta, but continued his close business and social contacts with Churchill.
At another time, on account of certain activities on the part of competitors of petitioner, he was caught with 100 carloads of cottonseed which he could not dispose of; almost facing ruin, he turned to his friend Churchill, who immediately cabled one of his agents in London to go to Bremen and negotiate with parties there for the purchase of the cottonseed. The agent was successful and Churchill advised petitioner to sack the cottonseed and he would ship it in his boats for whatever charge petitioner was able to pay. When his competitors learned that he had thus extricated himself from apparent business ruin, petitioner then disposed of his seed at a profit and turned an apparent business disaster into a most successful business transaction. Churchill was to have received no individual or personal profit or financial gain out of the part he played in the transaction, the extraordinary service having been prompted solely by personal friendship for petitioner.
Shortly*1855 after 1900, petitioner and Churchill noticed that the cotton received from the States of the Middle South was poorly compressed and conceived the plan of organizing a company operating a chain of compresses in such States similar to the chain operated by the Atlantic Compress Company in the South Atlantic States. The Gulf Compress Company grew out of this idea and was organized in Mobile, Ala., in the year 1902, with headquarters at Memphis, Tenn. Petitioner was made president of that company also and divided his time between Atlanta and Memphis, as the president of each of these compress companies. Churchill became a director and a stockholder in, and a creditor of, the Gulf Compress Company, and continued to advise with petitioner as his friend and business counsel.
During this period Churchill, who was considered an authority on cotton compression, had been working on a device known as a gadget for maintaining the high density of cotton that had been compressed. He had been so absorbed in the perfection and improvement of this device that it was considered his hobby. Churchill had no children of his own and had practically adopted a young man, Jack Kennedy, whom he was using*1856 to assist him in perfecting this gadget. Kennedy began to dissipate to such an extent that about 1905 Churchill had to sever his relations with him, which appeared to distress Churchill very deeply. Petitioner was cooperating with Churchill in the use of this gadget in the compresses operated by petitioner. *593 This greatly pleased Churchill and he appeared to transfer his fatherly affection to petitioner after Kennedy had disappointed him.
About 1907, the Gulf Compress Company became involved in certain anti-trust legislation in the State of Mississippi, and in order to protect itself, receivership proceedings were instituted in the Federal Court in Memphis, Tenn., and petitioner was appointed receiver for the company on May 31, 1908. He then resigned the presidency of the Atlantic Compress Company and moved to Memphis to give his entire time to the receivership of the Gulf Compress Company. However, he kept up his intimate relationship with Churchill through the period of the receivership of the Gulf Compress Company, which did not terminate until 1917. At that time the Federal Court at Memphis ordered the Gulf Compress Company sold, and the receivership terminated. *1857 Churchill owned all of the bonded indebtedness against the Gulf Compress Company, amounting to about $700,000, as well as the majority of the stock ($300,000 out of $465,000 issued), and bought in most of the properties of the Gulf Compress Company individually at the receivership sale for a total price of $475,000. He realized that the properties would hardly bring more than the bonded indebtedness, and in order that the unsecured creditors might not lose everything, he voluntarily offered them 25 cents on the dollar for their claims. The Judge of the Federal Court at Memphis stated this was one of the most liberal offers he had ever known.
When Churchill bought in these Gulf Compress Company properties he called on his old friend Dunn, one of the "trinity" who had left Savannah many years before and was at that time connected with Haskins & Sells, who were accountants with headquarters in New York, and requested Dunn to supervise his taking over of the properties of the Gulf Compress Company at the receivership sale. He requested Dunn, when he came to Memphis for that purpose, to deliver to petitioner a verbal message to the effect that he, Churchill, had put in about $800,000*1858 in these properties and when he realized that amount out of them, petitioner could have the remainder. This message was delivered by Dunn to petitioner.
Churchill took over the operation of these properties in his individual capacity about September 1, 1917. He placed petitioner in charge of them as his manager at a salary of $10,000 a year. He gave petitioner a broad power of attorney to enable him to operate the plants for him expeditiously and without embarrassment to petitioner.
These compress properties were then operated as the Churchill Compresses by petitioner as manager for Churchill, and the relationship *594 of employer and employee was established for the first time between Churchill and petitioner. Churchill then, in order to determine the value of these properties, had appraisals of all of them made by Coats & Burchard Company, a firm of public appraisers and engineers. When these appraisals were completed in 1918, they were taken to Savannah by petitioner and gone over with Churchill. Coats & Burchard appraised the reproductive cost new of the properties (except the land), less depreciation, as of February 16, 1918, at a total value as of that date*1859 of $1,442,562.15.
In the spring of 1918, R. L. Taylor and certain associates who were operating certain compress plants in competition with the Churchill plants, endeavored to purchase these Churchill properties. Taylor met Churchill in New York with petitioner and offered Churchill approximately $1,250,000 for these properties, but Churchill declined the offer. There was no appreciable difference between the value of the properties at that time and June, 1919.
During the spring of 1919, petitioner was negotiating the sale of some of the plants for Churchill and was keeping Churchill advised continuously as to offers and negotiations. One of these plants was located at Clarksdale, Miss. During these negotiations Churchill wrote petitioner a letter, dated June 2, 1919, in which is contained the offer to let petitioner have all of these properties for $550,000. The entire letter is as follows:
613 WHITAKER ST.,
DEAR HANSON: Your favors of May 15th 22nd & 27. I have been sick so could not answer you before. Note from the former, they have been told that you would submit an offer of $150,000.00 for Clarksdale, & from yours of 22nd it looks like you are going*1860 to be able to close the deal at this figure, & from yours of 27th of May, that you had closed it at $150,000.00, & handed Hollard the agreement just as he was leaving the city, he said he would read, sign & return it, this was several days ago, but you had not heard anything from him since, but will keep me advised.
Hanson the Dr. thinks I better not talk too much business, as it would not do me any good, so I will not ask you to come down & see me. I shall leave for Nova Scotia soon as I am able, will let you know when I go & you can write me there, in meantime continue to write me here. I would like to have had a talk with you, but as I cannot I will write you what I was going to talk about. Hanson I will sell you the whole outfit for $550,000.00 (five hundred & fifty thousand dollars) you can sell off this amount of the property, & keep the rest yourself, or you can form a company giving me the above amount in cash, & let any way to suit yourself, so long as you pay me the $550,000.00 of course the profits of the company is mine until you pay up.
Hoping Holland takes Clarksdale, & that you sell Greenville, & that you will be remitting me some money soon,
I remain yours*1861 truly,
Upon receipt of Churchill's letter dated June 2, 1919, petitioner considered the offer and under date of June 4, 1919, replied thereto as follows:
*595 MEMPHIS,
Capt. A. F. CHURCHILL,
MY DEAR CAPTAIN: Yours of the 2d reached me this morning.
I note what you say about having been sick; that you are better, but that your doctor thinks you had better not talk much business, and for that reason you will not let me come to Savannah at present. All right, Captain, whatever you think it best will be my pleasure.
Holland of Clarksdale is back. He is asking for a conference. I will see him the latter part of this week or the first of next.
I have heard from Wheatley at Greenville. He says the interest he is representing will not pay any large sum for an option at the price quoted. He tries to be a little indifferent, but finally his letter concludes with an inquiry. He wants to know, in the event a sale is made, if I will allow him 5 per cent commission. I am making a little investigation through a source that is open to me, and will give the matter full consideration and write*1862 Wheatley the latter part of this week or the first of next.
This brings me down to the second paragraph, page 2, of your letter in which you tell me you will take $550,000.00 for your compress properties.
Captain, your price is too low. I am confident if I can have the time that I can ultimately realize for you on your compress properties about twice the amount mentioned, in the meantime operating them on the whole at some profit. However, if after further consideration you want to close up the matter now and are still willing to take $550,000.00 net for your compress interest in my charge, then you may consider the properties sold, as I will accept your proposition and will send you a Contract of Sale as soon as Judge Sivley, your attorney here, can draw it up. You can rely on Judge Sivley and myself seeing to it your interest is properly protected. The only thing I am going to ask you now to do is to allow me as much as ninety days in which to raise the money.
In your letter you do not use the word "net." I mean by the word "net" that I will assume the payment of all taxes and the payment of all of your other liabilities, including the contingent liabilities growing*1863 out of the Gulf Compress Company's operations, which you assumed when you purchased those properties.
I hope that you will, upon reflection, tell me and so arrange matters, that I can go along operating these properties for your benefit until you shall have realized on them what you are entitled to. But as stated, if you conclude you are willing for me to have them for $550,000.00 cash, net to you, etc., I will take them.
On June 7, 1919, Churchill wrote petitioner, as follows:
Your favor of 4th & note all you say about Clarksdale & Greenville.
Referring to my offer to take $550,000.00 for the Churchill Compresses, I note you think my price is too low, and you are confident, if you can have the time, that you could ultimately realize about twice the amount for the Compress properties, in the meantime operate them at a profit.
Hanson, if you think my price is too low, you can allow me as much more as your conscience will permit, as there is no other man alive, that I would make the same proposition to, that I have to you, & if my health was good, I would not make it to you, the Dr. says it generally takes from two to three years to get over the trouble I have, which was*1864 all caused by blood pressure.
Yes, I meant
On June 13, 1919, petitioner wrote Churchill as follows:
Your letter of June 7, answering mine of the 4th, came duly to hand.
You renew your offer to let me have your compress properties, including all assets and equities, for the sum of $550,000.00 cash, net to you, payable in ninety days, I to assume payment of taxes and insurance and discharge all of your obligations resulting from the acquirement and your operation of said properties, including your contingent liabilities growing out of your purchase of the plants, leases, etc. from the Receiver of the Gulf Compress Company. I accept your offer, and am now proceeding accordingly.
In addition to the obligations I have assumed, to pay you $550,000.00 net for your properties, I will reimburse you for the*1865 following cash items:
| Sept. 1, 1917. Cash advanced. Interest on Gulf Compress Co's indebtedness, paid you by the Receiver and used here as your initial working fund in compress operations | $8,839.90 |
| Nov. 8, 1917. Balance due you and received from Dan F. Elliotte, in connection with Gulf Compress Company accounts which he purchased for you | 1,022.97 |
| Nov. 30, 1917. Cash sent to Memphis from Savannah | 5,000.00 |
| Dec. 10, 1917. Cash sent to Memphis from Savannah | 5,000.00 |
| Jan. 12, 1918. Cash sent to Memphis from Savannah | 5,000.00 |
| Total | 24,862.87 |
plus interest at 6 per cent to date payment is made.
I have gone over this matter with Judge C. L. Sivley. The Judge thinks the correspondence passing between us is self-explanatory and constitutes a contract of a bona fide sale by you and purchase by me. Judge Sivley suggests, however, it might be better for both you and me to reduce our agreement to a more formal document. He thinks probably you would want it, and that I will need it in my negotiations, already begun, for the money with which to make the payment within the ninety days. If you concur I will turn over to Judge Sivley copies of the deeds to your*1866 properties, lease contracts and such other data as he may desire for such purposes.
There is a feature in your letter upon which I have not as yet commented, viz: your statement, that I may allow you as much more for your properties as my conscience will permit. I have accepted your $550,000 net cash offer, payment to be made in ninety days, etc., because that is specific and definite. It fixes something that I must work to and for. I deeply appreciate your confidence, good-will and your generous spirit, and will state in respect to this feature that I have some well defined ideals and aims as to what I can and ought to do. Finally, I shall be governed as to the conscience end of this matter by the success of my undertaking, which I fully realize is only made possible by your magnanimity.
On June 14, 1919, petitioner wrote Churchill as follows:
Clarksdale. We are not far apart. I believe Holland and myself will get together in a formal sale contract next week. If we get together Holland will probably want to take over the property next month - July. The net amount realized for the Clarksdale property - and it will be upward of $125,000.00 - will be remitted to you - *1867 in New York Exchange unless you direct otherwise - to be credited on my purchase of your properties for $550,000.00 net, etc., which purchase includes Clarksdale.
*597 Greenville. My plans seem to be working but somewhat slowly. I am going to try and get Mr. Tindall, my Assistant, off to Greenville tonight to see if there isn't something he can say or do that will hurry matters along a little. And
From Greenville he will go to Vicksburg. A few days ago I had an inquiry from a certain interest at that point as to what we would take for your property there. I am going to see if I can sell it for $125,000.00 cash, plus extra for supplies, etc.
The power of attorney you gave me, while broad in scope and authority, yet it does not cover everything you yourself have a right to do. For instance, it does not give me the right to borrow money. Nor does it give me the right to transfer real estate by deed, etc.
I do not want to borrow any money, but am going to ask Judge Sivley Monday - he is not here today - to draw up for your execution another power of attorney, probably in the form of an amendment to the present one, which will give me the power to transfer for you*1868 realty by deed. I want this so as to be able to quickly and finally close a deal whenever the minds of the purchaser and myself meet.
In other words, Captain, I am going to try and sell as many of your plants within the next sixty days, that I can find a reasonably good purchaser for, as it is necessary to sell in order to enable me to liquidate, without borrowing, my indebtedness to you of $550,000.00 net cash, as stated in my letter of the 13th accepting your offer of the 7th, with additional remittances aggregating $24,862.87, plus 6 per cent interest from the date of certain other items stated in said communication. But
I have begun negotiations for funds to pay you the $550,000.00, etc. in the event I fail in part or in whole to make sales of properties now under negotiation, or to sell other properties, etc.
As fast as sales are made and the money received, the net proceeds will be remitted to you in New York Exchange, unless you direct otherwise, for credit to my purchase account, etc, until it shall have been fully liquidated.
The power of attorney you have already given me is, as stated, broad in authority. The confidence is deeply appreciated and it has not*1869 and will not be abused. The extending of said authority will also be greatly appreciated; neither will it be abused. However, you might bear this thought in mind, viz: Dunn put me under a $50,000.00 bond running to you, which guarantees you against losses insofar as my honesty, integrity, etc. is concerned. Likewise he put R. E. L. Martin, your Treasurer here, under a $25,000.00 bond, and J. H. Clark, your Cashier, under a $5,000.00 bond, which bonds run to you and are conditioned like mine.
On June 18, 1919, Churchill wrote petitioner (only material portion quoted) as follows:
* * *
Referring to your other favor of the 13th I note you accept my offer of $550,000.00 & are now proceeding accordingly, & in addition to the $550,000.00 net for the properties, you will pay me $24,862.87 plus 6% interest being the amount advanced to you.
I think this years profits belong to me anyhow. It is alright to reduce our agreement to a more formal document, & I concur with you about this.
Note you will be governed as to the conscience end of the matter, by the success of your undertaking.
* * *
*598 Note * * * that you are going to get Judge Sivley to draw up for my execution*1870 another power of attorney, which will give you the power to transact for me realty by deed, alright send it along I'll sign it.
Note you are going to try & sell as many of the plants within the next sixty days, that you can find a reasonably good purchaser for, note as fast as sales are made & the money received, you will remit me New York Exchange, as stated above, you can send New York Exchange, but send it to the "Sav. Bank & Trust Co" for my account, as I will not be here.
On June 20, 1919, petitioner wrote Churchill (only material portion quoted) as follows:
I have yours of the 18th acknowledging receipt of my letter of the 13th, in which I accept your offer of $550,000.00 for your compress properties, plus an additional payment of $24,862.87 with interest from the date stated, etc.
More formal agreement. I will see Judge Sively, ascertain what date he desires, supply same, get him to prepare the document, sign and send it to you for your signature as soon as practicable. In the meantime we will let the matter rest on a basis of the correspondence passing between us.
No formal contract or instrument of transfer was drawn as suggested by petitioner in the last above*1871 letter.
On June 19, 1919, Churchill and his wife executed an "Additional Power Of Attorney," which was very broad in its scope, whereby petitioner was empowered "to bargain and agree for, buy, sell, mortgage, hypothecate, and in any and every way and manner deal in and with" the Churchill compresses, "sign, seal, execute, deliver and acknowledge" deeds, leases "and such other instruments in writing of whatever kind and nature as may be necessary or proper in the premises * * * with full power and authority to do and perform all and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as I might, or could do if present."
Petitioner then continued to operate the properties in the name of Churchill and negotiate sales of certain properties and execute deeds for the transfer of such properties as were sold under this last power of attorney executed by Churchill. The time for the payment of the $574,862.87 to Churchill was extended from time to time by Churchill without objection.
On December 13, 1919, petitioner wrote Churchill: "Referring to your sale offer of June 2, my conditional acceptance of June 4, your further*1872 sale offer of June 7, my further acceptance of June 13, and subsequent correspondence," and stated that on June 2 he owed Churchill a total of $574,862.87; that he had paid off $300,000, leaving a balance due Churchill of $274,862.87; and that petitioner still owed Churchill $17,303.60 of interest. The letter continued with a request that petitioner be given until December 31, 1919, to pay the interest and 90 days longer to raise the money with which to pay the balance of $274,862.87.
*599 On December 16, 1919, Churchill replied to petitioner's letter of the thirteenth and granted all of the requests which petitioner had made.
Churchill died on June 10, 1920. At that time no formal contract or transfer of title to these properties had been executed by Churchill.
At the time of Churchill's death, petitioner still owed Churchill approximately $275,000 of the $574,862.87 he had agreed to pay Churchill before he would be entitled to the properties.
Churchill left all of his property to his wife as sole beneficiary and executrix of his estate. As there had been no transfer of title to these properties to petitioner, in order for him to continue to operate and sell*1873 off these properties, a power of attorney was secured from Mrs. Churchill to petitioner similar in all respect to the ones executed by Churchill during his lifetime.
Several months after Churchill's death and after his burial in Nova Scotia, petitioner went to Savannah, Ga., to visit Mrs. Churchill at her request. There she turned over to him intimate personal belongings of Churchill, which she stated Churchill had requested that petitioner should have. These personal belongings consisted of such articles as a dress suit, dressing gowns, pajamas, shirts, other articles of wearing apparel, and some hand-bags. Churchill and petitioner were about the same physical stature.
Petitioner continued to negotiate sales of the properties and send the cash proceeds and all deferred purchase price notes to Mrs. Churchill, to be held by her and applied on his indebtedness of $574,862.87.
It was not until April, 1924, that the full amount of $574,862.87, together with interest thereon, had been realized in cash from the proceeds of the sales of the properties by petitioner. Mrs. Churchill then returned to petitioner the unpaid deferred purchase price notes she held for the properties*1874 already sold under power of attorney, and executed formal deeds of transfer to petitioner for the remaining properties still unsold.
OPINION.
LOVE: The petitioner originally pleaded, and presented his evidence in this proceeding upon the theory, that the fair market value of the properties involved was, in June, 1919, in excess of $1,500,000, and that the difference between that amount and the amount he agreed to pay therefor constituted a gift to him from Churchill. It would follow that the basis for determining the depreciation allowance and also the gain or loss from the resale of the properties was the sum of the gift and the amount paid, a total alleged to be in excess of $1,500,000.
The respondent has determined that the petitioner acquired the properties entirely by purchase during 1919 and he has computed *600 profits on resales of certain of them during 1919 and 1920 upon the basis of the amount petitioner paid, using the same basis to determine a depreciation allowance. Both parties, therefore, were proceeding upon the theory that Hanson acquired the properties involved during 1919.
Upon hearing, petitioner was permitted to amend his pleadings to conform*1875 to proof, whereupon he alternatively assigned as error that:
The date for determining the gain or profit, if any, to the petitioner should have been April, 1924, and not during the years 1919 and 1920.
The effect of this amendment is to deny that Hanson acquired the properties until April, 1924, when the full amount, plus the interest, which he was required to pay for the properties, had been paid to Churchill or/and his wife.
We do not believe the evidence in this case justifies a holding that a gift was intended.
We are of opinion that our determination should turn upon the issue raised by the amendment to the pleadings, quoted above. Stated in other terms, that issue is: Was the agreement evidenced by the correspondence between Churchill and Hanson, as set out in our findings, a contract of sale or a contract to sell?
In , the Board said:
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, 2d ed., vol. 1, ch. 1, where the following definitions are given.
A contract to sell goods is a contract whereby the seller agrees to transfer*1876 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 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.
Sales and contracts to sell may both be subject to conditions expressed or implied, and conditions may be conditions subsequent or conditions precedent. A condition precedent requires that something shall happen prior to the vesting of the property in the buyer. A condition subsequent divests by its happening a title which has already vested.
* * *
* * * 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*1877 the sale. A seller who formerly had property which he desired to sell, thereafter had that property no longer. He thereupon exchanged his right and title to the *601 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 changed the rights of the parties to a sale.
The question whether a contract of sale is executory or executed depends primarily on the intention of the parties, to be gathered from the terms of the contract and such surrounding circumstances as may be legitimately considered as evidencing the intention. 23 R.C.L. 171, ; 22 U.S.(L.Ed.) 863; ; .
First, let us determine what the agreement was. It will be recalled that in 1917 Churchill bought in most of the properties of the Gulf Compress Company at a receiver's sale for a total price of $475,000. The properties then became known as the Churchill Compresses*1878 and the petitioner became manager of them. Churchill caused an appraisal of the properties to be made which indicated the then reproductive cost new (except the land), less depreciation, was $1,442,562.15, as of February 16, 1918. In the spring of 1918, Churchill declined an offer of approximately $1,250,000 for the properties.
During the spring of 1919 petitioner was negotiating the sale of certain of the properties for Churchill. Correspondence relating to such negotiations also contains the original proposition giving rise to the agreement we are considering. In a letter dated June 2, 1919, Churchill acknowledged receipt of certain letters relative to petitioner's progress toward sale of the compress properties, advised the petitioner of his illness, and continued:
* * * I would like to have had a talk with you, but as I cannot I will write you what I was going to talk about. Hanson I will sell you the whole outfit for $550,000.00 (Five hundred & Fifty thousand dollars) you can sell off this amount of the property, & keep the rest yourself, or you can form a company giving me the above amount in cash, & let any way to suit yourself, so long as you pay me the $550,000.00*1879 of course the profits of the company is mine until you pay up.
The quotation above was Churchill's original offer, an offer to sell the properties for $550,000
Under date of June 4, 1919, petitioner wrote to Churchill:
* * * you tell me you will take $550,000.00 for your compress properties. Captain, your price is too low. I am confident if I can have the time that I can ultimately realize for you on your compress properties about twice the amount mentioned, in the meantime operating them on the whole at some profit. However, if after further consideration you want to close up the matter now and are still willing to take $550,000.00 net for your compress interest in my charge, then you may consider the properties sold, as I will accept your proposition *602 and will send you a Contract of Sale as soon as Judge Sivley, your attorney here, can draw it up. * * * The only thing I am going to ask you now to do is to allow me as much as ninety days in which to raise the money.
In your letter you do not use the word "net." I mean by the word "net" that I will assume the payment of all*1880 taxes and the payment of all of your other liabilities, including the contingent liabilities growing out of the Gulf Compress Company's operations, which you assumed when you purchased those properties.
* * * if you conclude you are willing for me to have them for $550,000.00 cash, net to you, etc. I will take them.
On June 7, 1919, Churchill wrote the petitioner:
Referring to my offer to take $550,000.00 for the Churchill Compresses, * * *
* * *
Hanson, if you think my price is too low, you can allow me as much more as your conscience will permit. * * *
Yes, I meant
It was at this point that the parties reached an agreement. If it was an agreement of sale the petitioner then acquired the properties and an obligation to pay Churchill the $550,000, plus certain debts. If it was merely an agreement to sell, on Churchill's part, and to buy, on the petitioner's part, then the petitioner did not at that time acquire the properties. *1881 Some support for each view is found in the context. Going back to Churchill's original proposal, it will be noted that he asked $550,000,
It is no reflection upon either petitioner or Churchill to point out the very evident fact that their agreement reveals its lack of legal draftsmanship. Was petitioner's offer of $550,000 cash, net in 90 days, plus specified extras, a proposal to buy the properties on 90 days credit, or a proposal to buy the properties within 90 days for $550,000 net cash, plus the extras? And in accepting that proposal, did Churchill*1882 mean to sell the properties and allow petitioner 90 days credit for payment, or did he mean only to agree that he would sell the properties to petitioner for $550,000 net cash, plus the extras, *603 within 90 days? Succinctly stated, the question is, was the petitioner's obligation to pay Churchill $550,000 net cash a condition precedent or subsequent to a sale of the properties, i.e., to a transfer of the property right in them. We think a solution of this question requires resort to the parties' construction of their contract as indicated by their subsequent actions respecting it.
Petitioner's letter of June 13, 1919, to Churchill, detailed the obligations to be paid or assumed in addition to the $550,000 net cash which Churchill was to receive. It indicates that in the disposition of his compress properties through his agreement with petitioner, Churchill was to receive $550,000 net cash, and in addition payments would be made, or obligations assumed, on his behalf to the extent of $24,862.87, "plus interest at 6 per cent to the date of payment." The letter continued:
I have gone over this matter with Judge C. L. Sivley. The Judge thinks the correspondence passing*1883 between us is self-explanatory and constitutes a contract of a bona fide sale by you and purchase by me. Judge Sivley suggests, however, it might be better for both you and me to reduce our agreement to a more formal document. * * * If you concur I will turn over to Judge Sivley copies of the deeds to your properties, lease contracts and such other data as he may desire for such purpose.
The agreement was never reduced to a "more formal document" as petitioner suggested.
There is nothing in the subsequent correspondence between petitioner and Churchill, or in the subsequent agreement between petitioner and Mrs. Churchill, nor in the record in any way, to indicate the exercise of any of the common indicia of ownership of the properties by petitioner in his own right. Otherwise than as Churchill's agent, he was never in possession of any of those properties, nor any of the proceeds of sales, either cash or notes. Hanson claimed no part of the money or notes paid on the resales in 1919 and 1920. Under his contract to purchase, he was not entitled to receive, actuallyP or constructively, any part of that money or notes until 1924. His letter to Churchill, dated June 14, 1919, mentions*1884 "your property [Churchill's]."
Churchill's letter to petitioner, dated June 18, 1919, stated: "I think this year's profits belong to me anyhow." This is consistent with the condition of his original proposal of June 2, 1919, that "of course the profits of the company is mine until you pay up."
Petitioner was given broad authority, through powers of attorney, to act as Churchill's agent in the disposition of the properties. He continued to operate the properties and to negotiate sales of them. December 13, 1919, petitioner wrote Churchill advising that he had paid off about $300,000 of his obligation, that there remained due a balance of $274,862.87, and in addition $17,303.60, of interest. Petitioner *604 requested that he be allowed until December 19, 1919, to pay the interest, and 90 days longer to raise the balance of the purchase money. Churchill granted such extensions by letter of December 16, 1919.
Churchill died June 10, 1920, without having transferred the properties to petitioner, who still owed him approximately $275,000 of the purchase price. Mrs. Churchill, as sole heir and executrix, gave petitioner the necessary power of attorney and he continued*1885 to negotiate sales of the properties, sending the cash proceeds and all deferred purchase money notes to her. While the time for payment was extended to the ultimate extent of four years, the condition precedent - cash in advance, remained steadfast.
In April, 1924, the full amount of $574,862.74, together with all stipulated interest thereon, had been remitted in full to Churchill and/or to his widow. Mrs. Churchill then executed formal deeds transferring to petitioner such of the properties involved as remained unsold. She also surrendered to petitioner unpaid purchase money notes, reductions of which had been credited on petitioner's obligations to her husband and herself.
We think the whole history of the agreement and the parties' subsequent actions under it indicate that petitioner's payment to Churchill of $550,000 in cash was a condition precedent to completion of the sale, i.e., the transfer of title to him. The fact that receipt of the sum named, in cash, was a prerequisite to transfer of title, is strongly shown by the fact that although the Churchills took the purchase money notes as sales were made, such notes were not credited against the petitioner's obligation*1886 except as payments were made on them.
We conclude that the agreement between Churchill and petitioner, entered into in 1919, was an executory contract and that petitioner acquired no title to the properties involved during the years 1919 or 1920. It follows, at least under the facts in this case, that petitioner derived no profit upon the sale of such properties during the taxable years, and if at all, not until 1924, and, of course, he is not entitled to a depreciation deduction upon properties which he did not own. See ; affd., .
Reviewed by the Board.
SMITH and STERNHAGEN dissent.