Musgrave v. Commissioner

T.C. Memo. 2000-285
UNITED STATES TAX COURT
KENNETH L. MUSGRAVE AND ETTA D. MUSGRAVE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11209-98. Filed September 6, 2000.
David L. Hooper, for petitioners.
George E. Gasper, for respondent.
MEMORANDUM OPINION
LARO, Judge: This case is before the Court fully
stipulated. See Rule 122.1 Respondent determined deficiencies
in petitioners' 1994 and 1995 Federal income tax of $66,886 and
$41,020, respectively. The sole issue we must decide is whether
1
Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the years in issue.
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petitioners' entry into a contract for deed of real property with
a charitable organization in 1994 constituted, in part, a
completed gift. We hold that it did.
The stipulation of facts and attached exhibits are
incorporated herein. The stipulated facts are hereby found.
Background
When the petition was filed, petitioners resided in Abilene,
Texas. Petitioners owned a property located at 3001 North 3d
Street, Abilene, Texas (the property). On November 30, 1994,
petitioners signed a contract for sale of the property (contract
for deed) with the Word of Emmanuel Church (the Church).
Petitioners agreed to sell and the Church agreed to purchase the
property for $152,500, to be paid in monthly installments of
$1,400 each, beginning on January 1, 1995. When the contract for
deed was signed, the property was valued at $450,000. The value
of the property is not an issue.
Under the contract for deed,2 petitioners retained legal
2
In Graves v. Diehl, 958 S.W.2d 468, 470-471 (Tex App.
1997), a contract for deed was described as:
an agreement by a seller to deliver a deed to property
once certain conditions have been met. BLACK'S LAW
DICTIONARY 325 (6th ed. 1990). These contracts, also
referred to as “land sale contracts” or “contracts of
sale” typically provide that upon making of a down
payment, the buyer is entitled to immediate possession
of the property; however, [legal] title remains in the
seller until the purchase price is paid in full. * * *
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title to the property. The Church had full rights to enter upon
and to enjoy the property. In addition, the contract for deed
provided the Church would: Insure all improvements on the
property with loss payable to petitioners, keep all improvements
in good repair and condition, assume and pay all taxes on the
property, and keep the improvements on the property occupied.
When the entire purchase price had been paid by the Church,
petitioners were required to convey the legal title of the
property to the Church. The contract for deed prohibited the
Church from assigning, selling, pledging, or mortgaging the
property without petitioners' consent. The contract for deed
specified, in part, that if the Church was in default in the
payments, petitioners could elect to declare the entire unpaid
indebtedness to be due and payable and enforce collection or to
declare the contract canceled.3 As long as the Church made
prompt payments on the indebtedness, the Church had the right to
occupy the property.
Petitioners claimed a charitable contribution deduction on
their 1994 Federal income tax return for the difference between
the property’s $450,000 fair market value and its $152,500
selling price. A part of the deduction was carried over to their
1995 income tax return. Respondent's deficiency determinations
3
The provision required written notice of default to be
given to the Church and allowed a grace period of 15 days to cure
the default before petitioners could exercise their rights.
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are a consequence of the denial of this charitable deduction and
the carryover into 1995.
On December 30, 1997, Kenneth L. Musgrave, conveyed legal
title to the property, by warranty deed with vendor's lien to the
Church. The conveyance was duly recorded in the office of the
county clerk of Taylor County, Texas. The Church delivered a
real estate lien note to Kenneth L. Musgrave in the principal sum
of $133,315.69 and a deed of trust dated December 30, 1997,
securing such note with the property.
Discussion
Section 170(a) allows a deduction for any charitable
contribution made during the taxable year. Section 170(c)
defines the term “charitable contribution” to include a
contribution or gift to or for the use of a corporation, trust,
or community chest, fund, or foundation organized and operated
exclusively for religious purposes. A taxpayer who sells
property for less than the property’s fair market value (i.e.
makes a bargain sale) to a charity is typically entitled to a
charitable contribution deduction equal to the difference between
the fair market value of the property and the amount realized
from the sale. See Stark v. Commissioner, 86 T.C. 243, 255-256
(1986); Knott v. Commissioner, 67 T.C. 681 (1977);
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Waller v. Commissioner, 39 T.C. 665, 677 (1963); sec. 1.170A-
4(c)(2), Income Tax Regs.
In order for a bargain sale to constitute a charitable
contribution, the seller must make the sale with the requisite
charitable intent, and the fair market value of the property on
the date of the sale must in fact exceed the selling price. See
United States v. American Bar Endowment, 477 U.S. 105, 118 (1986)
(“The sine qua non of a charitable contribution is a transfer of
money or property without adequate consideration. The taxpayer,
therefore, must at a minimum demonstrate that he purposely
contributed money or property in excess of the value of any
benefit he received in return.”). Further, for the contribution
to be deductible, the taxpayer must place the donated property
beyond his or her control during the requisite tax period. See
Stark v. Commissioner, supra at 257.
Respondent concedes that a gift to the Church is a
charitable contribution. Respondent also concedes that
petitioners had the requisite charitable intent. The only issue
before the Court is whether petitioners' entry into the contract
for deed effected a completed gift of the property during the
requisite tax period. Resolving the issue involves answering two
interrelated questions. First, was the interest conveyed
sufficient to constitute a completed gift? Second, when were the
sale and gift completed?
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What Was Conveyed?
State law controls the determination of the nature of the
property interest the taxpayer conveyed. See United States v.
National Bank of Commerce, 472 U.S. 713, 722 (1985) (citing and
quoting Aquilino v. United States, 363 U.S. 509, 512-513 (1960)).
In order to determine the property rights transferred by the
contract for deed we must therefore look to Texas property law.
In determining what the relevant State law is “the State’s
highest court is the best authority on its own law.”
Commissioner v. Estate of Bosch, 387 U.S. 456, 465 (1967). The
decision of an “intermediate appellate state court ... is a datum
for ascertaining state law which is not to be disregarded”,
unless the Federal court is convinced that the State’s highest
court would decide differently. Id. The decrees of “lower state
courts should be attributed some weight”, but their decisions are
not controlling where the highest court of the State has not
spoken on the point. Id. (quotation marks and citation omitted).
State Law
Petitioner and respondent cite seemingly conflicting lines
of authority in setting out their respective positions on what
rights a purchaser acquires under a contract for deed in Texas.
Respondent relies on a line of cases that starts with
Johnson v. Wood, 157 S.W.2d 146 (Tex. 1941) (an opinion adopted
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by the Supreme Court of Texas)4 for the proposition that a
purchaser under a contract for deed receives a mere equitable
right to complete the contract. One court of appeals in Texas
has followed Johnson, stating it is the controlling law in Texas.
See Club Corp. of Am. v. Concerned Property Owners, 881 S.W.2d
620, 626 (Tex. App. 1994). On the basis of these cases,
respondent argues petitioners are not entitled to a charitable
contribution deduction in 1994, the year that they entered into a
bargain sale of real property (contract for deed) with the
Church. Respondent argues the contract for deed petitioners
entered with the Church was an executory contract. The contract
contemplated petitioners retaining legal title to the property
until the Church had made all of the payments required.
Respondent concludes that because the contract was executory, the
gift was incomplete in 1994.
Petitioners rely on a line of cases5 which finds its origin
in the case of Leeson v. City of Houston, 243 S.W. 485 (Tex.
Commn. App. 1922). These cases stand for the proposition that
the purchaser receives equitable title to the property either at
4
The significance of an opinion’s being adopted as opposed
to a judgment’s being adopted is discussed infra p. 8.
5
Fant v. Howell, 547 S.W.2d 261, 264-265 n.5 (Tex. 1977);
City of Austin v. Capitol Livestock Auction Co., 453 S.W.2d 461,
464 (Tex. 1970); Graves v. Diehl, 958 S.W.2d 468 (Tex. App.
1997); Bucher v. Employers Cas. Co., 409 S.W.2d 583, 584 (Tex.
App. 1966).
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contract signing or when he takes occupation. The Supreme Court
of Texas adopted the judgment in Leeson. Relying on these cases,
petitioners argue:
Petitioners’ gift to the Church was completed in 1994
when Petitioners and the Church executed the Contract
[for deed]. Such act gave the Church unrestricted
possession of the Property and equitable title to the
Property. At such time, the Church had the risk of
loss from destruction of improvements upon the Property
or decrease in the Property's value. The Church also
had the benefit of any increase in value of the
Property. In fact, the Church had all obligations and
benefits of ownership of the Property.
In order to determine the rights given to a purchaser under
Texas law it is necessary to examine the precedential value of
both lines of cases. Both Johnson v. Wood, supra, and Leeson
were decided by the Texas Commission of Appeals, an adjudicative
body formed to alleviate the workload of the higher courts of
Texas. See Club Corp. of Am. v. Concerned Property Owners, supra
at 625-626 (citing Texas Law Review Association, Texas Rules of
Form, ch. 5, at 14-17 (8th ed. 1995)). The precedential value of
a case decided by the commission depends on whether the opinion
was adopted, the holding was approved, or the judgment was
adopted by the Supreme Court of Texas. See id. at 626. If the
Supreme Court adopts the commission's opinion, then it is treated
as a precedent having the full authority of a Supreme Court of
Texas decision. See id. If the Supreme Court merely approves
the holding or adopts only the judgment, then the precedential
value of the commission's opinion is limited. See id.
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By adopting the judgment in Leeson v. City of Houston,
supra, the Supreme Court of Texas indicated that it approved
neither the specific holding nor the reasoning of the commission.
Thus, Leeson's value as precedent on the issue of property
interests conferred by a contract for deed appears, at first
glance, questionable.
The Supreme Court of Texas, however, has on two separate
occasions cited with approval the specific portion of Leeson that
states the purchaser under a contract for deed becomes the
equitable owner of the property. See Fant v. Howell, 547 S.W.2d
261, 264-265 n.5 (Tex. 1977); City of Austin v. Capitol Livestock
Auction Co., 453 S.W.2d 461, 464 (Tex. 1970). Leeson, therefore,
has also been approved on this point by the Supreme Court of
Texas.
Moreover, the Supreme Court of Texas has cited Bucher v.
Employers Cas. Co., 409 S.W.2d 583, 584 (Tex. App. 1966) for the
proposition the “contract for sale effects change of ownership
wherein the purchaser becomes [the] equitable owner of the
property while all that remains in the seller is bare legal
title, more in the nature of security to guarantee payment than
anything else.” Criswell v. European Crossroads Shopping Center,
Ltd., 792 S.W.2d 945, 949 (Tex. 1990).6
6
The Court of Civil Appeals of Texas said:
(continued...)
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Interest Conveyed Under Texas Law
We find the reasoning of the two lines of cases to be
reconcilable. Leeson v. City of Houston, supra and its progeny
stand for the proposition that as against parties not privies to
the contract for deed, on execution of the contract for deed and
upon entry onto the property the purchaser acquires all the
benefits and burdens of ownership. Simply stated, as against
third parties the purchaser receives full equitable title when
the contract is signed and the purchaser enters into possession.
In contrast, Johnson v. Wood, 157 S.W.2d 146 (Tex. 1941) and
its progeny stand for the more limited proposition that as
against the vendor of the property the purchaser under a contract
for deed has an equitable right to specific performance. The
6
(...continued)
The Texas courts have uniformly held that a
contract of sale such as is here involved does effect a
change of ownership. Under such a contract the
purchaser becomes full beneficial or equitable owner of
the property. All that remains in the seller is a bare
legal title, more in the nature of a security title to
guarantee payment of the purchase price than anything
else. The rule is summed up in 58 Tex. Jur. 2d 497,
499, § 267, under the heading “Vendor and Purchaser,”
as follows: “The purchaser, however, acquires an
equitable title or interest in the property from the
date of the contract, or in any event from the time
when he enters into possession, until his interest
ripens into a legal title by an absolute conveyance or,
where the transaction consists in a conveyance and a
reserved lien, by payment of the price or performance
of the contract. The passing of the equitable title is
a matter of law and not a matter of stipulation in a
contract.” [Bucher v. Employers Cas. Co., supra at
584.]
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purchaser is not entitled to a full equitable title and the right
to demand the conveyance of the legal title until he has
completely performed his payment obligation.
Federal Tax Consequences
When a bargain sale, in part, constitutes a charitable
contribution, normally the sale will occur at the same time the
gift is complete. See, e.g., Stark v. Commissioner, 86 T.C.
257. In Baird v. Commissioner, 68 T.C. 115, 124 (1977), this
Court considered when a sale of property occurred for tax
purposes and stated:
The question of when a sale is complete for tax
purposes is essentially one of fact which must be
resolved by an examination of all of the facts and
circumstances, no single one of which is controlling.
The test is one of practicality. Clodfelter v.
Commissioner, 426 F.2d 1391 (9th Cir. 1970), affg. 48
T.C. 694 (1967); Commissioner v. Segall, 114 F.2d 706
(6th Cir. 1940), revg. 38 B.T.A. 43 (1938); Deyoe v.
Commissioner, 66 T.C. 904 (1976). In examining the
circumstances surrounding a conveyance of property to
determine when it has occurred, the focus is directed
to a consideration of when the “benefits and burdens”
of ownership have shifted. Merrill v. Commissioner, 40
T.C. 66 (1963), affd. per curiam 336 F.2d 771 (9th Cir.
1964). And for purposes of real property, a sale is
generally considered to have occurred at the earlier of
the transfer of legal title or the practical assumption
of the benefits and burdens. Dettmers v. Commissioner,
430 F.2d 1019 (6th Cir. 1970), affg. 51 T.C. 290
(1968); Deyoe v. Commissioner, supra.* * *
A closed transaction for Federal tax purposes results from a
contract of sale which is absolute and unconditional on the part
of the seller to deliver to the buyer a deed upon payment of the
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consideration and by which the purchaser secures immediate
possession and exercises all the rights of ownership. The
delivery of a deed may be postponed and payment of part of the
purchase price may be deferred by installment payments, but for
taxing purposes it is enough if the vendor obtains under the
contract the unqualified right to recover the consideration. See
Merrill v. Commissioner, 40 T.C. 66 (1963) (quoting Commissioner
v. Union Pac. R. Co., 86 F.2d 637, 639 (2d Cir. 1936), affg. 32
B.T.A. 383 (1935)), affd. per curiam 336 F.2d 771 (9th Cir.
1964).
It has long been recognized that property, in the legal
sense, means not the thing itself, but the rights which inhere in
it. Ownership of property is not a single indivisible concept
but a collection or bundle of rights with respect to the
property. See, e.g., Merrill v. Commissioner, supra at 74. In
this case under Texas law the full equitable title did not pass
to the Church when the contract for deed was signed in 1994.
However, as against third parties the Church received equitable
title to the property. The Church bore the risk of loss or gain
in the value of the property, had a right to possession, could
sue third parties for nuisance or trespass, could erect
improvements on the land, was responsible for all taxes on the
property, and, with consent of the vendor, could mortgage the
property. As against petitioner the Church had the equitable
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right, subject to its performance under the contract, to specific
performance of the contract for deed.
Concentrating on the substance of the transaction, we
conclude that the bundle of rights that the Church received is
essentially the same bundle of rights7 that would have been
received had the Church obtained legal title to the property and
granted a mortgage back to petitioner. On brief, respondent does
not dispute that the latter transaction is a completed gift. The
Supreme Court of Texas describes the substance of a contract for
deed as effecting “a change of ownership wherein the purchaser
becomes [the] equitable owner of the property while all that
remains in the seller is bare legal title, more in the nature of
security to guarantee payment than anything else.” Criswell v.
European Crossroads Shopping Center, Ltd., 792 S.W.2d at 949.
For Federal income tax purposes we find no reason to treat the
transactions differently.
7
We recognize there are technical differences in the
remedies available to the vendor on default by the purchaser;
however, we are not convinced they are significant for Federal
taxation purposes in this case.
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We hold that a sufficient quantity of the benefits and
burdens of ownership passed to the Church so that the transaction
was closed for Federal income tax purposes when the contract for
deed was signed in 1994. Petitioners made a completed gift in
1994. Accordingly,
Decision will be
entered for petitioners.