McArdle v. Commissioner

Marion H. McArdle, Petitioner, v. Commissioner of Internal Revenue, Respondent. T. E. McArdle, Petitioner, v. Commissioner of Internal Revenue, Respondent McArdle v. Commissioner Docket Nos. 14819, 14820 United States Tax Court 11 T.C. 961; 1948 U.S. Tax Ct. LEXIS 26; November 30, 1948, Promulgated *26 Decisions will be entered under Rule 50. Income -- Cash Basis -- Receipt -- Year of -- Purchase Price Withheld. -- That part of the profit from the sale of stock represented by a portion of the purchase price which was, in accordance with the contract of sale, returned to the buyer at the time of the sale in order to guarantee him against loss from accounts receivable and contingent liabilities of the corporation the stock of which was being purchased, was not income to the seller on cash basis in the year of sale, but only in the following year when received by him unconditionally. Wesley E. Seale, Esq., for the petitioners. W. W. Kerr, Esq., and James R. Backstrom, Esq., for the respondent. Murdock, Judge. MURDOCK *961 The Commissioner determined a deficiency in income tax for 1943 of $ 110.21 against each of the petitioners. The only question is whether the community realized a profit of $ 25,381.14 in 1942. FINDINGS OF FACT. The petitioners are husband and wife. They reside in Texas. Their returns for 1942 and 1943 were filed on a cash basis with the collector of internal revenue for the first district of Texas. T. E. McArdle, hereinafter referred *27 to as the petitioner, entered into an agreement dated October 16, 1942, whereby the Consolidated Oil Corporation, called the party of the first part, agreed to buy, and the petitioner and his associates, called the parties of the second part, agreed to sell, 300 shares of M. A. R. Pipe Line Co. stock and 2,500 shares of Terminal Refining Corporation stock . The petitioner owned one-third of each kind of stock. The total purchase price for the petitioner's stock was $ 289,241.63 of which $ 88,821.68 was for the pipe line stock and $ 200,319.95 was for the refining stock. His basis for the pipe line stock was $ 10,000 and his basis for the Refining stock was $ 75,649.49. *962 The parties of the second part made certain representations in the agreement in regard to the pipe line and refining companies, one of which was that they would be free of debt except as provided in the contract. The contract originally provided that the buyer could withhold a portion of the purchase price sufficient to safeguard it against loss on account of contingent liabilities of the pipe line and refining companies. That was changed by amendments and the final agreement was that the sellers, upon *28 receiving the consideration from the buyer, would immediately return to the buyer $ 76,143.41 to safeguard it against loss on accounts receivable and contingent liabilities of the pipe line and refining companies. The petitioner was to return to the buyer one-third of the total amount, or $ 25,381.14. The sale was made on December 17, 1942. The petitioner, as consideration for his M. A. R. Pipe Line Co. stock, was given a cashier's check on a bank in the amount of $ 8,333.34, which he was required to endorse immediately so that it was payable to the order of the buyer. He was then given the remainder of the purchase price for that stock. At the same time he was given as consideration for his Terminal Refining Corporation stock a cashier's check for $ 17,047.80, which he was required to endorse so that it was payable to the order of the buyer. He was then given the remainder of the purchase price for that stock. The buyer, as it made collections on the accounts receivable and as the contingent liabilities were settled, returned portions of the $ 76,143.41 to the sellers during 1943. The petitioner received during 1943 less than $ 25,381.14. The difference was never received by*29 him, having been used by the buyer in accordance with the agreement. The buyer paid no interest to the sellers on the $ 76,143.41 or on any part thereof. The Commissioner, in determining the deficiencies, held that the entire gains were long term capital gains taxable to the community as income of 1942 and that the community had a loss on a guaranty in connection with the sale of the pipe line and refining companies stock which was deductible for 1943. The stipulation of facts is incorporated herein by this reference. OPINION. The parties are not in dispute as to any of the figures. The petitioners point to the terms of the contract under which they were required to return to the purchaser $ 25,381.14 of their share of the agreed purchase price to guarantee the purchaser against loss on accounts receivable and contingent liabilities. They argue that they did not actually receive that money for income tax purposes in 1942, since it was never theirs to do with as they pleased during that year, but was, for all practical purposes, withheld by *963 the purchaser, and in fact was never actually paid in full. The respondent relies upon the form of the transaction under which the*30 money was ostensibly paid to the petitioners and he says they voluntarily used it for a purpose of their own. The instruments and also the testimony of the petitioner show that the money never during 1942 came into the possession and control of the petitioners to do with as they pleased. Only a portion of it was finally paid to them without any strings attached in 1943. This case is not distinguishable from ; affd., . There, the contract of sale provided that $ 20,000 of the purchase price was to be deposited at the consummation of the sale and held in escrow to indemnify the buyer against any loss or liability on account of accounts receivable, bad debts, and undisclosed liabilities of the corporation the stock of which was the subject of the sale. The $ 20,000 less the amount of any uncollected accounts or undisclosed liabilities paid by the purchaser was to be paid to the sellers at the expiration of nine months after the sale. The Board of Tax Appeals, after stating that the income tax law is concerned only with realized gains, said: * * * Moreover, where the petitioner*31 is, as here, on the cash basis, pretty clear evidence of his command over the money held in escrow would have to be present to justify our holding that it was received in the year of execution of the contract, although not paid over until nine months later. The cases of , and , relied on by the respondent in that case, were discussed but were not followed. It was pointed out that the Stoner case had subsequently been reversed. ; certiorari denied, . The Board followed the cases of , and , and held that the profit represented by the petitioner's share of the $ 20,000 was not taxable to him in the year of the sale. The fact that the money in the present case was held by the buyer rather than by an escrow agent does not help the respondent. The parties apparently recognize*32 that ; affd., , is distinguishable, at least they have not cited it. There the taxpayer received some stock which he was required immediately to put up as collateral. But it was his stock and he had the rights of ownership of it, such as the voting rights, dividend rights, the right to any increase in value, and the right to have that particular stock returned to him when the collateral was no longer required. The parties to the present proceeding cite and rely upon the same cases as were discussed in the Bassett case. That case is followed here and decision on this point is for the petitioners. Decisions will be entered under Rule 50.