Cluff v. Commissioner

William A. Cluff, Petitioner, v. Commissioner of Internal Revenue, Respondent Cluff v. Commissioner Docket No. 26130 United States Tax Court 17 T.C. 225; 1951 U.S. Tax Ct. LEXIS 105; August 20, 1951, Promulgated *105 Decision will be entered for the respondent. Sections 42, 111 and 117. -- Cash Basis -- Sale of Stock for Indeterminate Amount to be Paid in Future -- Year in Which Gain Realized -- Short Term Capital Gain. -- Petitioner, reporting on a cash basis, in 1942 sold 10 shares of stock, less than 6 months from the date of purchase, for an indeterminate sum of money. In 1944 petitioner and the purchaser agreed on a definite purchase price covering this sale. In that same year, when petitioner received the first installment in excess of the cost basis previously recouped, he reported the excess as a short term capital gain. The final payment, received in 1945, he reported as a long term capital gain. Held, the determination of the respondent that in 1945 petitioner realized a short term capital gain on the sale in 1942 was not error. Carl J. Batter, Esq., for the petitioner. Michael J. Kenny, Esq., for the respondent. Hill, Judge. HILL *225 This proceeding involves a deficiency in income tax of $ 1,260.03 for the taxable year 1945. The question presented for decision is whether *226 the petitioner realized a short term capital gain in 1945 on the sale of 10 shares of stock in 1942. FINDINGS OF FACT. The facts stipulated are so found. Petitioner, an individual, filed his income tax return for the calendar year 1945 with the collector of internal revenue for the second district of New York. His return was on a calendar year cash basis. He is engaged in the practice of public accounting with offices in New York, New York. On June 1, 1942, petitioner purchased 10 shares of National Bronze & Aluminum Products Company stock for $ 25,000. On July 29, 1942, petitioner entered*107 into an agreement with The National Bronze & Aluminum Foundry Company, Cleveland, Ohio, sometimes referred to as the Foundry Company, covering the sale on July 29, 1942, of four of these shares of stock, which read in part as follows: In consideration of the sale, transfer and delivery to the undersigned [The National Bronze & Aluminum Foundry Company] by WILLIAM A. CLUFF * * * of FOUR (4) shares of the capital stock of National Bronze & Aluminum Products, Inc., the undersigned agrees to pay to said WILLIAM A. CLUFF in full payment therefor: (a) for a period beginning June 1, 1942, and expiring March 21, 1943, an over-riding charge of 4/114ths of 7/10ths of 1 cent per pound on all cast products of T-1 series alloys, all heat-treated castings and magnesium and Ten-Lox castings and 4/114ths of 7/20ths of 1 cent per pound on all T-1 series ingots; (b) for a period beginning on such date (not later than three years after the United States ceases to be at war) as a contract for the manufacture and sale of Ten-Lox load boards may be made with Messrs. Hurley & Nicholson (or their assignees or a corporation or company controlled by them) and expiring five years after the making of*108 such contract, an over-riding charge of 4/114ths of 7/20ths of 1 cent per pound on all Tex-Lox load board production under such contract. (c) for a period beginning June 1, 1942, and expiring September 21, 1945, 28/114ths of 1% of all sales made by the undersigned to Wright Aeronautical Corporation, American Locomotive Company, Baldwin Locomotive Company, Chrysler Corporation, Packard Automobile Company and sub-contractors or licensees of any of said corporations; (d) for a period beginning June 1, 1942, and expiring September 21, 1945 28/114ths of 1% of all sales made by the undersigned of aluminum tank castings which the undersigned produces directly or indirectly for Government accounts and for any contractors or sub-contractors of Government accounts from which any such tank orders originated; (e) The over-riding payments and percentage of sales provided for in subdivisions (a), (b), (c) and (d) above will be credited by the undersigned to you on the books of the undersigned as accounts are paid and payment will be made by the undersigned to you within ten days after payment is received by the undersigned from customers. [Emphasis added.] *227 Petitioner entered into two*109 other agreements with the Foundry Company on July 29, 1942, similar in terms to the above, covering the sale on or about the same time of the remaining six shares of stock. Pursuant to these agreements, petitioner on or about July 30, 1942, delivered these same 10 shares to the Union Bank of Commerce, Cleveland, Ohio, an authorized agent of the Foundry Company. The bank gave petitioner a receipt dated July 30, 1942, reading in part: The undersigned hereby acknowledged receipt of Certificate #63 representing 4 shares of the capital stock of the National Bronze & Aluminum Products, Inc. Said certificate was delivered to the undersigned by you in accordance with the terms of an offer by The National Bronze and Aluminum Foundry Company, dated July 1, 1942, for the purchase of all the capital stock of the National Bronze & Aluminum Products, Inc. * * * [Emphasis added.] Similar receipts dated on or about July 30, 1942, were issued by the authorized agent for the remaining six shares of this stock. Under the terms of the contract, during 1942 petitioner received $ 17,168.20, during 1943, $ 4,941.20. He did not report these sums or any part thereof in his 1942 or 1943 returns, *110 but did attach a statement which said in part: Under date of June 1st, 1942, I purchased 10 shares of stock of National Bronze and Aluminum Products, Inc. at $ 2,500.00 per share, total purchase price $ 25,000.00, in payment for said shares I paid in cash $ 10,000.00; a promissory note in the amount of $ 5,000.00 due on September 1st, 1942 which was paid on that date and a conditional sale agreement whereby the proceeds as dividends or otherwise from the said shares of stock would be applied to the unpaid balance of $ 10,000.00. On July 29th, 1942, I sold the 10 shares of stock to the National Bronze and Aluminum Foundry Company of Cleveland, Ohio and received in consideration thereof a contract of non-predeterminable value under which I was to receive installment payments from month to month to September 21st, 1945. I transferred and delivered said 10 shares of stock to the Foundry Company on July 29th, 1942 and received in return three contracts; one representing 4 shares, the second representing 4 shares and the third representing 2 shares. One of the contracts representing four shares I assigned to the original seller of the shares to me in order that the Foundry Company*111 would pay directly the proceeds from the contract representing 4 shares to apply upon the conditional sale contract as stated above. The Foundry Company made payment in 1942 of $ 17,168.20 to apply on said contracts, representing in part the purchase price of said 10 shares and in 1943 the Foundry Company paid $ 4,941.20 upon the said 10 shares of stock. The total of the installments paid by the Foundry Company under the terms of the three contracts to apply upon the purchase price of said shares amounts to $ 22,110.40 whereas I paid a total of $ 25,000.00 for said shares. It is, therefore, readily apparent that the total amount received in installments is not equal to the $ 25,000 original purchase price paid by me for the said shares. There has been no profit or loss in the transaction and consequently no report has been made of either profit or loss under Schedule B of Capital Gains or Losses on Securities sold. *228 The contract is in effect and further payments are expected during 1944 for the total installments equalling $ 25,000.00, at which time I will report such gains as I receive under this transaction. The reason for making this statement and attaching as*112 a schedule to this return is that the National Bronze and Aluminum Foundry Company on or about February 15th, 1944 issued form 1099 showing cash payments to me in the first column "Salaries, Wages, Fees, Commissions, Bonuses, $ 2,964.68" thereby indicating that I had received taxable income to report in my 1943 return, whereas the sum of $ 2,964.68 is an amount paid by the foundry and received by me during 1943 equalling my proportionate share of the installments upon the purchase price for six shares of stock of the National Bronze and Aluminum Products Inc., as above indicated. This is to certify that I did not receive $ 2,964.68 as taxable income but as part installments under the contract of sale to the Foundry Company under contracts whereby I sold to the Foundry Company 10 shares of common capital stock of the National Bronze and Aluminum Products Inc. [Emphasis added.] A similar explanatory statement was attached to the return for the year 1944. Respondent has not asserted a tax against the petitioner for the calendar years 1942 and 1943 on the sums of $ 17,168.20 and $ 4,941.20. On January 21, 1944, the petitioner and the Foundry Company entered into an agreement*113 which stated in part: WHEREAS, the Corporation [the Foundry Company] executed and delivered to the Contractholder an agreement to purchase certain specified shares of the capital stock of National Bronze and Aluminum Products, Inc., a New York corporation, on July 29, 1942, and agreed to pay the Contractholder certain overriding charges and percentages of sales on certain specified products of the Corporation for the period and on the conditions therein stated, and WHEREAS, the Corporation entered into similar agreements as of the same date with all of the stockholders of National Bronze and Aluminum Products, Inc. and thereby acquired all of the issued and outstanding capital stock of National Bronze and Aluminum Products, Inc., and WHEREAS, said agreement further provided for a deduction from said payments of possible service charges and likewise provided for certain adjustments to be made for possible tax liabilities, and * * * * WHEREAS, the parties desire to settle and adjust said disputes and differences and to agree and determine upon a fixed and definite settlement of the rights of the Contractholder under said agreement of July 29, 1942. NOW, THEREFORE, in consideration*114 of the mutual covenants and agreements herein contained, the parties hereto agree as follows: 1. The agreement of July 29, 1942 between the parties hereto is terminated and cancelled and the parties hereto agree in lieu thereof: (a) The Corporation agrees to pay to the Contractholder, and the Contractholder agrees to accept in full payment of all amounts due and to become due under said agreement of July 29, 1942, 10/114ths of $ 131,000.00 payable 10/114ths of $ 5,000.00 on or before January 28, 1944, and a like sum on or before the 28th day of each succeeding month thereafter until the total sum has been paid; provided that if and when the consolidated net income of the Corporation before taxes, shall equal $ 250,000.00 for any monthly period during the life of this agreement, and shall not exceed $ 300,000.00, then and in every such event, *229 the monthly payment for the next succeeding month shall be increased to 10/114ths of $ 7,000.00 and provided further that if and when such consolidated net income before taxes shall exceed $ 300,000.00 for any such monthly period, then and in every such event, the monthly payment hereunder for the next succeeding month shall be increased*115 to 10/114ths of $ 10,000.00. * * * * 2. The parties hereto hereby release each other from any and all claims that either has against the other except as to the payments herein provided to be made by the Corporation. [Emphasis added.] This agreement was subsequently modified by a letter dated February 2, 1944, which stated: 111 Broadway New York 6, New York February 2, 1944 The National Bronze and Aluminum Foundry Co. Cleveland 4, Ohio. Dear Sirs: The agreement which I signed with you under date of January 21, 1944, is hereby modified so that it shall be effective if and when similar agreements are executed by at least ninety-five per cent. (95%) in interest of the Contractholders. Very truly yours, (Signed) Wm. A. Cluff Wm. A. Cluff The terms of this letter were fulfilled on or about February 2, 1944. Petitioner paid an insurance premium of $ 211.66 in September 1944 insuring the agreement of January 21, 1944. During the calendar year petitioner did receive, under the terms of the agreement, the sum of $ 6,140 and reported as taxable income on his 1944 income tax return the sum of $ 3,038.14 as a short term capital gain. During the calendar year 1945 the petitioner received, *116 under the terms of this agreement, the sum of $ 5,350.80 and he included this amount in his 1945 income tax return as a long term capital gain. No further sums are due the petitioner under any of these agreements. The following costs of stock sold by petitioner on July 29, 1942, to the Foundry Company and the payments received by petitioner thereon are: Payments Unrecovered Year Cost received cost Profit [1942] $ 25,000.00 $ 25,000.00 None [1942] $ 17,168.20 7,831.80 None [1943] 4,941.20 2,890.60 None [1944] * 211.66 6,140.40 None $ 3,038.14 [1945] 5,350.80 None 5,350.80 Total $ 33,600.60 $ 8,388.94 *230 OPINION. The issue is whether respondent erred in determining that petitioner realized a short term capital gain in 1945 on shares of stock sold in 1942. Sections 42, 111, and 117 of the Internal Revenue Code. The transaction in 1942 wherein petitioner exchanged the 10 shares of stock for money consideration of an indefinite amount was a sale and, contrary to petitioner's allegation and argument on brief, was not an exchange for contracts of sale considered as property of an indeterminate fair market *117 value. Cf. Burnet v. Logan, 283 U.S. 404; Cortland Specialty Co. v. Commissioner, 60 F. 2d 937, certiorari denied 288 U.S. 599; Commissioner v. Moore, 48 F. 2d 526, certiorari denied 284 U.S. 620; Warner Co., 26 B. T. A. 1225; W. B. Geary, 6 B. T. A. 1109, modified by stipulation of the parties 30 F. 2d 1011; see also H. W. Johnston, 14 T. C. 560. The language used throughout the contracts of sale, the receipts for the shares, and the memorandum attached to the 1943 return leave no doubt that this transaction was regarded as a sale by petitioner at the time of the transaction and subsequently until 1944. Pursuant to the terms of the contracts, the shares of stock were delivered to the authorized agent of the purchaser on or about July 30, 1942, and the agent gave petitioner receipts for them, a copy of which has been stipulated. The period during which the shares were held was thus terminated on the day of*118 sale, July 29, 1942, less than 6 months from the date of acquisition, June 1, 1942. Since the shares were held less than 6 months, the gain which ultimately was realized was within the statutory definition of a short term capital gain. Section 117 of the Code. The provisions of the contracts of sale for future payments contingent on the production and sale of certain products, and the modifications in 1944, have no bearing on the length of time petitioner held the shares in question. Cf. Estate of Henry H. Rogers, 1 T. C. 629, affd. 143 F. 2d 695, certiorari denied 323 U.S. 780; W. H. Hay, 25 B. T. A. 96. The petitioner, who was on a cash accounting basis, properly reported no gain in 1942 when the sale took place. At that time he did not receive a sum in excess of the cost basis and it was also not possible to foretell with reasonable certainty under the contingent payment terms of sale whether or not there would be a gain or loss to report. Sections 42 and 111 of the Code. Until the cost basis was recovered and sums in excess were realized, or the transaction*119 was otherwise closed, no gain or loss could be computed and petitioner correctly treated the payments received as a return of capital. Thereafter, in 1944, when the first payment in excess of the cost basis was received, *231 petitioner properly reported it as a short term capital gain. Burnet v. Logan, supra;Commissioner v. Moore, supra. We conclude that respondent did not err in determining that the amount in question, $ 5,350.80, received in 1945 for stock purchased June 1, 1942, and sold July 29, 1942, was a short term capital gain realized in 1945. Decision will be entered for the respondent. Footnotes *. Insurance premium.↩