Number Nine Plantation v. Commissioner

NUMBER NINE PLANTATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Number Nine Plantation v. Commissioner Docket No. 21930. United States Board of Tax Appeals 23 B.T.A. 974; 1931 BTA LEXIS 1792; June 30, 1931, Promulgated *1792 Held, that the sale of the property involved was consummated in the taxable year 1926. Benjamin E. James, Esq., for the petitioner. C. A. Ray, Esq., for the respondent. TRAMMELL *974 This is a proceeding for the redetermination of a deficiency in income tax for 1925 in the amount of $2,560.17. The question involved is whether the sale of the real estate in controversy took place in 1925 or 1926. There is no other controversy between the parties, it being conceded that if the sale was a 1925 transaction the deficiency computed by the respondent is correct, and if it was a 1926 transaction there is no deficiency. *975 FINDINGS OF FACT. The petitioner is a Florida corporation with its principal office at Daytona Beach. On July 17, 1925, the petitioner, being the owner of a certain tract of land consisting of approximately 77 acres, 85 per cent of which was wild scrub land and the balance having fruit trees growing thereon, entered into the following instrument with T. J. McReynolds, trustee, for the sale thereof. The pertinent portion of the instrument is as follows: That for and in consideration of the sum of Ten Thousand*1793 ($10,000.00) Dollars cash in hand paid by the purchaser to the vendor, receipt whereof is hereby acknowledged by the vendor, and in further consideration of the mutual covenants hereinafter contained, it is hereby mutually covenanted and agreed by and between said parties as follows, to-wit: 1. The vendor hereby agrees to sell to the purchaser at the total purchase price of Two Hundred Forty-six Thousand Dollars ($246,000.00), the following described property situated in the County of Volusia, State of Florida, to-wit: * * * and to convey and assure unto the purchaser said property by good and sufficient warranty deed upon the payment of Sixty-five Thousand Dollars ($65,000.00) in cash on or before forty-five (45) days from the date of delivery of complete abstracts to date, and upon the execution and delivery of a certain mortgage in the sum of One Hundred Twenty-one Thousand Dollars ($121,000.00), payable as follows: Forty-one Thousand Dollars ($41,000.00) one (1) year after date of delivery of deed, with interest at eight per cent. (8%), payable semi-annually; Forty Thousand Dollars ($40,000.00) two (2) years after date of delivery of deed, with interest at the rate of eight*1794 per cent. (8%), payable semi-annually; and Forty Thousand Dollars ($40,000.00) three (3) years after date of delivery of deed, with interest at the rate of eight per cent. (8%) payable semi-annually, and the assumption by the said purchaser of an outstanding mortgage now held by the Volusia County Bond and Mortgage Company in the sum of Fifty Thousand Dollars ($50,000.00). 2. The purchaser hereby agrees to purchase the above described property from the vendor at the total purchase price of Two Hundred Forty-six Thousand dollars ($246,000.00), and to pay said purchase price in the following manner, to-wit: Ten Thousand Dollars ($10,000.00) cash upon the execution of these presents, receipt of which is herein above acknowledged; Sixty-five Thousand Dollars ($65,000.00) cash upon execution and delivery of the above mentioned warranty deed on or before forty-five days (45) from date of delivery of complete abstracts covering the above described property; Forty-one Thousand Dollars ($41,000.00) one (1) year after date of delivery of deed, with interest at eight per cent (8%), payable semi-annually; Forty Thousand Dollars ($40,000.00) two (2) years after date of delivery of deed, with*1795 interest at the rate of eight per cent. (8%) payable semi-annually; and Forty Thousand Dollars ($40,000.00) three (3) years after date of delivery of deed, with interest at the rate of eight per cent. (8%), payable semi-annually, and the assumption by the said purchaser of an outstanding mortgage now held by the Volusia County Bond and Mortgage Company in the sum of Fifty Thousand Dollars ($50,000.00). *976 3. All taxes and insurance payments upon the above described property are to be pro rated as of the date of delivery of deed. The vendor shall pay all prior taxes and insurance. The purchaser shall assume and pay all taxes and insurance thereafter due. 4. The vendor agrees to furnish an abstract of title showing deraignment of title to and including the vendor. 5. In case of failure of the purchaser to make either of the payments or any part thereof, or to perform any of the covenants on his part to be performed, this agreement shall at the option of the vendor be forfeited and terminated, and the purchaser shall forfeit all payments by him previously made under this agreement, and said payments shall be retained by the vendor in full satisfaction and liquidation*1796 of all damages by them sustained; and said vendor shall have the right to re-enter and take possession of the premises aforesaid without any legal liability therefor. On the date of the execution of the above instrument the vendee executed another instrument whereby he agreed to sell the same property to Wallace W. Clarke, trustee, for $375,000. The taxpayer kept its books upon the basis of a fiscal year ended September 30. Prior to the end of the fiscal year 1925 the vendee paid to the petitioner $10,000 in cash on the date of the execution of the contract above quoted, and $38,000 on September 29, 1925. On October 14, 1925, $27,000 was paid, that is, in the fiscal year 1926. This $27,000 was the remainder of the payment of $65,000 referred to in the agreement, upon the payment of which the petitioner had agreed to execute a warranty deed. On October 14, 1925, the petitioner delivered the abstract of title referred to in the agreement and the deed which petitioner agreed to execute was executed and delivered on that date. No right of ownership or possession was given by the petitioner to the vendee until the execution of the deed on October 14, 1925, and the vendee did*1797 not take actual possession of the property until on or after that date. The sale of the property was not consummated until October 14, 1925. OPINION. TRAMMELL: The only question here is when the transaction was consummated or closed. The answer to this question really depends upon whether the agreement entered into on August 17, 1925, was a contract to sell or was an actual sale of the property. In our opinion, that contract was executory and not executed or completed. The vendor agreed to sell upon certain conditions and the vendee agreed to buy upon certain conditions. These conditions had not been met prior to October 14, 1925, which was the fiscal year 1926. The vendor agreed to furnish an abstract of title to the property and the vendee was not obligated to pay any consideration other than the $10,000 already paid which was the consideration for the executory *977 contract, until on or before forty-five days from the date of delivery of complete abstracts and upon the execution and delivery of a certain mortgage. The contract of sale quoted in our findings indicates, upon its face, that the actual sale and conveyance was to be made in the future. One indication*1798 of this intention is the statement that all taxes and insurance payments upon the property are to be prorated as of the date of the delivery of the deed, that the vendor shall pay all prior taxes and insurance, and that the vendee shall assume and pay all taxes and insurance thereafter due. The remedy, in the event that the vendee had failed to pay the purchase price, would have been an action in damages for breach of contract and not for the purchase price. It is true that the vendee would have had an action of specific performance if he had complied with his agreement. This action, however, would have been to compel the vendor to comply with its contract to sell. We think that our conclusion herein reached finds support in the case of . In that case the Lumber Company gave to the Southern Pine Company a ten-day option to purchase its timber land for a specified price. On the same day the title was examined and found satisfactory and on December 30, 1916, the Pine Company notified the Texas Lumber Company that it would exercise its option and on that date ceased operations and withdrew all employees from the land. *1799 The option set forth the terms of the sale, which were accepted. Nothing remained to be done except the execution of the papers and the payment of the purchase price. The court said that only an executory contract was created by the option and notice of acceptance. The purchaser, in the notice of acceptance, declared itself ready to close the transaction and pay the purchase price "as soon as the papers were prepared." These papers were not prepared until January, 1917. The court said that the title and right of possession remained in the vendor until the transaction was closed, that unconditional liability of the vendor for the purchase price was not created until 1917. In the case before us the vendee was not obligated to make any payments on the purchase price of the land until an abstract of title had been furnished. While there was no obligation on the part of the vendee to make any payments, it actually made a payment of $38,000 on September 29, 1925, in addition to the $10,000 which was paid at the time of the execution of the contract. It was clearly indicated that it was the intention of both parties that the deal was not to be considered closed until the entire*1800 amount of $65,000, referred to in *978 the agreement, was paid. There is testimony to the effect that the vendor did not know whether the transaction would be closed until the last of the $65,000 payment was made. We consider that the $10,000 payment made at the time of the execution of the contract was merely the consideration for the execution of that contract, although if the contract were carried out it was to apply on the purchase price. If it were not carried out, it was to be forfeited together with any other payments as liquidated damages. The agreement also provided that the time for making the payments set out in the contract was to be considered an essential part of the agreement. This would indicate that the parties did not intend that there was an actual sale until the provisions of the agreement had been met. It may well have been that when the vendee received the abstract of title which was to be furnished before he was obligated to make payments, he might have discovered that the vendor did not have title to convey and clearly it was not intended that the sale was consummated until he had an opportunity to examine the abstract. This consideration was clearly*1801 a condition precedent to the consummation of the sale and this fact in connection with the other facts and conditions contained in the agreement indicate that there was not an unconditional liability of the vendee for the purchase price in the fiscal year 1925. The vendor was in no position to demand the $65,000 payment in that fiscal year, because it had not complied with its agreement. The vendor, not having furnished the abstract and other papers required to effect the transfer, had made no tender of title or possession, and the vendee, having received none and being in no position at that time to demand title or possession, we do not consider that the sale was made until those conditions had been met. The taxpayer did not offer possession or right of possession and the vendee exercised no right of possession until that time. We think the circumstances of this case distinguish it from those cases where a portion of the purchase price had been paid pursuant to an unconditional contract to sell. We do not think that it is material in this case that the vendee, on the same day that he executed the contract above quoted, entered into another contract to sell the property to others. *1802 At the time he entered into this contract to sell to others he was in no position to comply therewith unless his own contract had been complied with. This does not indicate that the vendee had actual possession or exercised any rights of ownership. Judgment will be entered under Rule 50.