Hancock v. Commissioner

G. ALLAN HANCOCK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hancock v. Commissioner Docket No. 36867. United States Board of Tax Appeals 25 B.T.A. 607; 1932 BTA LEXIS 1501; February 24, 1932, Promulgated *1501 Prior to December 31, 1921, the petitioner, as vendor, executed contracts for the sale of real estate in California, wherein it was provided that deeds to the property sold would not be delivered until the purchase money had been paid in full. The purchase money was not fully paid and the deeds were not in fact delivered until subsequent to December 31, 1921. Held, the sales were consummated after December 31, 1921, and petitioner's profits on installment payments received in 1923 are taxable under the capital gain provisions of the Revenue Act of 1921. Joseph D. Peeler, Esq., and Melvin D. Wilson, Esq., for the petitioner. Arthur Carnduff, Esq., for the respondent. MATTHEWS *608 This proceeding is for the redetermination of a deficiency in income tax for the year 1923 in the sum of $33,643.78. The petitioner alleges that the respondent erred in disallowing a contribution of $400 which was deducted by the petitioner as an ordinary and necessary business expense, and in refusing to tax the petitioner's gain from certain sales of land at the rate of 12 1/2 per cent, as provided in section 206 of the Revenue Act of 1921. At the hearing*1502 the petitioner waived the assignment of error with respect to the disallowance of the $400 contribution, so that there remains for consideration the sole issue whether the sales in question were consummated after December 31, 1921, in which event the petitioner may elect to have the profits therefrom taxed as capital gains in accordance with the provisions of section 206 of the Revenue Act of 1921. The facts were stipulated from which we make the following findings of fact. FINDINGS OF FACT. Petitioner is an individual, residing in Los Angeles, California. On his income-tax return for the calendar year 1923 the petitioner reported the amount of $2,869,047.15, representing profits on installment sales of land to be "capital net gain." From this amount the respondent deducted $96,028.99 and computed the tax on this latter amount at the regular normal and surtax rates, thereby determining a deficiency. This sum of $96,028.99 may be divided as follows: An item of $1,458.03 which represented income received and reported in 1922 and which was erroneously reported by petitioner on his 1923 return; An item of $77.77 which represented income received in 1923 from a contract of*1503 sale entered into on June 23, 1922, and which is conceded to have been improperly deducted by the respondent from the amount reported by petitioner as capital net gain for 1923; The amount of $94,493.19 which represented the total profits on installment payments made during 1923 with respect to contracts of sale entered into on or before December 31, 1921. The items totaling $94,493.19 were received in 1923 and were reported by petitioner as capital net gain subject to be taxed under the Revenue Act of 1921 at the rate of 12 1/2 per cent. The respondent refused to apply the capital gain provisions of the statute to the profits received by the petitioner, on the ground that the sales out of which these profits arose were consummated prior to December 31, 1921. Under the provisions contained in these contracts of sale, deeds to the property described therein were not to be delivered, and in fact were not delivered until after December 31, 1921. *609 Copies of the contracts of sale out of which arose the income involved herein were attached to the stipulation of facts. Each contract contains the terms upon which the agreement was entered into and sets out the terms, *1504 conditions and covenants to be contained in the grant deed which the seller agrees to deliver to the buyer upon receiving the full payment of the purchase money. A typical contract contains certain material provisions which, with variations as to price, time of payment, and other immaterial variations, are contained in all the contracts and which read in substance as follows: The seller, in consideration of the covenants and agreements hereinafter contained and made by and on the part of the buyer, agrees to sell and convey unto the buyer and the buyer agrees to buy of the seller: That real property situated in the city and county of Los Angeles, state of California, described as follows, to-wit: [Description of the property] For the price of $6,500, of which $1,300 has been paid in cash; and the buyer agrees to pay the balance on or before five years from date hereof, together with interest upon all deferred payments at the rate of 6 per cent per annum from the date hereof until paid, interest to be paid quarterly. The buyer agrees to pay all taxes and assessments of every character which may hereafter become a lien upon said property. Should default be made by the buyer*1505 in the payment of any sum of principal and/or interest when due, then the whole sum of principal and interest shall become immediately due and payable, at the option of the seller. The buyer shall have the privilege of paying upon said balance any portion thereof at any time prior to said five years. It is understood and agreed that time is of the essence of this contract with respect to each and all of the obligations herein assumed by the buyer, and in the event of the failure on the part of the buyer to comply with any of the obligations, conditions and covenants herein assumed by, or imposed upon the buyer, then the seller shall be released from all obligations in law and equity to convey said property, and the buyer shall forfeit all rights therein and in all money theretofore paid under this contract; but the seller, upon receiving the full payment at the times and in the manner above mentioned, agrees to deliver to the buyer a certificate of title to said property, together with a good and sufficient grant deed, subject, however, to any liens or encumbrances which the buyer has placed thereon or suffered to be attached to said property, and subject to the conditions and*1506 covenants hereinafter provided for. *610 Said conveyance shall contain the following terms, conditions and covenants: This conveyance is made upon and subject to the following conditions subsequent, all of which shall also be treated and construed as covenants running with the land, all of which conditions and covenants the Grantees assume and agree to perform and abide by, and expressly make binding upon their heirs, devisees, successors and assigns, viz.: I. (Here are set out covenants with respect to the uses to which the property may be put, the erection of buildings thereon, the minimum cost of the main residence building, etc.) II. The breach of any of the foregoing conditions and covenants shall cause the premises to be forfeited to and revert to the grantor. III. The said conditions and covenants shall be covenants running with the land. IV. Each and all of the restrictions, conditions and covenants herein contained shall terminate on January 1, 1970. The parties hereto agree that this contract is made with and subject to all of the said covenants and conditions hereinbefore stipulated to be inserted in the deed to the same extent as it would be*1507 had said conditions and covenants been herein fully set out with appropriate substitution of the word "Seller" for "Grantor" and "Buyer" for "Grantee." The seller agrees that he will, at his own expense and with all due diligence, construct within said tract the following improvements: 1. Sidewalks, curbs and street paving. 2. Sewer main and gas main with connections, and water main. 3. Ornamental lighting posts. 4. Ornamental trees. The seller agrees to pay before the same become delinquent the taxes upon said premises for the year 1919-1920. This contract shall be binding upon and inure to the benefit of the parties hereto, their heirs, executors, administrators, successors and assigns. OPINION. MATTHEWS: Section 206(a)(1) of the Revenue Act of 1921 reads as follows: "The term 'capital gain' means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921." It appears that the deficiency which has been determined by the respondent in this case resulted from the refusal of the respondent to treat as a capital net gain the sum of $96,028.99 which was included in the income reported by the petitioner for 1923. It has*1508 been stipulated that the item of $1,458.03 should be excluded from petitioner's income for 1923 because it was received and reported in 1922, and *611 that the item of $77.77 should be taxed as a capital gain for 1923. It is further agreed by the parties that the balance of $94,493.19 arose out of contracts for the sale of land entered into prior to December 31, 1921, which amount represents profits on installment payments made during 1923. The parties disagree only as to the method of taxing these profits in the total sum of $94,493.19. It is the petitioner's position that although the contracts of sale were executed prior to December 31, 1921, the sales were not consummated until after that date so that the profits are taxable as capital gains at the 12 1/2 per cent rate. The respondent denies that section 206, quoted above, is applicable and is contending that the gains must be taxed in the usual way with other income. The facts are not in dispute and it remains only to determine whether the sales out of which the income arose were consummated after December 31, 1921, within the meaning of the statute. *1509 In Theodore J. Swift,20 B.T.A. 1099, we considered a situation very similar to that presented herein. There was involved a sale of real property situated in California, the deeds to the property having been deposited in escrow in accordance with an agreement to sell dated March 4, 1921, delivery of the deeds to await a final payment on the purchase price to be made in 1924. The payments provided for in the agreement to sell were finally completed and the deeds were delivered to the purchaser in 1924. We held that title to the property did not pass from the vendor until 1924, when the deeds were delivered, and that with respect to the profit resulting from the transaction the vendor was entitled to have his tax liability computed under the capital gain provisions of the Revenue Act of 1924. This decision was affirmed by the Circuit Court of Appeals for the Ninth Circuit on January 5, 1932, 54 Fed.(2d) 746. See also Charles W. Dahlinger,20 B.T.A. 176, which involved the question whether profits on the sale of certain stock should be taxed as a capital gain at the rate of 12 1/2 per cent. In that case title to the stock passed to the*1510 purchaser in 1920, but the full purchase price was not paid until after December 31, 1921. We held that the sale was consummated when the title passed to the purchaser and that the seller's profits were not taxable under the capital gain provisions of the Revenue Act of 1921. This decision was affirmed by the Circuit Court of Appeals for the Third Circuit, 51 Fed.(2d) 664, certiorari denied by the United States Supreme Court, 52 Sup.Ct. 128. In the instant case it is stipulated that none of the deeds covering the property described in the contracts of sale involved herein was delivered prior to December 31, 1921. Under the authority of the above decisions we hold that the sales in question were not consummated until after December 31, 1921, and the taxpayer is entitled to the benefit of the capital gain provisions of the statute. *612 There should be excluded from net income for 1923 the item of $1,458.03, which was received and reported in 1922 and which was erroneously reported by the petitioner for 1923, and the amount of $94,570.96 which was stipulated to represent income on installment payments made in 1923 should be taxed as a capital*1511 net gain in accordance with the provisions of section 206 of the Revenue Act of 1921. Reviewed by the Board. Judgment will be entered under Rule 50. MORRIS, LANSDON, MARQUETTE, STERNHAGEN, and TRAMMELL dissent.