Dakota Creek Lumber & Shingle Co. v. Commissioner

DAKOTA CREEK LUMBER & SHINGLE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. UPRIGHT SHINGLE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. G. W. GILFILEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Dakota Creek Lumber & Shingle Co. v. Commissioner Docket Nos. 31811, 40654, 40655. United States Board of Tax Appeals 26 B.T.A. 940; 1932 BTA LEXIS 1217; September 6, 1932, Promulgated *1217 V. Peringer, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. MATTHEWS *940 The proceeding in Docket No. 31811 is for the redetermination of a deficiency against the Dakota Creek Lumber & Shingle Company, in the amount of $2,441.05 for the year 1923. The deficiencies in the other dockets in the amount of $624.96 each are asserted against the petitioners as transferees of the Dakota Creek Lumber & Shingle Company for the same year. The statement attached to the letters of the respondent asserting the liability against the transferees shows that the amount of the unpaid deficiency against the transferor for the year 1923 was only $624.96, being the amount of $2,411.05 originally asserted less an overpayment for 1924. The cases were consolidated for hearing. The only assignment of error in Docket No. 31811, which is also raised in the other two dockets, is that the respondent erred in computing the income of the Dakota Creek Lumber & Shingle Company for 1923 by including therein the entire profit from the sale of certain assets. In the other two dockets the petitioners contend that they are liable for only their pro rata share*1218 of the tax asserted against the transferor. FINDINGS OF FACT. The Dakota Creek Lumber & Shingle Company, hereinafter referred to as the Company, was during the year 1923 a corporation with its principal office in Bellingham, Washington. It was dissolved on July 1, 1929, and all its assets were distributed to its stockholders pro rata. In 1923 it owned and operated a lumber manufacturing plant at Bellingham. The Upright Shingle Company is a corporation, with its principal office in Bellingham, and G. W. Gilfilen is an individual, a resident of that city. The Upright Shingle Company and Gilfilen each received assets of the Company in distribution of a value in excess of the amount *941 of $624.96. The tax asserted against the company for 1923 is still unpaid. The deficiency here in controversy arises from the action of the respondent in including in the Company's income for 1923 the total profit in the amount of $17,839.04 from a sale of sawmill and other equipment which took place under the following circumstances: On October 1, 1923, the Company, as party of the first part, entered into a contract with the Baeten Lumber Company, as party of the second part, *1219 which, after reciting that the Company is the owner of certain real estate upon which are a sawmill and other personal property, also lumber, a lease, a water-right agreement and other properties, and after providing that the first party shall sell and assign to the second party all of these various properties, provides as follows: In consideration therefor the first party agrees to accept and the second party agrees to pay to the first party, as the full and complete consideration for said transfer, the sum of $44,643.68 plus $20.00 per thousand feet board measure, for all No. 1 old growth logs, $16.00 per thousand feet, board measure, for all No. 2 old growth logs, $12.00 per thousand feet, board measure, for all No. 3 old growth logs, $12.00 per thousand feet, board measure, for all second growth logs; the scale of all said logs to be hereafter determined; that if the parties hereto fail to agree as to the scale of said logs, then the scale of the said logs is to be determined by Puget Sound Log Scaling and Grading Bureau. The said purchose price is to be paid as follows: $25,000.00 in cash, the receipt of which is hereby acknowledged; $10,000.00 on the 1st day of December, *1220 1923; $10,000.00 on the 1st day of February, 1924; the balance of said purchase price to be paid within six months from the date of this contract; all deferred payments to draw interest at the rate of 7 per cent per annum, payable at the time the installments on the purchase price become due and payable. It is understood and agreed that the title to all of the property agreed to be sold under this contract shall remain in the first party until fully paid for, except that the second party shall have full right and authority to sell and convey any part or all of said lumber, and also shall have the right to manufacture said logs into lumber and sell said lumber, as long as the payments hereinbefore mentioned are duly made at the times the same become due and payable, time being of the essence of this contract; but in case the second party fails to make any of the said payments promptly at the time the same become due, then such right shall immediately cease without notice. It is understood and agreed that second party is to pay all taxes and assessments hereafter becoming due and payable upon said real estate and personal property but that first party shall pay all taxes which*1221 are now a lien against said personal property, or any part thereof, including those assessed during the year 1923, payments of said taxes by said parties respectively to be made promptly and before delinquency; and second party is to keep the said mill and property insured in the amount of $15,000.00 loss, if any, payable to the first party. That if the second party makes said payments promptly at the time the same become due and payable, and pays said taxes and assessments and keeps said property insured, as aforesaid, then the first party will convey to the second party all of the said property, both real and personal, the said conveyances *942 being made at this time and left in escrow, as hereinafter more specifically set forth; that if the second party fails to make the said payments promptly at the times the same become due, time being of the essence of this agreement, or fails to pay said taxes and assessments and keep said property insured, then the first party, upon giving the second party thirty days' notice, and said notice remaining uncomplied with for said period, may at its option declare this contract forfeited, and upon such forfeiture the second party is*1222 immediately to surrender unto the first party all of the said property remaining in its possession, and all right, title and interest of the second party shall cease and determine the same as if this contract had never been made, and in such case the second party shall forfeit unto the first party all payments made hereunder, as for rent and liquidated damages. The first party has this day executed unto the second party a warranty deed to the said premises, together with a bill of sale for all of the said described property, and has also made a written assignment of the said water right agreement and of the said contract wity the Director General of Railroads, also of that certain lease hereinbefore described and the said instrument relating to the construction of a dam, and has also furnished an abstract showing satisfactory title to the said real property. It is understood and agreed that all of the said papers and conveyances are to be placed in escrow in the First National Bank at Bellingham, Washington, and that if the second party makes the said payments promptly at the time the same become due and payable, time being of the essence of this agreement, then the said First*1223 National Bank is to deliver the said papers and conveyances to the second party; but that if the second party fails to make said payments promptly at the time the same become due, then upon the first party giving the second party thirty days' notice, the said papers and conveyances are to be delivered to the first party. The mill was in operation at the time the contract was executed and was continued in operation by the vendee. The logs were scaled, as required by the contract, in order to determine the exact amount of the purchase price, within one week from the time the contract was executed. The vendee went into possession of the sawmill about October 1, and immediately began to sell lumber and to manufacture logs into lumber for sale. Practically all of the lumber and logs had been disposed of prior to January 1, 1924. Payments under the contract were made as follows: October 8, 1923, $25,000; December 1, 1923, $10,000; February 1, 1924, $10,000; April 1, 1924, $19,016.84, making a total of $64,016.84. Upon final payment in April, 1924, the deed to the real estate, the bill of sale for the personalty and the various assignments were released to the vendee by the escrow*1224 agent. The Company included the amount of $35,000 received by it in 1923 in its gross income for that year and included the amount received in 1924 in its gross income for that year. OPINION. MATTHEWS: The parties have stipulated that Gilfilen and the Upright Shingle Company each received assets of the transferor in *943 excess of the amount of the deficiency herein determined. These transferees contend, however, that there were other tranferees and that each is liable for only his pro rata share of the tax. This contention is without merit, in view of the decision of the Supreme Court in the case of , in which the court held that each transferee is liable for the tax of the transferor in an amount equal to the total value of the assets received by him as transferee. It is clear, therefore, that the petitioners, the Upright Shingle Company and Gilfilen, are liable as transferees for the amount of the liability asserted against them in the event we decide that the Company was liable for the deficiency asserted by the respondent. The respondent has included the entire profit from the sale of the Bellingham*1225 plant and timber in the Company's income for 1923, upon the theory that the sale took place in that year. The petitioner's first contention is that only the amount received in that year should be included in gross income, upon the theory that the contract provided for two things, a sale of realty for $30,000 and a sale of lumber and the sawmill for approximately $34,000; that the amount paid in 1923 was for the lumber; and that the realty was not sold until the following year. To sustain this contention it introduced several witnesses who were instrumental in drawing up the contract. They testified that they agreed upon $30,000 for the realty, the mill and equipment, which included the water rights, and that they estimated the personalty, which included the lumber, to be about $35,000. There is also some testimony that they considered the amount of $35,000 paid in 1923 as payment for the personalty. But we can not agree that this establishes the petitioners' theory that there were two separate and distinct sales. The contract itself provides for a sale of personalty and realty for a lump sum and at the same time. The bill of sale and the deed were delivered in escrow and neither*1226 of them was released until the payment of the final purchase price. The vendee went into possession of both the realty and the personalty. We think that this evidence shows that this was a single contract for the sale of both realty and personalty. The petitioners further contend that, even if this were a single sale, the action of the respondent in including the amount in gross income for 1923 was erroneous, since, under the law of Washington, no title, legal or equitable, passed to the vendee until the deed was delivered in 1924. Counsel for the petitioners cites a number of Washington cases for the proposition that where there is a forfeiture clause in a contract no title, legal or equitable, passes to the vendee until the final payment and delivery of the deed. *944 A case holding that this question is not necessarily governed by the state law as to the passage of title is that of the . In that case the taxpayer corporation was engaged in subdividing and selling lots. The lots were disposed of under contracts providing for a down payment by the purchaser upon signing the contract, the remainder payable*1227 in installments represented by promissory notes. The contract provided that upon default in payment the seller might at its option either cancel the contract, in which event all amounts already paid should be retained by it, or declare the unpaid installments due and payable, and it further provided: "It is understood that the party of the first part acquires neither an equitable or legal title to the property until the same shall have been paid for in full." The purchaser under the contract did not take possession of the property. The taxpayer vendor contended that since under State law (Virginia) there was no sale in the year the contract was entered into, it derived no profit in that year. We held that under such a contract gain was realized in the year the contract was executed and the down payment made, and, after discussing the state cases relied upon by the petitioner, said: But we are of opinion that the question whether the transactions were sales is not determinative of income under these contracts. During the taxable period petitioner received under its contracts cash sums over which it acquired absolute ownership and control. While its obligation to transfer title*1228 in the lot was dependent upon payment of all installments of the purchase price, its right to the cash installments as paid was absolute and unconditional. They were not held in trust nor subject to any obligation to return in case the contractual obligations were not fulfilled. Under the statutory definition of gross income in section 213(a), they clearly constituted income derived from dealings in property. Cf. ; . * * * * * * In this proceeding, however, a default gave petitioner the option to declare the unpaid remainder due and payable. The liability for the full price, therefore, became absolute at the signing of the instrument. * * * But in respect of those transactions not taxable on the installment basis, it may happen that the total anticipated profit, on which petitioner is here taxed, exceeds the amount of the cash payment received. In such a situation it can not be said, as above, that petitioner is taxed only on cash paid, which upon receipt became its absolute property. But together with the cash petitioner likewise received the unconditional*1229 obligation of the vendee to pay the remaining amount of the purchase price; and, absent evidence to the contrary, the respondent's determination that such obligations were worth no less than par at the time of receipt is sustained. [Italics supplied.] The contract in the instant proceeding provides that the seller may, at its option, declare the contract forfeited and the buyer shall *945 forfeit to the seller all payments made thereunder, but makes no provision for the balance of the purchase price immediately becoming due and payable. However, as in the Birdneck case, the contract is voidable by the vendor and not by the vendee. It should be noted that the contract of sale was entered into in October, 1923, possession of the property delivered to the vendee, and a substantial part of the purchase price - in fact approximately 50 per cent - was paid in that year and the bill of sale and deed were executed and delivered to the escrow agent to be retained until the final payment of the purchase price. Thus, the seller had done all in its power to carry out the contract and nothing remained for it to do but to receive the payments on the purchase price or to declare*1230 the contract forfeited, if it so desired, in the event of failure of the purchaser to make the payments when due. We do not believe the fact that the contract does not provide that the unpaid balance shall become due and payable is material, in view of the facts present in this case which we have already mentioned, and which indicate a completed sale in the year the contract was entered into. In the case of , a contract in writing was entered into in July, 1920, providing that $10,000 be paid at once and when the title was satisfactory, $40,000 more was to be paid, whereupon the seller was to deposit in escrow a deed and, upon payment of the balance of the purchase price one year there-after, the deed was to be delivered to the purchaser. The contract provided that in case the purchaser failed to carry out his contract the seller might retain as liquidated damages all the money paid and the contract would then be null and void. The balance of the purchase price was paid in 1921 and the papers in escrow were then delivered to the purchaser in that year. The court held that the sale took place in 1920. *1231 In the Moir case the court did not discuss the question of when title passed, either legal or equitable, but based the decision on the theory that there was a completed transaction in the year that the sale was entered into and hence the total profit accrued in that year. That case arose in Illinois. We do not believe that as far as Federal taxation is concerned the question of when title passes by state law should govern in this proceeding. It is not a question of a determination of property rights, but a practical one of when a taxpayer receives income. There are a number of cases which hold that where a contract of sale is entered into and part of the purchase price paid, the deed executed and all that remains for the vendor to do is to receive the purchase money, the sale is completed for income-tax purposes in the year the contract is entered into. See ; ; ; *1232 ; ; ; ; ; and . While none of these cases is exactly similar to the instant proceeding, we believe that from the principles laid down therein we are justified in concluding that for income-tax purposes the sale was completed in 1923, regardless of the fact that title had not passed to the vendee. In reaching our conclusion we have not overlooked the decision of this Board in the case of , which in Docket No. 23605 involved two sales of timber in the State of Washington. In that case contracts of sale were entered into on April 21 and July 12, 1920, respectively, and about one-fifth of the purchase price was paid in that year, the remainder being payable in installments evidenced by promissory notes. We there held, see pp. 1020, 1021, 1028-1030, that there was no sale in 1920 under either of the contracts such as to render the*1233 petitioner liable to tax in that year on the total anticipated profit to be derived from the contracts. While the terms of the contracts are not set forth, it appears that no deed or other conveyance was executed and that the vendor retained control of the property, the vendee having a mere license there-under to cut timber. The situation in the present proceeding is clearly distinguishable. The respondent has included the entire amount of the profit in the Company's gross income for 1923. There is no evidence as to the basis upon which he computed the profit or whether the deferred payments under the contract had a readily realizable market value. In such a situation we must sustain the action of the respondent in including the entire profit in income for 1923. Judgment will be entered for the respondent.