Leatherbee v. Commissioner

HELEN E. LEATHERBEE AND STATE STREET TRUST COMPANY, EXECUTORS U/W ROBERT W. LEATHERBEE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Leatherbee v. Commissioner Docket No. 51513. United States Board of Tax Appeals 34 B.T.A. 196; 1936 BTA LEXIS 736; March 24, 1936, Promulgated *736 1. LEASE - OPTION - REAL ESTATE - ILLINOIS. - An assignee of an option to purchase real estate in Illinois acquires no title in the optioned real estate unless and until the option is exercised by purchase. Barnett v. Meisterling,327 Ill. 564; 158 N.E. 806. See also, Commissioner v. San Joaquin Fruit & Investment Co.,297 U.S. 496. 2. Fair market value of real estate at March 1, 1913, determined. 3. Deduction of alleged partially worthless debt denied. Percy E. Gleason, Esq., Frank A. Lynch, Esq., S. F. Moody, Esq., Hubert Van Hook, Esq., and Harry J. Gerrity, Esq., for the petitioners. Bruce A. Low, Esq., L. H. Rushbrook, Esq., and R. C. Grauer, C.P.A., for the respondent. LEECH *196 Respondent determined deficiencies in income tax against petitioners' decedent for the years 1925 and 1926, in the respective amounts of $2,523.40 and $37,560.22. Petitioners assign as error in both determinations, the basis respondent used in computing the taxable gain of petitioners' decedent, received in both years, on the sale of real estate in 1925. They assign error, also, to the*737 determination of the deficiency for 1926, in the disallowance of decedent's deduction on his income tax return for that year, of part of an alleged debt as having become worthless during that year. The proceeding was submitted on a stipulation of fact, together with exhibits and oral testimony. We make the following findings of fact. FINDINGS OF FACT. Prior to March 1, 1913, petitioners' decedent purchased 197.504 acres of land in Shields Township, Lake County, Illinois. He paid either $200 per acre or $100 per acre for almost the entire acreage. The purchase price for the comparatively trifling remainder is not disclosed. The fair market value of this 197.504 acres on March 1, 1913, was $400 per acre. On April 29, 1911, petitioners' decedent was the assignee of a certain lease and option to purchase, executed on March 9, 1911, covering 147.228 acres in the same township as the foregoing tract. This lease and option, after stating the date and parties thereto, contains the following material provisions: *197 WITNESSETH, that the said parties of the first part, in consideration of the covenants of the party of the second part, hereinafter set forth, do by these*738 presents lease to the said party of the second part, his heirs and assigns, the following described real estate and property, to-wit: [Description of the premises] to have and to hold the same to the said party of the second part, his heirs and assigns for the term beginning the Fifteenth day of March, A.D. 1911, and ending the Fifteenth day of March, A.D. 1914. And the party of the second part, his heirs and assigns, in consideration of the leasing of the said premises, as above set forth, covenants and agrees with the parties of the first part to pay the said parties of the first part, as rent for the same, the sum of Three Thousand Six Hundred ($3,600,00) Dollars, payable in semi-annual payments of Six Hundred ($600.00) each, as follows, to-wit: [Dates and place of payment]. And the said party of the second part, his heirs and assigns, covenants with the parties of the first part that at the expiration of the term of this lease he will yield up the premises to the parties of the first part without further notice, in as good condition as when the same were entered upon by the said party of the second part, loss by fire or inevitable accident, and ordinary wear excepted. *739 It Is Further Agreed by the said parties of the first part that they will pay all assessments and taxes that may be levied upon said premises during the term of this lease, and will keep the buildings and improvements on said premises insured in responsible insurance companies against damage or loss by fire, and pay all premiums on said insurance during the term of this lease. It Is Further Agreed by the said party of the second part, his heirs and assigns, that he will keep said premises and the improvements thereon and all fences in good repair. * * * And It is Further Expressly Agreed between the parties hereto that if default shall be made in the payment of the rent above reserved, or any part thereof, or in any of the covenants or agreements herein contained, to be kept by the said party of the second part, his heirs, executors, administrators or assigns, it shall be lawful for the parties of the first part, or their legal representatives into and upon said premises, or any part thereof, either with or without process of law, to re-enter and re-possess the same; and in order to enforce a forfeiture for non-payment of rent, it shall not be necessary to make a demand*740 on the same day the rent shall become due, but a demand and refusal or failure to pay at any time on the same day, or at any time on any subsequent day, shall be sufficient. And It Is Further Expressly Agreed between the parties hereto that, for and in consideration of Five Hundred ($500.00) Dollars, paid to the said parties of the first part by the said party of the second part, said parties of the first part do hereby give to the said party of the second part, his heirs and assigns, the privilege of purchasing the said described premises, at and for the price of Two Hundred ($200.00) Dollars per acre; the exact number of acres to be determined by a survey; said sum of money to be paid in cash or in such other manner as the said parties may mutually agree. Said party of the second part, his heirs and assigns, will have the right to exercise said option at the end of any one of said three (3) years, for which this lease of said premises runs, by giving sixty (60) days notice thereof, in writing, to the said parties of the first part, or their agent, of his election so to exercise said option. *198 Said parties of the first part also agree to furnish an abstract of title, *741 showing good title to said real estate and premises. In case the privilege of purchase, hereby given, is exercised, and the price above named paid or secured, as above provided, the said parties of the first part agree to convey and assure the said real estate and premises to the said party of the second part, his heirs or assigns, by good and sufficient warranty deed, free and clear of all liens or incumbrances whatsoever. It Is Also Further Agreed by said parties of the first part that, in case the privilege of purchase, hereby given, is exercised, then the Five Hundred ($500.00) Dollars, herein paid by the said party of the second part, as the consideration for this privilege of purchase, shall be credited on the purchase price herein provided for. It Is Further Understood And Agreed between the parties hereto that if said privilege of purchase is exercised by said party of the second part, his heirs or assigns, that this lease shall thereupon terminate, and no further rent shall be payable under said lease. The Said Parties Of The First Part hereby appoint and constitute Edward F. Gartley, of Waukegan, Illinois, their agent, to collect and receipt for the rent herein*742 provided; and they further constitute the said Edward F. Gartley as their agent to receive the notice herein provided to be given by the said party of the second part, his heirs or assigns, of his said privilege of purchase, herein provided for, and said notice shall be sufficient and binding on said parties of the first part when the same is given to the said Edward F. Gartley, by mailing same to his last known post office address, within the time above provided for. It Is Further Agreed by the said parties of the first part that during the term of this lease, and during the existence of said privilege of purchase, said lease and said agreement for said privilege of purchase, shall be binding on the heirs, executors, administrators and assigns of the parties hereto. It Is Understood and Agreed between the parties hereto that if the privilege of purchase herein is exercised by the party of the second part that the parties of the first part shall pay to John Griffith two and one-half (2 1/2) per cent. on the purchase price named in said privilege of purchase as and for his commission in negotiating this lease and sale. * * * For value received I hereby assign all my right, *743 title and interest in and to the foregoing lease and privilege of purchase unto Robert Leatherbee his heirs and assigns. Witness my hand and seal this 29th day of April 1911. [Signature.] We hereby consent to the assignment of the foregoing lease and privilege of purchase to Robert Leatherbee, his heirs and assigns. Witness our hands and seals this 29th day of April 1911. [Signatures.] In February and March 1914, petitioners' decedent exercised the above option, as assignee, and purchased the real estate described therein, comprising 147.228 acres, for $200 per acre. All of the above described real estate, owned by petitioners' decedent, was sold by him in April 1925, for a consideration of $500,000, part of which was received by that decedent in 1925 and the balance in 1926. *199 OPINION. LEECH: The only issue of law involved here is the question of when petitioners' decedent acquired the premises described in the foregoing lease and option. Respondent, in his original computation of the gain to petitioners' decedent on the sale in 1925, used a basis of $180 per acre for the entire acreage then sold. In this amended pleadings, respondent affirmatively*744 alleges the purchase of the acreage covered by the present lease and option by petitioners' decedent, in 1914 at a cost of $200 per acre. He thus asserts that such cost is the proper basis for computation of the disputed gain on the sale of that acreage by decedent in 1925. The petitioners take several positions - all of them premised ultimately upon the proposition that the decedent acquired an interest in the lands described in the pending lease and option, at the execution of that instrument. That premise is unsound. The instrument under consideration was not a contract of sale. An essential element in construing it as such is the presence of a binding obligation upon the seller to sell and the buyer to buy. . Cf. ; affd., ; ; affd., ; , and cases there cited; *745 . This requisite is absent here. The terms here, under which the privilege to buy could be exercised, were not fixed in the writing since the payments were to be made in a manner "mutually agreeable" when the option was exercised. The privilege to buy was as separate and distinct from the agreement of lease as though they had been in separate instruments. No part of the rent here reserved and paid was allocable, under any circumstances, including that of the exercise of the option, to the purchase price of the land. The entire "rent" was paid, as such, solely for the use of the premises during the lease term. The only credit on that purchase price, in the event of the exercise of the option, was the $500 paid as a specific and separate consideration for the option itself. Since the property here involved is situate in Illinois, the law of that state is authoritative in construing the pertinent instrument, which fixes the time when petitioners' decedent acquired the property described therein. *746 . The party of the second part in this instrument and, a fortiori, petitioners' decedent by virtue of the written assignment and its acceptance (; ; ; ), was a mere optionee of the real estate *200 included in that instrument and, as such, acquired no title therein until the exercise of that option in 1914. ; . Cf. ; ; certiorari denied, . This is in line with the weight of authority, as was decided by the Supreme Court in . Therefore, since petitioners' decedent did not acquire any title in the premises covered by that written instrument, until February or March 1914, when he purchased it at a cost to him of $200 per acre, the basis for the computation of gain*747 or loss of the petitioners' decedent on the sale of that acreage in 1925 is that cost. This brings us to the first question of fact, which is the fair market value of the 197.504 acres which petitioners' decedent purchased prior to March 1, 1913. As stated by the Supreme Court in , "at best, evidence of value is largely a matter of opinion, especially as to real estate." The spread is wide between the values to which the several witnesses testified. The petitioners introduced testimony of two witnesses, one of whom fixed the value of the acreage now under discussion as $1,000 at the crucial date. The three witnesses of the respondent gave it a value of $225 and $250 per acre, as of the same date. Between 1911 and 1913, the market for small farms and country homes in the vicinity of the tract here in dispute, had increased rapidly. The evidence of sales of comparable property in the same neighborhood, somewhat before and after March 1, 1913, indicates this fact. One of the respondent's witnesses testified to actual sales, in 1913 and 1914, of property directly across a road from the present acreage, at $500*748 per acre. True, he attempted to deprecate or destroy the natural effect of that testimony. However, in view of all the other evidence in the record, that attempt did not entirely succeed. A careful consideration of all the testimony, in the light of the respective qualifications of the several witnesses, leads us to the conclusion, already stated, that the 197.504 acres which petitioners' decedent acquired prior to March 1, 1913, had a fair market value on that date of $400 per acre. The other issue of fact is the correctness of respondent's action in disallowing the deduction by petitioners' decedent on his income tax return for 1926 of part of an alleged debt as having become worthless to that extent during the taxable year. At the outset, it must be noted that this so-called debt was said to be due from the brother of the petitioners' decedent. This fact *201 subjects the transaction to rigid scrutiny. . No written evidence of this asserted debt was executed, at least, until after the questioned deduction. No such evidence was offered to establish even that later execution. No evidence appears, either of the*749 fact of indebtedness or of its partial worthlessness in the taxable year, except the oral and, here, unconvincing testimony of the accountant who prepared the return upon which the deduction was taken. On the whole record, we are not satisfied that the petitioners have sustained their burden of proof in establishing error of the respondent in the disallowance questioned. The respondent is sustained on this issue. Decision will be entered under Rule 50.