Opinion
Docket Nos. 16329 16330.
1949-02-28
SAMUEL C. CHAPIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTHER HILL CHAPIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John R. Stivers, Esq., and W. G. Boone, Esq., for the petitioners. D. Louis Bergeron, Esq., for the respondent.
INCOME— ACCRUAL— YEAR.— The profit from a casual sale of real estate can not be reported until all of the factors essential to the computation of the gain are accruable, and where the expenses of the sale have not become fixed, the gain can not be reported or even computed. John R. Stivers, Esq., and W. G. Boone, Esq., for the petitioners. D. Louis Bergeron, Esq., for the respondent.
The Commissioner determined deficiencies in income tax for 1944 as follows:
+--+ ¦¦¦¦ +--+
Petitioner Docket No. Amount Samuel C. Chapin 16329 $5,480.18 Esther Hill Chapin 16330 5,792.77
The only issue for decision is whether the petitioners properly accrued the gain from the sale of real estate in 1943 or whether the Commissioner was right in taxing that gain to them as income for 1944.
FINDINGS OF FACT.
The petitioners are husband and wife. They filed their returns for 1944 with the collector of internal revenue for the district of Arkansas. Those returns were filed upon an accrual method of accounting, as were previous returns.
The petitioners owned about 5,000 acres of farm land in 1943, including 867 acres referred to herein as section 6.
The petitioners were approached in 1943 by representative of the Farm Security Administration who desired to make arrangements for the purchase of land from the petitioners by persons who were obtaining loans for that purpose through the Farm Security Administration. Seventeen couples made applications for loans to purchase specific portions of the petitioners' property known as section 6. The individuals and the land had been approved by a county committee and requests for loans and loan agreements had been executed by the 17 couples. The loans had not been granted and were not granted during 1943.
The petitioners entered into an option agreement on November 26, 1943, with W. R. Gobbell, one of the prospective purchasers, who was acting on behalf of the others. The option agreement provided that the petitioners agreed to sell section 6 to Gobbell for a total price of $73,695, provided that the option was exercised within one month after November 26, 1943. The option agreement provided:
The buyers of this property are to take possession of the farm January 1, 1945. The vendor to pay interest on option price of land from date loans closed to January 1, 1945, at the rate of 3%.
It also provided that the petitioners were to pay all state and county taxes and all improvement taxes up to and including the 1944 taxes. The option could be assigned by Gobbell to other buyers, not to exceed 20, and the regional director of the Farm Security Administration was authorized to substitute for any assignee another person as buyer. It was recited in the agreement that the option was given to enable the buyers to obtain loans from the United States through the Secretary of Agriculture, pursuant to Title 1 of the Bankhead-Jones Farm Tenant Act, for the purchase of the land. The petitioners agreed to deliver, without charge to the buyers, a policy of mortgagee title insurance satisfactory to the Government, and to comply with all requirements of such title insurance company, ‘including the furnishing of an abstract of title and continuation thereof, where required.‘ The petitioners agreed to discharge all liens against the property and to discharge all expenses incident to the preparation of deeds and other evidence of title required by the Government. The purchase price was to be paid at the time of recording general warranty deeds for the property. All of the deeds were to be delivered simultaneously and the petitioners were not to be bound unless and until the entire purchase price for the tract as a whole was tendered. Loss or damage to the property by fire or other act of God was to be at the risk of the petitioners until the deeds to the buyers had been recorded, and in the event of such loss or damage the buyers could refuse to accept deeds or could elect to accept a conveyance with an equitable adjustment of the purchase price.
The 17 buyers delivered documents to the petitioners on December 23, 1943, describing the property and the option and providing as follows:
I hereby accept the offer contained in the said option with respect to the aforesaid Tract 1 on the terms therein set forth.
You are hereby notified that, except as expressly reserved in your option, you are required not to cut any growing timber on the above land; not to plow any pasture land; not to remove or damage any buildings or improvements thereof; and not to commit any waste thereon or depreciate the value thereof in any way.
The petitioners remained in possession of section 6 during all or a part of 1944. Some of their tenant farmers remained on the land and continued to farm it during that period.
The petitioners did not obtain during 1943 policies of mortgagee title insurance on the properties being sold. They were obtained in 1944 by an attorney for the petitioners, who also prepared an abstract of title for the property and saw that all liens, if any, were cleared. The buyers obtained loans from the Government in 1944 and deeds to the properties were delivered to them shortly thereafter.
The record does not show that the petitioners kept any books or what entries were made in 1943 in any books kept by them.
The petitioners filed returns for 1943 on March 15, 1944. They reported on those returns long term capital gain of $11,408.37 each from the sale of section 6. That gain was computed as follows on schedules attached to the returns:
+-------------------------------------------------------------------+ ¦COST (acquired April 16, 1935) ¦ ¦ ¦ +----------------------------------------+-------------+------------¦ ¦Land: ¦ ¦ ¦ ¦ +----------------------------------------+-------------+------------¦ ¦867 Acres at $29.3137 per acre ¦ ¦$25,414.98 ¦ +----------------------------------------+-------------+------------¦ ¦Buildings ¦)¦ ¦ ¦ +--------------------------------------+-+-------------+------------¦ ¦26 houses ¦)¦ ¦ ¦ +--------------------------------------+-+-------------+------------¦ ¦1 mule barn ¦)¦$2,475.70 ¦ ¦ +--------------------------------------+-+-------------+------------¦ ¦1 Feed storage building ¦)¦ ¦ ¦ +----------------------------------------+-------------+------------¦ ¦Less: Accrued depreciation ¦696.18 ¦1,779.52 ¦ +----------------------------------------+-------------+------------¦ ¦COST OF PROPERTY SOLD ¦ ¦$27,194.50 ¦ +----------------------------------------+-------------+------------¦ ¦SALE PRICE ¦ ¦ ¦ ¦ +------------------------------------------------------+------------¦ ¦867 Acres Sold to F.S.A. including buildings thereon, ¦ ¦ +------------------------------------------------------+------------¦ ¦at gross price of $85.00 per acre ¦$73,695.00 ¦ ¦ +----------------------------------------+-------------+------------¦ ¦Selling Expenses ¦ ¦867.00 ¦ ¦ +----------------------------------------+-------------+------------¦ ¦NET SALE PRICE ¦ ¦$72,828.00 ¦ +----------------------------------------+-------------+------------¦ ¦PROFIT ON SALE ¦ ¦$45,633.50 ¦ +----------------------------------------+-------------+------------¦ ¦Profit distributed as follows: ¦ ¦ ¦ ¦ +------------------------------------------------------+------------¦ ¦Samuel C. Chapin, 50% ¦$22,816.75 ¦ +------------------------------------------------------+------------¦ ¦Esther Hill Chapin, 50% ¦22,816.75 ¦ +------------------------------------------------------+------------¦ ¦ ¦ ¦ ¦$45,633.50 ¦ +-------------------------------------------------------------------+
The Commissioner, in determining the deficiencies, held that the profit from the sales was income for 1944 and not for 1943.
OPINION.
MURDOCK, Judge:
The problem in this case is not the more simple one of when the right to receive money should be accrued for income tax purposes. The question here is, When did the petitioners realize their profit upon the sale of land. It was not their regular business to sell land and their case is not necessarily like that of a merchant selling his wares. Section 111 provides that the gain from the sale of property shall be the excess of the amount realized over the adjusted basis and the amount realized is the sum of any money received, plus the fair market value of whatever else is received. Determination of the gain involves a computation. It has always been recognized that all expenses of sale enter into that computation. Thus, while the amount to be received as purchase price and the expenses might all be accrued in advance of payment, nevertheless, they are the accruable items, rather than the gain itself, which is necessarily the result of a computation. The gain from a casual sale of real estate can not be reported, even by one using an accrual method, until the amount of the expenses of the sale is fixed and known.
Here the petitioners had to obtain mortgagee title insurance and had to have their attorney prepare an abstract of title and deeds satisfactory to the Farm Security Administration. They did not do those things in 1943 and the record does not show that the cost of those items was fixed or known in 1943. The record does not show that the petitioners kept any books or that they accrued on any books kept in 1943 the various receipts and disbursements which would be necessary factors in computing gain from the sale. It appears that they may have reimbursed the buyers after 1943 for interest on their loans to the Government. That might be a factor in computing their gain. Not all of the events had occurred in 1943 which fixed the amount of the gain. Also the petitioners retained possession and farmed the land during 1944. The Commissioner did not err in holding that that gain was taxable income of 1944 and not 1943. Lucas v. North Texas Lumber Co., 281 U.S. 11. Cf. Franklin County Distilling Co. v. Commissioner, 125 Fed.(2d) 800.
Decision will be entered for the respondent.