Opinion
Docket No. 48653.
1955-01-31
ESTATE OF CLARENCE W. ENNIS, DECEASED, REGINALD H. HOLBROOK, ADMINISTRATOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Thomas J. Bailey, Esq., for the petitioner. Peter K. Nevitt, Esq., for the respondent.
Thomas J. Bailey, Esq., for the petitioner. Peter K. Nevitt, Esq., for the respondent.
In 1945 decedent sold business property held jointly with his wife. The sale was pursuant to a contract in which the purchasers agreed to make a downpayment and monthly payments thereafter. The contract was similar to those generally used in selling land in Michigan, but no note or other evidence of indebtedness was given by the purchasers. Respondent determined that decedent realized taxable gain in 1945 in the amount of the difference between the basis of the property and the contract sale price. The downpayment and monthly cash payments actually received in 1945 amounted to less than the adjusted basis of the property. Held, the contractual promise of the purchasers to make future monthly payments had no ascertainable fair market value in 1945. The contract was not the equivalent of cash and, thus, not a part of the amount realized by decedent from the sale in 1945. Nina J. Ennis, 17 T.C. 465 (1951). Decedent, therefore, received no taxable gain in that year.
This proceeding involves deficiencies in income tax determined against the Estate of Clarence W. Ennis as follows:
+--------------------+ ¦Year ¦Deficiency ¦ +------+-------------¦ ¦1944 ¦$803.79 ¦ +------+-------------¦ ¦1945 ¦4,104.17 ¦ +--------------------+
The only issue is whether any gain was realized by decedent from the sale of business property in 1945. Petitioner has conceded that there is a deficiency as determined by the respondent for the year 1944.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
Petitioner, Reginald H. Holbrook, is the duly qualified administrator of the Estate of Clarence W. Ennis (hereinafter referred to as the decedent) who died on March 31, 1948. Decedent was a resident of Lansing, Michigan, during 1945 and filed his return for that year on the cash basis with the collector of internal revenue at Detroit, Michigan.
On August 1, 1945, decedent and his wife, Nina J. Ennis, as the joint owners of a business known as Deer Head Inn, agreed to sell the business including all equipment, furnishings, and real estate to Paul and Blanche Figley for the sum of $70,000, payable in accordance with the terms of a contract of sale executed by the parties on that date, the pertinent parts of which are set out in 17 T.C. 465, 466-468 (1951). The Deer Head Inn was Class ‘C’ liquor establishment licensed by The michigan Liquor Control Commission.
The contract of sale provided, among other things, for a downpayment of $8,000, minimum payments of $400 per month during the first year, and minimum monthly payments of $500 during the second year. Interest on the unpaid balance was to run at 5 per cent. The Ennises agreed that upon full performance of the contract by the Figleys a good and sufficient bill of sale would be executed together with a conveyance of the realty. The Figleys could not assign or transfer the contract, nor could they sell the business, fixtures, and equipment, nor lease or sublet the premises. The balance due to decedent and his wife under the contract at the end of 1945 was $57,446.41. The adjusted basis of the property in the hands of decedent and his wife was $26,514.69, and the difference between the basis and the sale price was $43,485.31, decedent's share thereof being $21,742.66. The Michigan Liquor Control Commission approved the transfer of the license to the Figleys in 1945, and each year thereafter granted a license to them. Under Michigan law, a liquor license is subject to renewal annually and may be revoked for any violation thereof.
Mich Stats. Ann. 1937, secs. 18.988, 18.991.
The parties have stipulated that land contracts, such as the one involved herein, are commonly used in the State of Michigan in virtually every real estate transaction in which deferred payments are involved and have so been in use for more than 50 years. Such contracts are regularly sold, traded, and assigned in that State, and numerous persons are engaged in the business of buying and selling them.
On his income tax return for 1945, decedent did not report the sale of the Deer Head Inn nor any gain resulting therefrom. On his return for 1947, when his basis in the property had been recovered, he reported his proportionate share of the gain recovered in that year; and on his return for 1948, he reported his share of the gain recovered in that year. In the deficiency notice, the respondent made the following determination:
It is held under the provisions of Sections 44, 111, and 117 of the Internal Revenue Code and the regulations promulgated thereunder that you realized a long-term capital gain in the taxable year 1945 in the amount of $21,742.66 resulting from the sale of the business known as Deer Head Inn. Such gain is to be taken into account to the extent of 50%, or $10,871.33.
Contracts of the type used to effect the sale of Deer Head Inn have been for many years used in Michigan for the sale of property where deferred payments are involved. Such contracts were and are freely assignable, sold and traded and there exists a constant and ready market for their sale notwithstanding they are not accompanied by a note or like obligation. Said contract has been held to have a fair market value equivalent to the face amount reduced by payments on account of principal to December 31, 1945, and to that extent the equivalent of cash in computing the gain determined herein.
The contract under which the Figleys were to pay the balance of the purchase price of the Deer Head Inn in deferred monthly payments over a period of years was not the equivalent of cash, and had no ascertainable fair market value on August 1, 1945. The only amounts realized on the sale of the Inn in 1945 were the cash received as a downpayment plus the monthly payments; and since the total amounts received was less than decedent's basis, no gain was realized on the sale in 1945.
OPINION.
RICE, Judge:
This same contract was before us in Nina J. Ennis, 17 T.C. 465 (1951), wherein we held that decedent's wife did not realize taxable gain on the sale of her one-half interest in the Deer Head Inn in 1945. This, we said, was so because the contractual obligation of the Figleys was not the ‘equivalent of cash’ and the only ‘amount realized’ was the amount of cash received in 1945, which was less than her basis for the property. Following the promulgation of our Opinion on September 27, 1951, the respondent filed a motion for rehearing on the grounds that he was prepared to offer evidence that the contract was a ‘land contract’ of the type commonly used in Michigan which was freely assignable, bought, and sold. We denied that motion.
Respondent's argument here is similar to that advanced in his motion for rehearing in the previous case; namely, that contracts such as the one here involved are in common use in Michigan, are freely bought and sold, and that this particular contract had a fair market value equivalent to 75 per cent of the amount due on the principal at the end of 1945. (This is a modification of his determination in the deficiency notice that the fair market value was equivalent to the full balance due on the principal at the end of 1945.)
At the hearing, petitioner called a former president of the Lansing, Michigan, Board of Realtors who had been actively engaged in the real estate business in that city since 1916. The witness was also a director of the Bank of Lansing and of the Central Trust Company in that city. As a director of the banks, he passed on mortgage loan applications. He frequently, during the years in which he was engaged in the real estate business, bought and sold land contracts. He was generally familiar with the Deer Head Inn property. It was his opinion that the contract here involved was not a salable contract. On cross-examination, he indicated that if the balance of the contract were discounted as much as 50 per cent, it might be possible to find a buyer. He testified that in his experience he had never known of a contract with so large a balance due, to be sold. He also considered that the necessity of renewing the liquor license annually had considerable bearing on the value of the contract because such licenses could be suspended for infractions of the State liquor laws. He estimated the value of the property to be not in excess of $20,000 without the liquor license and without any equipment in the building, which amount is less than the adjusted basis of the property in the hands of the vendors.
In Nina J. Ennis, supra, we said the contractual obligation here involved could not be considered the ‘amount realized’ within the meaning of section 111(b)
because it was not the equivalent of cash. We further said, 17 T.C. at p. 470, ‘In determining what obligations are the ‘equivalent of cash’ the requirement has always been that the obligation, like money, be freely and easily negotiable so that it readily passes from hand to hand in commerce.' We pointed out that the Figleys' promise to pay was merely contractual, and was not embodied in a note or in some other evidence of indebtedness possessing the elements of negotiability and, therefore, freely transferable.
SEC. 111. DETERMINATION OF AMOUNT OF, AND RECOGNITION OF, GAIN OR LOSS.(b) AMOUNT REALIZED.— The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.
Even though this contract was of a type which was regularly assigned in Michigan and passed from hand to hand in commerce, we are satisfied, on the whole record and have so found as a fact, that this particular contract had no ascertainable fair market value in 1945. Respondent's determination cannot, therefore, be upheld; and we conclude that the only amount realized in 1945 by the decedent on that sale of the property was the amount of cash actually received in that year.
Reviewed by the Court.
Decision will be entered under Rule 50.