Opinion
E-496.
November 3, 1930.
Suit by Horace Overbey, executor of the estate of John T. Overbey, deceased, and another, against the United States.
Petition dismissed.
This case having been submitted without argument, the court, upon the report of the commissioner, and the evidence, makes the following special findings of fact:
1. The plaintiff Horace Overbey is a citizen of the United States and a resident of Ryan, Okla. He is the son of, and executor of the estate of, John T. Overbey, deceased. Annette J. Overbey, coplaintiff, is a citizen of the United States, a resident of Smithfield, Tarrant county, Tex., and is the wife of John T. Overbey, deceased.
2. In the year 1919 John T. Overbey, deceased, was the owner of 613 shares of the capital stock of the Wichita Valley Refining Company of Iowa Park, Tex., which had cost him $42,283.39. On July 5, 1919, he sold and transferred by assignment on the back of the certificates all of the stock directly to the following named individuals for $122,600, as follows:
Certificates Nos. 33, 34, and 35, for 100 shares each, to N.H. Martin;
Certificate No. 36, for 90 shares, to R.S. Allen; and
Certificates Nos. 93 and 99, for 14 and 209 shares, respectively, to J.A. Kemp.
The stock so purchased by these parties was delivered to them, turned into the company, canceled, and new certificates of stock were issued to them.
The terms of sale provided that each of said individuals was to pay 15 per cent. of the purchase price in cash on July 15, 1919, and the balance in 17 equal monthly installments, commencing on September 1, 1919, each installment to be 5 per cent. of the purchase price. These installments were evidenced by the promissory notes of the respective individuals, bearing 6 per cent. interest. During the year 1919 the said John T. Overbey received, in cash and installments paid, 35 per cent. of the total selling price. The notes were delivered by said John T. Overbey to J.F. Boyd, of Iowa Park, Tex., to whom other stockholders, who also sold their stock under the same conditions, delivered their notes, as a so-called trustee, to collect and distribute the money. No collateral was deposited by the purchasers to secure the notes.
3. On August 6, 1919, all of the physical assets of the Wichita Valley Refining Company were sold to the Texhoma Oil Refining Company, and on the 6th day of August, 1919, the board of directors of the Wichita Valley Refining Company executed a consent to the corporate dissolution of the said Wichita Valley Refining Company and filed a certificate of dissolution with the secretary of the state of Texas on August 15, 1919.
4. The cash and installments actually received in the year 1919, amounting to 35 per cent. of the total sales price, were reported and included in the income-tax return of the said John T. Overbey and Annette J. Overbey as income for that year upon the belief that the sale of such stock was a sale on the installment plan, in accordance with article 42, Regulations 45, of the Treasury Department.
5. On April 21, 1920, J. Frank Boyd, together with P.F. Gwynn and Representative Lucian W. Parrish, called upon the Honorable William M. Williams, Commissioner of Internal Revenue, and asked for a ruling regarding the method of reporting the transaction for income-tax purposes, and at that time furnished him a statement of the supposed facts of the transaction. Under date of April 28, 1920, the Commissioner of Internal Revenue wrote Hon. Lucian W. Parrish as follows:
"I am in receipt of your letter of April 21, 1920, with which you transmit a statement of facts concerning the sale of stock by certain stockholders in the Wichita Valley Refining Company, of Wichita Falls, on which you ask that a speedy ruling be given you. This is the case which you, in company with Mr. P.F. Gwynn and Mr. J. Frank Boyd, discussed on the occasion of your visit to this office on April 21, 1920.
"It appears that certain stockholders sold their stock to the amount listed in the statement upon the terms and conditions as hereinafter set out:
"C. Birk, 120 shares, $24,000. "J.F. Boyd, 444 shares, $88,800. "Mrs. J.F. Boyd, 150 shares, $30,000. "Mrs. M.D. Brown, 30 shares, $6,000. "C. Fields, 200 shares, $40,000. "B.N. Furguson, 114 shares, $22,800. "J.M. George, 279 shares, $55,800. "W.F. George, 96 shares, $19,200. "Ralph Hines, 73 shares, $14,600. "H.B. Hines, 210 shares, $42,000. "John T. Overbey, 613 shares, $122,600. "Joe Overbey, 125 shares, $25,000. "Horace Overbey, 125 shares, $25,000. "John Serrien, 300 shares, $60,000.
"`The terms of the sale were 15 per cent cash, paid about July 15, and the balance in seventeen monthly installments, each amounting to 5 per cent of the total sale price, the first installment being due September, 1919, and the others extending through the year of 1920 and into the year 1921, but the sale is not finally consummated until the last installment is paid.
"`The stock of each individual who made the sale was placed in the hands of a trustee, namely, J.F. Boyd, of Iowa Park, Texas, and it was agreed that title to the physical assets of the company should remain vested in the corporation through this trustee for the benefit of the stockholders making this sale, until such time as final installments were paid, when the property should be transferred to the purchasers and the sale would be finally consummated. The stock of the corporation is the sole security, there being no other collateral of any nature.'
"In making out their income tax returns the various stockholders who sold their stock reported income received during the year 1919 according to the ruling in article 42 of Regulations 45. You desire to know whether the stockholders were within their rights in reporting only the installments paid during the taxable year 1919.
"In reply you are advised that the ruling in article 42 is not limited to dealers in personal property on the installment plan, but may be followed by individuals who sell corporate stock or other personal property on the installment plan. The sale of stock of the Wichita Valley Refining Company is a sale on the installment plan, the method of the stockholders of protecting themselves in case of default being that outlined in (d): `By conveyance to a trustee pending performance of the contract and subject to its provisions.' Therefore, the stockholders were within their rights in reporting only the income from the payments made during the taxable year 1919 in their 1919 income tax returns."
6. On or about May 13, 1921, the Bureau of Internal Revenue advised the said John T. Overbey that the sale was not a sale on the installment basis, and an additional tax of $6,191.57 was assessed against and paid by said John T. Overbey, and an additional tax was assessed against and paid by coplaintiff Annette J. Overbey to the collector of internal revenue at Dallas, Tex., in the amount of $15,137.89. On April 14, 1924, John T. Overbey filed a claim for refund in the sum of $5,601.76, and on the same day coplaintiff Annette J. Overbey filed a claim for refund in the sum of $15,137.89 and another claim for refund in the sum of $589.81. These claims were rejected on February 24, 1925.
7. William M. Williams resigned as Commissioner of Internal Revenue on April 11, 1921. Millard F. West was acting commissioner from that date until May 27, 1921, when David H. Blair became commissioner.
8. Under date of September 19, 1924, the Bureau of Internal Revenue wrote John T. Overbey and Mrs. Overbey, stating that the sale in question had been determined to have been an installment sale and advising that the tax collected as a result of the previous ruling would be refunded. The letter is as follows:
"The determination of your income-tax liability for the taxable year 1919, as set forth in office letters dated February 7, 1924, has been changed as a result of your letter of March 6, 1924, to disclose a total overassessment of $19,357.46.
"You are advised that the entire profit from the sale of the Wichita Valley Refining Company stock which was included by the examining officer in your income for 1919 has been eliminated, since this transaction is held to be on the installment basis, and the profit to be reported in your 1919, 1920, and 1921 returns is as follows:
-------------------------------------------------- | Cash | Profit 65.5 | received | plus % -----------------------|-------------|------------ 1919 ................. | $ 42,910 00 | $28,110 82 1920 ................. | 73,560 00 | 48,189 96 1921 ................. | 6,130 00 | 4,015 83 |-------------|------------ Total .............. | $122,600 00 | $80,316 61 --------------------------------------------------
"The adjustment on your 1920 and 1921 return will be made the subject of separate communication from this office.
"Your contentions that the additional deduction of $487.80 for interest paid should be allowed, and that your sons' income of $7,428.72 should be eliminated from your return, have been granted.
"Referring to the deduction of $600.00 on your 1919 return, representing an amount paid for four-year grass lease, which was prorated by the agent over the four years and reduced to $150.00, you are advised that regulation 45, article 109, provides as follows:
"`Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an aliquot part of such sum each year, based on the number of years the lease has to run.'
"The overassessment shown herein will be made the subject of a certificate of overassessment which will reach you in due course through the office of the collector of internal revenue for your district. If the tax in question has not been paid, the amount will be abated by the collector. If the tax has been paid, the amount of overpayment will first be credited against unpaid income tax for another year or years and the balance, if any, will be refunded to you by check of the Treasury Department. It will thus be seen that the overassessment does not indicate that amount which will be credited or refunded, since a portion may be an assessment which has been entered but not paid."
9. Under date of February 24, 1925, the Bureau of Internal Revenue again wrote John T. Overbey, stating that it had reversed the position taken in the letter of September 19, 1924, and had determined that the sale here involved was not a sale on the installment plan. The letter is as follows:
"A reexamination of your income-tax return for the year 1919 discloses a total overassessment of $3,097.60 instead of $19,357.46, as indicated in office letter dated September 19, 1924.
"With reference to the profit from the sale of the Wichita Valley Refining Company stock, you are advised that upon consideration of all the evidence submitted and particularly in the light of the facts and evidence set forth in the supplemental report of the revenue agent in charge at San Antonio, a recent decision of the Solicitor of Internal Revenue recommends that the conclusion reached by the former committee on appeals and review in regard to this sale is correct.
"This sale is therefore held to be a completed and closed transaction and the total profit realized, $80,316.61, is taxable for the year 1919. * * *
"The overassessment shown herein will be made the subject of certificates of overassessment which will reach you in due course through the office of the collector of internal revenue for your district. If the tax in question has not been paid, the amount will be abated by the collector. If the tax has been paid, the amount of overpayment will first be credited against unpaid income tax for another year or years, and the balance, if any, will be refunded to you by check of the Treasury Department. It will thus be seen that the overassessment does not indicate the amount which will be credited or refunded, since a portion may be an assessment which has been entered but not paid."
10. It is stipulated between the parties that if the court shall decide that plaintiffs are entitled to recover any amount, the parties hereto shall thereafter compute the amount in accordance with the decision of the court.
Robert Ash and Thomas J. Reilly, both of Washington, D.C., for plaintiffs.
Lislie A. Smith, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (Frederick W. Dewart, of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
A brief statement of the facts of the case shows that John T. Overbey and Annette J. Overbey, husband and wife, were residents of the state of Texas in 1919, and the property herein referred to was community property under the laws of that state. They owned 613 shares of stock in the Wichita Valley Refining Company, a Texas corporation, which stock had cost them $42,283.39. On July 5, 1919, the plaintiffs sold and transferred that stock to certain individuals for $122,600, payable 15 per cent. in cash and the balance in 17 equal monthly installments. The installments were evidenced by the promissory notes of the respective purchasers, bearing 6 per cent. interest. No collateral was given by the purchasers to secure the notes. During the year 1919 the plaintiffs received 35 per cent. of the total selling price. On August 6, 1919, all of the physical assets of the Wichita Valley Refining Company were sold and transferred to the Texhoma Oil Refining Company, and on the same day the board of directors of the Wichita Valley Refining Company executed a consent to the corporate dissolution of that company, and on August 15, 1919, a certificate of dissolution of the company was filed with the secretary of state.
The plaintiffs filed their income-tax returns wherein they showed this transaction as an installment sale and returned as income for 1919 only the amount of cash received that year.
Commissioner of Internal Revenue Williams, on April 28, 1920, on the facts as they were stated to him by the interested parties, and his understanding of the law thereon, wrote to Congressman Parrish expressing the opinion that it was an installment sale and the stockholders were within their rights in reporting in their income-tax returns for 1919 only the income from the payments made during 1919. Mr. Williams was the commissioner until and including April 9, 1921. Mr. Millard F. West was acting commissioner from that date until May 27, 1921, when Mr. Blair became commissioner. Under date of May 13, 1921, while Acting Commissioner West was in charge, the Bureau of Internal Revenue, upon consideration of further facts in the case and a reconsideration of the law, held that this was not an installment sale and all of the profit on the sale was income from 1919. An additional tax was assessed against the plaintiffs, which was duly paid. Subsequently, on February 24, 1925, while Commissioner Blair was in charge, the Bureau of Internal Revenue affirmed this decision. Claims for refund were duly filed and rejected.
The plaintiffs contend this is a sale under the installment plan as provided in Regulations 45 (art. 42) of the Treasury Department.
Prior to the Revenue Act of 1926, § 212(d), 26 USCA § 953(d), there was no expressed legislative authority for the installment sales method on which to compute incomes. Appeal of Blum's, Inc., 7 B.T.A. 737. Until then the only methods provided by the statutes were the cash receipts or disbursement basis and the accrual basis. The Commissioner of Internal Revenue in 1918, with the approval of the Secretary of the Treasury, in order to meet a third class of cases, issued Regulations 45, art. 42, which permitted returns to be made under certain conditions on a partial payment or installment basis. Regulations 45, art. 42, reads as follows:
"Sale of personal property on installment plan. — Dealers in personal property ordinarily sell either for cash or on the personal credit of the buyer or on the installment plan. Occasionally a fourth type of sale is met with, in which the buyer makes an initial payment of such a substantial nature (for example, a payment of more than 25 per cent) that the sale, though involving deferred payments, is not one on the installment plan. In sales on personal credit, and in the substantial payment type just mentioned, obligations of purchasers are to be regarded as the equivalent of cash, but a different rule applies to sales on the installment plan. Dealers in personal property who sell on the installment plan usually adopt one of four ways of protecting themselves in case of default: (a) Through an agreement that title is to remain in the seller until the buyer has completely performed his part of the transaction; (b) by a form of contract in which title is conveyed to the purchaser immediately, but subject to a lien for the unpaid portion of the purchase price; (c) by a present transfer of title to the purchaser, who at the same time executes a reconveyance in the form of a chattel mortgage to the seller; or (d) by conveyance to a trustee pending performance of the contract and subject to its provisions. * * *"
It is clear from the facts in the instant case that the plaintiffs do not bring themselves within the provisions of Regulations 45. Title did not remain in the seller until the final payment was made; no lien for the unpaid portion of the purchase price was given; and there was no conveyance to a trustee pending the performance of the contract. If the plaintiffs are to recover, they must come under section 212(d) of the Revenue Act of 1926, which is made to retroactively apply, in computing income, to the Revenue Act of 1918 ( 40 Stat. 1057). Section 212(d) and section 1208 of the Revenue Act of 1926, 26 USCA §§ 953(d), 953a, read as follows:
"Sec. 212. * * * (d) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term `initial payments' means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made."
"Installment Sales.
"Sec. 1208. The provisions of subdivision (d) of section 212 shall be retroactively applied in computing income under the provisions of the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, the Revenue Act of 1921, or the Revenue Act of 1924, or any of such Acts as amended. Any tax that has been paid under such Acts prior to the enactment of this Act, if in excess of the tax imposed by such Acts as retroactively modified by this section, shall, subject to the statutory period of limitations properly applicable thereto, be credited or refunded to the taxpayer as provided in section 284."
The plaintiffs do not bring themselves under the provisions of section 212(d), as it is admitted the purchase price was more than a thousand dollars, and more than 25 per cent. (i.e. 35 per cent.) of the consideration was paid in the taxable period.
If, however, they are not strictly within the provisions of the statute, the plaintiffs contend the letter from Commissioner Williams, defining the transaction as a sale on the installment basis, is binding on his successors in office and cannot be disturbed. The facts show Commissioner Williams had no claim before him when he wrote his letter to Congressman Parrish with the statement of what were supposed to be the correct and true facts. His letter was advisory and based on a supposititious case. Income-tax returns of the plaintiffs had been filed but not audited. As a matter of fact, the facts presented to Commissioner Williams did not correspond to the real facts of the transaction, as afterwards disclosed upon investigation by Commissioner Blair. Certain essential facts were erroneously stated to Commissioner Williams. The stock sold was never held by a trustee as security for the payment of the notes; the title to the physical assets of the company did not remain vested in the corporation through the trustee for the benefit of the stockholders making the sale, until the last installment was paid; all of the assets of the Wichita Valley Refining Company were conveyed to the Texhoma Oil and Refining Company and the former corporation surrendered its charter before the first installment fell due. However, it makes no material difference whether Commissioner Blair believed his predecessor's ruling to be erroneous in law or fact; the commissioner had the authority to examine the returns and determine the tax. Even though the returns had been examined, in the absence of a binding settlement, the commissioner had the authority to reexamine and redetermine the tax liability of the plaintiffs. Sweets Co. of America, Inc., v. Commissioner of Internal Revenue (C.C.A.) 40 F.2d 436 and cases cited. McIlhenny v. Commissioner of Internal Revenue (C.C.A.) 39 F.2d 356, Appeal of Yokohama Ki-Ito Kwaisha, Ltd., 5 B.T.A. 1248; James Couzens v. Com'r of Internal Revenue, 11 B.T.A. 1040; Appeal of Younker Bros., Inc., 8 B.T.A. 333.
The petition is dismissed. It is so ordered.