Opinion
No. J-629.
January 12, 1931.
Suit by Levi L. Davis against the United States.
Judgment for plaintiff.
This case having been heard by the Court of Claims, the court, upon the evidence adduced and the stipulation of the parties, makes the following special findings of fact:
1. On July 23, 1919, the plaintiff, Levi L. Davis, and one William Martin executed the following instrument in writing:
"Humboldt, Nebr., July 23, 1919.
"To whom it may concern:
"This instrument is to witness, that Levi L. Davis and ____ have this day sold to William Martin the west half of section 14 and the west half of section 23 all in township three, range thirteen in Richardson County, Nebraska, for the sum of $194,000.00 and made and executed a warranty deed which accompanies this instrument.
"That said purchase price shall be paid as follows, to wit: $4,000.00 of this date paid; and the remainder to be paid; $90,000.00 on or before March 1, 1920, and $100,000.00 as evidenced by one tax clause mortgage to run five years, which the purchaser assumes to pay with five per cent. interest from March 1, 1920, as balance of said purchase price.
"The said Levi L. Davis shall furnish an abstract showing good title to said lands, to be approved by F.R. Butterfield, which shall accompany the said deed.
"It is agreed that the insurance on buildings now in force, to wit: In the sum of $____ shall be kept in force and assigned to the purchaser, or grantee, when the deed is delivered upon final payment. Loss, if any, during the pendency of this contract, to be applied on contract, provided the purchaser or grantee completes his part of this contract and takes up the deed.
"The deed herewith shall be delivered to said William Martin upon his making full payment of purchase price as hereinbefore set forth. Possession to be given grantee 3-1-1920.
"In case the said William Martin, purchaser, shall fail for a period of three days after March 1, 1920, to make final payment of said purchase price, on demand said deed shall be delivered to said Levi L. Davis by the holder of said deed and this agreement and all payments made shall be forfeited to the seller as full liquidated damages. The taxes for the year 1919 shall be paid by Levi L. Davis.
"This agreement and the deed accompanying the same shall be held by the State Bank of Humboldt, Nebr., subject to the above terms and conditions.
"This contract is made and the second party assumes title subject to lease to A.S. Thompson and W.A. Taylor for the year 1920, to March 1, 1921.
"And it is further mutually agreed that all covenants and agreements herein contained shall extend to and bind the respective heirs, executors, administrators, and assigns of said parties."
2. Shortly after executing the instrument above set forth, the said William Martin and one Jacob Schuetz entered into an agreement whereby Martin agreed to sell to Schuetz the west half of section 23, being half of the land referred to in finding 1, for the sum of $120,000. The agreement was in writing, but is lost, and the evidence as to its terms is indefinite and uncertain. It appears, however, that $4,000 cash was paid on the execution of the agreement, and of the remainder, $66,000 was to be paid on the delivery of deed therefor, and the balance of $50,000 by the purchaser assuming a mortgage thereon.
3. About November or December, 1919, the plaintiff and said Martin, acting jointly through a real estate agent named Carsh, consummated an agreement with the tenant Thompson, named in the agreement set forth in finding 1, under which Thompson agreed to vacate the premises described in finding 1 on March 1, 1920, in consideration of $5,000 cash. Thompson received $3,000 of this amount from the plaintiff and the balance of $2,000 from Martin, about the forepart of December, 1919, under that arrangement.
4. On March 2, 1920, the said Martin and the said Schuetz made an agreement by which the price which Schuetz was to pay for the west half of said section 23 was reduced from $120,000 to $110,000.
5. About March 1, 1920, it became apparent that Martin was unable to carry out his agreement to make the cash payment required under his contract with plaintiff to be paid within a period of three days after March 1, 1920; and on March 3, 1920, the plaintiff, Martin, and Schuetz met in conference with parties representing the State Bank of Humboldt, Neb., with which the contract and deed between plaintiff and Martin (referred to in finding 1) had been deposited in escrow.
6. At that conference, with the assent of all these parties (having under consideration the situation with reference to the contracts between plaintiff and Martin and between Martin and Schuetz), all matters relating to the two contracts, either considered singly or taken together, were settled by mutual agreement that the price of the land for which Schuetz contracted with Martin should be reduced $10,000, that plaintiff would convey the west half of said section 23 directly to Schuetz for the consideration of $110,000, to be paid by him, and convey the west half of section 14 to Martin for the consideration of $84,000. The deed for the premises described in finding 1 was returned to plaintiff by the escrow holder, and plaintiff executed and delivered to Martin a warranty deed for the west one-half of said section 14. A return of the $4,000 paid Martin by Schuetz was effected by Schuetz giving Martin a check for $6,000, and Martin giving his check to Schuetz for $10,000, which covered the cash payment of $4,000 which Schuetz had given to Martin and the $6,000 check referred to. In addition to the $4,000 heretofore paid plaintiff by Martin under the original agreement, on March 3, 1920, Martin paid $30,000 in cash to plaintiff and gave to plaintiff a purchase-money mortgage for $50,000 upon the land conveyed to him. Schuetz executed to plaintiff a purchase-money mortgage on the property conveyed to him securing his two promissory notes to plaintiff, one for $12,800 due March 1, 1925, and one for $51,200 due March 1, 1930. Schuetz also executed to plaintiff a mortgage on other real estate owned by him, securing two notes dated March 1, 1920, for $6,800 and $27,200, and maturing March 1, 1925, and March 1, 1930, respectively; and made to plaintiff a mortgage upon other real estate, securing notes made by Schuetz to plaintiff dated March 1, 1920, for $2,400 and $9,600, and maturing March 1, 1925, and March 1, 1930, respectively, making a total of $110,000 in mortgages and notes delivered to the plaintiff by Schuetz. None of the notes made to plaintiff by Schuetz were due until after the year 1920, and Schuetz paid no cash to plaintiff for the conveyance of the land as set forth above.
7. In making his income tax return for 1920, the plaintiff treated the sales of these lands to Martin and Schuetz as one sale, and the Commissioner of Internal Revenue determined upon examination of the return and computation of the tax that a total income tax of $11,578.62 was due from the plaintiff for said year. The computation of this amount included $50,279 profit on the sale of the land to Schuetz, which had been assessed against him. A deficiency of $8,893 and interest amounting to $64.93, aggregating $8,957.93, was accordingly assessed by the Commissioner of Internal Revenue upon the assessment list of March, 1926. Plaintiff made payment of the tax as follows:
March 8, 1921 .......... $671.41 June 13, 1921 .......... 671.41 September 12, 1921 ..... 671.41 December 13, 1921 ...... 671.39 April 21, 1926 ......... 8,893.00
— together with $64.93 interest on April 21, 1926. Afterwards and about May 29, 1926, plaintiff filed his claim for refund of $10,812.24, or such greater amount as is legally refundable on account of income taxes paid for the calendar year of 1920. In this claim for refund plaintiff stated that the sale of the real estate involved in this case as negotiated in July, 1919, and as subsequently carried out under the agreement made about March 3, 1920, constituted separate and distinct sales, and alleged that the sale and conveyance of 320 acres direct to Schuetz was an installment sale within the retroactive provisions of section 212(d) and section 1208 of the Revenue Act of February 26, 1926 [ 26 USCA §§ 953(d), 953a]. In the claim for refund plaintiff set out his computation of the tax due on account of the transaction with Schuetz, and in so doing erroneously stated the selling price of the land conveyed to Schuetz as $120,000, and further erroneously stated that $10,000 in cash was received as one of the items in the settlement of this purchase price. In fact, no cash was paid by Schuetz to plaintiff, although, as above stated, he had paid $4,000 cash on his contract with Martin, which was returned to him. Shortly after the filing of the claim for refund, the plaintiff also filed a protest against the action of the revenue agent in rejecting his claim in which it was stated that Martin returned to Schuetz the "initial payment to him of $4,000, and it was then understood that Schuetz was to pay $110,000 for the 320 acres he had contracted to purchase instead of $120,000 as originally agreed upon."
F.W. McReynolds, of Washington, D.C., for plaintiff.
Lisle A. Smith, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (Frank J. Ready, Jr., of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, WHALEY, WILLIAMS, and LITTLETON, Judges.
Plaintiff brings this suit to recover what he alleges to be an overpayment of income taxes for the calendar year 1920, which were assessed on account of a profit alleged to have been realized in that year through a sale of real estate. The controversy is mainly as to the ultimate facts, and, when these are found, there is no dispute as to the statutory provisions which are applicable in determining the tax. The case is governed by the Revenue Act of 1926 ( 44 Stat. 9), which, by its terms, was made retroactive, and under the provisions of this act the Bureau of Internal Revenue made the following regulation:
"Art. 44. Sale of Real Property Involving Deferred Payments. — Under section 212(d) deferred-payment sales of real property fall into two classes when considered with respect to the terms of sale, as follows:
"(1) Sales of property on the installment plan, that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made do not exceed one-fourth of the purchase price."
The principal question in the case is whether a transaction involving the disputed tax was a sale of real property on the "installment plan" described in subdivision 1 of this regulation, and subject to the determination of this question another question is also involved, namely, as to whether any cash was received on the sale which was taxed.
The issue so presented is primarily one of fact, and its determination rests on still another question, which is whether one or two sales were consummated by the transactions hereinafter set out.
In the early part of 1919 the plaintiff entered into a written contract with one Martin for the sale to the latter of a section of land (640 acres). Under the terms of this contract, Martin was to make payment for the land partly in cash and partly by a purchase-money mortgage thereon. The contract is set out in full in finding 1 of the special findings of fact. It showed that a small payment had been made in cash, and further provided for the deposit of the deed and contract in escrow, for payment of an additional amount in cash, and the execution of a purchase-money mortgage to secure the balance of the purchase price by Martin not later than three days after March 1, 1920, and delivery of the deed to Martin on compliance with the contract on his part.
In the latter part of 1919, although Martin had as yet received no deed to the premises, he entered into a contract in writing with one Schuetz to sell him, on certain terms and conditions, one-half the land (320 acres) for which he held a contract from plaintiff. This instrument has been lost, but in a general way it appears that a small payment was made in cash, and the balance was to be settled on delivery of the deed therefor by payment of more cash and assuming a purchase-money mortgage on the premises. Subsequently, but before March 1, 1920, Martin admitted, and it was apparent to all parties interested in the land, that he would not be able to meet the cash payment that was required to be made by the original contract when that date arrived. This caused all three of the parties named, together with one or more of the land agents concerned in the transaction, to meet to consider the situation. This meeting was held about March 1, 1920, and as a result thereof it was finally agreed between plaintiff, Martin, and Schuetz that plaintiff should receive back the deed that he had deposited in escrow for the section, and should convey to Schuetz the half section which Martin had agreed to sell to Schuetz, the conveyance to be made on certain terms and conditions hereinafter set forth, and also that the plaintiff should convey the other half section to Martin on certain terms and conditions not necessary to be considered, if there were, in fact, two separate sales. As a part of the arrangement it was agreed that plaintiff should retain the cash payment which had been made to him, and that the price of the land purchased by Schuetz should be reduced to $110,000. The $4,000 which Schuetz had paid was returned to him through Schuetz giving Martin a check for $6,000 and Martin giving a check to Schuetz for $10,000, which covered the cash payment of $4,000 which Schuetz had given to Martin and the $6,000 check referred to. The price of the land purchased by Schuetz, reduced as above stated, was to be paid by him to plaintiff, and all matters arising out of the prior transactions between the plaintiff and Martin, and Martin and Schuetz, with reference to the land, were understood to be settled and were disposed of by the new agreements made.
Considering now more particularly that portion of the agreement between plaintiff and Schuetz, the evidence shows that plaintiff conveyed to Schuetz the half section bought by him for a consideration of $110,000. Schuetz settled for this amount in part by giving the plaintiff a purchase-money mortgage on the property conveyed to him, securing his two promissory notes to plaintiff, one for $12,800 due March 1, 1925, and one for $51,200 due March 1, 1930. Schuetz settled the remainder of the purchase price by executing to plaintiff two mortgages on other real estate owned by him, each of said mortgages securing two promissory notes payable at future dates. The total amount of the four notes so secured by these two mortgages was $46,000.
When plaintiff made his original return for the year 1920, he treated all of these transactions as though they were one sale of the whole section of land, and paid the tax accordingly. Subsequently, he filed an application for refund, alleging, in substance, that the final sale and conveyance to Schuetz and Martin superseded the original contract, and constituted, in fact, two separate and independent transactions; that, as he received no cash from Schuetz, the transaction with the latter should be treated as an installment sale; and that he made no income or profit in relation thereto in the year 1920. The Commissioner having denied this claim for refund, the plaintiff now seeks to recover in this action the amount of income tax assessed and paid by him on account of the transaction with Schuetz.
In discussing the contentions of the respective parties, it should be kept in mind that the tax in controversy was assessed for the calendar year 1920, and must be computed on the profits actually received that year. The plaintiff contends that the original contract of purchase of the land by Martin in 1919, and the final settlement and adjustment made between the plaintiff, Martin, and Schuetz about March 1, 1920, under which the deeds were executed by plaintiff by which the land was transferred in separate tracts to Martin and Schuetz, respectively, are two entirely separate transactions, although the one carried on about March 1, 1920, was connected with the original contract made between the plaintiff and Martin. It is contended on behalf of the defendant that there was in fact but one sale, or at least that the tax should be assessed on the basis of the contract for sale made by the plaintiff to Martin, and the Commissioner, while at first recognizing the claim of plaintiff, finally so held. This action, we think, was an error.
It is not necessary for us to determine whether the original contract merely granted an option or was one as to which specific performance could be compelled. Nor do we think it is material that Schuetz, in settling for the land which he bought, not only executed a purchase-money mortgage, but gave two other mortgages to secure notes aggregating $46,000. The important fact is that the original contract was entirely superseded, and the deed which had been executed thereunder and deposited in escrow returned to the plaintiff. The only profits taxable to plaintiff for the year 1920 were those which resulted from the settlement which occurred about March 1 of that year as carried out by the parties at the time, and in this connection it might be said also that, whether the original contract was enforceable up to the date of this new agreement or not, it is certain that it was not enforceable after the parties had entered into and consummated the new agreement. Shuetz paid no cash under his agreement with plaintiff made in the settlement, which was entirely different and separate from his agreement with Martin, which was no longer enforceable. He gave the plaintiff for the land which was conveyed to him nothing but notes payable in a future year secured by mortgages. It is urged on behalf of defendant that two of these mortgages were upon land which Schuetz owned and which was not conveyed to him by plaintiff, but all that plaintiff received from him for the land was evidences of indebtedness, and it is entirely immaterial how this indebtedness was secured. We find that there were two sales made by plaintiff, one to Schuetz and one to Martin, and that the sale to Martin was not made under the original contract; that, as no cash was received on the sale to Schuetz, no profits were realized, and none were taxable on that particular transaction, and that plaintiff's tax must be computed without this transaction being included therein.
It is contended on behalf of defendant that plaintiff in making his original return treated all these transactions with reference to land as one sale, but one of the objects of the statute providing for filing claims for refund is, as we think, to enable the taxpayer to correct errors of fact. The statement was prejudicial to the plaintiff rather than the defendant, and clearly was not willfully or fraudulently made. It also appears that, in making the application for the refund, the plaintiff stated that $10,000 was paid in cash on the sale to Schuetz. This is another error of fact which was not prejudicial to the defendant. Shortly after the filing of the claim for refund, the plaintiff also filed a protest against the revenue agent's action in rejecting the claim for refund, in which the facts were set out in more detail with reference to the claim than in the application for refund, and the protest showed that no cash was paid on the sale to Schuetz. We think this can be treated as an amendment to the claim, if any amendment was necessary, and that plaintiff therefore is entitled to recover the full amount of the additional tax assessed against him on account of the sale to Schuetz, with interest from date of payment. Plaintiff's claim for refund was for $10,812.24, or such greater amount as is legally refundable.
Computing plaintiff's income without allowing any profit on the sale to Schuetz, we find that his correct tax was $235.99. He paid a total, including interest, of $11,643.55, and is entitled to recover the difference between the amount paid and the amount actually due, together with interest from the several dates on which it was paid. Judgment will be rendered accordingly.