Opinion
Docket No. 47876.
1955-06-15
ESTATE OF URA M. FINCH, DECEASED, ALICE E. FINCH, ADMINISTRATRIX, AND ALICE E. FINCH, INDIVIDUALLY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
W. G. Boone, Esq., and Charles H. Davis, Esq., for the petitioners. Homer F. Benson, Esq., for the respondent.
W. G. Boone, Esq., and Charles H. Davis, Esq., for the petitioners. Homer F. Benson, Esq., for the respondent.
Decedent died within 3 years from the date of a conditional sales contract to purchase a business. After decedent died, the seller exercised his election under the contract. He elected to repossess the business rather than require decedent's heirs to continue to make payments under the contract. There was a loss of decedent's investment. Held: The business did not revert to the seller immediately upon or as of decedent's death; the reversion was after his death; the loss was not sustained during the taxable period which ended with his death. Respondent's disallowance of loss deduction is sustained.
The Commissioner determined a deficiency in income tax for 1948 in the amount of $1,701.68. The only question for decision is whether it is proper to deduct $9,783.48 from the income of the decedent for the last taxable period which ended with his death. The deduction is claimed under section 23(e)(1) of the 1939 Code as a loss incurred in a trade or business.
The return was filed with the collector of internal revenue for the district of Tennessee.
FINDINGS OF FACT.
The stipulated facts are found according to the stipulation. The stipulation, together with the attached exhibits, is incorporated herein by reference.
Ura M. Finch died intestate on June 27, 1948, a resident of Memphis, Tennessee. He is sometimes referred to hereinafter as either the decedent or as Finch. He was survived by his wife, Alice, only. She is the administratrix of the decedent's estate. A joint income tax return was filed for the year 1948 on behalf of the decedent and his surviving spouse.
Finch was engaged in the business of making and selling orthopedic appliances and similar equipment as a sole proprietor from about May 29, 1947, until his death. He carried on the business under the name of R. W. Snell Company. Finch kept his books and reported income on an accrual basis and for calendar years.
Finch entered into business under the following circumstances: Prior to May 29, 1947, R. W. Snell had been engaged in the business of making and selling orthopedic appliances and equipment in Memphis as a sole proprietor, under the name of R. W. Snell Company. Snell was 65 years old in May 1947, and he desired to retire from and sell his business. Snell wished to secure an income for the remainder of his life through the sale of the business. Finch who was then 43 years old was interested in buying the business.
On May 29, 1947, Snell and Finch entered into a contract of sale under which Finch acquired all of the assets of the business theretofore operated by Snell, including cash in bank, receivables, inventory, contracts, lease, fixtures and equipment, and goodwill. Finch also acquired the right to use the name of R. W. Snell in the operation of the business either as a sole proprietorship or in corporate form. It was provided in the contract of sale that all liabilities of the business which were due and payable prior to the date of the transfer, were to be paid out of the business bank account, and that any liabilities not then due and payable were to be assumed by Finch.
Under the contract of sale, Finch, as consideration for the transfer to him of the business, agreed to make monthly payments to Snell for the duration of Snell's life. Finch agreed to pay Snell $500 a month for 60 months from the date of the transfer of the business, and $300 a month thereafter as long as Snell lived. Finch's obligation to make the monthly payments to Snell was to terminate upon Snell's death, except for any sums then due and unpaid. It was provided in the agreement that if Finch was in default for a period of 3 months in making any of the monthly payments, Snell, after giving written notice of the default, had the right to repossess the business and to operate it as his own.
In the contract of sale, Finch agreed to devote his full time to the business, and Snell agreed to advise and cooperate with Finch, at the latter's request, in the operation of the business. Snell also agreed for a period of 5 years not to enter into any business within 100 miles of Memphis which would compete with the business to be operated by Finch.
Paragraph 6 of the contract is as follows:
6. If party of the second part (Finch) dies within three years from the date of this contract, party of the first part (Snell) shall have the right to re-enter and take possession of the said business and operate same as his own, and the obligations of party of the second part under this contract shall thereupon cease and be canceled; or, in the alternative, party of the first part shall have the right and election to call on the heirs or representatives of party of the second part to continue said business and continue the monthly payments hereinabove specified for the remainder of the sixty (60) months, or until the death of party of the first part prior thereto; and, for the purpose of guaranteeing to party of the first part the payment of the monthly sums payable during the remainder of the said sixty (60) months period, party of the second part shall obtain and pay the premiums on life insurance in the principal sum of Ten Thousand Dollars ($10,000.00) for a term of five (5) years from the date of this agreement, said policy of life insurance to be assigned to party of the first part as his interest shall appear therein. Should party of the second part die after the expiration of three (3) years but before the expiration of the aforesaid sixty (60) months, the heirs, representatives or assignees (sic) of party of the second part shall have the right to continue said business and carry out the obligations of party of the second part until the expiration of said sixty (60) months or until the death of party of the first part prior thereto, and the policy of insurance aforementioned shall be security for the payment of any amounts which may be due party of the first part up to the end of the sixty (60) months, but not thereafter. Should party of the second part die after the expiration of said sixty (60) months, all the provisions of this contract as to the payments of Three Hundred ($300.00) per month to party of the first part shall continue for and during the natural life of party of the first part, and the heirs, representatives or assigns of party of the second part shall be and remain liable therefor individually and as an obligation of said business.
The parties to the purchase contract, Snell and Finch, waived the provision in paragraph 6 of the contract under which Finch was obligated to obtain a life insurance contract in the amount of $10,000, and to pay the insurance premiums, and to assign the policy of insurance to Snell. Finch did not take out insurance in the amount of $10,000 for the benefit of Snell.
The parties have stipulated that the contract of May 29, 1947, was a conditional sales contract.
Finch died on June 27, 1948, prior to the expiration of 3 years from the date of the contract of sale. Snell, by letter dated June 30, 1948, addressed to the decedent's widow, gave notice that he elected to exercise his right under paragraph 6 of the contract to reenter and take possession of the business.
The income of the decedent for the taxable period which ended with his death, namely, January 1 through June 27, 1948, was reported in a joint return for 1948 which was filed by Alice E. Finch, as surviving spouse, and as the administratrix of the decedent's estate. The net income of R. W. Snell Company for the period January 1 to June 27 1948, amounted to $12,252.30, which amount was reported in the joint return as income of the decedent for the taxable period ended with his death. In the return, there was deducted from the net income of R. W. Snell Company as reported, $12,252.30, the amount of $9,783.48 as a ‘loss on business purchase contract.’ Accordingly, there was included in decedent's gross income, as reported, for the period ended with his death, the amount of $2,468.82, as net profit from business.
The respondent, in his notice of deficiency, disallowed the amount deducted in the return, $9,783.48, as a loss. Respondent gave the following explanation for his disallowance of the loss deduction: ‘The loss did not occur during the life of the decedent nor did it occur by reason of his death.’
OPINION.
HARRON, Judge:
The petitioners claim deduction for a loss under section 23(e) of the 1939 Code in the amount of $9,783.48 in the taxable period which ended with the decedent's death, which sum includes an alleged original investment of $300. There is no dispute about the amount of the loss. The question to be decided is whether the loss was sustained during the taxable period which began on January 1, 1948, and ended on June 27, 1948.
The Commissioner has determined that the loss was not sustained during the above period, and that it did not occur by reason of the death of the decedent. He states his position in the following way:
The loss claimed in computing taxable income of the decedent for the taxable period January 1 to June 27, 1948, resulted from the affirmative action of R. W. Snell in electing to terminate the conditional sales contract and to retake title and possession of certain business property previously conditionally transferred to Ura M. Finch.
Since, under the provisions of the agreement, the election to terminate the contract could not have been exercised until after the death of Ura M. Finch it follows that the loss did not occur prior to the date of the notice of election on June 30, 1948, and therefore it was not sustained by Ura M. Finch. Accordingly, the loss was sustained by his estate and is not deductible in computing taxable income of decedent for the taxable period January 1 to June 27, 1948.
The petitioners advance this argument: Under all of the circumstances, including the waiver of the requirement in paragraph 6 of the contract that Finch would take out $10,000 of insurance, Snell had only one choice, from a practical viewpoint, namely to repossess the business; that in reality Snell did not have the alternative choice of calling upon the estate, or heirs, or representatives of the decedent to continue to make the payments. Petitioners point to the fact that Finch left no estate of any appreciable value, and they argue that it would not have been prudent for Snell to have consented to have the ‘heirs' of Finch, his widow and, perhaps, 13 cousins, continue the operation of the business. Petitioners argue, also, that it is doubtful whether Snell could have compelled Finch's ‘heirs' to continue to operate the business and assume the obligation of making the stipulated monthly payments to Snell. Petitioners rely chiefly on National Metropolitan Bank v. United States, 11 F.Supp. 422.
There was no adjudication by a state court having jurisdiction of any dispute about the rights of Snell under the contract upon the death of Finch. Lacking any adjudication about several possible questions which petitioners' argument suggests, we refrain from either speculating about possible questions involving interpretation of the agreement, or deciding such questions.
Essentially, it is petitioners' contention that the contract was terminated by Finch's death; that the property and the business immediately reverted to Snell as of the time of Finch's death; and that Snell's election was a mere formality.
We are unable to accept as correct such broad construction of the contract as petitioners urge. The contract does not contain a provision that the business and property in question are to revert to Snell immediately upon the death of Finch. It does not provide that Snell's election to take repossession of the business, if made, is to be effective as of the time of Finch's death. On the other hand, the contract provides, in paragraph 6, that if Finch dies within 3 years from the date of the contract, Snell has the right to elect either to call on the heirs or representatives of Finch to continue the business and to continue to make the monthly payments of $500 during the remainder of the period of 60 months from the date of the contract, or to reenter, repossess, and operate the business as his own. In that situation, whether or not there would be a loss of Finch's investment in the business could not be ascertained until Snell made his election. Snell made his election by a written letter on June 30, 1948, about 3 days after Finch's death; and Snell took repossession of the business and property pursuant to his letter of election of June 30, 1948. That fact has been stipulated by the petitioners.
We do not have in this case a judicial determination that the business and property reverted to Snell instantly upon Finch's death. Cf. National Metropolitan Bank v. United States, supra; and Estate of George E. Howe, 16 T.C. 1493. Furthermore, we think that under the contract, Finch's surviving heir or heirs might have claimed a right to continue to operate the business and assume the obligations to make the monthly payments to Snell.
Upon the facts, we can conclude only that the business and property was held by the representatives of the decedent upon his death for a short period, until June 30, when Snell made his election to repossess the business and property; and that it did not revert to Snell as of Finch's death or immediately upon Finch's death.
The result we reach is obviously a harsh one. The question, however, is a close question. The determination of the question depends upon the terms of the conditional sales contract. It is our view that under the terms of paragraph 6 of the contract Snell had to act affirmatively in order to repossess the business, and that under the provisions of the contract, the business did not revert to Snell until he made his election which was after the death of Finch.
From the above conclusion, it follows that any loss under the contract was not sustained prior to the death of Finch, or ipso facto upon his death, and that it was sustained after his death. Therefore, the loss is not deductible from the gross income of the decedent for the taxable period which ended with his death. The respondent's determination is sustained.
Petitioners advance an alternative contention that the 1948 profits of the business to the extent of $9,483.48 were never received by Finch or by his estate but that they accrued to Snell as of the moment of the death of Finch and they therefore are not taxable to Finch. Upon consideration of this contention, we find that it lacks merit and must be rejected.
Decision will be entered for the respondent.