Ennis v. Comm'r of Internal Revenue

• Decision Date: 27 September 1951
• Docket Number: Docket No. 23608.
• Citation: 17 T.C. 465
• Parties: NINA J. ENNIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 465

NINA J. ENNIS, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 23608.

Tax Court of the United States.

Promulgated September 27, 1951.

A taxpayer reporting income on the cash receipts and disbursements basis sold property in 1945 in consideration of a down payment in cash and the vendee's contractual obligation to pay the balance of the purchase price in deferred payments extending over a period of years. The obligation was not evidenced by a note or some other evidence of indebtedness such as commonly change hands in commerce. Held, the contractual obligation was not the equivalent of cash, and the only amount realized by petitioner on the sale in 1945 was the sum of cash received. Thomas J. Bailey, Esq., for the petitioner.

Cyrus A. Newman, Esq., for the respondent.

Respondent has determined deficiencies in petitioner's income tax for the calendar years 1944 and 1945 in the amounts of $803.79 and $4,104.17, respectively.

The sole issue is whether all or any part of the profit realized by the petitioner from the sale of a business property on August 1, 1945, is includible in her 1945 taxable income.

Petitioner does not contest the deficiency determined by the respondent for 1944, nor the deficiency for 1945 insofar as it relates to the respondent's increase of capital gain realized from the sale of certain stock.

All of the facts have been stipulated.

FINDINGS OF FACT.

Nina J. Ennis, the petitioner herein, is an individual with an address in care of Mr. Reginald Holbrook, 26 Michigan Theatre Arcade, Lansing, Michigan. Her individual income tax returns for the years 1944 and 1945 were filed with the collector of internal revenue for the district of Michigan.

On August 1, 1945, petitioner and her husband, Clarence W. Ennis, as joint owners of a business known as ‘Deer Head Inn,‘ as ‘first parties,‘ agreed to sell the business, including all equipment, furnishing, fixtures and real estate, to Paul and Blanche Figley, as ‘second parties,‘ for $70,000, with a down payment of $8,000. The contract of sale executed by the parties on August 1, 1945, provided in part as follows:

Second Parties, in consideration of the covenants herein made by First Parties agree to purchase of First Parties the above described business known as the ‘Deer Head Inn‘ and the above described fixtures, equipment, furnishings, property, chattels and premises, and to pay therefor to First Parties, or their legal representatives, at Lansing, Michigan, the sum of Seventy Thousand ($70,000.00) Dollars in manner and form as follows: vix: Eight Thousand ($8,000.00) Dollars upon the signing of these presents, receipt whereof is acknowledged by First Parties, Four Hundred ($400,00) Dollars or more on the first day of September, 1945, and Four Hundred ($400.00) Dollars or more on the first day of each and every month to and including the first day of August, A.D. 1946, said payments to be applied, first, on the interest, and the balance on the principal which shall be due from time to time; and beginning on September 1st, 1946, the sum of Six Thousand ($6,000.00) Dollars or more a year, or a sum equal to sixty percent (60 percent) of the annual net profits of the business now known as the Deer Head Inn after payment of Government Income Taxes, whichever sum is greater, said payments to be made as follows: Five Hundred ($500.00) Dollars or more on the first day of September, 1946, and Five Hundred ($500.00) Dollars or more on the first of each and every month thereafter until the full purchase price is paid, and, in the event that in its fiscal years of August 1st to July 31st the annual net profit of the business, after allowance for income tax, is greater than the sum of the monthly payments stipulated for the months in such fiscal years, then an additional payment on or before the 15th day of September of each and every year beginning September 15th, 1947, increasing the annual payment to the sixty percent (60 percent) of the annual net profits, after allowances for income tax as hereinbefore provided, all such payments to be applied, first, on the interest and the balance on the principal which may from time to time be due, with interest on the whole sum that shall be from time tp time unpaid at the rate of five percent (5 per cent) per annum to be computed from August 1st, 1945, and to be paid monthly. Principal or interest not paid when due shall bear interest until paid at the rate of five percent (5 percent) per annum.

Second Parties shall keep all buildings now on, or that may hereafter be placed on said premises, and all fixtures, equipment and furnishings in connection with said business insured in the name of and in manner and amount and by insurers approved by the First Parties and leave the policy or policies with First Parties, and in such case the insurance, unless by mutual agreement used to repair, rebuild or replace, shall be paid to First Parties and endorsed on this Contract to the extent of the amount unpaid thereon, and the balance, if any, shall belong and be paid to Second Parties.

Second Parties shall enter said business, fixtures, equipment and premises for taxation in their name, and shall well and faithfully pay when due all taxes and assessments, ordinary and extraordinary, that may for any purpose be levied or assessed on said business, fixtures, equipment or premises, and shall not commit or suffer any other party to commit any waste or damage to said business, fixtures, equipment, premises, or to the appurtenances. Should Second Parties fail to pay any tax or assessment when due, or to keep said business, fixtures, equipment and buildings insured, First Parties may pay the same and have the business, fixtures, equipment and buildings insured, and the amount thus expended shall be a lien on said business, fixtures, equipment and premises, be added to the amount then unpaid hereon, be due at once and bear interest until paid at the rate of five percent (5 percent) per annum.

First Parties further agree that upon the full performance by Second Parties of all the covenants and agreements by Second Parties to be performed, and upon the payment by Second Parties of the several sums of money above mentioned, and in the time and manner and at the place mentioned, that thereupon the First Parties shall execute and deliver to Second Parties a good and sufficient Bill of Sale of said business, fixtures, equipment and chattels, and a good and sufficient Abstract and Warranty Deed of the premises, thereby conveying to Second Parties the business, fixtures, equipment and premises above described free and clear of all incumbrances, except taxes after the date hereof, and claims and liens thereon due to any act or neglect of Second Parties.

The business, fixtures, equipment and chattels now in the premises, and any additional fixtures, equipment or chattels, which may be placed on the premises, and all buildings and improvements now on, or that shall be placed or made on said premises, shall remain as security for the performance by Second Parties of this Contract, and the title, ownership and right of possession in and to said fixtures, equipment and chattels shall remain in the First Parties until the full consideration stated is fully paid and the title to said premises shall remain in First Parties until the full consideration herein stated is fully paid, and should default be made and this Contract be forfeited, said business, fixtures, equipment and chattels and said premises and the buildings and improvements and all payments made on said contract shall be forfeited to First Parties as stipulated damages for non-performance of this Contract, or First Parties may at their option declare all sums unpaid immediately due and payable, and enforce the collection thereof at law and make conveyance as aforesaid.

First Parties may at their option elect to enforce said Contract and their right to repossession of the business, fixtures, equipment and chattels covered hereby in any Court of law or equity, and may additionally through summary proceedings for the recovery of land, as in the statute made and provided, secure repossession of the real estate herein described through action before one of the Circuit Court Commissioners having jurisdiction thereof.

Second Parties shall not assign or transfer this Contract, nor shall they sell the business, the fixtures, equipment and chattels in connection therewith, nor shall they lease or sublet said premises or the buildings thereon, or any part thereof, nor shall they transfer or contract to sell or transfer any part of the premises thereof, the same being hereby declared as integral with and necessary to the conduct of the business, nor shall Second Parties add to or change said business, fixtures, equipment of buildings without the previous written assent of First Parties hereto endorsed hereon.

It is further mutually agreed that Second Parties may take possession of said business, fixtures, equipment and premises immediately and remain thereon as long as they shall perform all covenants and agreements herein mentioned on their part to be performed and no longer; and that if Second Parties shall at any time hereafter violate or neglect to fulfill any of said covenants or agreements they shall forfeit all right or claim under this Contract, shall relinquish possession of the business, fixtures and equipment, and be liable to be removed from said premises in the same manner as provided by law for the removal of a tenant that holds over premises contrary to the terms of his lease, and notice to quit and of forfeiture are each hereby waived. And it shall be lawful for First Parties at any time after such default to sell and convey said business, fixtures and equipment and said premises, or any part thereof, to any person without becoming liable to refund any part of the money received on this Contract or for any damages on account of...