Coupe v. Comm'r of Internal Revenue , Docket No. 861-65.

Citation52 T.C. 394
Decision Date11 June 1969
Docket NumberDocket No. 861-65.
PartiesLESLIE Q. COUPE AND MAYBELLE COUPE, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Lee M. Galloway, for the petitioners.

Gordon B. Cutler, for the respondent.

Petitioners contracted to sell their farm (Elk Grove), which included about 2 acres immediately surrounding their residence, to S.P. for $2,500 per acre in a series of conveyances. S.P. contracted to pay interest on all deferred payments. Subsequently petitioners and S.P. reformed their contract so that petitioners exchanged parcels of Elk Grove with third parties for (respectively) property of like kind, a deed-of-trust note, a new residence, and cash. Said third parties included petitioners' attorneys, who purchased the exchange properties in their own names. Simultaneously the third parties conveyed Elk Grove to S.P. for $2,500 per acre. Held:

1. Petitioners exchanges of Elk Grove property for property of like kind qualified as currently nontaxable transactions under sec. 1031 of the Code. Their exchange for the deed of trust note was not, inter alia, an exchange for like property and did not qualify under that section.

2. Petitioners received $2,500 per acre for the 1.936 acres which constituted their residence; consequently, only $4,840 qualified for nonrecognition of gain on replacement of the residence under sec. 1034.

3. A portion of the cash petitioners received represented interest income.

4. A $5,000 attorney's fee paid by petitioners in 1960 is allocated 20 percent as a selling expense of Elk Grove (either deductible, or as an adjustment to basis dependent upon time of recognition) and 80 percent to acquisition of properties.

5. The amount of $6,000 received by petitioners' attorneys in 1961 was not a profit realized by them but was a fee from petitioners; represented a part of petitioners' receipts from the Elk Grove disposition and 80 percent of such amount constituted currently nondeductible attorneys' fees paid in connection with the acquisition of property. The remaining 20 percent was a selling expense of Elk Grove, either deductible, or as an adjustment to basis dependent upon time of recognition.

6. Certain selling expenses allocated to taxable and nontaxable transactions.

FORRESTER, Judge:

Respondent has determined deficiencies in petitioners' Federal income taxes for the calendar years 1960 and 1961 in the amounts of $16,807.34 and $47,453.81, respectively.

The issues for decision are:

Whether the taxpayers sold their entire farm for cash, or whether they exchanged part of it for property of like kind. If there was an exchange, the amount of the unrecognized gross sales price attributable to petitioners' exchange must be determined.

The amount which petitioners received for the sale of their residence located on the farm.

Whether any amount of cash received in connection with the sale of the farm represented interest income to petitioners.

Whether $5,000 and $6,000 amounts received by petitioners' attorneys during 1960 and 1961, respectively, in connection with the farm sale, represented income to petitioners and, if so, whether such amounts also constituted deductible expenditures.

The correct allocation and deductibility of selling expenses which petitioners incurred in the sale of their farm.

FINDINGS OF FACT

Some of the facts are stipulated and they are so found.

Petitioners Leslie Q. Coupe and Maybelle Coupe (hereinafter sometimes called the Coupes or Leslie and Maybelle, respectively), husband and wife, resided in Galt, Calif., at the time the petition in the instant case was filed. Their joint Federal income tax returns for the calendar years 1960 and 1961 were filed with the district director of internal revenue at San Francisco, Calif.

Leslie and Maybelle are farmers. In 1945 they purchased 188.943 acres of farmland near Elk Grove, Calif. (hereinafter sometimes called the Elk Grove property). During all pertinent times the land was farmed continuously and primarily held for the purpose of farming.

In 1958 and 1959 Leslie and Maybelle received two unsolicited offers from a neighbor to buy the Elk Grove property for first $250 per acre and then $800 per acre. They refused both offers. On March 12, 1960, the Coupes granted an option to Malcolm K. Grant (hereinafter sometimes referred to as Grant), a real estate broker, to purchase the farm for $2,250 per acre. This option eventually led to a contract between the Coupes and Southern Pacific Co. (hereinafter sometimes referred to as S.P.), which called for the Coupes to sell the Elk Grove property for $2,500 per acre. The relevant provisions of this agreement are produced below:

THIS AGREEMENT, made this 1st day of June, 1960, by and between LESLIE QUENTIN COUPE and MAYBELLE COUPE, husband and wife, Sellers, and SOUTHERN PACIFIC COMPANY, a corporation, Buyer;

WITNESSETH:

Sellers hereby agree to sell and Buyer agrees to buy, subject to terms hereof, that real property situate, lying and being in the County of Sacramento, State of California, described as follows:

1. Sellers, at their expense, will cause said property to be surveyed by a registered civil engineer who shall furnish a mutually satisfactory and simplified metes and bounds description of the property, and who shall determine the number of acres in said property. The metes and bounds description shall replace the above description for all purposes hereunder.

2. Purchase price of the land or any part or parcel thereof shall be Two Thousand, Five Hundred (2,500) Dollars per acre acreage to be determined by the aforementioned survey.

3. Buyer shall acquire title to, and Sellers shall convey said property in parcels, as follows:

(a) Upon execution of this agreement, Buyer shall deposit the sum of Twenty-five Thousand (25,000) Dollars in escrow; Sellers shall as soon as practicable convey to Buyer a portion or parcel with area equal to twenty-nine (29) percent of the total area of said land, the location of said portion to be mutually agreed by the parties. At the time of such conveyance Buyer will pay the balance of the purchase price of said twenty-nine (29) percent portion over and above the initial payment of Twenty-Five Thousand (25,000) Dollars, and this first escrow shall close. It is understood the portions herein referred to are not undivided interests in the whole of said land, but rather parcels within said land.

(b) Buyer shall acquire at least twenty-five (25) percent of the remainder of the area of said land in each of the four (4) years following the conveyance set forth in (a) above, paying therefor at the rate herein specified, provided, that Buyer may accelerate acquisition in any manner it desires after one (1) year from the conveyance set forth in (a), and provided further that payment may be made by an exchange transaction as hereafter described.

4. Buyer shall pay interest at the rate of six (6) percent per annum on unpaid portions of the total purchase price for all the land.

5. Buyer shall have the right to pay for any acquisition covered in 3(b) hereof by a conveyance of property, hereafter called ‘exchange property’ of value equal to or less than the price of the parcel being acquired. If the value of such exchange property is less than the price of the parcel acquired, Buyer shall pay the difference in cash. It is understood, however, Buyer shall pay by means of exchange property only if at the time of such transaction a purchaser stands ready, willing and able to buy such exchange property from Sellers. The value of the exchange property to Sellers shall be measured by the price offered by such purchaser.

6. After execution of this agreement Sellers shall remain in possession of all of the property without rental or other payment to Buyer for a period of one hundred eighty (180) days. Thereafter Buyer shall have possession of all of the property without rental or other payment to Sellers, and together with all rights incident thereto, including the right to lease, to receive rental, and to conduct operations of every sort.

7. Sellers shall make all conveyances hereunder by good and sufficient grant deed, free and clear of all encumbrances except easements of record.

8. Sellers shall provide and pay for policy or policies of title insurance for Buyer. Sellers shall pay for all revenue stamps and any broker's or other commissions due on this transaction. Current taxes shall be pro-rated as of the date first herein written. Buyer shall pay all recording fees. Other expenses shall be in accordance with usual practice in Sacramento County, California.

9. This agreement shall inure to the benefit of and be binding upon the successors and assigns of the Sellers and the assigns of Buyer.

IN WITNESS WHEREOF, Sellers and Buyers have executed these presents the day and year first herein written.

+--------------------------------+
                ¦(S) LESLIE QUENTIN COUPE        ¦
                +--------------------------------¦
                ¦(S) MAYBELLE COUPE              ¦
                +--------------------------------¦
                ¦SOUTHERN PACIFIC COMPANY.       ¦
                +--------------------------------¦
                ¦By [Illegible], Vice President  ¦
                +--------------------------------+
                

Attest:

(Illegible) Assistant Secretary In a separate agreement, the COUPES agreed to pay Grant a commission of 10 percent of the sales price, payable one-half at the close of the first escrow under paragraph 3(a), and the balance at the close of the escrow under paragraph 3(b).

After signing the above agreement, the Coupes went over its provisions and noticed that while paragraph 3 called for a series of conveyances for cash, paragraph 5 provided for the possibility of an exchange of properties rather than a cash payment by S.P. for all conveyances after the first one. Since the Coupes wished to continue to farm after they had disposed of the Elk Grove property, they contacted Edwin B. Polhemus (hereinafter sometimes referred to as Polhemus), an attorney, with regard to arranging an...

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