Alderson v. CIR

• Citation: 317 F.2d 790
• Decision Date: 22 May 1963
• Docket Number: No. 18221.,18221.
• Parties: James ALDERSON, surviving husband and Estate of Clarissa E. Alderson, Deceased, James Alderson, Executor, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

317 F.2d 790 (1963)

James ALDERSON, surviving husband and Estate of Clarissa E. Alderson, Deceased, James Alderson, Executor, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 18221.

United States Court of Appeals Ninth Circuit.

May 22, 1963.

Paul Frederic Marx, Santa Ana, Cal., and Ernest J. Zack, Los Angeles, Cal., for petitioners.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Harry Baum, Alec A. Pandaleon, and Fred E. Youngman, Attys., Dept. of Justice, Washington, D. C., for respondents.

Before BARNES and MERRILL, Circuit Judges, and CRARY, District Judge.

CRARY, District Judge.

Petitioners seek review of the decision of the Tax Court, entered May 8, 1962, determining a deficiency in income tax for the taxable year 1957 in the amount of $39,530.58.

The question presented is whether the transactions whereby taxpayers transferred one parcel of realty and acquired another constituted a sale, the gain from which is recognizable under Section 1002¹ of the Internal Revenue Code of 1954, or a non-taxable exchange within the meaning of Section 1031² of said Code.

On May 21, 1957, following negotiations between petitioners and Alloy Die Casting Company, hereinafter referred to as Alloy, representatives of petitioners and Alloy executed escrow instructions to the Orange County Title Company, hereinafter referred to as Orange, constituting a purchase and sale agreement whereby petitioners agreed to sell their Buena Park property, consisting of 31.148 acres of agricultural property, to Alloy for $5,550.00 per acre, a total price of $172,871.40. Pursuant to the terms of said agreement, Alloy deposited $17,205.00 in the Orange escrow toward purchase of the Buena Park property.

Some time after the execution of the May 21st escrow petitioners located 115.32 acres of farming land in Monterey County, California, hereinafter referred to as the Salinas property, which they desired to obtain in exchange for their Buena Park property.

On August 19, 1957, petitioners and Alloy executed an amendment to their May 21, 1957, escrow providing that "the Salinas property be acquired by Alloy and exchanged for the Buena Park property in lieu of the original contemplated cash transaction." (R. 21). The amendment further provides that if the exchange was not effected by September 11, 1957, the original escrow re the purchase for cash would be carried out. On the same day (August 19th) petitioners' daughter, Jean Marie Howard, acting for petitioners, executed escrow instructions to the Salinas Title Guarantee Company, hereinafter referred to as Salinas Title, in the form of "Buyer's Instructions." The parties have agreed that the acts of petitioners' daughter, Jean Marie Howard, with respect to the transactions here involved, are to be considered as acts of the petitioners, and any acts of said daughter are hereinafter referred to as acts of petitioners. The escrow instructions last mentioned provided for payment of $190,000.00 for the Salinas property, that title was to be taken in the name of Salinas Title, that $19,000.00 had been deposited with Orange and that the remaining $171,000.00 would also be deposited with Orange. The instructions also stated that Salinas Title was authorized to deed the Salinas property to Alloy, provided Salinas Title could "immediately record a deed from Alloy * * * to James Alderson and Clarissa E. Alderson, his wife, issuing final title evidence in the last mentioned grantees." (R. 21-22, R.Br. 5).

On August 20, 1957, petitioners authorized Orange to pay $19,000.00 into the Salinas escrow, which was done, and directed Orange to pay $171,000.00 into the Salinas escrow when these funds became available. (R. 22).

On August 22, 1957, Alloy, by letter to petitioners, summarized the agreements of the parties re the manner of accomplishing the transfer of the properties between them. (R.Br. 6). The letter further stated thaat Alloy's representative would deposit $172,871.40 (the cash amount for the Buena Park property as per May 21st escrow) with Salinas Title on assurance that the agreements would be effected. The letter was countersigned by petitioners.

By deed dated August 20, 1957, title to the Salinas property was transferred to Salinas Title. By deed dated August 21, 1957, Salinas Title conveyed the Salinas property to Alloy. By deed dated August 26, 1957, petitioners conveyed the Buena Park property to Alloy and deed dated August 29, 1957, conveyed the Salinas property from Alloy to petitioners. All four of these deeds were recorded September 4, 1957. (R.Br. 6).

On September 3, 1957, Alloy, acting through its attorney, Elliott H. Pentz, deposited $172,871.40, belonging to Alloy, into the Salinas escrow, on Alloy's behalf, with instruction that said sum should be used to complete the purchase of the Salinas property. (R. 17, 24, 72-73). The said $172,871.40, plus the $19,000.00 previously deposited with Salinas Title by Orange, made up something more than the $190,000.00 purchase price for the Salinas property, and the excess was returned to the petitioners. Alloy's original deposit of $17,205.00 in the Orange escrow was returned to it sometime after August 28, 1957. (R. 23).

The petitioners paid approximately $10,000.00 into the Orange escrow for real estate commissions and escrow charges and paid for documentary stamps on the transfer of the Buena Park property to Alloy, and $471.80 into the Salinas escrow for fees and escrow charges together with cost of documentary stamps on the transfer of the Salinas property from Salinas Title to Alloy.

Alloy paid $106.38 to Orange for escrow charges and paid nothing to Salinas Title for escrow charges or stamps.

The Commissioner determined that the transfer of the Buena Park property to Alloy constituted a sale upon which petitioners realized a long term capital gain (R. 9) and the Tax Court sustained the decision of the Commissioner (R. 27) holding "* * * that the transactions in which petitioners disposed of the Buena Park property and acquired the Salinas property did not constitute an exchange within the meaning of Section 1031(a)."

In considering the question involved, there are certain findings of the Tax Court which this court believes to be particularly pertinent. Said findings are as follows:

"From the outset, petitioners desired to exchange their Buena Park property for other property of a like kind. They intended to sell the property for cash only if they were unable to locate a suitable piece of property to take in exchange." (R. 20) (Emphasis ours.)

"The deposit by Alloy of $172,871.40 in the Salinas escrow was made by Elliott Pentz, an attorney, pursuant to the commitment of his client, Alloy. The funds were received from Alloy by Pentz; were the property of Alloy; and were deposited by him in Alloy\'s behalf.

"Alloy acquired title to the Salinas property solely to enable it to perform its agreement to exchange that property for the Buena Park property." (R. 24) (Emphasis ours.)

"The Buena Park property and the Salinas property were of like kind." (R. 24)

By the findings of the Tax Court, supra, it was determined that there was from the outset no intention on the part of the petitioners to sell the Buena Park property for cash if it could be exchanged for other property of like kind. There is no question that the desired property of like kind was located (Salinas property) and that, as determined by the findings, petitioners had no intention other than to exchange the Buena Park property for the Salinas property. It also follows from the findings that petitioners had no intention to purchase the Salinas property and that title to the Salinas property was to come to the petitioners by exchange thereof for the Buena Park property. The intention of the parties and what actually occurred re the obtaining of the Salinas property for the exchange is further established by the finding that the $172,871.40 deposited by Alloy's attorney, Pentz, in the Salinas escrow was the "property of Alloy" and deposited by Pentz "in Alloy's behalf." Further, "Alloy acquired title to the Salinas property solely to enable it to perform its agreement to exchange the property for the Buena Park property."

Respondent concedes that an exchange is not vitiated because cash is received in addition to property held for productive use or investment, but asserts that the $19,000.00 deposited by petitioners with Orange escrow was transmitted by Orange to Salinas escrow, whereas Alloy's initial deposit of $17,205.00 into the Orange escrow was returned by Orange to Alloy, and that if petitioners were not the purchasers of the Salinas property that Orange would have returned the $19,000.00 to petitioners and deposited the $17,205.00 with Salinas escrow in payment of the difference between the value of the Buena Park property and the purchase price of the Salinas property.

It is the position of respondent that from the facts and circumstances outlined above it must be concluded the Buena Park property was sold by petitioners to Alloy and the Salinas property was purchased by petitioners, not Alloy. However, it does not appear from the terms of the amended Orange escrow (August 19, 1957) that there was ever any obligation on the part of Alloy to pay cash for the Buena Park property or for the petitioners to receive cash for said property as provided in the May 21, 1957, escrow, by reason of the fact that prior to September 11, 1957, Alloy did deposit with Orange a deed to the Salinas property conveying same to petitioners. Neither liability of Alloy to petitioners for payment of cash for the Buena Park property nor liability of petitioners to sell the said property to Alloy for money ever matured because under no conditions was there to be a sale of the Buena Park property for cash until September 11, 1957, and then only if the Salinas property was not acquired by Alloy and exchanged for the Buena Park property as of that date (R. 21)....