Alderson v. Comm'r of Internal Revenue

• Court: U.S. Tax Court
• Writing for the Court: BRUCE
• Citation: Alderson v. Comm'r of Internal Revenue, 38 T.C. 215 (T.C. 1962)
• Decision Date: 07 May 1962
• Docket Number: Docket No. 88988.
• Parties: JAMES ALDERSON, SURVIVING HUSBAND, AND ESTATE OF CLARISSA E. ALDERSON, DECEASED, JAMES ALDERSON, EXECUTOR, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

38 T.C. 215

JAMES ALDERSON, SURVIVING HUSBAND, AND ESTATE OF CLARISSA E. ALDERSON, DECEASED, JAMES ALDERSON, EXECUTOR, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 88988.

Tax Court of the United States.

Filed May 7, 1962.

Paul Frederic Marx, Esq., and Ernest J. Zack, Esq., for the petitioners.

Paul G. Wilson, Jr., Esq., for the respondent.

Petitioners entered an escrow to sell farm property B to a corporation. Petitioners wanted to exchange the property for other farm property, and upon finding suitable property S, the escrow agreement was amended to provide the corporation would acquire property S and exchange if for property B. Petitioners entered a second escrow as ‘buyer’ to acquire property S, and paid into that escrow the difference between the greater purchase price of property S and the amount the corporation had agreed to pay for property B. The corporation paid into the second escrow the amount it had agreed to pay for property B. Under petitioners' instructions, the title company in the second escrow took title to property S, then conveyed it to the corporation when the title company could ‘immediately record a deed (to property S) from * * * (the corporation) to * * * (petitioners).’ The corporation transferred title to property S to petitioners, who in turn transferred title to property B to the corporation. Held, the transaction was not an ‘exchange’ within the provisions of section 1031(a), I.R.C. 1954.

BRUCE, Judge:

Respondent determined a deficiency in income tax for the taxable year 1957 in the amount of $39,530.58.

Certain adjustments made by respondent are not contested.

The sole question for our determination is whether the transactions by which petitioners disposed of their title to certain realty, located in Orange County, California, and acquired title to certain other realty, located in Salinas, California, constituted a nontaxable exchange within the provisions of section 1031, I.R.C. 1954.

FINDINGS OF FACT.

The parties have stipulated certain facts. The stipulation and the exhibits are incorporated herein by this reference.

Petitioners are James Alderson and the estate of Clarissa E. Alderson. For convenience, we shall refer to James Alderson and his deceased wife, Clarissa E. Alderson, as petitioners.

In 1957 petitioners were husband and wife and resided in Los Angeles County, California. They timely filed a joint income tax return on the cash basis for the taxable year 1957 with the district director of internal revenue in Los Angeles.

In 1951 petitioners purchased certain property consisting of 31.148 acres and located in Orange County, California, hereinafter referred to as the Buena Park property, which they farmed continuously until sometime in 1957, in which year they learned from Merrill Hunt, a real estate broker, that Alloy Die Casting Company, hereinafter referred to as Alloy, was interested in acquiring the property.

Following negotiations between representatives of petitioners and Alloy, the parties executed, in the form of escrow instructions to Orange County Title Company, hereinafter referred to as Orange, a purchase-and-sale agreement dated May 21, 1957, under which petitioners agreed to sell their Buena Park property to Alloy for a cash consideration of $5,550 per acre, the acreage later determined by survey to be 31.148 acres and the total purchase price to be $172,871.40.

Under the terms of the May 21, 1957, agreement, Alloy deposited in the Orange escrow $17,205 toward the purchase of the Buena Park property.

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. At the time the May 21, 1957, agreement was executed, Alloy intended simply to effect a purchase of the Buena Park property for cash. Alloy did not learn that petitioners wished to create a property exchange until the latter part of July 1957.

In 1957 Orange had two separate forms, one for use in agreements for the sale of property, the other to be employed in exchanges of property. The parties utilized the former for their May 21, 1957, agreement.

Following execution of the May 21, 1957, escrow agreement, petitioners located certain property consisting of 115.32 acres in Monterey County, California, hereinafter referred to as the Salinas property, which they desired to obtain in exchange for the Buena Park property. On August 19, 1957, escrow instructions. This amendment provided that the Salinas property would be acquired by Alloy and exchanged for the Buena Park property in lieu of the originally contemplated cash transaction. The amendment provided, however, that if this exchange were not effected by September 11, 1957, the original agreement with respect to a purchase for cash would be carried out.

On August 19, 1957, petitioners' daughter, Jean Marie Howard, acting for petitioners, executed escrow instructions to the Salinas Title Guarantee Company in the form of ‘Buyer's Instructions.’ These instructions recited that $190,000 would be paid for the Salinas property; that.$19,000 was paid therewith out of a deposit by petitioners with range; and that title was to be taken from the then owners of the Salinas property by Salinas Title Guarantee Company. The escrow instructions contained the following additional language:

I hereby irrevocable authorize your Company to issue and deliver your deed for said premises to Alloy Die Casting Co., a corporation, to be recorded immediately following the recordation of the above mentioned deed to your Company, provided you can then immediately record a deed from Alloy Die Casting Co. without warranty, express or implied, to James Alderson and Clarissa E. Alderson, his wife, issuing final title evidence in the last mentioned grantees.

Salinas Title Guarantee Company received these escrow instructions on August 20, 1957, and on that same date petitioners' daughter authorized Orange to pay. $19,000 into the Salina escrow. She authorized Orange to make a further payment of $171,000 into the Salinas escrow when such funds became available. On August 21, 1957, Orange made payment of.$19,000 by check to Salinas Title Guarantee Company.

On August 22, 1957, a letter from Alloy to petitioners was executed by Alloy and petitioners, reflecting the understandings and agreements of those parties with respect to the practical means of accomplishing the exchange of properties between Alloy and petitioners.

This letter provided that Alloy's representative would deposit $172,871.40 with the Salinas Title Guarantee Company after assurance that all other aspects of the transaction would be carried out. This amount exactly equaled the price which Alloy had agreed to pay petitioners for the Buena Park property.

Salinas Title Guarantee Company acquired title to the Salinas property for a purchase price of $190,000, the funds, in fact, being provided as noted above, that is, $19,000 deposited by petitioners' daughter and $172,871.40 being paid into the Salinas escrow by Alloy. The excess of the amounts deposited in the Salinas escrow by Alloy and petitioners' daughter over the $190,000 purchase price was paid to petitioners by Salinas Title Guarantee Company.

Title to the Salinas property was then transferred to Alloy, and on or about September 4, 1957, title to the Salinas property was transferred by grant deed from Alloy to petitioners. At the same time petitioners transferred title to the Buena Park property to Alloy.

Except for the $17,205 deposit which Alloy had paid into the Orange escrow under the original purchase agreement, Alloy paid no amounts directly into the Orange escrow. This original deposit was returned to Alloy by Orange sometime subsequent to August 28, 1957.

Alloy did not provide any part of the.$19,000 which petitioners deposited in the Orange escrow and which was transferred to the Salinas escrow upon the instructions of petitioners' daughter on August 20, 1957. At no time did Alloy pay into either the Orange or the Salinas escrow any amounts which would total $190,000.

Petitioners paid approximately $10,000 into the Orange escrow for real estate commissions and escrow charges. Alloy paid $106.38 into the same escrow to cover escrow charges.

Petitioners paid for all documentary stamps connected with the transfer of title to the Buena Park property.

In the Salinas escrow the documentary stamps were paid for twice in connection with the transfer of title to the Salinas property— once by the original sellers of the Salinas property upon transfer to Salinas Title Guarantee Company and again by petitioners upon the transfer to Alloy. Alloy paid for no documentary stamps in connection with the transfer of this property.

Petitioners paid into the Salinas escrow a total of $471.80 in fees and escrow charges for the transfer of the Salinas property. Alloy paid no fees or charges in connection with this escrow.

In conformance with the demand of Alloy's legal representative during the negotiations, the deed to the Salinas property from Alloy to petitioners contained no warranty, express or implied.

Prior to signing the original escrow instruction on May 21, 1957, there had been no personal contact between petitioners and representatives of Alloy.

The deposit by Alloy of $172,871.40 in the Salinas escrow was made by Elliot 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.

The Buena Park property was held by petitioners for productive use in a trade or business and was not stock in trade or other property held primarily for sale. The Salinas property was acquired by pe...