Barter v. Commissioner, Docket No. 35294-87.

CourtUnited States Tax Court
Writing for the CourtSHIELDS
Citation59 TCM (CCH) 143,1990 TC Memo 142
PartiesH.H. Barter and Virginia Barter v. Commissioner.
Docket NumberDocket No. 35294-87.
Decision Date19 March 1990

59 TCM (CCH) 143
1990 TC Memo 142

T.C. Memo. 1990-142.

H.H. Barter and Virginia Barter

Docket No. 35294-87.

United States Tax Court.

Filed March 19, 1990.

Edward G. Maag, 123 Wedgewood Dr., Columbia, Ill., and Ronald D. Stanley, P.O. Box 422, Columbia, Ill., for the petitioners. Michael W. Bitner, for the respondent.

Memorandum Findings of Fact and Opinion


Respondent determined a deficiency of $464,208 in petitioners' 1980 income tax. After concessions, the issues remaining for decision are: (1) whether expenditures totaling $270,279 made by petitioner, H. H. Barter, are deductible as ordinary and necessary business expenses under section 1621 or must be treated as the nondeductible cost of acquiring a capital asset; and (2) whether petitioner, H. H. Barter, realized ordinary income in the amount of $116,585 by exchanging services for a parcel of land having a fair market in excess of the fair market value of the services.

Findings of Fact

Some of the facts have been stipulated and are so found. The parties' stipulations and the exhibits associated therewith are incorporated herein by reference.

Petitioners, H. H. Barter, who is also known as Sam Barter, and his wife, Virginia Barter, resided in Harrisburg, Illinois, at the time of filing their petition. They timely filed a joint income tax return for 1980 with the Internal Revenue Service Center in Kansas City, Missouri. All further references to petitioner in the singular are to H. H. Barter.

Despite having only an eighth grade education and marginal reading and writing skills, petitioner has successfully operated an excavation and earth-moving business as a sole proprietor for over 40 years. He has participated in several major projects including the construction of Interstate 57 which runs generally north and south through the eastern part of Illinois. In addition to his excavation business, petitioner in 1979 and 1980 was a partner with three other individuals in a partnership which owned and operated a Ramada Inn in Kentucky.

On or about November 1, 1979, petitioner was contacted by Lowell V. O'Neal (O'Neal), who owned a 24-acre tract of land located near Marion, Illinois, and just to the west of the intersection of Interstate 57 and Illinois Route 13. The tract was roughly rectangular in shape and bordered Route 13 for approximately 1,300 feet. In 1979 the tract was the unreclaimed site of a former strip mine. It was part of an unincorporated and relatively undeveloped area situated to the west of the intersection, while the area immediately to the east of the intersection was developed as part of the incorporated township of Marion.

Between November 1, 1979, and December 4, 1979, petitioner and O'Neal met on three or more occasions to discuss an arrangement under which petitioner would grade or level a portion of the 24-acre tract which O'Neal was initially trying to sell to a group of real estate developers. Petitioner had some previous knowledge of the area's topography since he had been involved in other nearby construction projects, including the construction of Interstate 57. At some point during this period petitioner also met with O'Neal and the developers. During or shortly after this meeting petitioner quoted the developers a price for grading the tract of $0.50 per cubic yard of earth moved.

During this same period O'Neal was also negotiating with petitioner's partners. Petitioner's partners were seeking to purchase a

59 TCM (CCH) 144
portion of the tract as a site for another Ramada Inn. O'Neal was interested in having a major motel such as Ramada locate on a portion of the tract because he believed that the location of a major motel at the intersection would attract business to a smaller and less expensive motel that he was planning to construct on a portion of the balance of the tract

In still another meeting which occurred on or about December 3, 1979, petitioner learned that O'Neal preferred to sell 7.7 acres of the tract to petitioner rather than to petitioner's partners. After this meeting O'Neal on December 4, 1979, requested that petitioner send him something in writing which would represent their "meeting of the minds" with respect to the project. Because of his poor writing skills, petitioner had an employee draft a letter, which was signed by petitioner and sent to O'Neal on December 4, 1979. The letter reads in pertinent part as follows:

In accordance with our conversation this date regarding purchase of property, I propose to do the following for the purchase of the 7.7 acres:
#1. I will grade approximately twenty-four (24) acres, more or less, according to the site plan of the engineer, Charles Miller. An agreement should be made for the approximate 7.7 acres that a frontage road across property from one interchange to the other interchange should take the needed right-of-way from the O'Neal land, the Barter land, and the land remaining. I agree to get 90% or better compaction with the dirt.
#2. I agree to tie on the city sewer and bring the 12" sewer across the fourteen (14) acres to the Barter property line on the west side.
#3. I agree to pay Charles Miller for the engineering for all the site grading.
#4. I will spend all necessary time in Springfield to try to get the drainage corrected and to try to get third lane in on Route 13 and promote traffic lights at both interchanges. I cannot guarantee this, however, but will use all influence with my Springfield connections to get it done.

Petitioner's files contain a handwritten memorandum dated December 6, 1979, in which petitioner referred to the agreement with O'Neal as follows:

Proposed Agreement Between
Lowell O'Neal & Sam Barter
Concerning 24 acre real estate development
Located at St. Rt. 13 & Int. 57
Drawing by LPS & Ass. Dated 12/3/79
Sam Barter to perform the following work:
Extend the sewer to property A, B & C.
To bring to grade, level & compact to 90% the entire 24 acres per engineering plans & supervision of Lyn Clarida.
To bring frontage road to grade, provide rock base ready for black top. To spend necessary time in Springfield to get the drainage corrected etc.
Lowell O'Neal to deed over a 7.7 acre tract of the above development for the above work.
The 7.7 acres to have a 335' frontage by 1000' in depth.
All buildings to maintain a 450' setback per drawing.

On December 10, 1979, petitioner and O'Neal met with petitioner's attorney, John Feirich. During this meeting Feirich was instructed to draw up a document to formalize the agreement that petitioner and O'Neal had reached. Feirich drafted a document entitled "Exchange Agreement" which reads in pertinent part as follows:

WHEREAS, O'Neal is the owner of a large tract of land located in Marion, Illinois, * * *
WHEREAS, Barter wishes to acquire a portion of said property * * *
WHEREAS, O'Neal is desirous of Barter doing certain necessary developmental work for the benefit of the entire tract including the part that Barter is interested in acquiring, and
WHEREAS, the parties hereto desire to exchange a part of the property now owned by O'Neal for developmental services to be performed by Barter, * * *
* * * the parties hereto agree as follows:
* * * Part of the property owned by O'Neal * * * which contains approximately 7.7 acres, shall be transferred by O'Neal by deed to Barter to be immediately delivered to the Escrowee hereinafter referred to in return for Barter's agreement to perform the developmental services as hereinafter set forth.
* * *
59 TCM (CCH) 145
* * * Barter agrees to perform the following developmental services for the entire tract shown on Exhibit A containing approximately 24 acres more or less, all in accordance with a site grading plan as prepared by Clarida Engineering Co., to-wit:
* * * Extend the present twelve (12) inch city sewer line which is currently East of the property in question from thence sic to the West line of the 7.7 acre tract being transferred to Barter pursuant hereto;
* * * Pay Clarida Engineering Co. for the supervisory services rendered in connection with the performance of the site grading.
* * * Grade the approximately 24 acre tract in accordance with the site plan of Clarida Engineering Co. and obtain a compaction of at least 90 percent on the earth graded.
* * * Grade, compact and place an eight inch rock base on the frontage road as the same appears on the aforesaid site grading plan.
* * * In addition, Barter will spend all necessary time in Springfield to fairly attempt to get the drainage corrected and to get a third lane on Route 13 in front of the property and promote traffic lights at the intersections at the East and West extremities of the entire 24 acre tract. It is mutually understood that this undertaking by Barter is not a guarantee that any of these things will be accomplished, only a promise on the part of Barter to make his best efforts in connection therewith.

Upon examining the draft prepared by Feirich, O'Neal expressed concern over the fact that under its terms the parcel of land was to be conveyed to petitioner in a direct exchange for petitioner's services. At this point, O'Neal took a copy of the unsigned agreement and left the meeting to consult with his accountant as well as his attorney, J. Michael O'Byrne (O'Byrne). Upon his return to the meeting, O'Neal informed Feirich that he wanted the agreement re-drafted as two separate documents, one being a contract for the purchase and sale of the 7.7 acres of land and the other a contract for grading the 16.3 acres which O'Neal would retain. O'Neal also instructed Feirich to include in both contracts a monetary consideration of $77,000 but to make the agreements appear to be separate and apart from one another.

Petitioner did not object to the revisions dictated by O'Neal and Feirich proceeded to draft two new contracts pursuant to O'Neal's instructions. The first, entitled "Contract For The Sale of Real Estate," reads in...

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