Boatman v. Comm'r of Internal Revenue
| Decision Date | 14 September 1959 |
| Docket Number | Docket No. 67388. |
| Citation | 32 T.C. 1188 |
| Parties | RALPH A. AND AZALEA BOATMAN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Jack R. Miller, Esq., for the petitioners.
Walter O. Johnson, Esq., for the respondent.
Petitioner in 1951 entered into an executory contract for the sale of his farm. The selling price was $60,000 with $12,000 payable upon the execution of the contract and the balance payable upon delivery of the deed in 1952. The contract also provided for liquidated damages of 20 per cent of the selling price, or $12,000.00, in case either party defaulted. In 1952 the vendee did not pay the balance of the purchase price of the farm and the sale was not carried out. Petitioner retained the $12,000. Held, the $12,000 retained by the petitioner was liquidated damages under the contract, due to the vendee's default, and is, therefore, taxable to the petitioner in 1952 as ordinary income.
Respondent determined a deficiency in petitioners' income tax and additions to tax under section 294(d)(2) of the Internal Revenue Code of 1939 1 in the amounts of $1,810.20 and $108.61, respectively, for the year 1952. The issues are:
(1) Whether a payment of $12,000 received by petitioners in 1951 upon the execution of a contract to sell real estate and retained by them in 1952 when the prospective vendee failed to carry out the contract is taxable to the petitioners in 1952 as a capital gain or as ordinary income; and
(2) Whether there was a substantial underestimate of the petitioners' estimated tax for the year 1952.
All of the facts have been stipulated and they are herein incorporated by this reference.
Ralph A. and Azalea Boatman, husband and wife, are residents of Ida Grove, Iowa. They filed a joint Federal income tax return for the year 1952 with the district director of internal revenue at Des Moines, Iowa. Ralph A. Boatman will hereinafter be called the petitioner.
On September 29, 1951, the petitioner executed a real estate contract with Roy Burcham, and under the terms of this contract petitioner agreed to sell and Burcham agreed to buy a farm consisting of about 327 acres located in Audrian County, Missouri. The farm had been acquired by the petitioner in March 1951. The agreed selling price of the farm was $60,000 with $12,000 payable upon the execution of the contract and the balance payable upon delivery of the deed. Burcham paid the $12,000 to the petitioner on September 29, 1951. The real estate contract provided that the vendor was to deliver to the vendee on or before March 1, 1952, a deed containing the usual and customary warranties and that possession of the farm was to be given to the vendee on March 1, 1952. The contract also provided for liquidated damages in case of default by either party as follows:
In the event that either party shall fail to duly perform his part of this agreement, the party defaulting shall forthwith pay to the other party as liquidated damages 20 per cent (20%) of the agreed price and in any event not less than the sum of $200.00. * * *
The sale and purchase under the contract was not carried out; the balance of the purchase price was not paid on March 1, 1952, and no deed was delivered. On or about March 15, 1952, the petitioner, having been advised by legal counsel in Mexico, Missouri, that he could either keep the farm or offer it for sale again, entered into an oral contract with the McGuire Auction Company of Holstein, Iowa, for the sale of the farm at public auction to be held on March 24, 1952. A few days after the sale, bills announcing the sale of the farm were distributed in and around Mexico, Missouri. Petitioner was advised by his legal counsel that Burcham was threatening to bring suit against him on the real estate contract. An agreement was reached between petitioner and Burcham and it was executed under date of March 24, 1952.
The agreement recited that the real estate contract had not been completed, that both parties declared a forfeiture of the contract, that each party was desirous of settling all claims and causes of action against t e other, and that it was desired by both parties that the farm be sold at auction, as advertised. The agreement provided that petitioner was to retain the $12,000 paid to him by the vendee in 1951. If the farm were sold at the auction, petitioner was to receive the first $48,000 of the proceeds of sale. All liens and encumbrances against the farm, as well as any expenses of the sale, were to be paid from this amount. The remainder of the proceeds of sale was to be paid to Burcham, but not to exceed the sum of $12,351. The balance, if any, of the sale proceeds was to be paid to petitioner. The agreement also contained mutual releases of the parties from any claim, damages, or causes of action, and it further provided for the execution and delivery to petitioner of a quitclaim deed to the farm by Burcham and his wife. The quitclaim deed was executed and delivered to petitioner on the date of the agreement.
The farm was offered for sale at public auction on March 24, 1952, and petitioner's bid of $44,000 was the highest bid received at the auction. No part of this bid went to Burcham under the agreement and petitioner retained the $12,000.00 received by him in 1951. On June 5 1952, the petitioner sold the farm for $55,000 to an unrelated third party.
The petitioner included the $12,000 received by him in 1951 as part of the selling price on the subsequent sale in June of 1952. Using the amount of $67,000 as the total selling price, the petitioner reported on his Federal income tax return for 1952 a long-term capital gain of $20,213.78 from the sale of the farm. The respondent in his notice of deficiency treated the $12,000 downpayment as a forfeiture and, after reducing it by various costs and legal fees amounting to $4,194.97, included the balance of $7,805.03 in the petitioner's 1952 income as a short-term capital gain. In an amended answer the respondent alleged that ‘should it be determined by the Court that said adjustment is not the net gain from the sale of a short-term capital asset, then in the alternative it constituted ordinary income received by the petitioners as liquidated damages arising out of a * * * real estate contract.’
Since a short-term capital gain in this case would be taxed to the same extent as ordinary income, petitioner's tax liability would be the same under either method.
We disagree with the petitioner's contention that the $12,000 less expenses and fees, is a long-term capital gain. The executory contract of sale, under date of September 29, 1951, provided for liquidated damages of 20 per cent of the agreed price of $60,000 if either party failed to duly perform his part of the contract. Burcham, the vendee, made a downpayment of $12,000, which was exactly 20 per cent of the selling price, and he agreed to pay the balance in March 1952, at which time the petitioner was to deliver a deed to the farm. Burcham did not pay the balance...
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