Ehlert v. Commissioner
| Decision Date | 16 September 1985 |
| Docket Number | Docket No. 21226-81. |
| Citation | 1985 TC Memo 479,50 TCM (CCH) 1048 |
| Parties | Delbert D. Ehlert v. Commissioner. |
| Court | U.S. Tax Court |
Phillip E. Gibbons, 700 E St., Sacramento, Calif., for the petitioner. Patricia Anne Golembiewski, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's 1976 Federal income tax in the amount of $22,973. After numerous concessions, the sole issue presented is whether petitioner is entitled to use the installment method of section 4531 in reporting the gain from his sale of certain real property. The parties articulate the issue as whether the broker's commission in the sale was the seller's obligation and part of the gross purchase price, as respondent contends, or the buyer's separate obligation, as petitioner contends.
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner resided in Days Creek, Oregon, at the time he filed his petition in this case. Petitioner timely filed a joint Federal income tax return for 1976 on behalf of himself and his then-wife, Joyce N. Ehlert (Mrs. Ehlert). Subsequently, Mrs. Ehlert filed a separate return for 1976. The parties now agree that the 1976 return filed by petitioner is to be treated as his separate return with head of household filing status.
In the fall of 1976, petitioner wanted to sell certain real property, commonly known as the Ehlert Foundry located in Grass Valley, California (the Foundry). He owned the Foundry as his separate property. Petitioner and Richard P. Esterly informally discussed having the W. W. Esterly Organization handle the sale. The record is not clear as to whether they actually discussed in so many words a "net listing" basis under which petitioner would receive a net return of $135,000 and leave it up to the broker to negotiate his commission with the buyer. However, it is clear that petitioner insisted that he had to receive at least $135,000 in the sale and that anything above that would be the broker's fee. There was no written listing agreement.
On December 10, 1976, petitioner sold the Foundry to Wood Electric Company (a partnership). The real estate purchase contract shows the purchase price as $150,000 and a commission of $15,000 to the W. W. Esterly Organization. Petitioner (as seller) signed a real estate purchase contract, which had been prepared by Richard P. Esterly, the individual broker involved. At the bottom of that form agreement, below the caption "Acceptance," the purchase contract stated:
The undersigned Seller accepts the foregoing offer and agrees to sell the property described thereon on the terms and conditions therein set forth. The undersigned Seller has employed W. W. Esterly Organization as Broker(s) and for the Broker(s) services agrees to pay Broker(s) as a commission, the sum of Fifteen Thousand and no/100 Dollars ($15,000.00) payable as follows: (a) On recordation of the deed or other evidence of title, or (b) if completion of sale is prevented by default of Seller, upon Seller's default, or (c) if completion of it is prevented by default of Buyer, only if and when Seller collects the damages from Buyer, by suit or otherwise, and then in an amount not to exceed one half that portion of the damages collected after first deducting title and escrow expenses and the expenses of collection, if any. Emphasis added.
However, an earlier paragraph of that same form contract provided in handwritten form that:
Buyer will deposit in escrow *** the balance of purchase price as follows:
$35,000 cash down of which the above deposit $500 is a portion thereof.
$100,000 note and D/T deed of trust to Seller, 8½% int., $1,000/month incl. int., first 2 years, $1,200.00 or more/mo. 3rd yr. to end of term of note — 10 year Due date.
$15,000.00 note & D/T deed of trust to Broker (commission) payable $250/mo. incl. int. @ 10% for 1st 2 years, 3rd yr. to end of term of note payments to be $350/mo. *** Emphasis added.
The seller's escrow instructions and the escrow closing agreement show the purchase price as $150,000 and the broker's commission as $15,000, paid by the buyer's note and deed of trust. The buyer executed the required $100,000 purchase money note secured by a deed of trust on the Foundry property in petitioner's favor. The buyer also executed a $15,000 installment note secured by a deed of trust on the Foundry property in the broker's favor in payment of his commission. The payments under that $15,000 note were to begin in June of 1977.
Esterly had been a licensed broker since 1962 and had been in the real estate business in Grass Valley, California since 1958. Grass Valley is a small town about 50 miles northeast of Sacramento. The contract Esterly prepared for petitioner was a standardized form, well accepted among California real estate practitioners, that had been provided by the California Real Estate Association. Normally, Esterly would modify the standardized form if it did not reflect the actual agreement between the buyer and seller. When dealing with individuals whom he knew and trusted, like petitioner and the buyer's principals in this case, Esterly might not modify the standardized form, relying instead on "the old handshake concept that a man is as good as his word."
On his 1976 return, petitioner reported the gain from this real property sale under the installment method. An attachment to petitioner's return, entitled Installment Sales Computation, stated that the gross sales price of the real property was $150,000. This attachment also indicated that petitioner received $35,000 in the year of sale,2 and treated the $15,000 commission as a mortgage assumed by the buyer.
In his statutory notice, respondent determined that petitioner was not entitled to use the installment method because he received more than 30 percent of the selling price in the year of sale. Underlying this determination is respondent's position that the $15,000 commission was petitioner's obligation and that the buyer's "payment" of this commission was part of the payment of the selling price that petitioner received in the year of sale.
OpinionThe only issue for decision is whether petitioner's sale of his Foundry qualifies for installment sale treatment under section 453. As applicable during the year before the Court, section 453(b) permits such treatment provided "payments" in the year of sale "do not exceed 30 percent of the selling price."3 Section 453(b)(2)(A) (ii) excludes "evidences of indebtedness of the purchaser" for purposes of the 30-percent limitation.
Payments under section 453(b) generally include the buyer's assumption of or cancellation of the seller's liabilities as part of the bargained-for exchange. Bostedt v. Commissioner Dec. 35,237, 70 T. C. 487, 490-492 (1978) and cases cited therein. See also Sallies v. Commissioner Dec. 41,346, 83 T. C. 44, 53-55 (1984).4 In particular, the buyer's assumption of or cancellation of the seller's obligation to pay a broker's commission is treated as payment to the seller. Bostedt v. Commissioner, supra; Wagegro Corp. v. Commissioner Dec. 10,510, 38 B. T. A. 1225, 1228-1229 (1938). Petitioner does not challenge the holdings in these cases but says that here the obligation to pay the broker's commission was the obligation of the buyer, not the seller. Respondent says the real estate purchase contract clearly shows that the buyer paid the broker's commission in satisfaction of petitioner's obligation, so that petitioner thus received more than 30 percent of the purchase price in the year of sale and hence is not entitled to use the installment method.5 The real estate purchase contract in this case is not as clear as respondent suggests.
We have consistently held that when a taxpayer has executed a written agreement providing the specific terms of a transaction in which the tax consequences are at issue, he must adduce "strong proof" to establish a position at variance with the clear language of his written agreement. Ledoux v. Commissioner Dec. 38,123, 77 T. C. 293, 308 (1981), affd. per curiam 83-1 USTC ¶ 9176 695 F. 2d 1320 (11th Cir. 1983); Porterfield v. Commissioner Dec. 36,389, 73 T. C. 91, 96 (1979); Lucas v. Commissioner Dec. 31,551, 58 T. C. 1022, 1032 (1972). Petitioner, however, is not seeking to vary the terms of his agreement.
Although one clause of the real estate purchase contract suggests that petitioner (the seller) had employed the broker and had promised to pay the broker's commission, another clause shows that the buyer was actually undertaking to pay the commission. Moreover, the terms of payment by the buyer are far different from the terms of payment in the clause that indicates petitioner was promising to pay the commission. We think the document is ambiguous on its face. Consequently, the "strong proof" rule does not apply since petitioner is merely offering extrinsic evidence to construe the terms of an ambiguous writing. Peterson Machine Tool Co. v. Commissioner Dec. 39,178, 79 T. C. 72, 81-82 (1982), affd. in an unreported opinion (10th Cir. 1984) (54 AFTR 2d 84-5407, 84-2 USTC ¶ 9885); Morrison v. Commissioner Dec. 31,602, 59 T. C. 248, 256 (1972).6 Cf. Smith v. Commissioner Dec. 41,180, 82 T. C. 705, 713-714 (1984) (). Petitioner bears only the usual burden of proof in this case. Peterson Machine Tool Co. v. Commissioner, supra; Rule 142(a).
While the factual issue in this case is very close, we conclude that payment of the broker's commission was the buyer's obligation and that the buyer did not assume or cancel any obligation of the seller. Both petitioner and Esterly, the individual broker, testified regarding their informal discussion of what amounted to a "net listing" arrangement. Petiti...
To continue reading
Request your trial