Fletcher v. United States

• Decision Date: 14 December 1967
• Docket Number: Civ. No. 1942.
• Citation: 303 F. Supp. 583
• Parties: Samuel W. FLETCHER and Charlotte D. Fletcher, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Indiana

303 F. Supp. 583

Samuel W. FLETCHER and Charlotte D. Fletcher, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. No. 1942.

United States District Court N. D. Indiana, Fort Wayne Division.

December 14, 1967.

John D. Shoaff, Shoaff, Keegan & Baird, Fort Wayne, Ind., for plaintiffs.

Alfred W. Moellering, U. S. Atty., Fort Wayne, Ind., for the Government.

MEMORANDUM OF DECISION

ESCHBACH, District Judge.

This civil action to recover federal income taxes, allegedly erroneously and illegally assessed and collected, was instituted by the filing of a complaint on December 14, 1967 by Samuel W. Fletcher and Charlotte D. Fletcher, husband and wife "taxpayer", against the United States of America.¹ Trial to the Court was held in Fort Wayne, Indiana, on April 21, 1969. This court has jurisdiction pursuant to 28 U.S.C. § 1346 (a) (1) (1964).

This suit concerns the proper treatment for tax purposes of gain from the sale by the taxpayer of 6,000 shares of stock of Peoples Life Insurance Company. Taxpayer sold this stock on November 13, 1957 and received part of the consideration in the taxable year 1957 and the balance in the taxable year 1958. On tax returns timely filed for the years 1957 and 1958, taxpayer reported this gain as long term capital gain. The Commissioner, however, determined that the gain was short term capital gain and in 1963 assessed a deficiency for 1957 and 1958, plus interest. Taxpayer paid the deficiency and, on May 21, 1965, filed a claim for refund, which was disallowed. This suit followed.

A principal issue is the determination of the date on which taxpayer's holding period for the stock began. The taxpayer contends that the holding period began on May 9, 1957, more than six months before the date on which taxpayer sold the stock. It was on May 9, 1957 that taxpayer executed the contract pursuant to which he bought the stock. Taxpayer's position is that title passed and he acquired substantial equitable rights in the stock on May 9. The Government, on the other hand, contends that the holding period did not begin until August 9, 1957, less than six months before taxpayer sold the stock. August 9 is the date on which taxpayer made his final payment for the stock. The Government argues, alternatively, that the document of May 9 was merely an option contract or an alternative contract to buy the stock which was not exercised until August 9 or that the May 9 document, if it was a sales contract, did not put title in the taxpayer until August 9. In addition, the Government argues that taxpayer was acting as the agent for an undisclosed principal so the gain from the sale of the stock was compensation for services which would be taxable at ordinary income tax rates. This court holds that taxpayer's holding period began on May 9, 1957 and that he was not acting as an agent. The gain from the sale of the stock, therefore, is long term capital gain, and judgment will be for the taxpayer. Int.Rev.Code of 1954, §§ 1222, 1221, 1201(b).

The agreement of May 9, 1957 was executed by Lyman E. Boyle, seller, and the taxpayer as buyer. A copy of the actual contract is attached hereto as an Appendix. In pertinent part, it provided that seller "agrees to sell and does hereby sell" to buyer 6,000 shares of stock "upon the following terms and conditions." Buyer agreed to pay $960,000.00 for the stock — $1,000.00 on May 9, $4,000.00 within 10 days, and the balance of $955,000.00 on or before December 9, 1957. A dividend which was expected to be paid on July 1, 1957 was to belong to seller if buyer had not by then paid the full price; otherwise it would belong to buyer. Seller was to endorse the stock in blank and deposit it with an escrow agent who was to hold the stock until the full purchase price was paid. Buyer was to pay the escrow fees, all taxes associated with the transaction, and seller's attorney's fee of $15,000.00. Paragraph 7 of the agreement, an inartful conglomeration of language which the Government attempts to characterize as a "no recourse" clause, provides that "in the event that buyer is unable to pay the balance of the purchase price on or before August 9, 1957 or for any other reason defaults and so informs seller by registered letter * * this contract will then be considered null and void." In the event of buyer's death before August 9, 1957, and if "his personal representative cannot carry out the terms of this contract," then the personal representative was to notify seller by registered letter "that said contract will not be fulfilled by reason of the death of buyer, and in any event the amounts heretofore paid to seller as part of the purchase price herein shall be retained by him as liquidated damages." Paragraph 7 continues:

"In the event the buyer does not complete the purchase of said stock on or before December 9, 1957, consistent with the terms of the within agreement, then and in that event the buyer will pay to the seller the additional sum of Twenty Thousand Dollars ($20,000.00), which sum is agreed upon between the parties, as liquidated damages and this contract will then become null and void and of no force and effect."

The last paragraph of the agreement provides that the agreement shall be binding upon the heirs, representatives, and assigns of the parties.

Both parties fully complied with the terms of the contract. Buyer paid the $1,000 on May 9 and paid the additional $4,000.00 within 10 days. The stock was endorsed by the seller and placed in escrow pursuant to an escrow agreement dated June 26, 1957. The balance of the purchase price was paid on August 9, 1957, and buyer took possession of the stock certificates.

The Government argues that the agreement of May 9, 1957 was an alternative contract in which seller agreed to sell and buyer agreed either to buy or to forfeit his down payment and pay liquidated damages. In support of this interpretation of the contract, the Government argues that Paragraph 7 of the agreement permitted the taxpayer, if he chose, to "bow out" of the contract before August 9, 1957 for "any reason merely by so notifying seller by registered letter and forfeiting the $5,000 down payment." In other words, the Government argues that Paragraph 7 denies seller his usual remedies for the purchase price or for damages in the event of a default by the buyer.

To consider properly the contentions of the Government requires a review of the contract itself, a survey of the case law which has construed many of the terms the parties used here, and an examination of any other indications going to the intent of the parties. The question is whether this contract is a truly alternative contract or whether buyer promised a single performance but provided for liquidated damages in case of a breach. This is a problem of interpretation in light of the surrounding facts. 5 A. CORBIN, CONTRACTS § 1070 (1951). As will be seen, the Government's arguments are without merit.

The Government's argument begins by completely ignoring Paragraph 1 of the agreement in which buyer unequivocally "agrees to pay to the said seller for said stock the sum of Nine Hundred Sixty Thousand Dollars. * * *" The question, therefore, is whether or not Paragraph 7 gives to the buyer an alternative from which he would appear to be foreclosed by Paragraph 1.

The second paragraph of Paragraph 7 gives seller the right to a payment from the buyer of $20,000.00 "as liquidated damages" in the event that buyer does not complete the purchase of the stock on or before December 9, 1957. If buyer does not complete the purchase by December 9 and if buyer pays $20,000.00 to seller the "contract will then become null and void and of no force and effect." The first sentence of the first paragraph of Paragraph 7 substantially overlaps the second paragraph and provides that in the event that buyer "is unable to pay the balance of the purchase price on or before August 9, 1957, or for any other reason defaults * * * this contract will then be considered null and void." If buyer fails to pay the purchase price before August 9, a fortiori he fails to pay it before December 9, and, again, seller would have a right to a payment of $20,000.00 as liquidated damages. In either of these cases, it is not certain that the $5,000.00 already paid to seller would be a credit against the $20,000.00 or that it would be retained by seller in addition to the $20,000.00 so that seller would retain a total of $25,000.00. It is equally uncertain whether or not the second sentence of the first paragraph of Paragraph 7 resolves the dilemma. This resolution, however, is not necessary to a decision of the issues of this case because it is clear that the parties, by Paragraph 7, have attempted to fix the measure of damages, in the event of a failure by the buyer to pay the purchase price, at a sum of at least $20,000.00.

The Government's argument focuses on the first sentence of the first paragraph of Paragraph 7 and asserts that this language eliminates the buyer's obligation to pay the purchase price. The language, however, does not so operate. The words "null and void" in these circumstances do not mean that seller's sole remedy in case of a default by the buyer is to take back the stock and recover $20,000.00 from the buyer as liquidated damages. Phrased differently, the words do not mean that the buyer can force the seller to take back the stock by tendering to him a payment of $20,000.00. "Null and void" as here used means that the contract is voidable at the election of the seller. Stewart v. Griffith, 217 U.S. 323, 30 S.Ct. 528, 54 L.Ed. 782 (1910); Burns Mortgage Co. v. Schwartz, 72 F.2d 991 (3d Cir. 1934); see Western Union Telegraph Co. v. Brown, 253 U.S. 101, 40 S.Ct. 460, 64 L. Ed. 803 (1920); 1A A. CORBIN, CONTRACTS § 166 (1950).

Furthermore, there is nothing about the per se presence of a liquidated damages clause which restricts the seller's remedies in case of a breach by the buyer. That is, the...