Grannemann v. United States

• Decision Date: 29 September 1986
• Docket Number: No. N85-0127C.,N85-0127C.
• Parties: Edward GRANNEMANN and Ruth Grannemann, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Eastern District of Missouri

649 F. Supp. 949

Edward GRANNEMANN and Ruth Grannemann, Plaintiffs, v. UNITED STATES of America, Defendant.

No. N85-0127C.

United States District Court, E.D. Missouri, N.D.

September 29, 1986.

Brown, Willbrand & Simon, P.C., B. Daniel Simon, Columbia, Mo., Wasinger, Parham & Morthland, Austin Parham, Hannibal, Mo., for plaintiffs.

Robert D. Metcalfe, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., Wesley D. Wedemeyer, Asst. U.S. Atty., St. Louis, Mo., for defendant.

MEMORANDUM

HUNGATE, District Judge.

This matter is before the Court for determination on the merits based upon the parties' stipulation that the claim could be determined on the parties' cross-motions for summary judgment. The parties have waived trial by jury.

In general, plaintiffs seek a refund of paid taxes which plaintiffs contend were improperly assessed and collected. Upon the 1979 sale of their farm land and related personal property, plaintiffs assert that, pursuant to 26 U.S.C. § 453, they were entitled to use the installment sales method of reporting the income from that sale. Plaintiffs also seek an award of attorney's fees and litigation costs pursuant to 26 U.S.C. § 7430. Defendant contends plaintiffs were not entitled to use the installment sales method to report this income because sale proceeds were deposited with a bank in escrow and such funds must be treated as having been received by plaintiffs in the year of the sale.

Having carefully considered the record herein, including the pleadings, the parties' joint stipulation of uncontested facts, the parties' supplementary joint stipulation of uncontested facts, the relevant exhibits, and the parties' argument, the Court hereby makes and enters the following findings of fact and conclusions of law.

Findings of Fact

1. Plaintiffs, Edward and Ruth Granneman, are and were at all times relevant to

the present action husband and wife, residing in Chariton County, Missouri, which is within the Eastern District of Missouri.

2. Prior to December 18, 1979, plaintiffs were the owners of (a) real property located in Chariton County, Missouri, described as follows:

All the Southwest Quarter (SW¼) of Section Twenty-two (22) Township Fifty-four North (54N) Range Seventeen West (17W)

and (b) certain personal property located on that real property, and more properly described as:

Wheat crop (growing), all cattle watering systems, tanks and fountains (including automatic watering systems), all fences, 6 wire hog panels, window air conditioning unit in house, television tower, built in electric range and hood, smoke house and brooder house.

3. Prior to August 1979, plaintiffs decided they wanted to sell their farm, including the above-described real and personal property. At that time, they wanted to take the sales price in installments, paid over a number of years, rather than taking the sales price in cash in the year of sale, so they could minimize the capital gains taxes which they would otherwise be required to pay by reason of the sale. Plaintiffs' sole motivation to sell their farm on an installment plan was to qualify for the installment sales method of reporting income and to thereby reduce the capital gains tax that would otherwise be payable under a cash sale if plaintiffs received the entire amount of the sales price at the time of the sale in 1979.

4. In August 1979, plaintiffs listed their farm for sale with Walter S. Iman, a real estate broker who operated Iman Realty and Auction Service located in Chariton County, Missouri. The listing agreement recited a sales price of $360,000.00 for the farm, which plaintiffs then believed had a total of 160 acres. The total was based upon a sales price of $2,250.00 per acre. The terms of sale contained in the "Missouri Farm Listing Agreement" provided for the following schedule for payment of the principal amount of the sales price: ten percent in cash at closing; and the balance to be paid over a period of ten years at nine percent per annum.

5. In November 1979, Jimmie Webster, the land agent for the Associated Electric Cooperative (AEC) of Springfield, Missouri, a Missouri corporation, approached Walter Iman and, on behalf of AEC, offered to purchase plaintiffs' farm for a price of $2,000.00 per acre. AEC desired to acquire the farm in order to exchange it for a farm owned by John Bixenman. The Bixenman land contained coal that AEC desired to mine in its coal mining operation.

6. At the time of the offer to purchase the Grannemann farm, Mr. Webster offered either to pay the entire purchase price in cash ($320,000.00) upon closing of the purchase and sale, or to pay the purchase price in installments over several years. At the time the offer was made, AEC had the present ability to pay in cash the entire amount offered as its purchase price for the Grannemann farm.

7. At the time of AEC's offer, Walter Iman, acting on behalf of plaintiffs, informed Jimmie Webster that the purchase price of the farm would have to be paid in installment payments and that the Grannemanns would refuse to accept payment of the entire purchase price in cash in the year of the sale.

8. Plaintiffs also then indicated their desire that the obligation of AEC to pay to the Grannemanns the balance of the sales price in installments be secured or collateralized in some manner. In a transaction for the purchase and sale of a farm, the obligation to pay the installment payments representing the balance of the sales price would ordinarily be secured or collateralized by a mortgage or deed of trust upon the farm land. AEC was unable and unwilling to give a mortgage or deed of trust to the Grannemanns as security or collateral for the obligation to pay them the installment payments because (a) AEC was a party to a first mortgage given to the Rural Electrification Administration (REA) and that mortgage automatically attached to all land then owned and all land later acquired by AEC; and (b) AEC was required to convey the plaintiffs' land to John Bixenman, free and clear of any encumbrance.

9. Mr. Jack Peace, an attorney for AEC, had developed an escrow arrangement which could be used to provide security for installment payments in lieu of a mortgage or deed of trust upon farm land. Under the terms of that escrow arrangement, AEC would enter into an "Escrow Agreement" with a local banking institution, and would deliver funds to that bank for investment or deposit in interest-earning deposits issued in the name of AEC and upon which AEC would earn and receive the interest. The terms of the escrow arrangement provided that if there was a default upon a promissory note given by AEC in part payment of the purchase price for the land, then the holder of the note would be entitled to present the note to the banking institution acting as the escrow holder, which would be required to pay the note. During the negotiations between plaintiffs and AEC for the purchase and sale of plaintiffs' farm, Mr. Peace proposed to Walter Iman that this escrow arrangement be used to secure or collateralize AEC's installment payments.

10. In November 1979, AEC agreed with Edward and Ruth Grannemann to purchase the real and personal property for the price of $2,000.00 per acre of farm land.

11. On November 19, 1979, plaintiffs and AEC executed a written sales agreement entitled "Contract for the Sale of Farm Land" (contract). The contract provided for the sale of 160 acres of farm land, in addition to the personal property, for the total purchase price of $320,000.00. Schedule A of the contract provided that the original purchase price of $320,000.00 would be paid by AEC to plaintiffs in the following manner:

(a) $32,000.00 would be deposited in escrow with the Iman Realty and Auction Service by AEC as an earnest money deposit, to be paid over to plaintiffs at the closing of the sale;

(b) AEC would pay an additional $56,160.00 to plaintiffs at the closing of the sale; and

(c) AEC would pay the balance of the purchase price, an amount determined to be $231,840.00, by tendering to plaintiffs four promissory notes in the amount of $57,960.00 each, which would bear interest in the amount of nine percent per annum, and which would be payable successively on January 15, 1980, January 15, 1981, January 15, 1982, and January 15, 1983. Schedule A provided that upon payment of each of the promissory notes given by AEC to plaintiffs, plaintiffs would mark the promissory note as "paid" and "cancelled," and return it to AEC. Schedule A of the contract further provided that on the date of the closing of the sale of the farm land, AEC would place "additional cash collateral of $231,840.00" into "an escrow account of the Salisbury Mercantile Bank established and owned by the buyer for the purpose of providing collateral to guarantee notes executed by Associated Electric Cooperative to the Seller."

12. A land survey of the relevant real property was made in December 1979. It established that the actual area of the real property was 165.05 acres. To reflect the increased acreage, the contract and Schedule A thereto were subsequently amended in the following manner:

(a) the total purchase price was raised from $320,000.00 to $331,000.00, to reflect the price of $2,000.00 per acre;

(b) the additional payment of cash due at the time of the closing of the sale was raised from $56,160.00 to $60,800.00;

(c) the balance of the purchase price due after the closing of the sale was raised from $231,840.00 to $238,200.00; and

(d) the face value of each of the four promissory notes, which together represented the balance of the purchase price due after the closing of the sale, was raised from $57,960.00 to $59,550.00. The earnest money amount of $32,000.00 was not changed.

13. The use of Salisbury Mercantile Bank (bank) as the escrow agent was suggested by Walter Iman and agreed to by plaintiffs and AEC. AEC had no account with the bank other than a small courtesy bank account. The...