Musselman v. Comm'r of Internal Revenue (In re Estate of Bowers)
| Decision Date | 16 April 1990 |
| Docket Number | Docket No. 37702-87. |
| Citation | 94 T.C. No. 34,94 T.C. 582 |
| Parties | ESTATE OF ALEXANDER S. BOWERS, DECEASED, ROBERT M. MUSSELMAN, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
T entered into an agreement of April 28, 1982, to sell his Federal oil and gas lease to AQ Company (AQ) for $2,000,000, which paid $400,000 earnest money therefor in May 1982. On some undisclosed date prior to July 1982, Browne Land Trust contracted to purchase a farm and related Federal Land Bank stock from an undisclosed seller for $877,000. The Trust had no connection either with T or with AQ. The Trust agreed on July 6, 1982, to transfer its interest in the farm to T for an additional $200,000. On July 7, 1982, the Trust purchased the farm and stock, making payment therefor in part with cash furnished by T. In T's 1982 income tax return there was attached Schedule F relating to the operation of a farming business. It was concerned solely with the farm that was still under contract to be sold to T by the Trust. That schedule reported income received in 1982 by T from the operation of the farm and claimed a wide range of deductions for expenses paid and depreciation sustained in connection with the farm during that year. In 1983, in order to ‘save or defer‘ taxes, T participated in three ‘restructured‘ agreements whereby AQ purportedly undertook to buy the farm from the Trust, and AQ in turn agreed to ‘exchange‘ the farm for T's oil and gas lease. HELD, in the circumstance of this case, there had already been such ‘substantial implementation‘ of T's purchase of the farm in 1982, cf. Coupe v. Commissioner, 52 T.C. 394, 405 (1969), as to preclude the availability of the nonrecognition provisions of section 1031(a) of the Internal Revenue Code upon the 1983 ‘restructuring‘ of the transactions.
The Commissioner had filed an amended answer claiming an increased deficiency based solely upon a recomputation of the alternative minimum tax. HELD, unless there is more to the matter than has been disclosed to the Court, what is involved here is merely a mechanical computation that can be made by the parties under Rule 155 without the production of any evidence by the Commissioner, notwithstanding that the burden of proof in respect of an increased deficiency would otherwise be upon the Commissioner. Douglas E. Little, for the petitioner.
Deborah C. Stanley, for the respondent.
Petitioner is the Estate of Alexander S. Bowers. The Commissioner determined deficiencies in the decedent's income tax for the calendar years 1982 and 1983 in the amounts of $43,211.42 and $216,851, respectively. The decedent was a resident of Virginia, and Robert M. Musselman, executor of his estate, was also a resident of Virginia when the petition herein was filed. After concessions, the parties agree that the only remaining issue is whether decedent's transfer of an oil and gas lease and acquisition of a farm constituted an ‘exchange‘ which qualifies for nonrecognition of gain under section 1031. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. This case was submitted on the basis of a stipulation of facts and a stipulation of issues.
FACTS. On April 28, 1982, by letter addressed to American Quasar Petroleum Company (American Quasar), Bowers agreed to sell a Federal oil and gas lease to it for $2,000,000. On May 13, 1982, American Quasar endorsed its acceptance of the agreement on that letter, and, as required therein, paid $400,000 earnest money deposit to Bowers on the same day. The remaining $1,600,000 was to be paid upon delivery of an executed assignment of the lease. The assignment was to be made on a form acceptable to the Bureau of Land Management. Delivery of the assignment was to be made ‘no sooner than 12 months from the simultaneous drawing date of February 25, 1982, and no later than 30 days following the 12 month anniversary date of February 25, 1982.‘
Browne Land Trust (the Trust) was an entity of which Henry J. Browne was both trustee and a beneficiary. Neither the Trust nor Mr. Browne nor anyone else associated with the Trust in any way was shown to have any connection with Bowers or American Quasar. At some undisclosed time prior to July 1982, the Trust entered into an agreement to purchase approximately 441 acres known as Hickory Ridge Farm (the farm) for a gross purchase price of $870,000 plus $7,000 for the purchase of the sellers' Federal Land Bank stock.
By letter dated July 6, 1982, the Trust agreed to transfer its interest in the farm to Bowers for an additional $200,000. Thus, the offer by the Trust was to sell the stock and the farm for a total of $1,077,000, plus payment of closing costs and one year's insurance premium. The purchase price was to be paid as follows:
(a) Assumption of a Federal Land Bank loan in the approximate amount of $120,000, plus purchase of the sellers' Federal Land Bank stock for $7,000;
(b) Assumption or pay-off of a second lien deed of trust note to the Trust's grantor in the principal amount of $380,000;
(c) A temporary note for $322,000;
(d) A temporary note for $200,000; and
(e) Cash of $55,000 to be paid on July 7, 1982, ‘time being of the essence.‘
On July 7, 1982, the Trust purchased the farm and the sellers' Federal Land Bank stock for $877,000 as follows:
+--------------------------------------------------------------+
¦To agreed purchase price ¦$870,000.000¦ ¦
+-------------------------------------+------------+-----------¦
¦By assumption of Federal Land ¦ ¦$118,411.44¦
+-------------------------------------+------------+-----------¦
¦Bank deed of trust ¦ ¦ ¦
+-------------------------------------+------------+-----------¦
¦By interest due to sellers but ¦ ¦5,466.66 ¦
+-------------------------------------+------------+-----------¦
¦payable in Oct. 1st installment on ¦ ¦ ¦
+-------------------------------------+------------+-----------¦
¦Federal Land Bank loan ¦ ¦ ¦
+-------------------------------------+------------+-----------¦
¦To purchase of Federal Land Bank ¦7,000.00 ¦ ¦
+-------------------------------------+------------+-----------¦
¦stock ¦ ¦ ¦
+-------------------------------------+------------+-----------¦
¦By two second lien deferred purchase ¦ ¦380,000.00 ¦
+-------------------------------------+------------+-----------¦
¦money bonds ¦ ¦ ¦
+-------------------------------------+------------+-----------¦
¦By sellers' share of recording tax ¦682.00 ¦ ¦
+-------------------------------------+------------+-----------¦
¦By sellers' share of 1982 rsaveestate¦$2,473.73 ¦ ¦
+-------------------------------------+------------+-----------¦
¦taxes on 333.7 acres ¦ ¦ ¦
+-------------------------------------+------------+-----------¦
¦By sellers' share of 1982 real estate¦ ¦$658.46 ¦
+-------------------------------------+------------+-----------¦
¦taxes on 117.910 acres ¦ ¦ ¦
+-------------------------------------+------------+-----------¦
¦By certified or cashier's check ¦ ¦369,507.71 ¦
+-------------------------------------+------------+-----------¦
¦ ¦877,000.00 ¦877,200.00 ¦
+--------------------------------------------------------------+
The cash paid by the Trust at closing was obtained from Bowers as follows:
+-----------------------------------------------------------+
¦By proceeds of loan per temporary ¦ ¦$322,000.00¦
+------------------------------------+----------+-----------¦
¦note of July 6, 1982 ¦ ¦ ¦
+------------------------------------+----------+-----------¦
¦By deposit made June 30, 1982 by ¦ ¦5,000.00 ¦
+------------------------------------+----------+-----------¦
¦Bowers ¦ ¦ ¦
+------------------------------------+----------+-----------¦
¦By proceeds of loan to Bowers from ¦ ¦55,000.00 ¦
+------------------------------------+----------+-----------¦
¦National Bank & Trust Co. ¦ ¦ ¦
+------------------------------------+----------+-----------¦
¦By interest earned on $5,000 deposit¦ ¦5.06 ¦
+------------------------------------+----------+-----------¦
¦—7 days at 5.24% ¦ ¦ ¦
+------------------------------------+----------+-----------¦
¦To fees, expenses, and closing costs¦$1,950.94 ¦ ¦
+------------------------------------+----------+-----------¦
¦incurred by Trust in closing ¦ ¦ ¦
+------------------------------------+----------+-----------¦
¦purchase of the farm ¦ ¦ ¦
+------------------------------------+----------+-----------¦
¦To gross purchase price paid for ¦369,507.71¦ ¦
+------------------------------------+----------+-----------¦
¦purchase of the farm ¦ ¦ ¦
+------------------------------------+----------+-----------¦
¦To Bowers, interest on deposit ¦5.06 ¦ ¦
+------------------------------------+----------+-----------¦
¦To balance refunded to Bowers ¦10,541.35 ¦ ¦
+------------------------------------+----------+-----------¦
¦ ¦382,005.06¦382,005.06 ¦
+-----------------------------------------------------------+
The sum of $10,541.35 was refunded to Bowers by the attorney for the Trust on or about July 9,...
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