Porterfield v. Comm'r of Internal Revenue
| Citation | 73 T.C. 91 |
| Decision Date | 15 October 1979 |
| Docket Number | Docket No. 1504-77. |
| Parties | C. J. PORTERFIELD and IRENE PORTERFIELD, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P sold his ranch and received in partial consideration a $178,000 promissory note of the purchaser secured by certificates of deposit of the same value placed by the purchaser in an escrow account. P elected to report the gain from the sale under sec. 453, I.R.C. 1954, relating to installment sales. The parties to the sale intended the escrow account to be security only, and they regarded the purchaser as P's sole debtor. Held, the creation of the escrow account did not constitute a payment in the year of sale within the meaning of sec. 453(b)(2). Frank L. Scofield, for the petitioners.
James N. Mullen, for the respondent.
The Commissioner determined a deficiency of $79,903.69 in the petitioners' Federal income tax for 1972. The petitioners have conceded several issues; the sole issue remaining for decision is whether the petitioners were entitled to use the installment method of section 453 of the Internal Revenue Code of 19541 to report the gain on the sale of a ranch. The resolution of such issue turns on whether certain certificates of deposit placed in escrow to secure the performance of the purchaser's note constitute payment within the year of the sale.
Some of the facts have been stipulated, and those facts are so found.
The petitioners, C. J. Porterfield and Irene Porterfield, were husband and wife in 1972 and maintained their legal residence in Bryan, Tex., at the time they filed their petition herein. They filed their joint Federal income tax return for 1972 with the Internal Revenue Service, Austin, Tex. Mr. Porterfield will sometimes be referred to as the petitioner.
In March 1972, the petitioner, a rancher and businessman in Bryan, Tex., contracted to sell a ranch (the ranch) which he had owned in Robertson County, Tex., since about 1962. Under the contract, the purchaser, Henry B. Clay, a banker and investor in Bryan, was to purchase the 1,464 acres, more or less, for $250 per acre. Mr. Clay was to pay 30 percent of the purchase price at closing; but if he could not raise that amount, he had the options of either making a small down payment and assuming a first mortgage to which the property was subject or of canceling the sale. At the time of the sale, such mortgage was in the amount of $100,450 and was held by the Kansas City Life Insurance Co. (Kansas City Life). To finance the balance of the purchase price of the ranch, Mr. Clay agreed to give the petitioner personal notes payable over a 10-year period and secured by a second mortgage on the ranch. Mr. Clay was also to pay $1,000 in earnest money, and such payment was made on March 24, 1972.
After entering into such contract, Mr. Clay learned that he could secure more favorable terms by refinancing the purchase of the ranch, and the petitioner cooperated with him in arranging for the refinancing. To that end, on June 6, 1972, the petitioner executed a deed transferring the ranch to Mr. Clay. The petitioner acknowledged in the deed that he had received $285,000 from Kansas City Life and that the money had been paid at the request of Mr. Clay. However, in fact, Mr. Clay, and not the petitioner, received this money, and on the same day, Mr. Clay executed a note for the $285,000 payable to Kansas City Life and executed a deed of trust transferring the ranch as security for the note.
On June 19, 1972, the $285,000 was deposited in Mr. Clay's name in an escrow account with the Brazos County Abstract Co. (the abstract company). The abstract company dispensed most of this money in two payments. First, on June 22, 1972, it issued to Kansas City Life a check for $100,450 in full payment of the first mortgage of the petitioner to which the ranch was subject at the time of the sale. Second, on June 30, 1972, it issued a check for $178,000 to a bank for the purchase of certificates of deposit. The certificates were held by the abstract company under a second escrow agreement with Mr. Clay, dated July 1, 1972, under which the abstract company promised Mr. Clay to redeem the certificates as necessary in order to pay:
to CLYDE J. PORTERFIELD, FIVE (5) annual payments of $29,666.66 beginning on January 2nd, 1973 and continuing until January 2nd, 1977 and one (1) final installment of $29,666.70 on January (2d) 1978.
On July 1, 1972, Mr. Clay also executed a 61;2-percent note payable to the petitioner for $178,000 in partial consideration for the ranch. The note contained the same payment schedule as the escrow agreement. The escrow agreement was intended by Mr. Clay and the petitioner to replace the ranch as security for a portion of Mr. Clay's personal obligation to the petitioner; thus, the note stated that it was secured by the escrow agreement, and the escrow agreement also stated that it secured the note.
The remaining consideration received by the petitioner for the ranch consisted of three items: First, the petitioner was entitled to a cash payment of $6,550, payable out of the $285,000 borrowed from Kansas City Life.2 Second, on June 12, 1972, Mr. Clay executed a note for $81,112.50 payable to the petitioner over a period of 10 years, and on July 12, 1972, executed a deed of trust on the ranch to secure such note. Third, a survey of the ranch had ascertained that the actual acreage exceeded the estimate contained in the sales contract, and as a result, the petitioner received from Mr. Clay an additional note, dated July 12, 1972, in the amount of $3,740 for such additional acreage and an additional deed of trust to secure such note.
Despite some of the terms of the escrow agreement of July 1, 1972, the petitioner, Mr. Clay, and the escrow agent all considered the escrow fund merely as a security device, and in operation, it was so treated. Although the escrow agreement provided that the funds were to be paid to the petitioner, both the interest and payments of principal were actually paid to Mr. Clay. Mr. Clay, in fact, made the payments to the petitioner in accordance with the note, and the escrow agent made the payments of principal to Mr. Clay only after the agent was assured that Mr. Clay had made the payments called for by the note. The petitioner actually looked to Mr. Clay for payment of the note, and when Mr. Clay was late in making the 1974 payment, the petitioner agreed that he could wait and make such payment together with the 1975 payment.
The total...
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