Rutland v. Commissioner

• Decision Date: 17 January 1977
• Docket Number: Docket No. 6438-74.
• Parties: Hubert Rutland and Ruth Rutland v. Commissioner.
• Court: U.S. Tax Court

36 TCM (CCH) 40

1977 TC Memo 8

T.C. Memo. 1977-8.

Hubert Rutland and Ruth Rutland v. Commissioner.

Docket No. 6438-74.

United States Tax Court.

Filed January 17, 1977.

Michel G. Emmanuel, Michael D. Annis, 20th Floor, Exchange National Bank Bldg., Tampa, Fla. and Joseph D. Edwards, for the petitioners. Donald W. Williamson, Jr., for the respondent.

Memorandum Findings of Fact and Opinion

SCOTT, Judge:

Respondent determined deficiencies in petitioners' Federal income tax for the taxable years ending June 30, 1968 and 1969 in the amounts of $45,497.07 and $67,650.10, respectively, and additions to tax under section 6653(a), I.R.C. 1954¹ of $2,274.85 and $3,382.51, respectively.²

Some of the issues raised by the pleadings have been disposed of by agreement of the parties. The issues remaining for decision are:

(1) whether a transaction whereby petitioners acquired a building and cash and International Minerals and Chemical Corporation acquired land formerly owned by petitioners constitutes in part an exchange of like kind properties within the meaning of section 1031;

(2) whether, under a contract for sale of fruit by petitioners, amounts available for petitioners to draw by agreeing to pay interest in excess of the prime rate were constructively received in their taxable year ended June 30, 1969, even though the amounts were not drawn;

(3) whether the fair market value of office space which petitioners furnished rent-free to a symphony society and a credit counseling service during their fiscal year ended June 30, 1969, pursuant to an unwritten agreement, is deductible as a charitable contribution under section 170.

Findings of Fact

Some of the facts have been stipulated and are found accordingly.

Petitioners Hubert Rutland and Ruth Rutland were residents of St. Petersburg, Florida at the time of the filing of their petition in this case. Petitioners filed joint Federal income tax returns for the taxable years ended June 30, 1968 and 1969, with the District Director of Internal Revenue for the District of Florida.

Mr. Rutland is a well-known St. Petersburg businessman. During the years here in issue he was controlling shareholder, president and chairman of the board of directors of the St. Petersburg Bank and Trust Company, a Florida banking corporation. Mrs. Rutland, petitioners' daughter and their son-in-law, Robert N. Bussey, were also on the board of directors of the bank during the years here in issue. Mrs. Rutland also held the position of vice president of the bank.

Petitioners owned approximately 28,560 acres of land situated in Manatee County, Florida. Officials of International Minerals and Chemical Corporation (IMC) believed this land contained commercially recoverable deposits of phosphate rock. On May 4, 1965, petitioners entered into a "Lease and Agreement" with IMC which, in part, gave IMC the right to purchase 2,500 acres of the Manatee County land for $500 per acre. The agreement was thereafter supplemented and amended on March 31, 1966, and July 7, 1967. The early drafts of the "Lease and Agreement" provided for an exchange of properties if desired by Mr. Rutland. Section 2 of Article IV of the third early draft provided as follows:

The owners the Rutlands shall convey such property to IMC or its nominee by general warranty deed by payment of the purchase price. The purchase price for such property shall be $500.00 per acre and the owners shall have the right to select either of the following plans for payment:

1. Cash upon closing;

2. Other terms which may be acceptable to owners and IMC;

3. An exchange for real property to be designated by owners which may be available for purchase by IMC at a price not exceeding the purchase price of the property being purchased hereunder, with the additional costs of the transfer and exchange to be borne by owners and with no obligation by way of warranty of the title to the selected property on the part of IMC in such exchange; any additional balance due on the purchase price of the property being purchased hereunder to be paid in cash at closing, or

4. Any combination of the above plans acceptable to both owners and IMC.

The fourth, fifth and sixth drafts of the agreement contained only items 1 and 2 above. The seventh and final draft provided only that "The purchase price for the property shall be $500.00 per acre," the other language being eliminated because the "Lease and Agreement" was to be submitted to the Internal Revenue Service for a ruling as to whether the disposition of the Manatee County land under the agreement would be considered as a sale of a capital asset. There, however, was an oral agreement between Mr. Rutland and IMC that IMC would cooperate with Mr. Rutland in effecting an exchange of third-party property that Rutland might like IMC to acquire and convey to him in full or partial consideration for his conveyance to IMC of 2,500 acres of Manatee County land.

On June 3, 1965, counsel for IMC submitted to the Internal Revenue Service, Washington, D.C., on behalf of petitioners, a request for a ruling that the disposition of the Manatee County land under the "Lease and Agreement" dated as of May 4, 1965, would be considered as a sale of a capital asset. No mention of an exchange was made in the ruling request.³

Mr. Rutland also owned a store and office building on Fouth Street and Central Avenue in St. Petersburg, Florida, known as the Rutland Building, which is a portion of a building originally known as the Snell Building. The other portion of the building was occupied by Walgreen Drug Company. The building was known as the Walgreen Building. The Walgreen Building was beneficially owned by A.H. Greenfield of Chicago, Illinois, with the title to the building being held in the name of his daughter and nominee, Cecelia Taman, also of Chicago.

Mr. Greenfield desired to sell the Walgreen Building property and engaged an attorney, Leonard Cooperman, to assist him in this regard. In February 1967, Mr. Greenfield approached Mr. Rutland about buying the property for $350,000, but Mr. Rutland declined to acquire the property.

Subsequently, Mr. Cooperman contacted Mr. Rutland, who expressed a willingness to acquire the property as part of a transaction between Mr. Rutland and IMC. Mr. Greenfield, through Mr. Cooperman, orally agreed with Mr. Rutland directly, or with Mr. Rutland through his attorney, Mr. Bussey, on a purchase price of $300,000 for the Walgreen property. Neither IMC nor its representatives ever negoitated with Mrs. Taman, Mr. Greenfield or Mr. Cooperman with respect to the proposed acquisition of the Walgreen Building property. The terms of this transaction were negotiated by Mr. Rutland or his attorney. However, Mr. Cooperman was informed that IMC would be the buyer and Mr. Cooperman further advised Mr. Greenfield that there was no reason to believe that Mr. Rutland would acquire the property other than from IMC. Therefore, it was clear to Mr. Cooperman early in the negotiations for purchase of the Walgreen Building that Mr. Rutland was interested in the Walgreen Building only if the transfer of land to IMC was to be consummated. Whether the acquisition was in the name of IMC or Mr. Rutland made no difference to Mr. Greenfield, as long as he received the agreed upon selling price.

Mr. Cooperman drafted a sales agreement which provided, in part, that the Walgreen Building property would be conveyed by Mrs. Taman, joined by her husband, to the St. Petersburg Bank, as trustee. The agreement was executed by the Tamans and forwarded to Mr. Bussey, but the bank never signed the contract. This sales agreement was drafted after Mr. Rutland had requested IMC to acquire the Walgreen Building to be used as a partial exchange for the Manatee County land. Mr. Bussey had informed Mr. Cooperman that the exchange was to be made.

In a letter dated June 23, 1967, Mr. Bussey advised IMC's attorney, Mr. Butler, of the legal description of the Walgreen Building. On June 28, 1967, Mr. Butler forwarded to Mr. Bussey copies of the various documents pertaining to the closing of the transfer of the Manatee County land to IMC and the purchase of the Walgreen property, including a draft of a closing memorandum. Mr. Butler advised Mr. Bussey that it was assumed that the Tamans would pay the documentary stamps with respect to the conveyance of the Walgreen property and that therefore such cost was not shown on the closing memorandum and, also, that the closing memorandum did not reflect any arrangement Mr. Bussey might have made with respect to a proration of taxes, insurance, or other matters in connection with the acquisition of the building.

All of the details necessary to the proposed acquisition of the Walgreen Building property were handled by Mr. Bussey. He checked the title to the property and had West Coast Title Company recertify the abstract. After an examination of the title he advised Mr. Rutland of his findings through an opinion letter. He also had correspondence with Equitable Life Assurance Society of the United States with respect to the abstract on the property and also requested information concerning the amount and payoff provisions of the mortgage on the Walgreen Building held by Equitable.

July 7, 1967, was finally set as the closing date for the transactions concerning the Walgreen Building property and Manatee County property. Closing had been delayed because of title problems with respect to the Manatee County land to be conveyed by Mr. Rutland to IMC. The documents to be executed by IMC had been forwarded for that purpose by Mr. Butler to IMC's Chicago attorney, E.W. Saunders, on June 27, 1967. The executed documents were delivered at closing. The Tamans had executed a deed on June 29, 1967, to convey the Walgreen Building property to the St. Petersburg Bank, a trustee.

The deed executed by the Tamans conveying the property to the St. Petersburg Bank, as trustee, was delivered at the closing on July 7,...