Sterling v. Ham

• Decision Date: 06 May 1933
• Parties: STERLING v. HAM, Collector of Internal Revenue.
• Court: U.S. District Court — District of Maine

3 F. Supp. 386

STERLING v. HAM, Collector of Internal Revenue.

District Court, D. Maine, S. D.

May 6, 1933.

Locke, Perkins & Williamson, of Augusta, Me., for plaintiff.

William B. Nulty, Asst. U. S. Atty., of Portland, Me., for defendant.

PETERS, District Judge.

This action is brought to recover the sum of $3,436.32 paid by the plaintiff for income taxes, penalty, and interest for the year 1926.

From the provisions of a stipulation between the parties, it appears that the plaintiff is properly in court and a jury waived.

The plaintiff and others associated with him sold certain lands in 1926 to the Central Maine Power Company, a corporation agreed to have been then and subsequently financially sound. Payment of a part of the purchase price of each parcel was deferred for about five years without interest. The method of treatment of the deferred payments in relation to the income of the plaintiff for the year of the sale constitutes the dispute between the parties.

The record title to one of the parcels sold by the plaintiff, called his Homestead Farm, turned out to be in a mortgagee who had foreclosed the mortgage some years previously without disturbing the possession of the plaintiff. When the matter of title became vital, the plaintiff made arrangements to purchase it from the mortgagee, and out of the cash payment of $10,796 made on this parcel by the power company, $10,000 was paid directly to the mortgagee on account of the repurchase price agreed upon with the plaintiff.

The plaintiff urges that, as this sum of $10,000 did not actually pass through his hands, he should not be charged with it, and that therefore he received from the initial payment less than 25 per cent. of the sale price and would be entitled to treat the sale of the Homestead Farm as an installment sale under the statute and regulations hereinafter referred to.

This contention cannot be sustained for the reason that the payment to the mortgagee, made at the direction and for the benefit of the plaintiff, had the same effect as if made to him and then passed by him to the mortgagee. In respect of this payment, the attorney handling the distribution of the money clearly acted as agent of the plaintiff.

It follows that the sale of the interest of the plaintiff in the three parcels was a deferred-payment sale falling within classification (2) of Treasury Regulations 44 and 46 under section 212(d), Revenue Act of 1926 (26 USCA § 953(d):

"(2) Deferred-payment sales not on the installment plan, that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made exceed one-fourth of the purchase price.

"Sales falling within class (1) and class (2) alike include (a) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the purchase price has been paid, and (b) sales where there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments.

"In transactions included in class (2) in article 44 the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash to the amount of their fair market value in ascertaining the profit or loss from the transaction."

The total amount payable to the plaintiff from his sale was $58,190, of which $14,730.01 was paid to him in cash (including the $10,000 above mentioned), payment of the balance being deferred until work should be commenced on a certain dam in connection with the construction of which these and other lands were purchased, or, in any event, not later than July 1, 1931.

The deferred payments were not represented by any notes, bonds, or such evidence of indebtedness of the purchaser, a contract only being entered into called an "Indenture of Agreement and Trust," to which the plaintiff and four other vendors and a trust company, as trustee, were parties, which covered matters of future payments and many other details of a somewhat complicated transaction.

As the cash payments made to the plaintiff, when applied to the cost of the property sold, taken in connection with his exemptions, showed no tax due for 1926, he filed no return, but the Collector, investigating the tax liability of the plaintiff, in November, 1929, prepared a return for the signature of the plaintiff showing a tax due, with penalty and interest of $5,771.62.

To obtain this result the Collector applied the total purchase price, both cash and deferred noninterest bearing payments, to the cost of the property and figured the balance as profit. This was admittedly erroneous.

The tax thus assessed was not paid and a distraint order was issued. Thereupon the plaintiff, acting through his attorney, filed another return in which the payments agreed to be made not later than 1921, without interest, were commuted in value to the date of sale, and the reduced amount of tax, penalty, and interest, amounting to $3,436.32, was paid, claim for refund made, and this suit...