1931 BTA LEXIS 1633 | B.T.A. | 1931
Lead Opinion
The problem for solution in this proceeding is whether or not any part of the payments received by the decedent, Alexander Friend, from the Brunswick-Balke-Collender Company during the period between January 1, 1924, and September 2, 1926, constituted taxable income. To solve this problem we must determine what it was that Friend acquired by reason of his agreement with Shank and wife. Such a determination involves consideration of the contract by which in the year 1922 Shank and his wife agreed to convey to the Brunswick-Balke-Collender Company the premises described in the agreement between Shank and Friend.
By the contract with the Brunswick-Balke-Collender Company Shank and his wife covenanted to convey to the corporation the real property referred to if the corporation made the payments specified and performed the covenants on its part to be performed. The contract price was $345,000. The corporation paid $45,000 in cash and agreed to pay the balance of the purchase price, namely, $300,000, in 180 monthly payments. These monthly payments did not bear interest until after maturity and no notes were given for the unpaid balance of the purchase price. By the provisions of the contract immediate possession of the premises was vested in the purchasing coiporation, which agreed to pay all taxes and to keep the property, insured. A warranty deed conveying title in fee simple to the corporation was placed in escrow, by Shank, for delivery to the purchasing corporation upon its compliance with the terms of the agreement. The sellers, however, reserved the right to reenter and repossess the premises in the event that the purchaser defaulted in any of the covenants on its part to be performed. It was also provided that whenever 60 per cent of the purchase price had been paid the Brunswick-Balke-Collender Company should be entitled at its election, upon 30 days notice, to receive the warranty deed, provided it executed and delivered a purchase-money second mortgage for the amount of the unpaid balance of the purchase
In our opinion the Brunswick-Balke-Collender contract was a completed contract of sale in 1922. Seletha O. Thompson, 9 B. T. A. 1342; Old Farmers Oil Co., 12 B. T. A. 203; Harry C. Moir, 14 B. T. A. 23; aff’d., 45 Fed. (2d) 356. After the execution of the contract, the making of the initial payment, the placing of the purchaser in possession and the delivery of the deed to the escrow agent, the sellers retained only the bare legal title to the premises described in the contract and the right to reenter and repossess them in the event of the default or defaults of the purchasing corporation. If the purchasing corporation fulfilled its covenants the deed would be delivered to it and the bare title to the land reserved by the sellers would be extinguished. This bare legal title and the right to reenter and repossess the premises constituted the security held by the sellers for the payment of the balance of the purchase price. Practically, therefore, the sellers were in the same situation as if they had actually conveyed the title to the premises to the purchasing corporation and had accepted a purchase-money second mortgage for the unpaid balance of the purchase price. As a matter of fact the contract provided that the sellers were to receive such a second mortgage if the purchasing corporation elected to exercise its option and demand the deed to the premises after 60 per cent of the purchase price was paid.
It follows from the foregoing that after the agreement between Shank and wife and Friend had been fully consummated, as set out in the findings of fact, Friend acquired under that agreement only what Shank and his wife had to sell, namely, the right to receive monthly payments as specified in the Brunswick-Balke-Col-lender contract, the unpaid total of which might be converted into a purchase-money second mortgage under specified conditions, together with the right as owner of the bare legal title to repossess the premises in the event of the default of the Brunswick-Balke-Collender Company. Friend, therefore, purchased something akin to a purchase-money second mortgage, the balance unpaid thereon at date of purchase being payable in 164 stipulated monthly amounts,
It appears from the evidence that contracts such as the Brunswick-Balke-Collender Company contract were bought and. sold in the Chicago real estate market just as second mortgages are bought in that same market, namely, at their fair market value. The testimony discloses that the realty which was the security for the payment of the monthly amounts to be paid to Friend was depreciating in value, that the building on the premises was not well constructed and was built for factory purposes only, and that the neighborhood of the premises was undesirable. A witness, who was admittedly qualified, testified that in the Chicago real estate market the customary and usual method of determining the fair market value of such a contract as the Brunswick-Balke-Collender contract was to discount the present worth of the deferred payments by at least 20 per cent. This percentage of discount was arrived at by consideration of the value of the land and buildings covered by the contract and the financial character of the person or corporation obligated to pay the deferred amounts. This witness also testified to the effect that at the date the right to receive the monthly payments was acquired by Friend their present -worth was $186,221.75. This testimony stands uncontra-dicted and undisputed in the record and no reason is shown why it should be disregarded by us. We have, therefore, found that the fair market value of the Brunswick-Balke-Collender contract, at the
In accordance with the stipulation entered into between the parties, we find for the purpose of the recomputation of deficiencies in income tax that the adjusted net income of Alexander Friend for the year 1924 was $56,928.97; for the year 1925 his adjusted net income was $62,291.83; and for the period from January 1, 1926, to September 2, 1926, his adjusted net income was $45,587.86. The deficiencies should be recomputed accordingly.
Judgment will be entered under Rule 60.