1930 BTA LEXIS 2378 | B.T.A. | 1930
Lead Opinion
The respondent contends that the instruments used by the petitioner in his real estate transactions were plain leases, coupled with options to purchase the jiroperty described therein; and that, for this reason, the payments in controversy which were made under them must be regarded as income from leased property and for the year received. The petitioner contends that these instruments, in view of the purposes for which they were employed and the prior understandings which formed the inducement for their execution, must be regarded as contracts of sale for the property described therein, and that collections thereunder, otherwise called rent, except in cases of their forfeiture through default or abandonment and to the extent of which they are interest, must be regarded as payments upon the purchase price.
If the issues here could be determined by a narrow construction of the bare contract in evidence, the decision would be simple, since we consider the law too well settled to admit of an extension of its provisions beyond their plain written terms. Such instruments are lease-option contracts and not contracts for sale of real estate. Caldwell v. Fraizer, 65 Kans. 24; 68 Pac. 1076; Bras. v. Sheffield, 49 Kans. 702; 31 Pac. 306. The question, however, as to what constitutes taxable income is one of fact and can not be determined alone by a mere regard to the form of instrument under which it was collected. It is the character of the transaction which produced the funds collected, as governed by the intent of the parties in carrying it out, that must determine the character of such funds in the hands of the taxpayer.
The record here shows that the petitioner, who for many years has been engaged in real estate operations, acquired each of the properties involved in these considerations for the purpose of development and sale on a deferred payment plan to persons of moderate circumstances. That because of the small advance payments required of his buyers upon their taking possession of the property, and owing to the liberal provisions of the Kansas redemption laws in favor of such buyers once in possession, the petitioner considered that the plan most commonly employed in selling homes on the installment plan failed to afford him adequate protection against defaulting purchasers, and for this reason he brought into use the lease-option contract system as shown. None of these leases were executed by the petitioner except in favor of parties who had first agreed to purchase the property involved and in accordance with terms of payments on the purchase price in amounts and at dates as set forth in the lease under the rental and option provisions. In other words, a bona fide agreement of sale was in fact first made between the parties, complete in every respect except for the writing. Under such circumstances, the sale was effective without the writing upon delivery of possession of the property, but under the Kansas redemption laws such possession could be held by the purchaser for a period of eighteen months, without further payments, and it Avas to prevent such an adverse holding that the system here shown was called into play.
We think the record here supports the hypothesis last suggested. The only evidence as to the intent of the parties in entering into the contracts under consideration is the testimony of the petitioner,
Our decision that the transactions here involved were, in fact, sales of real estate leaves open the question as to the correct rule for determining and taxing the income resulting therefrom. There are two well established methods for computing the taxes on income included in payments received from real estate sales, viz., the completed sales and installment bases. The method proposed by the petitioner conforms to neither, but it is contended that it is the only way in which the true income and tax liability resulting from the transaction here involved can be computed. We are not convinced that this is true. In our opinion the deals in question were sales of real estate on the installment plan, and the income realized therefrom should be reported on the installment basis.
Reviewed by the Board.
Decision will be entered under Rule 50.