*972 1. SALE OR OPTION - CONSTRUCTION OF A CONTRACT. - A certain agreement dated February 10, 1923, construed in connection with a certain trust agreement dated March 22, 1923, and held to constitute an installment sale of 703.2 acres of land rather than a mere option to purchase such land in parcels.
2. INSTALLMENT OBLIGATIONS TRANSMITTED AT DEATH. - CONSTITUTIONALITY AND APPLICATION OF SECTION 44(d), 1928 ACT. - Decedent died on December 10, 1928, owning uncollected installment obligations from an installment sale of real estate made by him in 1923, having a stipulated fair market value on the date of death in excess of the basis of cost. At the time of his death, decedent had reported no profit from the uncollected obligations. Held, section 44(d), 1928 Act, is not unconstitutional on the ground that it provides for inclusion as a part of decedent's income certain gains which are not "income" within the Sixteenth Amendment. Held, further, that the gain computed under the provisions of section 44(d) is taxable to decedent in the year of his death and it is immaterial that the uncollected installment sales obligations in question were obligations resulting from a sale*973 made prior to January 1, 1928.
*227 These proceedings are for the redetermination of deficiencies in income tax for the years 1923 to 1926, inclusive, in the amounts of $1,666.01, $2,948.83, $2,738.45 and $8,893.66, respectively, and for the period January 1, 1928, to December 10, 1928, in the amount of $71,007.86. The issues involved will be stated in the opinion.
FINDINGS OF FACT.
Petitioners are the duly appointed executors of the last will and testament of Erskine M. Ross, deceased, with their principal office in the Standard Oil Building, Los Angeles, California. Ross, hereinafter referred to as the decedent, died on December 10, 1928.
The account books and records of the decedent were kept on the cash receipts and disbursements basis.
During the period from 1890 to 1901 decedent acquired approximately 703.2 acres of land situated near the city of Glendale in Los Angeles County, California. Prior to March 1, 1913, approximately 216.77 acres of this*974 property were improved with full-bearing *228 citrus, deciduous and olive trees. The fair market value of the land and trees on March 1, 1913, was $832,151.60. The stipulation which has been filed herein segregates this March 1, 1913, value among six different parcels and apportions this value between land and trees. It is not deemed necessary to set out these figures in detail in these findings of fact. All the stipulation on this and other points involved in these proceedings, not included in these findings of fact, is incorporated herein by reference.
On February 10, 1923, the decedent entered into an agreement with the Haddock-Nibley Co., sometimes hereafter referred to as the buyer, relative to the sale of the aforesaid land and trees. On March 22, 1923, he caused title to the entire acreage involved in the agreement to be transferred to the Security Trust & Savings Bank (now Security First National Bank of Los Angeles) as trustee. The agreement of February 10, 1923, was made a part of the declaration of trust and was attached thereto as Exhibit A.
In the agreement of February 10, 1923, the decedent was called the "seller" and the Haddock-Nibley Co. was called*975 the "buyer." Among other things it recited that there was a mortgage of $65,650 upon the property, "upon which said note the seller agrees to secure an extension of four years, or if the bank refuses an extension, then seller agrees to renew said mortgage and note, making the prinicipal payable four years after the date thereof, etc.," which said note and mortgage "the buyer agrees to pay with interest thereon from the date of delivery of deed to the Trust Company hereinafter provided for" and "in addition agrees to pay the seller in cash the sum of $34,350, the receipt of $2,500 of which is hereby acknowledged, and in consideration thereof and the other obligations hereinafter assumed by the buyer the seller agrees to convey by good and sufficient deed of conveyance to a trust company selected by the seller" all of the aforesaid land and trees with the exception of certain reservations and easements not here material. The agreement further provided that the buyer was to survey and plat the property for subdivision into parcels, "said plat or plats to be submitted to and to be subject to the approval of the seller and to be recorded or placed of record only when approved and signed*976 by the seller; and the buyer shall, by and with the consent of the seller, determine which particular part or parcel of said land shall be platted and placed on the market for sale, it being understood that parcels are to be selected for improvement and sale in such order as will inure to the benefit both of the seller and the buyer." The agreement further provided that the buyer was to install all street work and utilities in and upon the parcels so selected at the sole cost and expense of the buyer, and was to protect the seller and the seller's *229 property from all liens of workmen or persons furnishing materials to be used in the construction of such improvements. The agreement further provided:
It is understood and agreed that the Buyer has the option of purchasing the whole of the said property herein first described at a total price of One Million Six Hundred Thousand Dollars ($1,600,000.00), but that said sum of Thirty-Four Thousand Three Hundred and Fifty Dollars ($34,350.00) paid on the execution of this Agreement, or any money paid upon either the principal or interest of the above mentioned mortgage, shall not be considered a payment on account of the purchase*977 price except as the final payment on the entire property, provided all of the other terms and conditions thereto on the part of the Buyer have been kept and performed and all of the purchase price of said property, other than said Thirty-Four Thousand Three Hundred and Fifty Dollars ($34,350.00) together with the principal and interest of the said mortgage, have been fully paid by the buyer to the seller and the mortgagee.
When any of such property which has been platted and a map thereof recorded with the Seller's approval is placed upon the market for sale, either in lots or parcels or as a whole, the same must be offered for sale and sold at prices in excess of the release price for the property in said subdivision as shown by the schedule of release prices hereto attached and made a part hereof; it being understood that the said Trustee shall convey by deed or otherwise to the purchaser or purchasers of such lots, parcels or subdivisions when the Trustee shall have received for the Seller the total of the release price of such lots, parcels or tracts of land, respectively, as shown by said schedule of release prices.
As soon as a tract or subdivision has been platted and*978 the plat approved and filed as hereinbefore provided for, the total value of the land in such subdivision shall be deemed a debt due and owing by the Buyer to the Seller, which value shall be the total release price for all of the property shown on said plat, and such total value shall from the date of the filing of said plat for record bear interest at the rate of six (6) percent per annum, payable semiannually, and be payable as such by the Buyer to the Seller.
The agreement of February 10, 1923, further provided that in cases where the lots or parcels were sold for all cash the seller was to receive from such cash price "the release price of such particular property so sold" and in cases of installment sales the buyer was to receive the first 25 percent of the sale price and thereafter the seller was to receive 50 percent of all further payments "until the seller has received the full release price of such lot" together with any accrued interest owing by the buyer to the seller. No lot was to be sold at a price which would not yield to the seller "the total release price of such lot, piece or parcel." The agreement further provided:
It is further understood and agreed that*979 within two years after the property hereinbefore first described has been conveyed to the said mentioned Trustee, that the Seller is to receive either through sales of the property or otherwise a total payment on account of the principal of not less than * * * ($175,000.00) in cash and within each succeeding year not less than * * * ($175,000.00) on the principal of such purchase price, and any and all interest which may accrue under the terms and conditions of this agreement until the Seller *230 shall have received in full from the Buyer the total purchase price of * * * ($1,600,000.00) and all interest which may have accrued meanwhile * * *.
It is further understood and agreed that the Buyer may, with the consent of the Seller, lease any portion of said land that both the Seller and Buyer, in writing agree on, for oil or gas development purposes, * * * in which event all rents and royalties, bonuses, profits or income of any kind received on account of such leases for oil, gas or other kindred substances shall be divided equally between the Buyer and the Seller.
During the life of the agreement the buyer was to pay all taxes of every kind, except income and inheritance*980 taxes, to the end that the seller was to receive "from the sale of said property" not less than $1,600,000, together with interest as hereinbefore stated. Provision was made whereby the seller might terminate the agreement as follows:
Time is of the essence of this Agreement, and if the Buyer shall fail to proceed with all due diligence to survey, plat, subdivide and improve said property and parcels thereof, and to place the same upon the market, and with all reasonable efforts for the sale thereof as herein contemplated, or having made such plats and subdivisions and having constructed such improvements the buyer shall fail to proceed with due diligence and with the usual efforts in like cases for the sale of such property, then and in that event, upon ninety (90) days' notice from the Seller to the Buyer, his successor or successors, the Seller may terminate this Agreement, and all obligations or the Seller and Buyer hereunder, and the Trustee shall re-convey to said Seller said property and the whole thereof, except only such lots, pieces or parcels of said property which may have been sold and conveyed or agreed to be conveyed in accordance with the terms of this contract, *981 and in the event of such termination of this Agreement the Seller shall retain said sum of * * * ($34,350.00) and any and all sums which he may have received under the terms hereof, and any and all sums paid upon said mortgage, as liquidated damages suffered by him by reason of the failure of the Buyer to proceed under this Agreement and complete said purchase as herein contemplated.
It was also understood "that the Seller is now cultivating and farming a portion of the property covered by this Agreement and that the Seller is entitled to receive all crops and products produced upon said land until said land is actually taken for subdivision or sale purposes under the terms hereof, and that the seller may continue to farm said property as heretofore, retaining for that purpose the free and uninterrupted use of all of the water now and heretofore pertaining to said property, etc." It was further agreed that there was reserved to the seller the ground on which stands the Rossmoyne Packing House and The approaches thereto during the time "the seller operates the orchards." The last paragraph of the agreement provided in part as follows:
It is understood by and between the respective*982 parties hereto that it is the intent of the Seller to convey to the above mentioned trust company for the purposes of this trust all of the acreage owned by the said Seller in the City of Glendale * * * and for the purposes of said conveyance and for the purposes of the schedule of releases as hereinafter set forth it is agreed that *231 the said property shall be specifically described by a competent survey, and it is understood and agreed that the release price of all of said land to be conveyed shall be at the rate of * * * ($4,000.00) per acre with the exception of * * *.
The declaration of trust dated March 22, 1923, provided that the trustee therein named would hold title to the 703.2 acres in question and administer the trust in accordance with the said agreement of February 10, 1923. It was to continue "until the sale and disposition in fee of all the property subject to this trust and the distribution of all proceeds thereof, in accordance with the terms hereof, or until the expiration of twenty-five years after the date hereof, whichever event shall happen first."
The declaration of trust contains, among many other provisions carrying out the agreement of February 10, 1923, the*983 following paragraph with reference to the method and manner of payment to the seller for the land sold:
It is understood and agreed that the trustor shall receive the aforementioned sum of $1,600,000, as follows: $175,000, either through sales of property in the manner contemplated by this trust or otherwise on or before two years from this date and the balance at the rate of not less than $175,000 per annum, either through sales of property or otherwise, together with interest as provided in said contract, it being understood that the payment of $34,350 which has been made at the time of the execution of this declaration shall be deemed to be the last payment to be made hereunder, and shall have the effect of reducing the sum upon which interest is to be paid to the sum of $1,565,650. All moneys which the trustee pays to the trustor out of collections made by it on sales of real estate hereunder shall be credited by the trustor upon the unpaid portion of the purchase price of said property and as and when credited shall no longer bear interest.
The Haddock-Nibley Co. was later succeeded by the Nibley Investment Co.
On November 21, 1927, the decedent addressed a letter to*984 the trustee, the material part of which is as follows:
Because, and only because of the existing depression in the sale of property within many, if not all, of the subdivisions of property for sale in and about the City of Los Angeles, I hereby, at the request of the Nibley Investment Company, authorize you as trustee of my property, known as "Rossmoyne", to extend the three cash payments on the purchase price of my said lands that will become due from the said Nibley Investment Company for the three years ending, respectively, March 23, 1928, March 23, 1929, and March 23, 1930, to the extent, and only to the extent, of requiring that company to pay on or about each of those three said dates on the purchase price of my said lands * * * ($100,000.), instead of * * * ($175,000.), as is specifically required in and by our trust agreement.
On November 16, 1928, the declaration of trust was amended to the extent that the "release price" provided for in the last paragraph of Exhibit A, attached to the trust agreement, was lowered.
*232 In accordance with the agreement and declaration of trust, certain parcels of property upon which principal payments were made by the "purchaser", *985 as hereinafter stated, were platted and maps thereof were recorded with the "seller's" approval as follows:
| Year approved | Acres covered by plat |
| 1923 | 132.253 |
| 1926 | 5. |
| 1926 | 17.591 |
| 1927 | 2. |
Plats were also approved and maps thereof recorded covering acreage upon which no payments other than interest were made. The year of approval of such plats, together with the number of acres covered and the March 1, 1913, fair market value thereof is as follows:
| March 1, 1913, fair market value | |||
| Year approved | Acres covered by plat | Land | Trees |
| 1924 | 10.284 | $12,355.00 | |
| 1924 | 27.573 | 33,776.92 | |
| 1924 | 24.951 | 14,970.60 | |
| 1926 | 34.568 | 20,740.80 | |
| 1926 | 19.6 | 24,500.00 | $19,600.00 |
| Less depreciation to December 31, 1925 | 4,606.00 | ||
| Depreciated March 1, 1913, value of trees | 14,994.00 |
Any obligation of the Haddock-Nibley Co. created by the platting and approval of the acreage mentioned in the preceding schedule did not have a fair market value in excess of the decedent's basis in the acreage on the date the obligation was created.
During the year 1923 the Haddock-Nibley Co. paid the decedent the amount of $34,350 particularly specified*986 in the agreement of February 10, 1923.
The amount to be paid by the buyer for the release of the 132.253 acres of land platted and recorded in 1923, pursuant to the terms of the agreement and declaration of trust, was $529,012. During the years 1923 to 1927, inclusive, and the period from January 1 to December 10, 1928, the amounts actually paid to the decedent for the release of the 132.253 acres were as follows:
| 1923 | $34,004.07 |
| 1924 | 85,835.08 |
| 1925 | 74,261.65 |
| 1926 | $116,200.14 |
| 1927 | 77,271.02 |
| 1928 | 55,675.00 |
The amounts to be paid and the amounts which were actually paid by the buyer for the release of the 5, 17.591 and 2 acres of land platted and recorded in 1926, 1926 and 1927, respectively, pursuant to the terms of the agreement and declaration of trust, were $20,000, *233 $70,364 and $8,000, respectively. Except as set forth in the foregoing paragraphs, no principal payments were made to the petitioners' decedent by the Haddock-Nibley Co. and no collections were made by petitioners' decedent to apply on the release price of any of the acreage embraced in the agreement dated February 10, 1923, or the declaration of trust dated March 22, 1923.
*987 The respondent determined that the agreement of February 10, 1923, was an installment sale of the entire 703.2 acres, and that in each installment collection there was a profit of 60.134 percent.
The amount of taxable profit thus determined by the respondent for each of the years and period in question is as follows:
| Year | Collections | Profits |
| 1923 | $68,354.07 | $41,104.04 |
| 1924 | 92,835.08 | 55,825.45 |
| 1925 | 81,961.65 | 49,286.82 |
| 1926 | 238,551.50 | 143,450.56 |
| 1928 | 55,675.00 | 33,479.60 |
In addition to the above profit of $33,479.60 determined by the respondent for the period January 1 to December 10, 1928, the respondent also determined that there should be included in decedent's income for that period, in accordance with section 44(d) of the Revenue Act of 1928, an amount of $551,981.78 as representing realized gain on unreported profits resulting from installment sales.
The net selling price of the entire acreage covered by the agreement and trust, the March 1, 1913, fair market value of the same, and the maximum gross profit that can be realized therefrom if the entire acreage is platted and recorded, is as follows:
| Gross sales price | $1,600,000.00 | |
| Less: Thom's interest in the contract | 100,000.00 | |
| Net sales price | 1,500,000.00 | |
| Deduct: | ||
| March 1, 1913, value, trees | 191,464.00 | |
| Less: depreciation sustained | 56,113.13 | |
| Value less depreciation | 135,350.87 | |
| March 1, 1913, value, land | 640,687.60 | |
| Total | 776,038.47 | |
| 1923 - sales expenses | 3,000.00 | |
| 1926 - sales expenses | 7,187.36 | |
| 1927 - sales expenses | 1,237.38 | |
| 787,463.21 | ||
| Maximum gross profit realizable | 712,536.79 | |
| Percentage of gross profit to sales price | 47.502% |
*988 *234 The interest of the decedent in the property covered by the declaration of trust had a market value on the date of his death of $666,213.30.
The unrecovered basis (cost or March 1, 1913, value) of the decedent's interest in the property covered by the declaration of trust on December 10, 1928, the date of his death, was $485,095.23.
OPINION.
BLACK: The issues which we have to decide in this proceeding are as follows:
(1) Does the agreement dated February 10, 1923, together with the declaration of trust dated March 22, 1923, detailed in our findings of fact, constitute an installment sale of the 703.2 acres of land described therein or does the agreement, together with the declaration of trust, constitute a mere option to purchase the 703.2 acres in parcels, such option to be exercised from time to time as to separate parcels by the recordation of plats thereof?
(2) Are the provisions of section 44(d) of the Revenue Act of 1928 constitutional and, if so, do they apply to any balance due on sales made prior to January 1, 1928, that remained unpaid on December 10, 1928, the date of death of Erskine M. Ross?
Issue No. 1.
Relative to the first issue, *989 the respondent contends that the agreement and declaration of trust was an installment sale of the 703.2 acres, and that the decedent realized taxable income each year to the extent of the percentage of profit recognizable under the regulations applicable to installment sales. Petitioners contend that the agreement and declaration of trust was merely an option to purchase from time to time parcels of the 703.2 acres, granted by the decedent to the Haddock-Nibley Co., referred to as the buyer, and that no sales, installment or otherwise, occurred until the alleged option was exercised by the buyer by platting and recording certain particular parcels thereof. In other words, petitioners contend that instead of there being one installment sale of the entire 703.2 acres, as the respondent contends, there were, during the years in question, four separate sales upon which taxable income was realized, namely, an installment sale in 1923 of 132.253 acres, and two completed sales in 1926 of five acres and 17.591 acres, respectively, and one completed sale of 2 acres in 1927.
In deciding Issue No. 1 we have two lengthy documents to construe. *990 These documents, though executed a few days apart, were parts of the same transaction and must be construed together. In construing the documents, we must take them as a whole and not take mere isolated parts. If we were to judge the transaction by isolated parts of the documents, some of them are so contradictory *235 that it would be difficult to judge what the parties really did mean to do. But the construction of a written instrument is not to be found in any name which the parties may have given to the instrument and not alone in any particular provisions it contains, disconnected from all others, but in the ruling intention of the parties, gathered from all the language they have used. It is the legal effect of the whole which is to be sought for, not a mere part. Heryford v. Davis,102 U.S. 235">102 U.S. 235.
Following this rule of construction, did the documents in question evidence an installment sale of the entire 703.2 acres described therein, or merely give the buyer an option to purchase all or any part of the entire tract under the terms and conditions set forth in great detail in the documents? At this point it is well to note that installment sales*991 may be either where the title completely passes to the buyer at the time of sale, or where it is contemplated 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. Art. 44, Regulations 62, 65, 69; art. 352, Regulations 74. Of course a mere option is not a contract of sale and would not be treated as an installment sale under the statute and the Commissioner's applicable regulations.
Whether an agreement is a contract of sale or a mere option is a question that has been often litigated. The test usually applied is whether the agreement under consideration creates a "mutual obligation" on the part of the buyer to buy and the seller to sell. If it does, it is a sale; if it does not, it is an option. See Stelson v. Haigler,63 Colo. 200">63 Colo. 200; 165 Pac. 265, wherein the court said:
It may be laid down as an established rule of law that, unless the contract contains language which may reasonably be construed as an agreement on the part of the vendee to purchase the property, or to assume some obligation thereunder, it will be an option contract and not an agreement of sale*992 and purchase. It is impossible to conceive of an agreement of sale and purchase without obligation on the part of the vendee to purchase. On the other hand, the absence of such obligation is the distinctive characteristic of an option contract. A contract of sale creates mutual obligations on the part of the seller to sell, and on the part of the purchaser to buy, while an option gives the right to purchase, within a limited time, without imposing any obligations to purchase. James on Option Contracts, sec. 105, and authorities cited; Hessell v. Neal, 25 Colo.App. 300, 137 Pac. 72.
See also Brickell v. Atlas Assur. Co.,10 Cal. App. 17">10 Cal.App. 17; 101 Pac. 16, wherein the court sets forth the distinction between the two kinds of contracts as follows:
* * * "The distinction between a contract to purchase or sell real estate and an option to purchase is that the contract to purchase or sell creates a mutual obligation on the one party to sell and on the other to purchase, while an option merely gives the right to purchase within a limited time without imposing any obligation to purchase." 29 Am. & Eng. Ency. of Law (2d Ed.) 608; *993 Menzel v. Primm,6 Cal. App. 204">6 Cal.App. 204, 91 Pac. 756. In other words, an option *236 is a right "acquired by contract to accept or reject a present offer within a limited or reasonable time in the future." 21 Am. & Eng. Ency. of Law, 924.
Petitioners recognize that the rule is as stated in the two above mentioned decisions, which decisions petitioners cite along with others as supporting the rule, but contend that the buyer in the agreement of February 10, 1923, was not "obligated" to buy any part of the 703.2 acres until a parcel thereof had been platted and maps recorded with the seller's approval, and that therefore the said agreement was nothing more than a mere option to buy. Whether an instrument or instruments constitute a sale or an option "is answered by reading the instruments." Gutierrez v. Graham,227 U.S. 181">227 U.S. 181.
A careful reading of the agreement in question impresses us that entire 703.2 acres in which certain optional features were granted entire 703.02 acres in which certain optional features were granted to the buyer to plat and subdivide it into separate tracts. Under the agreement the buyer was obligated "to pay with the interest*994 thereof from the date of delivery of deed to the Trust Company" a mortgage of $65,650 which seems to have existed on the entire tract; to make a down payment of $34,350; "to survey and plat said property for subdivision in parcels" subject "to the approval of the Seller"; "to install all street work and utilities * * * at the sole cost and expense of the Buyer"; "to take such steps as may be necessary in the judgment of the Seller by giving bond or otherwise to protect the Seller and the Seller's property from liens of workmen or persons furnishing materials to be used in the construction of such improvements"; to pay the seller within two years after the property had been conveyed to the said trustee "a total payment on account of the principal of not less than" $175,000; to pay the seller in each succeeding year thereafter not less than $175,000 "on the principal of such purchase price, and any and all interest which may accrue * * * until the Seller shall have received in full from the Buyer the total purchase price of One Million Six Hundred Thousand Dollars ($1,600,000.00) and all interest which may have accrued" it being understood, however, that the payment of the mortgage and*995 the $34,350 above mentioned, "may be treated as a balance of the purchase price"; and to pay all taxes, assessments and governmental charges of every kind, except income and inheritance taxes, beginning with the fiscal year 1923-1924.
It will be noted from the language quoted above that the buyer was obligated to pay not less than $175,000 on the principal during the first two years and $175,000 annually thereafter until the contract price was fully paid. There seems to be nothing conditional or contingent about these promised payments. The obligation which they represent is inconsistent with the idea that the contract of sale of February 10, 1923, was a mere option giving the buyer option to *237 buy whatever parcels of land he should decide to plat but binding him to purchase none. It is true that in none of the taxable years before us did the buyer make a payment as large as that called for by the provisions of the contract. The reason for this is not explained by the stipulation which has been filed. Doubtless it was due to an agreeable arrangement between the buyer and the seller which has not been explained to us, but, be that as it may, there is nothing to show*996 that petitioners' decedent ever regarded the buyer's obligation to pay this $175,000 the first two years and $175,000 annually thereafter as anything other than a straight-out contractual obligation to pay.
It seems to us that this fact is conclusively shown by the letter which decedent wrote to the trustee on November 21, 1927. In this letter decedent called attention to the fact that the buyer would owe payments of $175,000 each on March 23, 1928, March 23, 1929, and March 23, 1930, and that the trustee was authorized, on account of the existing depression, to reduce these payments to $100,000 on each of the above respective dates, "instead of the $175,000 as is specifically required in and by our trust agreement."
Counsel for petitioners in their brief lay a good deal of stress on the fact that it is the duty of the Board to give the written documents a construction which will accord with the interpretation which the parties themselves put upon the documents in their dealings with each other. Certainly the action of decedent in instructing the trustee to require only payments of $100,000 annually for three years instead of annual payments of $175,000 and referring to the*997 $175,000 annual payments as being "specifically required in and by our trust agreement", does not accord with petitioners' contention that the documents in question granted a mere option to purchase.
In Suburban Imp. Co. v. Scott Lumber Co., 59 Fed.(2d) 711; certiorari denied, 287 U.S. 660">287 U.S. 660, the court construed a certain agreement to be a sale rather than an option, upon facts somewhat similar to those in the instant proceedings. In that case the complainant was the owner of a suburban real estate development near the city of Wheeling, West Virginia, which it had divided and platted into approximately 100 residential lots. In 1928 it entered into a contract with the defendant whereby it agreed "to sell any one or all" of the lots at prices set forth in the contract "at any time while this contract remains in force." The defendant agreed that it would:
* * * within the calendar year 1928, purchase and pay for a number of said lots, aggregating in price at the least twenty thousand dollars ($20,000.00), and that it will, within each and every calendar year thereafter, during the life of this contract, purchase and pay for a number of said lots*998 aggregating in price at the least twenty thousand dollars ($20,000.00). It is mutually covenanted and agreed that failure or default on the part of the party of the second *238 part [the defendant] to comply with the provisions of this paragraph shall cause a forfeiture of its right under this contract.
Paragraph 11 of the contract there involved provided, in part:
It is understood and agreed that this contract constitutes an option, which divests the party of the first part [the complainant] of its right to make sale to any other party of any of the lots included herein, during the life of this contract * * *.
After 1928 the defendant refused to buy and pay for any more lots, contending that its contract with the complainant was nothing more than a mere option under which it was under no obligation to buy. The court held against that contention and upheld complainant's bill. In its opinion the court cited in support of its holding the case of Berry v. Humphreys,76 W. Va. 668">76 W.Va. 668; 86 S.E. 568">86 S.E. 568, in which it was held:
A contract granting to the party of the second part an exclusive right and option to purchase certain lots of land, *999 and in express terms binding him to pay, in installments, a stipulated amount of purchase money, binding the parties of the first part to sell and convey the lots to him, and giving them an option to annuall the unperformed part of the contract, in case of default in payment, and treat the payments as money paid for the option and right of purchase, and retain it, but not specifically extending to the party of the second part any right to withdraw or cease to make payments, is a contract of sale and purchase, not one of mere option to purchase.
Cf. Jefferson Gas Coal Co.,16 B.T.A. 1135">16 B.T.A. 1135; affd., 52 Fed.(2d) 120; A. B. Watson,24 B.T.A. 466">24 B.T.A. 466; affd., 62 Fed.(2d) 35; Charles J. Derbes,24 B.T.A. 276">24 B.T.A. 276, and cases there cited; C. A. Cochran,23 B.T.A. 616">23 B.T.A. 616.
On Issue No. 1 we hold in favor of respondent.
Issue No. 2.
The second issue presents an entirely new question that has never been passed upon by either the Board or the courts - at least we have been cited to no decision construing the section of the statute in question. It is, whether, under section 44(d) of the Revenue Act of 1928, *1000 there should be reported in the final income tax return of a decedent dying after the effective date of that act, either a gain or a loss on the outstanding installment sales obligations of his vendees, the profit from which sales he had been reporting on the installment basis, and as to which outstanding obligations no profit therein had been previously reported. The statute provides:
(d) Gain or loss upon disposition of installment obligations. - If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange - the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange - the fair market value of the obligation at the time of such *239 distribution, transmission, or disposition. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied*1001 in full.
The respondent determined that under the provisions of the above statute, as interpreted by him in I.T. 2512 (IX-1 C.B. 125), there should be included in decedent's income for the period January 1 to December 10, 1928, a gain in the amount of $551,981.78. The respondent now concedes, as we interpret the stipulated facts, that the gain, if any, is the amount of $181,118.07.
The respondent in his ruling in I.T. 2515, supra, cites Committee on Finance Report No. 960, 70th Cong., 1st sess., p. 24, as supporting the interpretation he has placed upon section 44(d), supra. This part of the Committee's report is as follows:
Subsection (d) contains new provisions of law to prevent evasion of taxes in connection with the transmission of installment obligations upon death, their distribution by way of liquidating or other dividends, or their disposition by way of gift, or in connection with similar transactions. The situations above specified ordinarily do not give rise to gain and yet at the same time it is urged that they permit the recipient to obtain a greatly increased basis in his hands for the property received, except in case of gifts. It therefore*1002 seems desirable to clarify the matter. The installment basis accords the taxpayer the privilege of deferring the reporting at the time of sale of the gain realized, until such time as the deferred cash payments are made. To prevent the evasion the subsection terminates the privilege of longer deferring the profit if the seller at any time transmits, distributes, or disposes of the installment obligations and compels the seller at that time to report the deferred profits. The sub-section also modifies the general rule provided in sub-section (a) for the ascertainment of the percentage of profit in the deferred payments, in those cases in which the obligations are satisfied at other than their face value or are sold or exchanged. The modification permits a compensating reduction in the percentage of profit in case the obligations are satisfied at less than their face value, or are sold or exchanged at less than face value.
Petitioners contend that section 44(d), as construed by the respondent, is unconstitutional, in that it proposes to tax as "income" that which is not "income" within the Sixteenth Amendment, and that, in any event, it cannot apply to sales made prior to January 1, 1928. *1003 The term "income" has often been defined, Eisner v. Macomber,252 U.S. 189">252 U.S. 189, and need not be repeated here. As used in the Sixteenth Amendment, "income" includes gains derived by a taxpayer from an exchange of property, as well as gains realized in money, and the provisions in the revenue acts providing for the taxation of such gains are constitutional. Atkins' Estate v. Lucas, 36 Fed.(2d) 611.
We have already held in deciding the first issue that the agreement of February 10, 1923, constituted a contract of sale. The gain from such contract of sale comes within the Supreme Court's definition of income. The parties have stipulated that the maximum gross profit that could be realized from the agreement of sale when and *240 as executed, was $712,536.79, which is 47.502 percent of the agreed sales price. Sections 212(d) and 1208 of the Revenue Act of 1926 granted the decedent the "privilege" of returning this gain on the installment basis, that is, on the basis that 47.502 percent of each payment of the sales price was income. On this basis, approximately $251,800 of the $712,536.79 was returnable as income up to the date of decedent's*1004 death. Congress intended by section 44(d), supra, to terminate the "privilege of longer deferring the profits," but provided, however, that the deferred profit should be recomputed on the basis of the difference between the fair market value of the installment obligations remaining unpaid at the decedent's death and the "basis" of such obligations provided by law. The effect of section 44(d) in the instant proceedings is to reduce the remaining deferred profit from approximately $460,700 ($712,536.79 minus $251,800) to $181,118.07. Since the latter amount is merely a part of the original gain, taxation on which was deferred because of the installment method of rendering income granted by the Government to the taxpayer as a privilege and not as a right, it follws that section 44(d) cannot be held unconstitutional on the ground that the realization of gain provided for therein is not income within the Sixteenth Amendment. The gain involved in these proceedings would have all been taxable in the year 1923, assuming that the agreed deferred payments had a readily realizable fair market value, but for the fact that Congress has enacted legislation which permits the installment plan*1005 of returning income for taxation. Cf. B. B. Todd, Inc.,1 B.T.A. 762">1 B.T.A. 762; Hoover-Bond Co. v. Denman, 58 Fed.(2d) 909; Willcuts v. Grodwohl, 58 Fed.(2d) 587.
It remains only for us to consider petitioner's remaining contention that, in any event, section 44(d) cannot apply to sales made prior to January 1, 1928, the effective date of Title I, which includes section 44(d). See secs. 1 and 65, Revenue Act of 1928.
The decedent died on December 10, 1928, which was subsequent to the effective date of the statute here involved. On the date of his death he owned installment obligations of the fair market value of $666,213.30 (face value $957,026.94), as to which no profit had been reported. True, these obligations were from a sale made in the year 1923. But the statute does not require that the installment obligation which is transmitted by death be one resulting from a sale made subsequent to January 1, 1928. It plainly says: "If an installment obligation is * * * transmitted * * * gain or loss shall result * * *." The petitioners' contention on this point is denied.
Reviewed by the Board.
Decision will be entered*1006 under Rule 50.
TRAMMELL and ADAMS dissent.