*1258 1. In the circumstances of this proceeding the agreement to sell the property of the petitioner was not an executed contract of sale in 1922.
2. An item is accruable as income only when all the facts that assure its receipt at come future date are fixed and certain.
*814 Income tax deficiencies for the years 1923 and 1924 in the respective amounts of $48,180.40 and $30,436.84 are at issue. The dispute arises over the respondent's having held that certain profits, realized by petitioner from the sale of mine properties, should be allocated to these years and not to the year 1922, when the sale contract was executed. The parties filed a stipulation, which we accept, and adduced documentary and oral evidence at the hearing.
*815 FINDINGS OF FACT.
The petitioner is a California mining corporation, organized in 1914, with an authorized capital stock divided into 130,000 shares of a par value of $10. Prior to 1920 it acquired certain mining land properties in the State of Arizona, which were partially surrounded by adjoining properties*1259 owned by the Phelps-Dodge Corporation.
With a view to purchasing petitioner's properties and with petitioner's consent, the Phelps-Dodge Corporation, sometime during 1921, had its engineers go upon and make a thorough inspection and appraisal of them. Thereafter, on May 20, 1922, a sales agreement was entered into between the petitioner and that corporation.
The sale contract, which is included in the record, is quite lengthy and a greater part of its provisions relate to the mechanics of operating the properties during the period prior to final payment and to accounting for profits, etc., most of which have no material bearing upon the point in issue here. Its provisions material here may be summarized as follows:
The contract recites that for $1,000 paid, an exclusive option to purchase the petitioner's mine properties has been granted to the Phelps-Dodge Corporation, which option is to continue so long as it keeps the terms of the sale, which are thereafter set forth in detail.
The entire sale price for the properties is fixed at $1,250,000, including the $1,000 paid for the option, to be paid in installments as follows: $249,000 upon approval by purchaser's attorneys*1260 of the petitioner's title, capacity to convey, and the legal regularity of the deed and attending corporate acts had to effect conveyance; $500,000 to be paid February 1, 1923; $250,000 August 1, 1923; and $250,000 February 1, 1924.
To the first of these payments ($249,000), if and when made, the $1,000 paid for the option was to be added and an initial credit of $250,000 was to be given upon the purchase price. Thereafter, all unpaid balance of the purchase price was to draw interest at the rate of 5 percent per annum, to accrue and be paid simultaneously with each installment payment. All payments were to be made to the credit of petitioner in the Los Angeles Trust & Savings Bank, which it was agreed should be the escrow agent to receive and hold them as well as all title papers for accounting and delivery after all conditions of the contract had been fully performed. One condition of the agreement, to be performed "as soon as possible" after the signing, required the petitioner to furnish the attorneys of the purchaser with an abstract of its title and other related addenda necessary to show its power to convey good title in case the option *816 was exercised. The*1261 procedure thereafter to be followed was directed in the contract as follows:
Within five days after the receipt thereof [abstract of title, etc.], said attorneys shall either approve or disapprove first party's said title and proceedings, and upon approval thereof and the execution, acknowledgment and delivery by first party to said Los Angeles Trust & Savings Bank, as escrow holder, of a proper warranty deed, in form and substance satisfactory to said attorneys, conveying and transferring said property to second party, its successors and assigns, second party, within five days from and after written notice to it from first party of such deposit of said deed, shall pay to said bank for the credit of first party, or shall pay to the bank of Bisbee for the credit of said Los Angeles Trust & Savings Bank for the use of first party, the above mentioned payment of Two Hundred and Forty-Nine Thousand Dollars ($249,000) on account of said stipulated purchase price.
If second party's said attorneys shall disapprove said title or proceedings upon some ground or grounds not deemed by them speedily curable, this agreement shall thereupon terminate and said payment of One Thousand Dollars*1262 ($1,000) shall be returned by first party to second party.
* * *
If said title and proceedings shall be finally approved by second party's attorneys, in time and manner as aforesaid, first party, immediately upon receiving written notice thereof, and as a condition precedent to second party's payment of said sum of Two Hundred and Forth Nine Thousand Dollars ($249,000) shall execute, acknowledge and exhibit to second party's said attorneys a good and sufficient warranty deed in form and substance satisfactory to second party's said attorneys, transferring and conveying said mining claims and properties to second party, and its successors and assigns, and shall deliver said deed for deposit in escrow to said Los Angeles Trust & Savings Bank to be held by said Bank subject to the following instructions, to-wit:
Said Bank shall hold said deed subject to second party's making or causing to be made the remaining payments on account of the aforesaid purchase price, with interest thereon, in the manner and installments, and at or before the times, as in this agreement set forth.
If second party shall make or cause to be made the said remaining payments and each and every payment*1263 thereof, with interest as aforesaid, at or before the times respectively when the same shall be due and payable as in this agreement provided, and shall keep and perform the stipulations of this agreement on its part to be kept and performed, then and immediately upon the making of the last of said payments, the said Bank shall forthwith deliver the said deed to second party or its order.
If second party shall fail to make said payments, or any thereof, with interest as aforesaid, in the manner and at or before the dates respectively when they fall due and payable as aforesaid, or shall fail to keep and perform the stipulations of this agreement on its part to be kept and performed, then and in such event, said option and this agreement shall be forfeited and ended and the Bank shall and it is hereby instructed thereupon to deliver said deed to first party or its order.
Upon execution of the contract the second party was given the right to go upon petitioner's properties for the purpose of exploring and testing the ores, and after making payment of $249,000 on *817 the purchase price, if timely, but not otherwise, was to have exclusive possession of them with unrestricted*1264 rights to prospect, explore, and develop, subject only to certain rights reserved by petitioner to go upon them and inspect underground workings, new improvements, etc.
Other terms of the contract are as follows:
If second party shall make the above mentioned payment of Five Hundred Thousand Dollars ($500,000) on or before February 1st, 1923, with interest as aforesaid, but not otherwise, it shall thereupon and thereafter, during the life of this agreement, have the unrestricted right to extract, remove, ship, smelt and treat ores from said mining claims and properties, provided, however, that the net proceeds of said ores, as hereinafter defined, shall be paid by second party, to the Los Angeles Trust & Savings Bank for the credit of first party, or to said Bank of Bisbee for the credit of said Los Angeles Trust & Savings Bank, for the use of first party, to be applied by said Bank, first, to the liquidation of interest then accrued and unpaid, upon the next accruing and unpaid installments of said purchase price, as above specified, and second, any portion of said net proceeds then remaining shall be applied to the liquidation and satisfaction of said next accruing installment*1265 of said purchase price, following the order of payment as hereinabove specified.
* * *
After second party shall have made the above specified payment of Two Hundred and Forty-Nine Thousand Dollars, ($249,000) on account of said purchase price, second party shall have the right, at any time, to surrender the aforesaid option and this agreement, and to discontinue any and all further payments hereunder, and upon such discontinuance or failure on the part of second party to make any of said payments accruing hereunder subsequent to said payment of Two Hundred and Forty-Nine Thousand Dollars ($249,000) this agreement shall forthwith cease and determine, and said property shall vest in first party as of its former estate fully discharged of this contract, and first party shall have no right to recover anything further from second party on account of any payment of payments of said purchase price, or interest thereon, then remaining unpaid, it being understood, however, that second party shall not thereby be released from any obligation to account for any ores theretofore taken or extracted from said properties of first party and not then fully settled for as required by this agreement. *1266 [Italic ours.]
* * *
If second party shall elect not to exercise said option hereby given, or if second party shall fail or neglect to make any of the aforesaid payments on account of the purchase price, with interest as aforesaid, or shall fail to keep any of the stipulations of this agreement on its part to be performed resulting in a forfeiture or cancellation of this agreement as hereinafter provided, second party covenants and agrees that it will peaceably surrender possession of said properties and every part thereof to first party upon demand.
That any and all payments made by second party upon the purchase price of said mining claims and properties, or any payment of interest thereon, as hereinabove specified, shall immediately be and become the property of first party whether second party shall complete said payments and take title to said properties or not, and shall be retained by it as liquidated damages.
In event the purchaser "elected not to complete" the purchase payments, and thereby canceled the contract and forfeited the payments *818 theretofore made, it was given the right within 30 days to remove all property, except underground timbers placed*1267 on the properties by it.
On July 1, 1922, the Phelps-Dodge Corporation notified the petitioner of its approval of all title requirements as being fully met, and on the day following paid the $249,000 called for on such condition under the contract. On July 2, 1922, the purchaser took possession of the properties and thereafter made the deferred payments according to the strict terms of the contract.
The petitioner keeps its accounts and makes its income tax returns on the accrual basis. In its income tax return for 1922 it reported a taxable profit $250,000 derived from the sale.
Upon audit the respondent held that petitioner's sale was only in process of consummation during 1922 and that the contract of May 20, 1922, should be treated for income tax purposes as merely an unused option to purchase at a later date. He therefore applied the payments made under the contract in 1922 to the reduction of the petitioner's cost base, which he fixed at $601,417 and allocated all profits to the years 1923 and 1924, after that base had been exceeded by subsequent payments, and determined the deficiencies here in controversy.
OPINION.
LANSDON: On the facts as above set out the*1268 respondent has held that the agreement to sell petitioner's mine was not an executed contract of sale on July 2, 1922, and that there is no basis in law upon which the profits realized from such sale may be accrued on that date. He has determined a cost of the property in the amount of $601,417.50 and a profit of $648,582.50. Holding that at every payment date there was doubt as to whether any future payments would be made, he has applied the successive payments first to the recovery of cost and has determined tax liability on amounts received after such recovery. On this basis he has held that petitioner is taxable on income realized in 1923 and 1924 in the respective amounts of $398,582.50 and $250,000, and has determined the deficiencies have in controversy.
The petitioner contends that the contract of sale was executed on July 2, 1922, and that, being on the accrual basis of accounting, under the provisions of section 213(a) of the Revenue Act of 1927 it was required to accrue in that year and return as income all profit realized from the transaction. In its return for 1922 petitioner reported $250,000 in its gross income as profit realized from the sale. Upon audit the*1269 respondent increased such reported profit to $648,582.50, which the petitioner now agrees is the amount of gain realized from the sale.
*819 The parties have tried and briefed this proceeding on the assumption that the main issue is whether the agreement in question is a contract of a sale executed on July 2, 1922, or an option to purchase which resulted in an executed sale on the date of the last payment in 1924. The agreement contains no provision under which the purchaser could be required to convert it into an executed contract of sale. The payment of $249,000 on July 2, 1922, was conditioned on a favorable report as to petitioner's power to transfer title. The payment of $500,000 on February 1, 1923, was to be made only after the purchaser had entered and explored the mine. The payments of $250,000 each on August 1, 1923, and February 1, 1924, depended entirely on decisions which could be made only by the purchaser, who had executed no obligations in the form of notes or mortgages. The agreement provided for all contingencies that might result from the failure of the purchaser to observe all its terms and make all the deferred payments. In these circumstances, *1270 we think it immaterial whether the instrument in question was a continuing option or contract of sale finally executed at the date of the last payment. In any event it was not a contract of sale executed on July 2, 1922. The real question relates to the date or dates at which the payments became taxable income to the petitioner.
It is now well settled that deductions contingent on future events may not be accrued for income tax purposes. ; ; ; affd., ; certiorari denied, . The courts have generally applied the same rule to the accrual of income. In , it was held that, "An item accrues when all events have occurred necessary to fix the liabilities of the parties concerned therewith and to determine the amount of such liabilities." In *1271 , the Court said:
In order to determine whether there has been gain or loss, and the amount of the gain, if any, we must withdraw from the gross proceeds an amount sufficient to restore the capital value that existed at the commencement of the period under consideration. . Revenue Act 1916 § 2, 39 Stat. 757, 758; Revenue Act 1918, c. 18, 40 Stat. 1057. Ordinarily, at least, a taxpayer may not deduct from gross receipts a supposed loss which in fact is represented by his outstanding note. L.Ed. (April 13, 1931). And, conversely, a promise to pay indeterminate sums of money is not necessarily taxable income. Generally speaking, the income tax law is concerned only with realized losses, as with realized gains. .
On the above cited authorities and in the light of the facts herein, we think it clear that the profit realized from the sale of petitioner's *820 *1272 mine was not accruable as income in 1922. The petitioner contends that as it kept its accounts on the accrual basis, it was required to accrue its profit from the sale of its mine as and when received. The Commissioner, however, is authorized to reject the accounting method of any taxpayer if income is not truly reflected thereby. In this proceeding he has determined that there was no income in 1922 and we think that determination and his further finding that income was realized only after cost had been recovered must be affirmed.
Reviewed by the Board.
Decision will be entered for the respondent.