1928 BTA LEXIS 3045">*3045 Transaction held to be completed sale in 1920, not 1921.
14 B.T.A. 23">*23 This is a proceeding for the redetermination of a deficiency in income tax for the year 1921 in the amount of $7,099.20. The error 14 B.T.A. 23">*24 alleged is that the respondent included in the petitioner's income for 1921 the sum of $54,339.65 on account of a sale of an individual one-half interest in a certain leasehold estate.
FINDINGS OF FACT.
The petitioner is an individual resident in Chicago, Ill. On July 1, 1920, the petitioner herein, with his wife, Rose K. Moir, entered into a contract with the Chicago Methodist Episcopal Church Aid Society, which contract was on or about said date deposited in escrow with Chicago Title & Trust Co., together with $10,000 of earnest money paid by said Chicago Metbodist Episcopal Church Aid Society. The contract provided as follows:
THIS AGREEMENT WITNESSETH, that the Purchaser, THE CHICAGO METHODIST EPISCOPAL CHURCH AID SOCIETY, a corporation of Illinois, hereby agrees to purchase at the price of ONE HUNDRED NINETY FIVE THOUSAND1928 BTA LEXIS 3045">*3046 ($195,000.00) DOLLARS, the leasehold interest in the real estate situated in the City of Chicago, County of Cook and State of Illinois, described as follows: The South Fifty (50 feet of Lot four (4) in Block Fifty-Seven (57) in the Original Town of Chicago, created by a certain lease dated May 1, 1911, wherein THERESA KOHN, HARRY D. KOHN, EDWIN D. KOHN, AND JULIA K. BERNHEIMER, Trustees under the Last Will and Testament of David A. Kohn, deceased, are the lessors, the HARRY C. MOIR and JOHN MILLOY are the original lessees, said lease being more particularly described as Document Number 4,874,508, and recorded on Page 90 in Book Number 11780 in the Recorder's office of Cook County, Illinois, and the Vendors, Harry C. Moir and Rose K. Moir, who now own said leasehold interest, agree to sell said leasehold interest together with all rights, easements, privileges, appurtenances and hereditaments thereunto belonging and appertaining; and all interest of the lessees thereunder in and to the buildings and improvements situate on said described premises; and also any rights of the said lessees in and to any and all party wall agreements pertaining to said premises and all interest in and to1928 BTA LEXIS 3045">*3047 any and all rights, privileges and benefits enjoyed by said lessees in connection with said leasehold estate and the said buildings and improvements thereon, whether the same be appurtenant thereto, or arising out of separate contract, or otherwise, at said price and to convey to said Purchaser a good and merchantable title thereto by deed of assignment, or such other deed of conveyance as said Purchaser may designate to be delivered at the time hereinafter specified, but subject to:
(1) All of the terms and conditions of the following subleases of various portions of the building located on said premises, to-wit:
| Tenant | Annual Rental | Lease Expires By Limitation |
| Boston Theatre Co | $18,000.00 | Apr. 30, 1922 |
| Clover Leaf Waffle Co | 3,000.00 | Apr. 30, 1922 |
| S. D. Stucking | 3,600.00 | Apr. 30, 1926 |
| Candy Factory | 1,700.00 | Monthly lease |
| Israel Gitelson | 3,600.00 | Apr. 30. 1925 |
all of which said leases are to be assigned to said purchaser at the time of the delivery to it of said deed of assignment or other deed of conveyance.
14 B.T.A. 23">*25 The said first three sub-leases contain a provision giving to the lessors therein the right to cancel the same upon giving1928 BTA LEXIS 3045">*3048 ninety (90) days' previous notice of such cancellation. The said last mentioned lease to Israel Gitelson contains a provision reserving to the lessor the right to cancel said lease on January 1, 1921, provided notice of lessor's intention to cancel said lease shall be given to the lessee on or before October 1, 1920, or said lease may be cancelled on January 1st, of any year thereafter upon giving a like notice.
(2) All taxes and assessments levied or charged against said leasehold estate, said buildings or said real estate of any kind or nature after the year 1919, excepting, however, the said Vendors shall pay the pro rata portion of the general taxes levied or charged against said leasehold interest, said building and said real estate up to the date of the delivery of said deed of assignment. It is agreed that as it will not be possible during the year 1920 to ascertain the exact amount of the general taxes which may be levied for that year, that at the time of the delivery of said deed of assignment, or other deed of conveyance (if such delivery occurs in the year 1920), said Vendors shall pay to said Purchaser an amount equal to the pro rata portion of the general taxes for1928 BTA LEXIS 3045">*3049 the year 1919, and if it should later develop that the general taxes for 1920 are in excess of those for the year 1919, then said Vendors shall pay to said Purchaser the excess sum; and if, on the other hand, it should develop that the general taxes for the year 1920 are less than the taxes paid for the year 1919, then said Purchaser shall reimburse said Vendors for any overpayment. It is further agreed that if such delivery of said deed of assignment, or other deed of conveyance, occurs in the year 1921, said Vendors shall pay all taxes and assessments levied or charged against said leasehold estate said buildings and said real estate for the year 1920 and shall also then pay to said Purchaser an amount equal to the pro rata portion of the general taxes paid for the year 1921, using the taxes paid for 1920 as a basis of calculation, and if it should later develop that the general taxes for 1921 are in excess of those for the year 1920, then said Vendors shall pay to said Purchaser the excess sum, and if, on the other hand, it should develop that the general taxes for the year 1921 are less than the general taxes for the year 1920, then said Purchaser shall reimburse said Vendors1928 BTA LEXIS 3045">*3050 for any over-payment.
(3) To all party wall agreements of record and all existing party walls and party wall rights.
Said Purchaser has paid TEN THOUSAND DOLLARS ($10,000.00) as earnest money to be applied on said purchase when consummated and agreed to pay to the Vendors within thirty (30) days after the title has been examined and found good or accepted by it, the further sum of FORTY THOUSAND DOLLARS ($40,000.00) at the office of the Chicago Title and Trust Company, in Chicago, provided a good and sufficient deed of assignment or other deed of conveyance as such Purchaser may designate conveying to said Purchaser a good and merchantable title to said leasehold estate and the building and improvements thereon, including engines, boilers, fixtures, and all appurtenances, together with all rights, easements, privileges, appurtenances and hereditaments thereunto belonging and appertaining, subject only to the provisions of said 99 year lease; and all interest, right and title of the lessees under said 99 year lease in and to any and all party wall agreements pertaining to said premises and all interest in and to any and all rights, privileges and benefits enjoyed by said lessees1928 BTA LEXIS 3045">*3051 in connection with said leasehold estate and the buildings and improvements thereon, whether the same be appurtenant thereto, or arising out of separate contract, or otherwise, and due assignments and transfer of all 14 B.T.A. 23">*26 sub-leases, shall then be ready for delivery; and provided further that the owners of the fee simple title to said premises shall, contemporaneously with said payments, also deposit in escrow as hereinafter provided due, sufficient and proper instruments of transfer and conveyance of said fee, free and clear of all liens, charges and incumbrances, except only said 99 year lease, taxes and party wall agreements of record as specified in the contract for the purchase of said fee between said Purchaser and Harry D. Kohn and Edwin D. Kohn, individually and the Surviving Trustees under the Will of David A. Kohn, deceased, to be entered into contemporaneously with this contract together with due, proper and sufficient instruments of transfer and conveyance of all interest of the lessors in and to said 99 year lease together with all rights, easements, and appurtenances pertaining and relating to said property; and all lessors' interest in and to the building and improvements1928 BTA LEXIS 3045">*3052 situated on said real estate and due assignments of all party wall agreements and of all other rights, privileges, and benefits enjoyed by said owners of the fee title in connection with said real estate and the buildings and improvements thereon, whether the same arise out of separate contract or otherwise, including any right to the use of the space under the sidewalk and any other right, privilege or benefit enjoyed by the owners of said fee in connection with their ownership thereof and of the building thereon situate.
Upon the making of said payment of FORTY THOUSAND DOLLARS ($40,000.00) it is agreed that said deed of assignment or other deed of conveyance shall be deposited in escrow with said Chicago Title and Trust Company and the purchaser hereby agrees to pay to the Vendors the balance of the said purchase price, viz., ONE HUNDRED FORTY FIVE THOUSAND DOLLARS ($145,000.00) at the office of said Chicago Title and Trust Company on or before one year from the date of deposit in escrow as aforesaid of said deed of assignment or other deed of conveyance, as aforementioned.
Upon payment in full of said purchase price the Purchaser shall be entitled to receive said deed of1928 BTA LEXIS 3045">*3053 assignment or other deed of conveyance from said Chicago Title and Trust Company and record the same.
It is agreed by and between the parties hereto that the Vendors shall remain in possession of said premises, collect the rents accruing from the sub-leases hereinbefore mentioned and perform and discharge all the terms and covenants of the said ground lease on the part of the lessee therein and hold said Purchaser harmless from any cost, damage or expense by reason of their (the Vendors') failure so to do and that they will not do or suffer to be done any act by legal proceeding or otherwise that will or may impair or affect their title to said leasehold or suffer or permit any lien or charge to attach thereto after the same has been examined by said Purchaser or its Counsel and before the said Purchase price shall have been paid in full and said deed thereto has been delivered to said Purchaser. The Vendors further agree that at the time of the delivery of said deed of assignment or other deed of conveyance to said Purchaser they will pay to said Purchaser, the interest on the sum of FIFTY THOUSAND DOLLARS ($50,000.00) at the rate of five (5) per cent, per annum from the date1928 BTA LEXIS 3045">*3054 said deed of assignment or other instrument is deposited with the Chicago Title and Trust Company as hereinbefore provided.
This contract is entered into with the understanding that the Purchaser is arranging contemporaneously herewith for the purchase of the fee of said premises and that the said Purchaser does not desire to purchase said leasehold interest from the Vendors herein unless it also acquires a good title to 14 B.T.A. 23">*27 said fee, and it is, therefore, expressly agreed that unless the title to said fee shall be found good or be accepted by the Purchaser herein, and the Purchaser shall acquire the title to said fee, this contract shall become null and void and all moneys it shall have paid hereunder shall be returned to it, and in that event, no commissions shall be paid to the Vendors' broker.
It is further agreed that if and when the Purchaser has made the additional payment of FORTY THOUSAND DOLLARS ($40,000.00) above provided for, then the parties hereto, together with the present owner of the fee, shall enter into an agreement (sometimes called a joint order escrow agreement) substantially in the following form:
CHICAGO, , 1920.
CHICAGO TITLE AND TRUST COMPANY:
1928 BTA LEXIS 3045">*3055 Harry C. Moir and Rose K. Moir, by Messrs. Campbell and Fischer, their attorneys, hereby deposit with you in escrow the following papers, documents and instruments of assignment, transfer, sale and conveyance, viz:
(Here insert list of same)
The persons above named and the Chicago Methodist Episcopal Church Aid Society hereby deposit with you the contract (describing same, viz., this agreement).
You are to deliver said papers, documents, and instruments of assignment, transfer, sale and conveyance only upon the joint order of:
1. Any member of the firm of Campbell and Fischer or said Harry C. Moir or Rose K. Moir;
2. Jointly with either Simon P. Gary, William W. Dixon, or any member of the firm of Hollett, Sauter & Hollett, as attorneys for said Society.
If, at the time for the delivery of said instruments, etc., as aforesaid, all those herein designated as representing any or either of the parties hereto, shall have died, or be under legal disability, or absent from Cook County, Illinois, and unable to act, shall, in writing, designate to the said Chicago Title and Trust Company a substitute and successor who shall possess the same power to release said escrow by1928 BTA LEXIS 3045">*3056 joining with the representatives of the other parties as aforesaid.
The said escrow agreement may also embody the provisions contained in the form of "Joint Order Escrow No. 1" now in use by said Chicago Title and Trust Company conferring certain powers on said Company, designated for its protection as such escrow-holder.
The said escrow agreement shall be signed and executed by all of the attorneys aforesaid and shall be accepted by said Chicago Title and Trust Company.
The Vendors herein agree that upon the full payment of the purchase price with interest as aforesaid, they will cause the release of said escrow and the delivery of said papers, documents, instruments of assignment, transfer, sale and conveyance, etc., to be made by said Chicago Title and Trust Company to said Society by joining in a request on said Chicago Title and Trust Company to so deliver the same.
At the time of the deposit in escrow as herein provided, all insurance policies relating to the property herein agreed to be sold, shall be endorsed by the respective companies with a notation of the sale of same under this contract of the property covered thereby, and should any loss or damage occur, covered1928 BTA LEXIS 3045">*3057 by any such insurance prior to the delivery of the said deeds and instruments of assignment, transfer and conveyance (meaning the delivery and surrender of the 14 B.T.A. 23">*28 same by escrow holder to said Purchaser) the amount realized from such policies of insurance (except rent insurance) shall be paid to Foreman Bros. Banking Co., as Trustee, in accordance with the provisions of said 99 year lease. Upon full payment by the said Purchaser of the consideration herein stipulated to be paid for the property herein agreed to be conveyed, the said Purchaser shall be subrogated to all the rights of the Vendors in and to said insurance money, under the terms of said 99 year lease.
It is further agreed that all securities on deposit with Foreman Bros. Banking Co., as security for the fulfillment of the terms of the said lease on the part of the said lessees shall be and remain the property of the Vendors and that upon the delivery of said deed of assignment or other deed of conveyance to the Purchaser, said Foreman Bros. Banking Co., shall be at liberty to turn over said securities to the Vendors herein, free from any claims of any kind whatsoever, on the part of the said purchaser.
1928 BTA LEXIS 3045">*3058 It is further agreed that at the time of the delivery of said deed of assignment or other deed of conveyance to the Purchaser, the Purchaser shall pay to the Vendors the unearned insurance premium on the insurance carried on said building, and shall also pay to the Vendors any rent paid in advance under the terms of said long term lease.
The Purchaser or its attorneys shall, within thirty (30) days after receiving a merchantable abstract of title to said premises, deliver to the Vendors or their attorneys, Campbell & Fischer, of Chicago, a memorandum in writing, signed by the Purchaser or its attorneys, specifying in detail the objections it makes to the title to said leasehold estate, if any, or, if none, stating in substance that the same is satisfactory.
In case material defects be found in said title and so reported, then if such defects be not cured within sixty (60) days after such notice thereof, this contract shall, at the Purchaser's option, become absolutely null and void, and said earnest money shall be returned, notice of such election shall be given to the Vendors, but the Purchaser may, nevertheless, elect to take the title as it then is, and in such case, the1928 BTA LEXIS 3045">*3059 Vendors shall convey, as above agreed, provided, however, that the Purchaser shall have first given a written notice of such election within ten (10) days after the expiration of said period of sixty (60) days and tendered performance hereof on its part.
In default of such notice of election to perform and accompanying tender within the time so limited, the Purchaser shall, without further action by either party, be deemed to have abandoned its claim upon said premises, and thereupon this contract shall cease to have any force or effect as against said leasehold estate or the title thereto, or any right or interest therein, but not otherwise.
Should such Purchaser fail to perform this contract promptly on its part at the time and in the manner herein specified, all payments made as above, shall, at the option of the Vendors be retained as liquidated damages, and this contract shall thereupon become and be null and void. Time is of the essence of this contract and of all the conditions hereof.
The notices required to be given by the terms of this agreement, shall, in all cases, be construed to mean notices in writing, signed by, or on behalf of, the party giving the same and1928 BTA LEXIS 3045">*3060 may be served either upon the other party or its or their attorneys.
This contract and the said earnest money shall be held by said Chicago Title and Trust Company for the mutual benefit of the parties concerned, and after the payment in full of all the purchase price hereunder, said Trust Company shall be at liberty to cancel this contract and deliver and same to said Purchaser; 14 B.T.A. 23">*29 and it shall be the duty of said Trust Company, in case said money be retained as herein provided by reason of the default of the Purchaser, to apply the same to the payment of any expenses incurred for the Vendors by their agent in this matter, rendering the surplus to the Vendors. It being agreed, however, that if and when said sum of FORTY THOUSAND DOLLARS ($40,000.00) hereinbefore mentioned is paid, the Vendors shall pay to said Vendors' broker, S. C. Iverson, of Hibbard Porter & Bro., the sum of FIVE THOUSAND DOLLARS ($5,000.00) for his services in procuring this contract. Unless said sum of FORTY THOUSAND DOLLARS ($40,000.00) is paid, said broker shall receive no commissions. Purchaser is to pay one half of escrow charges.
On or before October 20, 1920, the vendors' title to the leasehold1928 BTA LEXIS 3045">*3061 described in said contract was found to be good and the vendors, being the petitioner and his said wife, thereafter, under date of October 14, 1920, executed and acknowledged a deed of conveyance to Chicago Methodist Episcopal Church Aid Society of the leasehold estate described in said contract, which deed of conveyance conformed to the provisions of said contract, and had attached thereto and canceled, on October 20, 1920, $195 of United States documentary revenue stamps.
Simultaneously or prior thereto, the Chicago Methodist Episcopal Church Aid Society arranged to acquire the fee simple title to the premises covered by said leasehold, which fee simple title was conveyed to the Chicago Methodist Episcopal Church Aid Society by two certain deeds of conveyance, both executed under date of September 22, 1920, the grantors under one of which deeds of conveyance were Harry D. Kohn and Nellie S. Kohn, his wife, and Edw. D. Kohn and Hulda L. Kohn, his wife, conveying as individuals, and the grantors of the other of which deeds of conveyance were Harry D. Kohn, Edw. D. Kohn, and Julia K. Bernheimer, as surviving trustees under the last will and testament of David A. Kohn, deceased, to1928 BTA LEXIS 3045">*3062 the first of which deeds of conveyance there were, on September 22, 1920, attached and canceled, $192.50 of United States documentary revenue stamps, and to the second of which deeds of conveyance there were on said date attached and canceled $192.50 of such documentary revenue stamps.
On or about October 20, 1920, said deed of conveyance and assignment of said leasehold, so executed by the petitioner and his wife, was deposited in escrow with Chicago Title & Trust Co., pursuant to the provisions of said contract that -
said deed of assignment or other deed of conveyance shall be deposited in escrow with said Chicago Title and Trust Company, and the purchaser hereby agrees to pay to the vendors the balance of said purchase price, viz., $145,000, at the office of said Chicago Title and Trust Company on or before one year from the date of deposit in escrow as aforesaid of said deed of assignment or other deed of conveyance as aforesaid. Upon payment in full of said purchase price the purchaser shall be entitled to receive said deed of assignment or other 14 B.T.A. 23">*30 deed of conveyance from said Chicago Title and Trust Company and record the same.
Continuing from said 20th day1928 BTA LEXIS 3045">*3063 of October, 1920, until October 20, 1921, the deed of assignment remained in escrow and the vendors of the contract (being the petitioner and his wife) remained in possession of the premises conformably to the provisions of the agreement. Immediately preceding or contemporaneously with the deposit in escrow of the deed of conveyance, there was paid to the petitioners by the Chicago Methodist Episcopal Church Aid Society the sum of $40,000, and there was released for payment to the petitioners the sum of $10,000 theretofore deposited in escrow as earnest money, $5,000 of which $10,000 was forthwith on the said 20th day of October, 1920, paid by the Chicago Title & Trust Co. to the petitioner and his wife, and the remaining $5,000 thereof was simultaneously upon their order paid to their broker, S. C. Iverson as his commission for effecting the sale of the leasehold.
The provision that the vendors should remain in possession of the said premises was included in the contract, at the suggestion of the Chicago Methodist Episcopal Church Aid Society because it was acquiring title to said leasehold for the purpose of removing the building then thereon and constructing a new building thereon1928 BTA LEXIS 3045">*3064 and did not care to manage the property consisting of the old building prior to such removal of the old building. In so operating said premises said vendors acted conformably with the provisions of the contract and collected rent from subtenants and retained the amounts received in excess of operating expenses and paid to or made credits to the Chicago Methodist Episcopal Church Aid Society of amounts representing 5 per cent interest on the sum of $50,000 so on October 21, 1920, received by said vendors.
On or about October 20, 1921, the Chicago Methodist Episcopal Church Aid Society paid to the vendors the sum of $145,000 at the office of the Chicago Title & Trust Co. as required in said contract. and the deed of assignment was thereupon delivered to the Chicago Methodist Episcopal Church Aid Society and filed for record by it in the Recorder's Office of Cook County, Illinois. The Chicago Methodist Episcopal Church Aid Society enjoyed high credit in the Cith of Chicago and owned valuable real estate and its obligations were then considered worth face value.
Following the payment so as aforesaid made on October 20, 1920, the Chicago Methodist Episcopal Church Aid Society obtained1928 BTA LEXIS 3045">*3065 and on October 29, 1920, filed for record in the office of the Recorder of Deeds of Cook County, Illinois, a receipt reading as follows:
14 B.T.A. 23">*31 CHICAGO, ILLINOIS, October 20, 1920.
Received of the Methodist Episcopal Church Aid Society the sum of Forty Thousand Dollars ($40,000) which, together with the earnest money amounting to Ten Thousand Dollars ($10,000) this day released from escrow, constitutes the initial payment provided for in contract made by Harry C. Moir and Rose K. Moir date July 1, 1920, for the sale to said Church Aid Society of a leasehold estate in (here followed a legal description of the property) said contract being deposited in escrow with the Chicago Title and Trust Company.
HARRY C. MOIR
ROSE K. MOIR
By CAMPBELL AND FISCHER.
The respondent, in determining the dificiency herein, added to the income reported by the petitioner for 1921 the sum of $54,339.65, representing the profit on the sale of the one-half interest of the petitioner in said leasehold.
The petitioner made his return for 1921 upon the cash receipts and disbursements basis. At no time during the pendency of the contract above set forth did the purchaser issue or deliver1928 BTA LEXIS 3045">*3066 to the petitioner or to the escrow agent any notes or securities. The conveyances executed by the vendors were deposited in escrow to be held until the balance of the $145,000 was paid. The purchaser was not to have physical possession until the $145,000 was paid.
OPINION.
SIEFKIN: Reduced to its simplest terms, the question in this proceeding is whether the petitioner received income in 1920 or 1921. In 1920 the agreement was executed, $10,000 earnest money was deposited, title was found good, an additional amount of $40,000 was paid, conveyances to the grantee were placed in escrow, and the broker was paid his commission for effecting the sale. At the end of 1920 and until October 20, 1921, the petitioner retained possession and the conveyances were kept in escrow. On that date the $145,000 remaining under the agreement was paid and the conveyances were delivered to the grantees by the escrow agent and were filed for record.
On this state of facts the petitioner contends that he realized his profit in 1920. Since he made his return on the cash receipts and disbursements basis, such a contention is based upon the theory that he received the equivalent of cash in 19201928 BTA LEXIS 3045">*3067 in the form of an obligation of the purchaser for a deferred payment.
In this respect we have a situation comparable to that which we considered in , where we said:
Under the circumstances here, it is our opinion that a completed transaction took place which was taxable in 1919. There was more than a contract 14 B.T.A. 23">*32 to sell those oil rights to Kamaiky; there was a sale in 1919. The whole of the purchase price was paid over to the vendors or assignors, the vendees or assignees went into possession under the assignment and received the oil produced and the proceeds from its sale. They enjoyed and, until default, were entitled to enjoy, all the rights and privileges which they would have when the assignment was delivered. The petitioner, by placing the assignment in escrow, retained the bare legal title for one purpose only, i.e., to secure payment of the notes. Neither the practical nor the legal situation differs from a conveyance of title to the vendee with a mortgage from him to the vendor to secure payment of a part of the purchase price. The petitioner had conveyed her title, and had received payment. She was entitled1928 BTA LEXIS 3045">*3068 to collect the notes as they became due without any further steps or further conveyance on her part. That the instrument conveying legal title was held in escrow as security for payment of the notes can not alter her ownership of the notes. The situation is entirely different from one where the conveyance and the consideration are both placed in escrow pending some future date or accurrence.
As we view the transactions, there was a contract to sell up to the time the title was found good, the additional money was paid, the conveyances were put in escrow and the sales agent was paid his commission for effecting the sale, but at that time the agreement to sell was converted into a sale on which the petitioner realized a profit based upon the cash received and the obligation (worth its face value) of the purchaser. Thereafter, the petitioner held possession for two reasons. One was that he did so because the purchaser intended to demolish the building on the land and erect a new one and did not want the management of the old building before its removal. This reason is mingled with the other reason, that the petitioner was retaining possession as security for the balance of the1928 BTA LEXIS 3045">*3069 purchase price because the security might be diminished if the removal of the building was permitted before payment of the obligation.
See also, as to the technical position of the parties under an escrow in Illinois, in which it is held that delivery of the deed in such a case is effective at the time the conveyances are put in escrow.
We conclude that the profit was taxable in 1920.
Reviewed by the Board.
Judgment will be entered under Rule 50.