*978 This proceeding arises upon the determination of a deficiency in petitioner's income tax for the calendar year 1924 in the sum of $48,526.91, arising from a profit of $395,524.72 on the sale of its assets. The petitioner assigned as error, first, the respondent's determination that gain resulted to the petitioner corporation from the sale of its assets, consisting of timber lands and timber, to another corporation, petitioner alleging that the sale was made by petitioner's stockholders through a liquidating trustee and not by the petitioner as a corporation; and, second, respondent's determination that gain resulted from such sale, by whomever made, in 1924, when the conveyance was executed, petitioner alleging that the sale was effective *979 for income-tax purposes when the contract was executed and possession delivered in 1923.
FINDINGS OF FACT.
Petitioner was a corporation, organized under the laws of Oregon, with its principal office at Wallowa, Oregon. It was engaged in logging and lumbering. Prior to August 1, 1923, negotiations were*1212 carried on by the petitioner with the Bowman-Hicks Lumber Company, looking to the sale by petitioner of its assets, consisting of timber, timber lands, lumber-manufacturing plant avd personal property situated thereon.
The minutes of a special meeting of petitioner's board of directors held on August 1, 1923, recite:
It appearing that stockholders acting in their individual capacity, representing more than two-thirds of the stock of the Nibley-Mimnaugh Lumber Company, had designated J. F. Ravenscroft as trustee to hold, operate or sell the assets of the Nibley-Mimnaugh Lumber Company, together with the property conveyed to him by the Grande Ronde Lumber Company, [an Oregon corporation owning stock of the petitioner] and that said stockholders have guaranteed to secure the approval of the stockholders to its action, it was
Resolved: That the President and the Secretary of the Nibley-Mimnaugh Lumber Company be authorized to convey title to all assets of the Nibley-Mimnaugh Lumber Company to J. F. Ravenscroft, Trustee. * * *
The trustee was to distribute the proceeds "as a liquidating dividend" to the stockholders and the petitioner to be dissolved.
At an adjourned meeting*1213 of the directors on the following day, August 2, it was "Resolved, that J. F. Ravenscroft, as Liquidating Trustee, be and he hereby is authorized to sell and convey all of the property of this company, except its cash and accounts receivable, to Bowman-Hicks Lumber Company, for the price and on the terms shown in a written agreement dated August 2nd, 1923, between said Bowman-Hicks Lumber Company and others, including said Liquidating Trustee, exhibited at this meeting, to execute said agreement as Trustee, and to execute the same also for and on behalf of the company. Said agreement provides for the payment by Bowman-Hicks Lumber Company of $1,150,000.00 for said property, including certain property of the Grande Ronde Lumber Company."
On August 2, 1923, the contract was executed, the opening paragraph reciting that it was entered into by "the Nibley-Mimnaugh Lumber Company, an Oregon corporation, First Party, acting herein by and through J. F. Ravenscroft as Liquidating Trustee of said Nibley-Mimnaugh Lumber Company under and by virtue of a resolution of the directors of the company passed at a meeting thereof held August 1st, 1923, said Nibley-Mimnaugh Lumber Company and said*1214 J. F. Ravenscroft as such Liquidating Trustee being collectively hereinafter *980 referred to as the 'Seller,'" and Grande Ronde Lumber Company, an Oregon Corporation, Second Party, and certain stockholders of the petitioner owning more than two-thirds of its stock, Third Parties, and "the Bowman-Hicks Lumber Company, a Delaware corporation, Fourth Party, hereinafter called the 'Purchaser.'"
The contract provided that "the seller has contracted to sell and the purchaser has contracted to buy" certain property set forth and described in an exhibit attached, upon certain terms and conditions, which need not be set forth in full, but the pertinent portions of which are summarized as follows: The seller agreed to furnish abstracts of title to all tracts and, in the event that such title proved unsatisfactory to the purchaser and such defects of title could not be cured and were not waived by the purchaser, there was to be a pro tanto abatement of the purchase price. The price was to be $1,150,000, $100,000 thereof to be paid at once in cash (receipt being acknowledged by the seller in this agreement); $350,000 more to be paid upon ratification of the contract by the seller's*1215 stockholders; and the balance in five years. For such balance the purchaser was to execute and deliver to the seller, upon receipt of the deed and bill of sale, five negotiable promissory notes dated August 3, 1923, bearing interest at 5 1/2 per cent per annum, maturing at one year intervals thereafter and secured by a purchase-money mortgage given by the purchaser to the seller. Where titles to tracts should prove incurably defective, there was to be a reduction in the purchase price by the amount of $3.33 per M feet of timber on the land and by $3 per acre of the land. The lumber at the mill was estimated at 8,500,000 feet, but as the purchaser had not had time to take an inventory of it, it was provided that if it should not prove so much, the purchase price was to be reduced by the amount of $20 per M feet of the deficiency. All reductions in the purchase price were to be applied against the principal of the notes.
In the event of the purchaser refusing to perform after the seller had complied with all conditions, the seller should have the right to terminate the contract and reenter and take possession of the property, including any improvements made by the purchaser, and*1216 to retain the cash payments as liquidated damages. If the title to the mill site should prove incurably defective or if the area of merchantable timber should prove less than 20,000 acres, or if the seller could not furnish evidence of its stockholders' assent to the contract, or a general warranty deed, then the purchaser might refuse to carry out the contract. In such event, the purchaser's advances and expenditures were to be counted a loan to the seller at 8 per cent interest, secured by a first lien on the seller's property. The seller was to give a general warranty of title, in which the *981 Grande Ronde Company was to join, and the property to be free of liens.
Paragraph 7 provided in part:
One of the most important considerations inducing the purchaser to enter into this contract is the right to have possession at once of the property covered hereby, in order, among other reasons, that it may prepare for winter logging. Contemporaneously with the execution of this agreement, therefore, the purchaser shall be given possession of the property covered hereby.
The stockholders of the petitioner (more than two-thirds of whom, in interest, were made parties to*1217 the contract) were, by resolution at a regular meetingto be held not later than August 10, 1923, to authorize and approve this contract to sell. They further agreed to indemnify the purchaser for their failure to act.
Other paragraphs provided for the assumption by the purchaser of the seller's liabilities and contracts, adjustment of profits therefrom, and fire insurance on the property.
The purchaser, by George R. Hicks, its president, took possession of petitioner's mill and timber holdings included under the contract at 4.30 p.m. on August 3, 1923, the day after the contract was signed. This delivery was in accordance with instructions given by the petitioner to David Stoddard and Ravenscroft.
On August 11, 1923, the stockholders of petitioner at a special meeting authorized their directors to sell all petitioner's assets except accounts receivable and cash to the Bowman-Hicks Company, in accordance with the contract of August 2, 1923, at the same time ratifying their officers' and directors' action in making the contract. A liquidating trustee was empowered to carry out the contract in the event of petitioner's dissolution.
The purchaser paid to Ravenscroft for*1218 the petitioner $100,000 when the contract was signed on August 2, 1923, and $350,000 more two weeks later.
On September 4, 1923, the stockholders of petitioner met and resolved to dissolve the corporation and to ratify all the acts of Ravenscroft as liquidating trustee. The directors on the same day likewise ratified all Ravenscroft's prior acts and appointed him trustee to wind up petitioner's affairs and carry out the terms of the Bowman-Hicks contract.
The purchaser on taking possession of petitioner's mill and timber holdings on August 3, 1923, began at once to carry on lumber operations on the property. Logs in the pond and in the woods were brought in and sawed up. These and lumber in the yard were sold by the purchaser, the petitioner getting no money from the sale. From nine to twelve million feet of timber were removed by the purchaser from these lands in 1923. In the same year it rebuilt about eight miles and regraded about six miles of the railroad running *982 through the holdings, put in heavier metal rails, and expended thereon a substantial amount of money. In general, the purchaser exercised over the properties included in the contract all the rights*1219 of ownership and dominion.
By December 31, 1923, abstracts of title covering more than 21,000 acres of petitioner's lands had been accepted by the purchaser's lawyers, including that covering the mill site.
On December 18, 1923, Ravenscroft, as liquidating trustee, distributed to petitioner's stockholders all the money received by the vendor on the purchase price except about $50,000 or $60,000.
The parties to the contract were able to determine the amount of cut timber in the yard within ten days after the contract's signature, but the area of "cut-over" lands was not finally determined until early in 1924. On January 15, 1924, a contract finally adjusting these differences by remission to the purchaser of $66,508.07 of the purchase price (to be deducted from the notes) in accordance with the contract of sale respecting incurable defects of title was signed by the purchaser, by Ravenscroft as liquidating trustee of the seller, by the Grande Ronde Company, and by Elmer I. Stoddard, Ravenscroft and Mimnaugh as stockholders.
A deed of conveyance covering the mill and certain described timber lands, being all the assets of the petitioner, was executed on February 28, 1924, the*1220 preamble of which reads:
THIS INDENTURE, made as of the 3rd day of August, 1923, but actually executed this 28th day of February, 1924, between J. F. Ravenscroft, as Liquidating Trustee of Nibley-Mimnaugh Lumber Company, a corporation of the State of Oregon, under and by virtue of a resolution of the Directors of said corporation passed at a meeting thereof held August 1, 1923, and said Nibley-Mimnaugh Lumber Company, parties of the first part, and Bowman-Hicks Lumber Company, a corporation of the State of Delaware, party of the second part, WITNESSETH: * * *.
Ravenscroft, as "Liquidating Trustee of Nibley-Mimnaugh Lumber Company," and the Nibley-Mimnaugh Lumber Company, by Elmer I. Stoddard, president, attested by Ravenscroft, secretary, executed the deed.
At the same time the purchaser executed a first trust or mortgage on the Nibley-Mimnaugh property to secure notes in the amount of $633,500 representing the balance of the purchase price given by the purchaser to the petitioner as seller. The negotiations upon the form this mortgage was to take were carried on between counsel for the purchaser and for the seller in 1923. The notes given by the purchaser were dated August 3, 1923, and*1221 bore interest from that date, but were not delivered to the vendor until February 28, 1924, at the time conveyance of title was executed.
*983 The certificate of dissolution of the Nibley-Mimnaugh Lumber Company was issued by the Corporation Commissioner of the State of Oregon on March 7, 1924.
After August 3, 1923, Ravenscroft opened new books as "Trustee" and entries thereafter were made in these books.
Petitioner filed a return for 1923 covering the period up to August 3. Ravenscroft filed a return for himself as trustee for the period August 3 to December 31, 1923, and for 1924. No return was made by petitioner as a corporation in 1924. The profit from the sale was not reported by petitioner in its return for 1923, nor by Ravenscroft as trustee in his fiduciary return for 1923 or 1924. Depreciation was allowed by the respondent to petitioner in 1923 for the period only before August 2, 1923, on the ground that the property had then been transferred. Neither petitioner, nor Ravenscroft as liquidating trustee, paid any taxes for 1923 on the lands comprised within the contract of sale.
OPINION.
MATTHEWS: This is a question (1) whether the gain derived from*1222 the sale of certain timber lands is taxable to the petitioner as a corporation, as respondent contends, in view of petitioner's contention that the sale was made by the stockholders through a liquidating trustee and the corporation dissolved; and (2) whether the gain was derived in 1923, when the contract of sale was executed and possession delivered to the purchaser, as petitioner contends, or in 1924, as respondent contends, when the legal title was formally conveyed.
1. The first question raised is, who was the vendor? The petitioner contends that the sale was made by petitioner's stockholders through Ravenscroft as liquidating trustee, while the respondent argues that it was made by the petitioner in its corporate capacity. We find it impossible to escape the conclusion that the petitioner as a corporation made the sale, and, as the facts supporting this conclusion are set out fully in our findings, we think it unnecessary to dwell on them here.
If the petitioner intended to dissolve and have the sale of its assets made by a liquidating trustee, it took no steps to convey to the trustee. On the contrary, as the evidence shows, every instrument from the original contract*1223 of sale to the final conveyance was executed by the petitioner as a corporation, acting through its proper officers. And, finally, dissolution of petitioner was completed only after all formalities of sale had also been completed. The fact that Ravenscroft, as liquidating trustee, also executed all the instruments does not make the sale one by the stockholders.
*984 Even if the petitioner's intention had been carried out, it is very doubtful whether the gain would be taxable to the stockholders. . We hold that the contract was made by the petitioner as a corporation and any gain arising therefrom is taxable income to the petitioner corporation.
2. Before answering the second question raised we must determine whether we are to be governed by the rules of local law in deciding when taxable income is received on a sale. Ordinarily, of course, local law would determine whether a contract to convey timber lands effected a transfer when the contract was made and possession delivered or only when legal title was conveyed, but neither the petitioner nor the respondent has argued this point in his brief with respect*1224 to the law of Oregon. Moreover, we do not consider it necessary, for the purpose of deciding whether income under a Federal tax statute was derived in 1923, to decide whether under local law the sale was completed in that year. , and . Respondent in his brief points out that the Government's view of the determinants of a transfer for income-tax purposes is set out in Law Opinion 988, C.B. No. 2, p. 84 (1920), and that the rule there laid down has been subsequently accepted in other decisions of the Commissioner. The rule accepted is as follows:
No realization of gain or loss arises from a mere contract to sell real estate in the future. The sale is held to occur at the time a deed passes or at the time possession and the burdens and benefits of ownership are from a practical standpoint transferred to the buyer, whichever occurs first. Payments made prior to the sale are to be applied in reduction of cost so far as they do not exceed cost; being treated as income to the extent, if any, to which cost is exceeded.
There is no dispute upon the facts. A*1225 contract was executed by the petitioner corporation, by petitioner's liquidating trustee, and by certain of its stockholders (joined by the Grande Ronde Company as a covendor) with the Bowman-Hicks Company as purchaser on August 2, 1923, for the sale of all of petitioner's assets except cash on hand and accounts receivable. Immediately thereafter, at 4.30 p.m. on August 3, the purchaser took physical possession of the property - the right to have immediate possession of the property being expressly stated in paragraph 7 of the contract to be one of the most important considerations inducing the purchaser to enter into the contract because of the purchaser's plans for logging before the winter snows should begin - and throughout the remainder of 1923 and thereafter exercised all rights of dominion and ownership. The purchaser sawed logs and sold the lumber for its own benefit and expended, according to the testimony of several witnesses, *985 something like $100,000 in laying new railroad tracks, regrading and extending petitioner's railroad. It would be difficult to conceive acts more clearly indicating the purchaser's understanding that it had bought the property when the*1226 contract was signed on August 2, 1923, or, at any rate, when the stockholders had, in accordance with the contract, formally ratified the sale at their meeting on August 11, 1923. After the latter date nothing remained for the vendor except to furnish the purchaser's attorneys with satisfactory abstracts of title to the several tracts covered by the contract, which was done in 1923, and to make a formal conveyance of title by deed.
Accepting, then, the test above laid down, we think it clear that "possession and the burdens and benefits of ownership" in the instant proceeding were transferred by the petitioner in 1923, when unconditional possession was delivered to the purchaser, which thereupon and thereafter derived from the subject matter of the sale all the benefits and assumed all the burdens (1923 taxes, for instance, which were on the evidence not paid by the petitioner and presumably, therefore, were paid by the purchaser) incident to ownership. The opening words of the contract themselves show the clear intention of the parties: "That the Seller has contracted to sell and the Purchaser has contracted to buy the property set forth and decribed * * *."
Moreover, it will*1227 be observed that the purchase-money mortgage was made as of August 3, 1923, and the notes, although not given by the purchaser until 1924, were dated August 3, 1923, and bore interest from that date. The purchaser did not hesitate in 1923 to manufacture and sell for its own benefit lumber in a substantial amount. A substantial portion of the purchase money, $450,000 of the total $1,150,000 of the contract, passed to the vendor in 1923.
Much is made by the respondent of the forfeiture clause in paragraph 9 of the contract, by which the purchaser was allowed to cancel the contract if the vendor should be unable to give a good title to the mill site or to as much as 20,000 acres of "sound, merchantable timber," or, if the stockholders should not ratify the contract, or the vendor should be unable to give a general warranty deed. But it should be pointed out that all of these required conditions were met by the vendor before the end of 1923, so that the purchaser's obligation to purchase had become unconditional in 1923. Nor does the other major objection of the respondent carry great weight. He urges that the subsequent agreement between the parties of January 15, 1924, by which*1228 the purchase price was reduced in the amount of $66,508.07, supports his contention that no unconditional liability rested on the purchaser in 1923. We are unable to accept this view. The contract provided, in paragraph 1, expressly for such a contingency *986 as arose - the inability of the vendor to give good abstracts of title to all the land conveyed - and it provided that in such case such lands should be omitted and a corresponding abatement of the purchase price allowed. No conditions of termination or forfeiture on the part of the purchaser are laid down except those already referred to under paragraph 9. Because the exact amount of the indebtedness was not finally determined in 1923, the purchaser's obligation does not on that account become conditional and contingent.
We are of the opinion that, all prerequisite conditions having been fulfilled in 1923, the purchaser was under an unconditional obligation in that year to pay the vendor the purchase price for that part of its timber lands for which the vendor had supplied good abstracts of title. The clear intent of the parties and the uncontradicted fact of the possession taken and dominion exercised over the*1229 vendor's lands by the purchaser in 1923 clearly establish a transfer for income-tax purposes in 1923. The case of , is sufficiently similar on its facts to merit quotation here:
A contract of sale by the corporation of certain real estate on which it had operated a lumber yard was made to solvent purchasers, able to pay at any time, on November 20, 1919. At that time $10,000 was paid in cash and a contract in writing was entered into between the corporation and the purchasers, conditioned alone on the title being found satisfactory to the purchasers. Some time in the month of December, 1919, the purchasers, having examined the title, removed this condition from the contract by advising the corporation the title to the property was satisfactory to them, and the contract of sale was thus made absolute. The contract provided for the payment of the remainder of the purchase price, $100,000, on June 1, 1920, and that conveyance should be delivered by the corporation to the purchasers at this time. Also, the corporation, not being able to remove its business from the property, agreed to pay one-half the taxes*1230 for the year 1920 as a consideration for being permitted to remain on the premises. However, the dominion, control, burdens, and benefits of the property were passed to the purchasers in the year 1919 at the time the contract of sale was made absolute. * * *
* * *
The question is, who owned this property in the latter days of the year 1919? As the right of the corporation to compel compliance with the terms of the contract was by the contract made dependent on the corporation delivering a good title to the purchaser, the contract remained conditional and dependent until the title had been examined and approved by the purchasers. As the corporation was notified this condition was met in the month of December, 1919, thereafter the conditional contract of sale became absolute in its terms, and any loss to the property or any benefits or advantage accruing thereto was the loss or benefit of the purchasers. To this end come not only the adjudicated cases on the question but the very reason of the thing itself. * * *
* * *
As the contract for the sale of the property, fixing the terms of the sale made, the amount of the purchase price to be paid, and all other of its terms, *1231 including the present payment of $10,000, was performed in the year 1919, the amount of *987 profits taxable must have been determined as of that year as readily and absolutely as of the date the conveyance was delivered and the deferred payment made. I therefore find as a fact the sale of the real estate in this case, while not perfected by conveyance and full payment of the purchase price until June, 1920, was made in the year 1919, as contended by the plaintiff in this case, and that the profit made in the transaction should have been included in the income and excess profits taxes of the corporation for the year 1919.
The Davidson case it seems to us is on all fours with the instant proceeding and conclusive of the issue involved. If any difference exists - and it is not clear that such a difference may be inferred from the facts of the Davidson case, as stated - it is merely that here the amount of abatement of the agreed purchase price may not have been definitely known before the close of 1923. We have already said that we do not regard this fact as important. The rule requiring inclusion in income for a particular year of amounts undetermined at the end*1232 of that year finds sanction in a line of cases involving income of railroads under the Transportation Act, considered by this Board and the Supreme Court. . Inclusion is predicated upon the taxpayer's unconditional right to the money. Here the vendor's right to payment had ripened in 1923, and the exact amount due might reasonably have been known or ascertained in that year, as is amply shown by the amending agreement fixing that amount having been made on January 15, 1924, only a fortnight later. The full sale price therefore must be regarded as having accrued to the petitioner in 1923.
It is unnecessary to multiply citations, but it should be noted that we have followed a course similar to that of the Davidson case on frequent occasions. ; ; . Cf. . The cases cited by respondent's counsel in his brief tend to support, for the most part, this conclusion rather than that for which he contends. The*1233 Supreme Court's decision in , is clearly distinguishable from the instant case, for in that case the purchaser's notice (given in the earlier year) that it would exercise its option to purchase created, the court held, only an executory contract, since no tender of title or possession was made by the vendor until the following year. Cf. .
We hold, therefore, that the profit from the sale was derived by the vendor in 1923.
Judgment will be entered under Rule 50.