*1070 1. TAXABLE TRANSACTION - ESCROW. - Where the petitioner in 1926 sold his stock in a corporation for $50,000 cash and $50,000 in notes payable over a period of 100 weeks, and the certificates of stock were placed in escrow until all the notes were paid, the transaction was completed and is taxable in 1926. Seletha O. Thompson,9 B.T.A. 1342">9 B.T.A. 1342, and John W. Sherwood,8 B.T.A. 103">8 B.T.A. 103, followed.
2. REDUCTION OF CONSIDERATION. - Where petitioner in 1928 made a settlement with the purchasers of the stock by which he reduced the selling price of the stock by $12,814.53, the reduction does not affect the tax liability of petitioner for 1926.
*541 This case involves a deficiency in income taxes of $12,476.50 for the calendar year 1926. Petitioner sold one hundred shares of stock in the Michigan Stock Buyers, Inc., for $50,000 cash, and $50,000 in notes payable over a period of 100 weeks. Petitioner claims that respondent erred in taxing the entire profit to him in the taxable year, and erroneously failed to allow a deduction*1071 of $12,814.53 remitted by petitioner on the purchase price. It is further claimed that Sigmund Goldman was an equal partner in the transaction and that petitioner is liable for only one half of the deficiency, if any.
FINDINGS OF FACT.
The Michigan Stock Buyers, Inc., was a corporation organized under the laws of Michigan prior to 1926. It was engaged in the business of buying up stocks of goods and selling them at cut-rate prices. The capital stock was $30,000 paid in, and was owned by petitioner Jacob Carp, Sigmund Goldman, and Sy Blum, each of whom owned one hundred shares.
*542 On January 8, 1926, the petitioner, as party of the first part, and the Michigan Stock Buyers, Inc., of the second part, entered into the following contract:
The first party agrees to sell and the second party agrees to purchase One Hundred (100) shares of the capital stock of the Michigan Stock Buyers, Inc., a Michigan corporation, second party herein, for the sum of ($100,000.00) One Hundred Thousand Dollars, which second party agrees to pay in the following manner, to-wit: Fifty Thousand Dollars ($50,000.00) on the date hereof, receipt of which is hereby confessed and acknowledged; *1072 and the balance of Fifty Thousand Dollars ($50,000.00) in weekly installments of Five Hundred Dollars ($500.00) per week, without interest. Said balance of Fifty Thousand Dollars ($50,000.00) is represented by One Hundred notes of Five Hundred Dollars ($500.00) each, payable weekly, endorsed by Sigmund Goldman and Sy Blum.
Said one hundred shares of stock sold shall be assigned to the corporation on the certificate thereof by first party and deposited in escrow with the United States Trust Company of Detroit. The escrow agent, shall upon receiving evidence of full payment of the purchase price herein, deliver said certificate of stock to the Michigan Stock Buyers, Inc., second party herein.
Until this purchase price is fully paid and while the stock is in the hands of the escrow agent, it shall carry no voting power in the corporate affairs whatsoever.
Second party agrees that it will indemnify said first party herein against any loss whatsoever which he may suffer directly or indirectly by reason of endorsements, guarantees, or other obligations assumed by said first party in behalf of second party to date hereof.
It is understood and agreed that there are three notes*1073 (3) payable to the First State Bank of Detroit, executed by the second party herein, two of which are each in the sum of Twenty-Thousand Dollars, and the third in the sum of Ten Thousand Dollars, maturing April 10th, 1926, upon which said first party herein is endorsed. Said first party agrees that upon the maturity thereof, if second party herein makes a substantial reduction in said indebtedness, he will endorse renewal notes for the balance, and will continue this practice until said notes are fully paid.
First party hereby resigns as officer and director of the Michigan Stock Buyers, Inc., a Michigan Corporation.
In witness whereof, the parties hereto have hereunto set their hands and seals the day and year first above written.
The contract of January 8, 1926, between the petitioner and the Michigan Stock Buyers, Inc., bears an endorsement dated January 9, 1926, as follows: "Received certificates #4 and 1, totaling 100 shares of stock for the purposes herein set forth." The endorsement was signed: "United States Trust Company of Detroit, by O. D. Marcks."
On January 8, 1926, the petitioner, as party of the first part, and Sigmund Goldman, as party of the second part, *1074 entered into a written agreement as follows:
WHEREAS, first party has disposed of his stock holdings in the Michigan Stock Buyers, Inc., a Michigan Corporation, receiving therefor Fifty Thousand Dollars ($50,000.00) in cash, and Fifty Thousand Dollars ($50,000.00) in notes signed by the Michigan Stock Buyers, Inc., and
*543 WHEREAS, second party herein now is the owner of ninety-nine (99) shares of the capital stock of said Michigan Stock Buyers, Inc., and
WHEREAS, it is the desire of the parties hereto that they shall share jointly in the stock holdings of the second party and the assets received by first party from the sale of his stock.
Now, THEREFORE, it is understood and agreed as follows:
1. Second party acknowledges that first party herein is entitled to one-half (1/2) of the value of said shares of stock second party now owns or which he hereafter acquires in the Michigan Stock Buyers, Inc., and is entitled to one-half (1/2) of the profits, dividends and income to be derived therefrom.
2. First party agrees to engage in business and/or invest the proceeds derived by him from the sale of his stock in the Michigan Stock Buyers, Inc., and that second party*1075 herein shall have a one-half (1/2) interest in said proceeds and in the business and/or investments into which said proceeds, or any part thereof, may be put, and shall likewise be entitled to one-half (1/2) of the profits that may be derived from such business, businesses, and/or investments.
3. It is the intent of the parties hereto that the interest of the second party in the corporation aforesaid and all its benefits accruing thereto, and the proceeds of first party from the sale of his stock as aforesaid, and all benefits accruing thereto, shall be considered a joint investment of the parties hereto in which they shall be interested equally, dividing the profits and losses therein equally. First party shall draw for his salary from the common fund a sum equal to the wages or salary received by second party from the Michigan Stock Buyers, Inc.
4. The parties hereto agree to carry on this joint venture for a period of seven and one-half (7 1/2) years from date hereof, at the end of which time they shall divide their respective assets, or pay their proportionate share of their liabilities.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals*1076 the day and year first above written.
In addition to the consideration of $100,000 mentioned in the contract between petitioner and the corporation, it was further agreed that a debt of $9,814.53 owing by petitioner to the corporation should be considered paid and canceled. This was done.
The $50,000 cash payment provided for in the contract between petitioner and the corporation was borrowed by the corporation from the First State Bank of Detroit, Michigan. There were three notes, consisting of two for $20,000 each and one for $10,000. These notes and all renewals thereof were endorsed by the petitioner and the other two stockholders, Blum and Goldman. The proceeds of the notes were placed to the credit of the corporation, and it then gave the petitioner its check for that amount. The endorsement of petitioner and the other stockholders was required by the bank before making the loan. These were the notes mentioned in the contract. Petitioner received the cash and the one hundred $500 notes and shortly after January 8, 1926, left Detroit and went to Los Angeles, California, but before leaving loaned the corporation $10,000.
After his arrival in Los Angeles petitioner*1077 placed the one $500hunered notes in a vault and made no use of them for a short time. He then arranged for a line of credit with the Union Bank *544 & Trust Co. of Los Angeles, California, for approximately $25,000. From time to time during 1926 when he would obtain loans from the bank in varying amounts of $2,000, $3,000, or $5,000, he would put up as collateral some of $500these notes. These notes were payable weekly and were collected by the bank as they fell due and credited to his account. There was no default in the payment of these weekly $500 notes during 1926, but of the notes due during 1927 and 1928 a total of about $23,000 of the $500 notes and about $35,000 of the notes in the First State Bank of Detroit remained unpaid at February 20, 1928. In December 1926 it became necessary for petitioner to return to Detroit for the purpose of assisting the Michigan Stock Buyers, Inc., in obtaining bank credit, or additional loans.
On February 20, 1928, the following agreement of settlement of the $500 notes was made:
MEMORANDUM OF AGREEMENT, made and entered into this 20th day of February, 1928, by and between the MICHIGAN STOCK BUYERS, a Michigan corporation, as*1078 party of the first part, JACOB CARP, as party of the second part, SY BLUM, as party of the third part, and SIGMUND GOLDMAN, as party of the fourth part, WITNESSETH:
WHEREAS, the said Jacob Carp holds certain notes totaling Twenty-Three Thousand Dollars ($23,000), which notes were duly executed by the said Michigan Stock Buyers, and endorsed by the said SY BLUM and Sigmund Goldman, which said notes are now held by the Union Bank of Los Angeles, California, as security for the payment of the sum of Ten Thousand, Six Hundred Ninety-Five Dollars ($10,695.00), and
WHEREAS, the parties hereto have agreed that the total amount to be required to be paid by the said first party on said notes is the sum of Ten Thousand, One Hundred Eighty-Five and 47/100 Dollars ($10,185.47), and the said Jacob Carp has agreed to waive and does hereby waive the payment of the amount of the notes in excess of said sum of Ten Thousand One Hundred Eighty-Five and 47/100 Dollars ($10,185.47).
Now, THEREFORE, in consideration of the sum of One Dollar and other good and valuable considerations in hand to each other paid, receipt whereof is hereby confessed and acknowledged, IT IS HEREBY AGREED as follows:
*1079 1. That the said first party shall pay the said sum of Ten Thousand One Hundred Eighty-Five and 47/100 Dollars ($10,185.47), and the said Jacob Carp does hereby agree that upon the payment of said sum as demanded by said Union Bank, he, the said Jacob Carp, will return or cause to be returned and cancelled the full sum of Twenty-Three Thousand Dollars ($23,000.00) specified in said promissory notes.
2. The said Michigan Stock Buyers and the said Sy Blum do hereby waive and release any and all claims which they may have against Jacob Carp to the date hereof.
3. The said Jacob Carp does hereby release all claims which he may have against the said Michigan Stock Buyers for the payment of the sum of money represented by the difference between the settlement amount and the original amount of said notes.
The said Jacob Carp does hereby agree that upon the full and complete payment of said sum of Ten Thousand One Hundred Eighty-Five and 47/100 Dollars ($10,185.47), together with interest, he will return or cause to be *545 returned by the said Union Bank, the full amount of Twenty-Three Thousand Dollars ($23,000.00) in notes, and a copy of this agreement shall operate*1080 as authority to said Union Bank to return said notes to said first party, upon payment of said sum of Ten Thousand One Hundred Eighty-Five and 47/100 Dollars ($10,185.47) (totaling Twenty-Three Thousand Dollars).
On or about June 4, 1929, the Michigan Stock Buyers, Inc., completed payment of the balance due on the notes to the Detroit bank and the escrow agent delivered the stock certificates to the purchaser.
While in Los Angeles, petitioner organized the Irving Investment Co., a corporation, and invested in it the $50,000 he had received in cash for his stock in the Michigan Stock Buyers, Inc. One half of the stock in the Irving Investment Co. he sent to Sigmund Goldman in compliance with his contract with Goldman of January 8, 1926. It does not appear that any part of Goldman's stock in the Michigan corporation was ever assigned or transferred to the petitioner, or to the corporation. At the time of the sale of petitioner's stock there was ill feeling between petitioner and Sy Blum, who was his brother-in-law. Petitioner resigned as an officer and director. The Michigan corporation paid dividends on November 30, 1926, and June 17, 1927, after petitioner severed his connection*1081 with it. At the time of the declaration of the dividends both Blum and Goldman were indebted to the corporation and the dividends were credited on their indebtedness. Petitioner knew nothing of these dividends until he received the deficiency notice.
The Commissioner held: (1) That the profit derived from the transaction by which the petitioner disposed of his stockholdings in the Michigan Stock Buyers, Inc., in 1926 constituted taxable income for that year; (2) that the entire amount of such profit was taxable to the petitioner; and (3) that the amount of the profit derived from the transaction in 1926 could not be reduced by the amount of $12,814.53, representing the amount by which, under the terms of an agreement made in the year 1928, the then unpaid balance of the selling price of the petitioner's stock was settled or liquidated for less than the total amount due. The Commissioner further determined that the stock was acquired by the petitioner at a cost of $10,000 and that the selling price was $109,814.53, the latter sum being the total of the amount of the selling price mentioned in the contract of January 8, 1926, and the amount of the petitioner's indebtedness to the*1082 corporation which was canceled as a part of the deal. The deficiency involved was determined accordingly.
OPINION.
ADAMS: It is the contention of the petitioner that the two contracts of January 8, 1926, do not state the facts or agreements correctly, and that the correct agreement was that he was selling *546 only one half of his stock, or 50 shares, and that Goldman was selling one half of his stock, or 50 shares, to the Michigan Stock Buyers, Inc. It is further contended that the two contracts as corrected should be construed together and considered as one transaction, and if this were done Goldman was a full partner in the deal and liable for half of the tax.
We are not impressed by this claim nor by the evidence introduced to sustain it. The two contracts were drawn by a capable lawyer, who included therein the agreements as told him by the parties, who were all present and signed the contracts. The contract between petitioner and the corporation provides: "The first party agrees to sell and the second party agrees to purchase one hundred (100) shares of the capital stock of the Michigan Stock Buyers, Inc." It was further provided in the contract: "Said one*1083 hundred shares of stock sold shall be assigned to the corporation on the certificate thereof by first party and deposited in escrow with the United States Trust Company of Detroit."
In the contract between petitioner and Goldman, we find this recital: "Whereas first party [petitioner] has disposed of his stock holdings in the Michigan Stock Buyers, Inc., a Michigan corporation, receiving therefor Fifty Thousand Dollars in cash, and Fifty Thousand Dollars in notes, signed by the Michigan Stock Buyers, Inc., and Whereas, second party herein [Goldman] now is the owner of ninety-nine shares of the capital stock of said Michigan Stock Buyers, Inc., and Whereas, it is the desire of the parties hereto that they shall share jointly in the stock holdings of the second party and the assets received by first party from the sale of his stock * * *." The contract then provided that petitioner was to have a one-half interest in the stock Goldman then owned, or might own in the future in the Michigan Stock Buyers, Inc., and Goldman was to have a one-half interest in any business or investment made or entered into by petitioner with the proceeds from the sale of petitioner's stock.
We prefer*1084 to follow the provisions of these written contracts rather than the vague, uncertain oral testimony. There is nothing whatever in either of the contracts indicating a sale by Goldman of one half of his stock to the corporation and no agreement by it to purchase anything whatever from Goldman. Plainly there were two separate transactions - one a sale by petitioner of his one hundred shares of stock to the Michigan corporation, and the other an agreement by which Goldman gave petitioner a one-half interest in his 99 shares of stock in the Michigan corporation in consideration for a one-half interest in a business or investment to be made by petitioner with the proceeds of the sale of petitioner's stock. Goldman had no interest in the stock sold by petitioner and whatever *547 profit resulted from the sale is taxable to the petitioner. We are not now concerned with the results of the joint venture between petitioner and Goldman. It remains now to consider whether the profits of the transaction were taxable in 1926, when the petitioner received the consideration, or in 1929, when the certificates of stock were released by the escrow agent and delivered to the purchaser.
*1085 A good deal of the evidence and of the argument of petitioner's counsel was devoted to the theory that, because the petitioner endorsed the notes upon which the $50,000 for the cash payment was obtained, petitioner received no consideration of value in 1926. It is sufficient to say in answer to this that petitioner did receive the cash payment of $50,000 and the Michigan company ultimately paid the notes, It was part of the agreement that petitioner endorse the notes, and he received the cash as agreed upon. There was nothing unusual in the transaction, for if the corporation had given him the notes instead of the bank, he would have had to endorse them to discount them.
We think that this case is governed by the rules laid down in , , and others hereinafter cited, and that the entire profit is taxable in 1926.
In both of these cases as in the instant case the seller received the entire consideration in the taxable year and the stock certificates and lease assignments were merely placed in escrow to secure the payment of the notes. As there were a hundred notes it would have*1086 been impractical to attach the stock certificates to them as collateral security, so the difficulty was met by placing them in escrow. Cf. ; ; ; ; .
Of the cases cited by petitioner, , and , related to the statute governing capital gains which required that sales be consummated after December 31, 1921, and they were decided mainly on the meaning of the word "consummated." In addition, it may be observed that the Swift case involved a sale of real estate where the deed had been placed in escrow and was not to be delivered until final payment, while the Dahlinger case really sustains the contention of the respondent herein. In , the consideration was in escrow during the taxable year, and in *1087 , the question at issue was whether or not there was an installment sale. None of these cases is applicable here.
Petitioner also relies upon the case of , but that case is clearly distinguishable from the instant *548 case. In the Silberblatt case the petitioner placed the stock in escrow to be delivered to the purchaser if and when the latter made prompt payment of the deferred installments as they fell due. The right to recall the stock from escrow, if any deferred payment was not promptly made, was expressly reserved to the petitioner. Under this reserved right of recall title did not pass until all deferred payments were made. This right to recall the stock from escrow was not in the agreement in the instant case and clearly distinguishes them.
Relative to the claim of the petitioner that he is entitled to a deduction of $12,814.53 for reduction or remission of consideration made by him, it is sufficient to say that if any deduction is allowable therefor it would be for 1928 and not 1926. The same question was before us in *1088 , where we said:
We fail to find any evidence to the effect that he made any gift of the three notes in the year 1923. After one note of $2,500 was paid in 1924, he surrendered the remaining three. The gift of the notes was made in 1924 and can in no way affect decedent's tax liability for 1923.
The respondent determined that the one hundred $500 notes had a fair market value of par. All of the notes falling due in 1926 and all but about $12,000 during later years were paid. Petitioner has not produced sufficient competent evidence to rebut the prima facie correctness of respondent's finding, but, on the contrary, the evidence tends to support it.
We have no fault to find with the many Michigan cases cited by petitioner, but "we are concerned only with the meaning and application of a statute enacted by Congress, in the exercise of its plenary power under the Constitution, to tax income. The exertion of that power is not subject to state control." .
Decision will be entered for the respondent.