1939 BTA LEXIS 947">*947 Petitioners in 1929 contracted to sell real estate for a price of $185,000, the vendee paying $35,000 upon execution of the contract and agreeing to pay the balance on the closing date in 1930. By further agreement the closing date was postponed to 1931 upon payment by the vendee of $25,000 additional purchase money. In 1931 the vendee defaulted on the contract and refused to make further payment. In 1933 petitioners brought suit against the vendee for specific performance and the vendee set up a conterclaim for recovery of the purchase money paid. On April 3, 1934, the court entered its decree dismissing both complaints on the merits. Held, that the purchase money payments received by the petitioners in 1929 and 1930 constituted taxable income of the petitioners for 1934.
39 B.T.A. 940">*940 This proceeding is for the redetermination of a deficiency of $12,711.31 in petitioners' income tax for 1934. Substantially all of the 39 B.T.A. 940">*941 deficiency results from the inclusion in petitioners' gross income for 1934 of the amounts of $35,000 and $25,000 received1939 BTA LEXIS 947">*948 by the petitioners in the respective years 1929 and 1930 from the vendee under a contract for the sale of real estate. The respondent has determined that the amounts in dispute constitute income for 1934 by reason of the fact that an equity suit involving the rights of both parties under the contract, after breach of the contract by the vendee, was concluded in that year and petitioners were permitted to retain the amounts received under the contract in the prior years.
FINDINGS OF FACT.
The petitioners are husband and wife and are residents of New York City. In 1903 they purchased at a cost of approximately $17,000 a brownstone dwelling located at 137 East 45th Street, New York City, where they resided for a number of years. Title to the property was taken in the name of the petitioner, Lucy J. Doyle, although both of the petitioners contributed to the purchase price.
On June 10, 1929, Lucy J. Doyle entered into a contract for the sale of the property to the Tishman Realty & Construction Co. :hereinafter referred to as the Tishman Realty Co.). Under the terms of the contract the Tishman Realty Co. was to pay $185,000 for the property. As a part of the consideration the1939 BTA LEXIS 947">*949 Tishman Realty Co. was to assume a mortgage upon the property for $10,000. The vendee paid to Lucy J. Doyle $35,000 upon the execution of the contract. The balance of the purchase price was to be paid on June 10, 1930, at which time Lucy J. Doyle was to deliver to the Tishman Realty Co. a warranty deed for the property. The contract provided, however, that the Tishman Realty Co. should have the privilege of a further extension of time for closing and making the final payment on June 10, 1931, upon payment of a further sum of $25,000 to Lucy J. Doyle on or before June 10, 1930. It also had the privilege of taking title to the premises and paying the balance of the purchase price at any time prior to June 10, 1931, upon giving the party of the first part notice of its intentions so to do. The contract further provided:
The party of the first part upon receiving such payment at the time and in the manner herein provided shall, at her own proper cost and expense, execute, acknowledge and deliver to the party of the second part, or its assigns, a proper Deed containing the usual full covenants and a general warranty for the conveying and assuring to it or them the fee simple of said1939 BTA LEXIS 947">*950 premises free from all encumbrance, except the covenants and restrictions contained in the Deed recorded in the Office of the Register of New York County in Liber 871 of Conveyances, Page 465; the mortgage, aforesaid; a lease to John F. Jackson, dated July 18, 1921, which lease by its terms expires on January 14, 1932, exhibited to the party of the second part at the time of the execution 39 B.T.A. 940">*942 hereof and approved by the said party of the second part; and also to any conditions as to possession and location of walls which an accurate survey of said premises would show.
Of the total consideration the Tishman Realty Co. paid Lucy J. Doyle $35,000 on June 10, 1929. In June 1930 it elected to postpone final date of closing to June 10, 1931, and, pursuant to the terms of the contract, paid an additional $25,000 on the purchase price.
On June 10, 1931, the parties consented to a further postponement of the closing date to June 16, 1931, stipulating that time should be the essence of the contract.
On the date for settlement, June 16, 1931, Lucy J. Doyle tendered a deed to the property to the Tishman Realty Co., which at that time presented its certified check for $115,000, 1939 BTA LEXIS 947">*951 the balance of the purchase price, but contended that the tender of the deed made by Lucy J. Doyle was not in accordance with the terms of the agreement, specifying numerous objections, among which were that the mortgage of record upon the property was $11,000 instead of $10,000 and that taxes were delinquent and had become a lien upon the property. The Tishman Realty Co. refused to receive the deed and refused to deliver the certified check for $115,000 and demanded the repayment to it of the $35,000 made in 1929 and the $25,000 payment made in 1930, with interest.
The petitioner still wanted the contract performed and Harry F. Doyle, acting for himself and wife, went to his lawyer and told him to insist upon the contract being performed. Efforts were made by the Tishman Realty Co. to settle and call the deal off, offering to make payments ranging from $5,000 to $12,000 in addition to the amounts already paid. Doyle instructed his attorney to bring suit against the Tishman Realty Co. for the specific performance of the contract. The attorney delayed, however, in the hope and belief that the Tishman Realty Co. would accept the deed and pay the balance of the purchase price.
1939 BTA LEXIS 947">*952 On February 16, 1933, Lucy J. Doyle brought suit against the Tishman Realty Co. in the Supreme Court of the State of New York, New York County, for specific performance of the contract. In answer to the suit the Tishman Realty Co. made the same objections which it had made to the plaintiff on June 16, 1931, and, in addition, contended that the plaintiff was not entitled to specific performance of the contract by reason of laches in instituting suit. In its opinion filed on April 3, 1934, presiding Judge Dore stated as follows:
On June 16, 1931, plaintiff tendered a deed and defendant tendered its certified check for $115,000, the balance of the purchase subject to a mortgage, but contended at the closing that the plaintiff's tender was not in accordance with the terms of the agreement specifying numerous objections.
On the trial the objections were reduced to three: first, that the contract called for taking title subject to a $10,000 mortgage, whereas the recorded 39 B.T.A. 940">*943 mortgage was for $11,000; second, that the taxes which had become a lien after May 1, 1931, were unpaid on June 16, 1931; and finally, defendant contended that the twenty months which had elapsed between1939 BTA LEXIS 947">*953 the date of the alleged default, June 16, 1931, and the date when this action was begun, February 16, 1933, constitute laches which makes it unequitable now to enforce specific performance, especially in view of the changes in conditions relating to credit, finance and realty value.
That the first mortgage as recorded was $11,000 was admitted, but it was shown that the mortgage had actually been reduced to $10,000 and plaintiff proved that on the closing plaintiff had the receipts showing such reduction and that after the objections were made plaintiff's attorney asked the attorney for the defendant to adjust the claims but defendant's attorney refused.
I think the first two defenses are clearly insufficient and must be overruled. The mortgage actually had been reduced to $10,000 and I find and believe that the plaintiff produced the receipts and was ready to exhibit and show them if the defendant would look at them on the closing; and it would have been a slight matter to adjust the small item of taxes. The nature of the objections made on the closing, most of which were abandoned on the trial, and the enormous depression in economic and real estate values between the1939 BTA LEXIS 947">*954 original date of the contract in June, 1929, and the closing in 1931, lead the court to believe that defendant on June 16, 1931, was seeking pretexts to escape the obligations of a contract that had obviously become onerous.
However, plaintiff delayed for nearly twenty months after defendant's default to do or say anything; there was no offer, no demand, no communication from the default to the commencement of this action twenty months later. Equity speaks from the date of the decree; plaintiff without adequate excuse unreasonably had delayed her action for specific performance; and the market value of the property as shown on the trial has very substantially decreased.
Specific performance is not a strict right and in the discretion of the court will be withheld in the furtherance of justice :especially where there is inexcusable laches) to prevent results not fairly within the intention and contemplation of the parties.
The complaint is dismissed upon the merits and defendant's counterclaim is dismissed upon the merits, wihtout costs to either party as against the other. Present decision containing findings and conclusions and judgment accordingly upon one day's notice1939 BTA LEXIS 947">*955 on or before April 9th.
Lucy J. Doyle still holds legal title to the premises in question, which are now rented to tenants.
In preparing their joint income tax return for 1929 the petitioners sought to include in gross income the $35,000 received from the Tishman Realty Co. in that year, but were advised by a deputy collector in the collector's office not to report the $35,000 received in 1929 and to wait until the final outcome of the sale before reporting income from the transaction. Similarly, in preparing the 1930 return the petitioners were advised by a deputy collector not to report the amount received from the Tishman Realty Co. in that year. In the returns filed for 1929 and 1930 the petitioners made a notation of the amount of cash received from the Tishman Realty Co. in each year. Again, in March 1932, in the preparation of the 1931 return the petitioners made a full disclosure to a representative of the collector 39 B.T.A. 940">*944 in the collector's office of all the facts relating to the transaction and were advised that the 1931 return should not include any income from the amounts already received.
After the suit for specific performance was terminated in 1934, 1939 BTA LEXIS 947">*956 the petitioners filed, on June 7, 1935, amended joint returns for 1929 and 1930 in which they reported in their gross incomes the respective amounts of $35,000 and $25,000 received from the Tishman Realty Co. in those years and paid the additional taxes shown to be due by the amended returns, namely $2,140.33 plus interest of $669.19 on the amended return for 1929, and $1,668.84 plus interest of $421.64 on the amended return for 1930. On November 6, 1935, petitioners filed claims for the refund of the taxes and interest paid on the amended returns on the ground that at the time the taxes were paid they were barred from assessment and collection by the statute of limitations.
The petitioners did not include any of the amounts received from the Tishman Realty Co. in 1929 and 1930 in their joint return for 1934. In his determination of the deficiency for 1934, however, the respondent has included the total of such amounts, namely, $60,000, in petitioners' gross income for that year as damages awarded by the court in the action brought by the petitioners for specific performance.
For all of the years 1929 to 1934, inclusive, the petitioners' income tax returns were made upon a1939 BTA LEXIS 947">*957 cash receipts and disbursements basis.
OPINION.
SMITH: The petitioners' first contention in this proceeding is that the $60,000 received by them in 1929 and 1930 did not constitute taxable income for 1934, or for any other year, within the meaning of the word The Revenue Act of 1934 requires the inclusion in gross income of gains, profits, and income derived from whether real or personal, growing out of the ownership or use of or interest in such property; * * * or gains or profits and income derived from any source whatever. of 1934 the petitioners were in possession of their property which they had contracted to sell to the Tishman Realty Co. and also of $60,000 cash which they had received from the Tishman Realty Co. upon its executory contract of sale entered into in 1929. The Board is of the opinion that there is no merit in the petitioners' contention that this $60,000 did not constitute taxable income to them in some year.
The only question which remains to be decided is whether the $60,000 constituted taxable income of 1934. The petitioners contend that it was either taxable income of 1929 and 1930, as shown by the amended returns filed for those years, or of 1931, 1939 BTA LEXIS 947">*958 when the contract was alleged to have been breached by the Tishman Realty Co. The 39 B.T.A. 940">*945 respondent contends that the entire $60,000 constituted taxable income come of the petitioners for 1934 and in support of that contention cites ; affd. :C.C.A., 4th Cir.), 99 Fed.:2d) 919. The question presented in that case was whether certain payments received by the Virginia Iron Coal & Coke Co. in 1931 and 1932 upon option contracts to sell real estate constituted taxable income of 1933, the year in which the optionee elected to forfeit the payments made upon the option contract. The Board and the court both held that the forfeited payments constituted taxable income of 1933. To the same effect is , and . The syllabus of our opinion in the Miles Realty Co. case, supra, reads as follows:
Where land is sold on the installment plan under contracts which provided in substance that, if the buyer breached the contract, it should thereupon become null and void without any act on the part of the seller, and that1939 BTA LEXIS 947">*959 all amounts paid and improvements made should be retained by the seller, who was entitled to immediate repossession, as liquidated damages, held, (a) some affirmative action is necessary on the part of the seller to cancel the contract and declare the forfeiture; :b) the seller may by conduct, or expressly, extend time after he has the option to cancel and forfeit; :c) until such time as the seller elects to forfeit the contract, the payments and improvements subject to forfeiture do not constitute income to the seller.
We said in our opinion:
It seems to us that under the facts of this case, the contracts were voidable only and that as petitioner not only took no steps to enforce the forfeiture, but after default endeavored to make further collections, forfeitures did not occur until 1928, when the contracts were formally canceled on the books. * * *
We, therefore, reversed the action of the Commissioner in taxing the forfeitures in 1926 and 1927 and sustained the claim of the taxpayer that the amounts constituted taxable income of the year 1928.
In 1939 BTA LEXIS 947">*960 , the facts were that a vendee in 1920 paid $100,000 upon an executory contract for the sale of property. In 1921 the vendee refused to make a further payment upon the contract and the company brought suit for damages. The litigation was settled and the company received a large amount for damages in 1921. The Board held that both the payment made in 1920 and the amount collected as damages in 1921 constituted taxable income of 1921.
Although the Tishman Realty Co. in the proceeding at bar breached the executory contract which it had with the petitioners for the purchase of the property, the petitioners elected to overlook such breach. They were insistent that the Tishman Realty Co. live up to its contract and instituted suit against it in 1933 for the specific performance of the contract. It was not until 1934 that the court dismissed the suit for specific performance and also dismissed the counterclaim 39 B.T.A. 940">*946 of the Tishman Realty Co. for a repayment to it by the petitioners of the $60,000 which it had paid them in 1929 and 1930, together with interest thereon. It was not until 1934 that the petitioners learned as1939 BTA LEXIS 947">*961 a result of the decision of the court that they could not obtain specific performance of the contract and that the $60,000 which they had received from the Tishman Realty Co. was not subject to repayment. The Board is of the opinion that the respondent correctly determined that the gain of $60,000 constituted taxable income of the petitioners for 1934.
Relative to the claim of the petitioners that the $35,000 received in 1929 and the $25,000 received in 1930 constituted taxable income of those years, and not of 1934, it may be observed that if the contract for the sale of the property had not been breached by the Tishman Realty Co. the total amount to be received by the petitioners would not constitute taxable income, but only the amount over the cost or March 1, 1913, value of the property, whichever was greater. In their petition the petitioners alleged that the March 1, 1913, value of the property was $90,000. This was denied by the respondent in his answer and no proof was offered upon the point. Since the taxable income would not have been the entire amount of $60,000 if the contract had been carried out the Board is of the opinion that the amounts received in 1929 and1939 BTA LEXIS 947">*962 1930 did not constitute taxable income of the petitioners for those years. Cf. .
Undoubtedly, also, the petitioners would have been warranted in declaring in 1931 that the contract had been breached by the Tishman Realty Co. and that the down payments had been forfeited in 1931. But the petitioners did not elect to declare the contract forfeited in 1931. Therefore, we are of the opinion that the $60,000 received in 1929 and 1930 was not taxable income of the petitioners for 1931.
Judgment will be entered for the respondent.