1946 U.S. Tax Ct. LEXIS 186">*186 Decision will be entered under Rule 50.
On March 6, 1940, the petitioner purchased 625 shares of Campbell Transportation Co. stock. On March 10, 1941, the petitioner and all the other stockholders of the company agreed to sell their shares to another company, subject to approval by the Interstate Commerce Commission and to other conditions, including payment therefor. The shares of stock were deposited with an escrow agent. Pursuant to provisions of the escrow agreement, the delivery date was extended to September 10, 1941, by which date the conditions named in the escrow agreement had been satisfied and the buyer paid for and received the stock. Held, that the date of the sale was September 10, 1941, and that, since the petitioner had held the stock for more than 18 months, he is liable for tax upon only two-thirds of the gain realized.
6 T.C. 1134">*1134 This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1941 in the amount of $ 56,248. The petitioner alleges that the respondent erred in treating his gain from the sale of 625 shares of Campbell Transportation Co. stock as a short term capital gain rather than as a capital gain realized upon the sale of securities held for a period of from 18 to 24 months, only 66 2/3 percent of which gain is includible in the gross income.
FINDINGS OF FACT.
The petitioner is a resident of Pittsburgh, Pennsylvania. He filed his income tax return for the calendar year 1941 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh.
On March 6, 1940, the petitioner purchased 625 shares of Campbell Transportation Co. stock at a cost of $ 150,000. He sold this stock in 1941 at $ 419.16 per share, or $ 261,975, less transfer tax paid of $ 37.50, realizing therefor $ 261,937.50, or a profit of $ 111,937.50. In his income tax return for 1941 the petitioner reported this profit as a long term 1946 U.S. Tax Ct. LEXIS 186">*188 capital gain on assets held for a period of more than 18 months and reported only two-thirds of the profit as includible in gross income. In the determination of the deficiency the respondent has held that the profit is taxable at 100 percent as from a short term capital gain.
On March 10, 1941, an agreement was executed by Mississippi Valley Barge Line Co., a Delaware corporation (hereinafter referred to as Mississippi Co.), Charles T. Campbell, and each stockholder of Campbell 6 T.C. 1134">*1135 Transportation Co. who shall have signed a counterpart of the agreement, and Mercantile Bank & Trust Co. of St. Louis, Missouri (hereinafter referred to as Mercantile Bank). The agreement was executed and delivered by the petitioner, Albert E. Dyke, on March 10, 1941, and became effective on that date.
Mississippi Co. and Campbell Transportation Co. were both subject to the jurisdiction of the Interstate Commerce Commission under the provisions of the Transportation Act of 1940.
The agreement provided in part as follows:
4. The consummation of the sale and purchase and the respective obligations of the parties hereunder shall be conditional upon the granting to Buyer of authority to make such purchase1946 U.S. Tax Ct. LEXIS 186">*189 by the Interstate Commerce Commission, under the provisions of the Transportation Act of 1940, on or before September 22, 1941. * * * If the Sellers or the Buyer, as the case may be, shall fail promptly and diligently to perform their or its covenants herein set forth, then the other party or parties, as the case may be, shall have the right forthwith to cancel and terminate this Agreement in its entirety. * * *
5. When and if the Interstate Commerce Commission shall have entered an order authorizing the purchase by the Buyer of the shares of stock to be purchased under this Agreement, the Buyer shall forthwith give notice of the entry of such order to Charles P. Campbell, as representative of the Sellers. As used in this Agreement, the term "Closing Date" means the last day of the month during which Buyer shall have given such notice and the term "Delivery Date" means the date on which the sale is to be consummated and the purchase price is to be paid, viz., the 10th day of the month following the Closing Date.
* * * *
6. Buyer's obligations under this Agreement shall be conditioned upon
(a) The delivery to the Buyer on or before the Delivery Date of the following:
1. Evidence 1946 U.S. Tax Ct. LEXIS 186">*190 that Campbell Transportation Co.'s obligations do not exceed those shown on the balance sheet of November 30, 1940, with certain exceptions.
2. Evidence that the financial position of the Campbell Transportation Co., as of the closing date, is not materially adversely different from that shown by the balance sheet of November 30, 1940, provided, however, that the payments of dividends of $ 20 per share, the payment of dividends allowed by paragraph 5, nor obligations incurred under paragraph 6-1-a of the agreement shall not be deemed to adversely affect the financial position.
Then follow five other items, and then:
Sufficient evidence that Campbell Transportation Company has, on or before Closing Date, done any and all things necessary to prevent the waiver or lapse or loss of any rights which the Company may have had under the so-called Grandfather Clause of Part III of the Transportation Act of 1940.
In addition to these things, the buyer's obligation under the agreement was conditioned upon a favorable opinion of buyer's counsel as to the title of Campbell Transportation Co. to all property, real or personal, purported to be owned by it.
Paragraph 8 of the agreement provided:
In1946 U.S. Tax Ct. LEXIS 186">*191 the event the Commission shall have entered an Order authorizing the purchase and on the Delivery Date such Order shall have been vacated, rescinded, 6 T.C. 1134">*1136 annulled or set aside, temporarily or permanently, by action of the Commission or of a court of competent jurisdiction, then this Agreement shall in like manner terminate, all obligations hereunder shall cease and the Escrow Agent shall take the action hereinbefore set forth, unless the Buyer shall, on such Delivery Date, by written notice to Charles T. Campbell, as representative of the Sellers, and to the Escrow Agent, elect to complete the purchase on such Delivery Date without regard to the status of such Order on such date.
Paragraph 9 of the agreement specified the mechanics by which the sellers should deposit their stock with the escrow agent, and prescribed the form of receipt to be issued by such escrow agent.
Paragraph 9 (b) required the buyer to furnish the escrow agent on or prior to delivery date, the funds with which to make payment for the shares of the stock deposited, and then provided:
* * * and if all the conditions set forth in this Agreement shall have occurred on or prior to said Delivery Date, the Escrow1946 U.S. Tax Ct. LEXIS 186">*192 Agent shall, at eleven o'clock in the forenoon, Central Standard Time, on the Delivery Date, forthwith distribute, to or upon the order of each Seller and against the surrender of the receipt theretofore issued by the Escrow Agent in respect of the certificate or certificates deposited by such Seller, the amount of the purchase price herein specified for such shares, and shall also deliver to the Buyer all of the deposited certificates, endorsed for transfer as hereinbefore provided. If said conditions shall not have occurred on or prior to said Delivery Date, the Escrow Agent shall forthwith return to or upon the order of each Seller and against the surrender of the receipt issued therefor, the certificate or certificates theretofore deposited by such Seller and shall release to the Buyer the funds deposited by it pursuant to this subparagraph (b).
Paragraph 11 authorized and empowered Charles T. Campbell, as the representative of the sellers:
* * * to enter into such agreements with Mississippi Valley Barge Line and the Escrow Agent as the said Charles T. Campbell shall consider to be for the best interests of the Sellers, for the purpose of supplementing, extending, modifying 1946 U.S. Tax Ct. LEXIS 186">*193 or amending this Agreement; provided, however, that the said Charles T. Campbell shall have no authority to (a) extend the Delivery Date beyond December 10, 1941; (b) make any agreement which shall impose any additional obligations on the Sellers, or any of them; (c) diminish the purchase price specified in paragraph 3 hereof, except for minor adjustments for taxes, transfer stamps, etc., or (d) waive the right of the Sellers to cause the declaration and payment of dividends as provided in paragraph 5 hereof. * * *
The agreement dated March 10, 1941, was promptly executed by all parties concerned and the approval thereof by the stockholders of the buyer was had on March 26, 1941. Thereupon Campbell Transportation Co. gave notice to each of its stockholders that the Mississippi Co. stockholders had approved the contract and that it would be in order for the stockholders to deposit their respective shares of stock with the escrow agent. The petitioner deposited his stock on April 1, 1941, and received his receipt from the escrow agent dated April 4, 1941.
Application was promptly made by Mississippi Co. to the Interstate Commerce Commission for approval of the purchase by it of the1946 U.S. Tax Ct. LEXIS 186">*194 Campbell 6 T.C. 1134">*1137 Transportation Co. stock. Hearings were held and the case submitted to the Commission. The months of May and June, and more than 30 days of July, elapsed without any intimation being given by the Interstate Commerce Commission as to when the decision could be expected.
In the afternoon of July 31, 1941, an officer of Mississippi Co. appeared at Campbell's office and advised him that the Interstate Commerce Commission had rendered its decision authorizing the purchase by the Mississippi Co. of the shares of stock in question. July 31, 1941, fell on Thursday. The notice was received so late in the afternoon that nothing could be done on that day, and in the following ten days two Saturdays and two Sundays intervened.
Under the terms of the agreement the closing date was July 31, 1941, and the delivery date was August 10, 1941. During that ten days the books of Campbell Co. had to be closed for the month of July and a statement of its earnings up to July 31 made available to both Mississippi Co. and Campbell Transportation Co. Its business was scattered along the Ohio and tributary rivers, also the Mississippi River and some of its tributaries. It operated 1946 U.S. Tax Ct. LEXIS 186">*195 a large number of barges and carried freight in large and small quantities for whomsoever desired shipment on those waters. It was impracticable, if not impossible, for the Campbell Transportation Co. to close its books within ten days, and furnish other information required. In these circumstances Charles T. Campbell, representing the sellers, requested an extension of the delivery date from August 10 to September 10, 1941. In his letter he stated in part as follows:
In order to induce you to make this necessary extension, the undersigned, for himself and the other stockholders, herewith agrees with you as follows:
1. The extension will extend the Delivery Date only and will not extend the "Closing Date" specified in the aforesaid agreement or in any other manner affect or prejudice your rights thereunder.
2. The directors of Campbell Transportation Company will cause a dividend to be declared, in an amount equal to the net earnings of the company, as defined in Paragraph 5 of the aforesaid agreement, for the period beginning January 1, 1941, and ending July 31, 1941, to the extent that such net earnings exceed $ 30.00 a share (representing the $ 20.00 limitation set forth in said1946 U.S. Tax Ct. LEXIS 186">*196 Paragraph 5, plus $ 10.00 a share already declared and paid out of such net earnings). Said dividend will be payable to present stockholders of the company and will be paid, if practicable, on or before September 10, 1941.
3. At your request, the present directors of the company, viz., Charles T. Campbell, A. E. Dyke, Harry J. Steele, Kenneth G. Jackson and John E. Laughlin, Jr., will tender their resignations and the directors or the present stockholders of the company will elect successor directors acceptable to you.
The buyer readily granted an extension of the delivery date as requested.
All earnings and profits realized by Campbell Transportation Co. from and after the "Closing Date," July 31, 1941, were distributable 6 T.C. 1134">*1138 to Mississippi Co. Mississippi Co. was anxious to have representatives of its own on the board of directors of Campbell Transportation Co. It did not request the resignation of any of the five directors of the company, as it had a right to do pursuant to Campbell's letter quoted above, but two of them, the petitioner herein and Kenneth G. Jackson, tendered their resignations as directors on August 15, 1941, and directors agreeable to the Mississippi1946 U.S. Tax Ct. LEXIS 186">*197 Co., C. C. Taylor, and Edward Clemens, took their places. Shortly thereafter meetings of the board of directors of Campbell Transportation Co. were held.
All of the conditions of the escrow agreement had been complied with to the satisfaction of the buyer on September 10, 1941, and on that date the buyer paid for and received the shares of stock held by the escrow agent. Dyke received his check on or about September 12, 1941, for $ 261,937.50, which was the purchase price of the stock ($ 261,975), less a transfer tax of $ 37.50, and deposited it for collection on or about September 15, 1941. The net profit realized by him from the sale of his shares was $ 111,937.50.
OPINION.
The narrow question presented by this proceeding is the period of holding by the petitioner of his 625 shares of Campbell Transportation Co. stock. Both parties are in agreement that he purchased the shares on March 6, 1940. They are in disagreement as to the date of the sale of the stock, the petitioner contending that the sale was made on September 10, 1941, and the respondent that it was made on July 31, 1941, the date upon which the Interstate Commerce Commission approved the application of the Mississippi1946 U.S. Tax Ct. LEXIS 186">*198 Co. to purchase all the shares of stock of Campbell Transportation Co.
Section 117 of the Internal Revenue Code defines a long term capital gain as meaning:
* * * gain from the sale or exchange of a capital asset held for more than 18 months, if and to the extent such gain is taken into account in computing net income. [§ 117 (a) (4).]
Subdivision (b) of the same section provides:
(b) Percentage Taken Into Account. -- In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
100 per centum if the capital asset has been held for not more than 18 months;
66-2/3 per centum if the capital asset has been held for more than 18 months but not for more than 24 months.
It is the position of the respondent that substantially all of the conditions of the escrow agreement, aside from the actual payment of the cash by the Mississippi Co., had been fulfilled or could have been fulfilled on or before August 10, 1941, and that the extension of the 6 T.C. 1134">*1139 delivery date to September 10, 1941, was made for the purpose of making it possible for1946 U.S. Tax Ct. LEXIS 186">*199 the petitioner and the other stockholders, who had purchased their stock at the same time that petitioner had purchased his, to claim that the gains made by them on the sales of their shares were long term capital gains rather than short term capital gains. We are convinced from a careful consideration of all of the evidence in this case that the request for the extension was not for the purpose of accommodating the petitioner and the other stockholders. In point of fact, petitioner had no voice whatever in obtaining an extension of the delivery date.
There can be no question that where a person agrees to sell property, subject to certain conditions, and the property is placed with an escrow agent who holds the property until the conditions have been fulfilled, no sale is effected unless and until those conditions have been fulfilled. In Texon Oil & Land Co. v. United States, 115 Fed. (2d) 647, and Big Lake Oil Co. v. Commissioner, 95 Fed. (2d) 573, both involving the transfer of corporate stock through an escrow agreement, it was held that the transferee did not receive the stock until the delivery out of the1946 U.S. Tax Ct. LEXIS 186">*200 escrow on the ground that the conditions upon which the escrow was premised were not completed until then. See also McLaughlin v. Commissioner, 113 Fed. (2d) 611; Howell v. Commissioner, 140 Fed. (2d) 765; certiorari denied, 322 U.S. 735">322 U.S. 735. In the last named case an escrow agreement and capital gain tax were involved. The taxpayer contended a "long term," and the Commissioner a "short term," capital gain had been realized. The taxpayer and one Ferguson entered into an escrow agreement on October 6, 1937, whereby Ferguson agreed to lease certain land to the taxpayer, provided oil drilling was commenced on the land by November 21, 1937. The drilling of the well was begun on November 16 or 17, 1937, and on the same day the lease was delivered out of the escrow to the taxpayer. On April 10, 1939, the taxpayer sold his interest in the lease for a substantial profit. The court held that no interest in the lease was obtained by the taxpayer until the delivery out of the escrow on November 16 or 17, stating with respect to the interest he acquired on October 6, 1937, as follows:
* * * But 1946 U.S. Tax Ct. LEXIS 186">*201 all that he had on that day was a contractual right to have a lease issued to him if and when he should comply with the terms and conditions of his contract. Taxpayer fails to recognize the difference between the absolute and the conditional. Prior to the starting of the well the lease was purely conditional, and would become absolute upon the compliance with the conditions. The parties traded with this thought in view. Taxpayer, doubtless, had this thought in mind when he made a contract of sale of a portion of his interest in the contract to the Consolidated Oil Company before the lease was delivered and then, upon the delivery of the lease, made an absolute assignment of the interest he had theretofore contracted to sell. In Norman v. Wilson, 41 S.W.2d 331, the Court of Civil Appeals of Texas, Austin Division, held that a grantee was not entitled to delivery until he had fulfilled the conditions imposed by the escrow 6 T.C. 1134">*1140 agreement, and that the placing of a conveyance in escrow to be delivered upon the performance by the grantee of certain conditions passed no title to the property until delivery.
In Lucas v. North Texas Lumber Co., 281 U.S. 11">281 U.S. 11,1946 U.S. Tax Ct. LEXIS 186">*202 the lumber company had granted a ten-day option to purchase timber lands. The purchaser, on November 30, 1916, gave notice that it would exercise the option and pay the purchase price as soon as papers were prepared. The vendor did not prepare the necessary papers to effect the transfer or demand the purchase price in 1916, but delivered the necessary papers on January 5, 1917, when the transaction was finally closed. The lumber company claimed that the profit was realized in 1916 and represented taxable income of that year. The Supreme Court held otherwise, however, and stated:
An executory contract of sale was created by the option and notice, December 30, 1916. In the notice, the purchaser declared itself ready to close the transaction and pay the purchase price "as soon as the papers were prepared." Respondent did not prepare the papers necessary to effect the transfer or make tender of title or possession or demand the purchase price in 1916. The title and right of possession remained in it until the transaction was closed. Consequently unconditional liability of vendee for the purchase price was not created in that year. * * *
In the instant case it is clear that the 1946 U.S. Tax Ct. LEXIS 186">*203 Mississippi Co. had no legal obligation to pay the purchase price for shares of stock of the Campbell Transportation Co. until all of the conditions of the escrow agreement had been complied with. They were not complied with prior to September 10, 1941. One of the terms of the escrow agreement was that the shares of stock should be held by the escrow agent until it received payment for the shares. This is an ordinary condition of an escrow agreement. It was plainly the intention of the parties, as shown by the escrow agreement, that the sale was not to be consummated until the delivery date. Paragraph 5 of that agreement stated:
* * * As used in this Agreement, the term "Closing Date" means the last day of the month during which Buyer shall have given such notice and the term "Delivery Date" means the date on which the sale is to be consummated and the purchase price is to be paid, viz., the 10th day of the month following the Closing Date.
There is clearly no ground for the respondent's contending in this proceeding that the "Closing Date" or any other date prior to the "Delivery Date" was that on which the sale was consummated. The delivery date was postponed in accordance 1946 U.S. Tax Ct. LEXIS 186">*204 with the escrow agreement.
We hold that the petitioner held his 625 shares of Campbell Transportation Co. stock for a period of more than 18 months within the purview of section 117 of the code.
Decision will be entered under Rule 50.