*1065 In these proceedings, which were consolidated for hearing, we are asked to redetermine the following deficiencies for the year 1920:
| James D. Boone | $85,081.37 |
| D. W. Boone | 37,087.54 |
| J. A. Boone | 86,521.68 |
| W. F. Boone | 145,245.64 |
| W. L. Burruss, Administrator of the Estate of Eli J. Taylor | 22,999.90 |
At the hearing all of the issues in the case of petitioner W. F. Boone were settled by stipulations entered into between counsel for the parties.
In the remaining cases all issues have been settled by stipulations save one, namely, whether the profit realized by petitioners from the sale in 1920 of the property of the Brown Coal Company should be taxed on the installment or completed sale basis.
FINDINGS OF FACT.
James D., John A., and W. F. Boone, and Eli J. Taylor each had a one-fourth interest in the Brown Coal Company, a partnership, which, since sometime prior to 1913, owned certain coal leases and operated a coal mine at Nuttallburg, West*1256 Virginia. Early in 1920 the partners decided that, in view of the then flourishing condition of the coal market, the time was opportune for an advantageous sale of their properties and, after discussion, they fixed $500,000 as the price at which they would be willing to sell. Thereafter, in April 1920, John A. Boone, as general manager of the company, gave Holly Stover a written option to purchase the properties at that price, of which $100,000 was to be paid in cash, the balance to be represented by four notes, each of like amount and maturing one each year thereafter.
Stover interested the Inland Steel Company in the Brown properties and was authorized to purchase them for $550,000, and by deed dated May 1, 1920, the properties were conveyed to Stover as trustee. This deed recited a total consideration of $550,000, of which $150,000 was paid in cash and the balance was evidenced by notes secured by a deed of trust on the properties and payable in four equal annual installments of $100,000 each. However, the partners had demanded and expected to receive as the selling price of their properties, not $550,000, but $500,000, of which only $100,000 was to be in cash. Before entering*1257 into the formal contract of sale, Stover arranged with the partners to make a $150,000 down payment, with the understanding that $50,000 of this amount was to be refunded to him immediately, and the sale was made upon the basis of the option previously given to Stover as supplemented by this *1066 understanding. The Inland Steel Company supplied the $150,000 by certified check, which was deposited in bank by J. A. Boone. The next day Boone withdrew $50,000 in cash and paid it over to Stover. The partners did not employ Stover to sell their properties and never agreed to pay him any commission. He was the only party they knew in the transaction. By deed of May 10, 1920, Stover conveyed the properties to the Stover Coal Company, a corporation, the capital stock of which was owned by the Inland Steel Company.
The promissory notes covering the remainder of the purchase price were distributed, one to each of the four partners. With the exception of the note due in the fourth year and held by Taylor, which was paid one year in advance of its due date, all the notes were paid at maturity. Petitioners made no attempt to discount or dispose of these notes.
The tax returns*1258 of the Brown Coal Company and of the individual partners for the year 1920 were prepared by a firm of accountants from books and records turned over to them. Petitioners, themselves, had little knowledge of accounting, the income tax laws, or the preparation of returns. Although they signed and swore to the returns, they did not know the accounting basis upon which the sale was reported, or that there was more than one way of reporting the transaction. Petitioners reported no income from this transaction upon payment of the notes. The partnership return for the year 1920 showed a profit from the sale of this property of $115,076.71, computed as follows:
| Selling price | $550,000.00 |
| Less commission | 50,000.00 |
| Net sale price | 500,000.00 |
| Less book value of property | 384,923.29 |
| Net profit | 115,076.71 |
The partners reported upon their individual returns for 1920 their respective shares of the profit from this sale. It is now stipulated that each of the petitioners, except W. F. Boone, derived a profit of $79,564.50 from the transaction.
OPINION.
GOODRICH: Petitioners contend that under the provisions of section 212(d) as retroactively applied by section 1208, *1259 Revenue Act of 1926, the sale of the Brown coal properties in 1920 was an installment sale and that the taxable gain derived therefrom should be computed upon that basis or, in the alternative, if the transaction was not an installment sale, then the notes evidencing the deferred payments *1067 had no market value when received and no taxable gain is to be recognized until petitioners have returned to them their capital investment. Respondent has determined, and maintains, that the transaction was not an installment sale within the meaning of the statute because more than one-fourth of the selling price (which he contends was $550,000) was received and, further, that petitioners may not now change the basis upon which they reported the transaction in their returns.
Obviously, we must first determine the amount of the selling price and the amount of the cash payment. We are convinced that these were $500,000 and $100,000, respectively. It is true, as respondent argues, that both the contract of sale and the deed recite a total consideration of $550,000, and a down payment of $150,000, but those recitals are not necessarily conclusive. Here respondent is neither a party*1260 nor a privy to the instruments, and in such case it is well settled that the petitioners may introduce evidence at variance with or in contradiction to the terms of the written instrument to show the real nature of the transaction. ; ; ; ; ; . The evidence is conclusive that, so far as petitioners were concerned, their only agreement was to sell the property for $500,000, of which $100,000 was to be paid in cash. They neither demanded nor expected more, nor, we think, did they receive more. Stover was not their agent. He was the man who purchased from them, whether for himself or for an undisclosed principal, they did not know. The inflation of price in the recital of the contract deed was done for Stover's purposes, at his request and under an agreement to refund to him immediately the excess of $50,000 over the cash payment the partners demanded. Consequently, that excess, when received*1261 by petitioners, was impressed with a trust to return it to Stover, to whom the money belonged, and it was not a part of the consideration for which the partnership sold its properties. Therefore, the initial payment did not exceed one-fourth of the purchase price and the transaction falls within the statutory definition of an installment sale. .
Respecting respondent's contention that because petitioners in their returns for 1920 reported the profit from the sale on an accrual basis they can not now change to the installment basis, we again disagree. We have previously held that there was no statutory authority for reporting income on the installment basis under the Revenue Act of 1918. ; , . Obviously, therefore, when *1068 petitioners filed their returns for 1920 they had no right to report the income from this sale on the installment basis. This privilege was accorded them by the provisions of section 212(d) of the Revenue Act of 1926 as retroactively applied by section 1208*1262 of the same act. To hold that petitioners can not change the method of reporting this installment sale would be contrary to the intention of Congress as expressed in these sections. ; ; ; ; . Cf. .
In this view of the case, it is unnecessary to consider petitioner's alternative contention.
Judgment will be entered under rule 50.