*16 Decision will be entered for the respondent.
1. For several years prior to 1963 Shamrock had sought to purchase a ready-mix concrete plant and business conducted by petitioners as a sole proprietorship. In 1963 petitioners agreed to sell the properties to Shamrock for $ 200,000. At that time it was the desire and intention of Shamrock to make a cash payment of the total sales price. The petitioners insisted that the sale be made on an installment payment basis and would not accept cash payment of the total sales price. Thereafter extended negotiations followed between petitioners and Shamrock as to security to be furnished for the unpaid portion of the sales price. In order to comply with the requests and demands of petitioners for making sale of the properties, Shamrock, with participation of petitioners, established a detailed and elaborate escrow arrangement whereby $ 200,000 was placed in escrow as security for the payment of the sales price which the purchaser was to make in stated installments over a subsequent 10-year period. At the time of the sale and transfer of the properties by petitioners, Shamrock was ready, willing, and able to make payment in full of the *17 total sales price. At that time receipt of the total sales price was available to the petitioners at their command. Held, that the sale of the properties did not constitute a true statutory installment sale.
2. Held, that petitioners have not shown that a deduction of $ 2,000 taken by them for a payment to public accountants was allowable as an ordinary and necessary business expense or as a reduction of the proceeds received by the petitioners from the sale of their properties.
*120 The respondent has determined a deficiency of $ 33,664.94 in the income tax of the petitioners for 1963. As a result of concessions made by the petitioners, the only issues for determination are the correctness of the respondent's action (1) in determining that the sale by petitioners of their business and assets did not qualify as an installment sale within the purview of section 453 of the Internal Revenue Code of 1954 and that the gain realized thereon was includable in the income tax return of the petitioners for 1963, and (2) in disallowing as a deduction for an ordinary and necessary business expense an accountants' fee of $ 2,000.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
The petitioners are husband and wife and resided at all times herein material in Novato, Calif. They filed a Federal joint income tax return for the year 1963 with the district director of internal revenue in San Francisco, Calif.
Petitioners owned and successfully operated for a number of years a sole proprietorship doing business as E. Pozzi Co., a ready-mix concrete and associated products business located in Novato, Calif. The accrual*19 method of accounting was employed by petitioners in keeping the books and records of their business and in reporting income (or loss) from the business on the Federal income tax returns filed by them.
For several years prior to 1963, Shamrock Materials, Inc., of San Rafael, Calif., sometimes hereinafter referred to as Shamrock, had sought to purchase the E. Pozzi Co. ready-mix plant and business. Finally, in 1963, petitioners agreed to sell them to Shamrock for $ 200,000. At the time the petitioners agreed to make such sale, it was the desire and intention of Shamrock to make a down cash payment of the total sales price of $ 200,000. However, the petitioners insisted that the sale be made on an installment payment basis and would not accept a down cash payment of the total sales price.
Thereafter and since the petitioners desired to sell the business and assets on an installment payment basis, they made a proposal of sale to Shamrock by letter dated August 16, 1963. A copy of that letter is not contained in the record. In response thereto, Shamrock being desirous of purchasing the properties and being aware that petitioners would not sell the properties on the cash basis, replied*20 by letter dated August 22, 1963, as follows:
*121 You have presented to us an offer dated August 16, 1963, to purchase your business. Our board of directors at their regular meeting last night authorized the acceptance of said offer as presented, viz., Shamrock Materials Inc., a corporation, will purchase all of the assets of E. Pozzi Co. for a total price of $ 200,000, plus the cost of any inventory on hand at the date of transfer. The purchase price will be paid as follows: (1) $ 5000 with the delivery of this letter, receipt of which is acknowledged by your signature on a copy of this letter. (2) The sum of $ 25,000 as an additional down payment to be deposited in a local title company by us prior to September 1, 1963. (3) The balance of $ 170,000 to be payable over a ten-year period, with 6% interest per annum on the unpaid balance, principal and interest payable in monthly installments so as to amortize the balance over the ten years.
The payment for the inventory is to be deposited in escrow immediately after completing the actual inventory count, said escrow to be established with either our attorneys, Gardner, Riede & Elliott, or an escrow agent agreeable to both *21 of us. This escrow is for the purpose of complying with the laws on the sale of a business and any sales taxes due by reason of the transfer of the assets will be split between us. The cost of the escrow on the sale of the business will also be split.
The title company escrow shall close, as to the real property, as soon as possible and all charges of that escrow will be paid by us, except the revenue stamps on the deed which are normally paid by a seller. Title to the real property shall be free and clear of all encumbrances. To secure the aforesaid balance of $ 170,000 we shall give back to you a first mortgage on the real property, and a chattel mortgage on the equipment, if you so desire.
Possession of the business shall be given to us on September 1, 1963, or as soon thereafter as possible.
The assets included are all those associated with your business, including, without limitation, the batch plant, real property of one acre, more or less, equipment, office and office equipment, the name E. Pozzi Co., shop and shop equipment and trucks, plus all inventory items.
Since your offer to us was not actually signed, [then] by your, and your wife's, signature on a copy of this letter, *22 we shall then have a binding agreement as to the sale on the terms indicated. But, unless you do so indicate your approval at the time of the presentation of this letter and check, we shall have no agreement.
Following receipt of Shamrock's letter of August 22, 1963, the petitioners signed their agreements thereto on a copy of the letter, subject to the following conditions which Shamrock later accepted:
The above signed subject to the following:
1: Mutual agreement between the Seller and buyer as to the liability for payment of Sales Tax.
2: Security in addition to that mentioned above, to secure Note in the amount of $ 170,000.00, as deemed adequate by sellers.
Shamrock Materials Inc.
By (S) Lee R. Ceccotti, President
E. Pozzi Co.
By (S) E. Pozzi
(S) Lucy Pozzi
Shamrock paid to the petitioners on August 22, 1963, the $ 5,000 mentioned in the letter of that date. On August 29, 1963, Shamrock *122 deposited an additional downpayment of $ 25,000 with the Title Insurance & Trust Co., San Rafael, Calif., as mentioned in the letter of August 22, 1963, and in addition, an escrow, identified by No. 74777, was established with that company.
About the end of August 1963, petitioner*23 Everett Pozzi went on a trip to Alaska. Prior to his departure he informed his accountant, J. W. Deaton, that he desired that the sale of the E. Pozzi Co. plant and assets be made on an installment payment basis plan, that security for the note for the unpaid portion of the sales price consist not only of the properties involved in the sale but also of additional security and requested Deaton to determine the character and value of such additional security that Shamrock might offer and its acceptableness. Thereafter Deaton, being of the opinion that marketable securities having a loan value by a bank of $ 120,000 would constitute adequate additional security, so informed Shamrock's accountant.
Thereafter negotiations, the details of which are not disclosed by the record, were carried on by petitioners and Shamrock which culminated in the execution of a new and final agreement dated October 14, 1963, with petitioners as sellers and E. Pozzi Co., Inc., sometimes hereinafter referred to as Pozzi, Inc., as buyer. Shamrock also signed the agreement as guarantor of the performance of all agreements and conditions thereof to be performed by Pozzi, Inc. Pozzi, Inc., was a new corporation*24 formed prior to October 14, 1963, by the officers and shareholders of Shamrock under the laws of the State of California for the purpose of taking title to the properties in issue. All of the capital stock of Pozzi, Inc., was issued to the shareholders of Shamrock, Lee R. Ceccotti, Mario Ghilotti, and Dino Ghilotti, the president, secretary, and treasurer of Shamrock, respectively, who were also elected to like offices of Pozzi, Inc., by the board of directors of that corporation.
Under the October 14, 1963, agreement petitioners agreed to sell to Pozzi, Inc., the real property and all other assets of the business, and the parties allocated the purchase price of $ 200,000 as follows:
| Automotive equipment | $ 54,900 |
| Office equipment | 1,000 |
| Batch plant and miscellaneous items | 37,000 |
| Spur track, real property, buildings, and improvements | |
| thereon | 100,000 |
| Goodwill | 7,000 |
| Total purchase price | 200,000 |
The October 14, 1963, agreement provided that Pozzi, Inc., would pay the purchase price of $ 200,000, with interest at the rate of 6 percent per year on the unpaid balance, to the petitioners at the Pacific *123 National Bank of San Francisco (hereinafter referred to*25 as Pacific National), beginning with a $ 30,000 payment, without interest, on January 2, 1964, followed by 20 successive installments of $ 8,500 each, plus interest, on every first day of July and second day of January thereafter until the balance was paid, meaning that the last payment would be due on January 2, 1974.
The parties further provided in the agreement of October 14, 1963, that the purchase price would be secured by collateral to be deposited by Pozzi, Inc., with Pacific National pursuant to a basic escrow agreement dated October 11, 1963, and executed by the parties on October 14, 1963. Shamrock also guaranteed the performance of all agreements and conditions of the basic escrow agreement to be performed by Pozzi, Inc.
The agreement of October 14, 1963, and the basic escrow agreement required Pozzi, Inc., to remit the installment payments, including interest, to Pacific National as they became due and payable. Pacific National was instructed to deposit the payments in a savings account in the name of the petitioners and, simultaneously, to release from the collateral deposit an amount equal in principal to the purchase price installment paid, plus accrued interest.
*26 Pacific National agreed to notify both Pozzi, Inc., and the petitioners of the failure on the part of Pozzi, Inc., to timely remit an installment payment. If the default in payment were to remain unpaid for 5 days after the bank's receipt of written notice from petitioners demanding payment of the collateral deposit, the bank was required to liquidate the collateral security and deposit the entire proceeds therefrom to the account of petitioners.
In order to obtain $ 200,000 in cash which petitioners demanded as a collateral deposit, Pozzi, Inc., borrowed $ 50,000 on October 9, 1963, from the Bank of Marin, San Rafael, Calif. The loan was secured by a first deed of trust on the real property involved in the sales transaction. Interest on this loan was fixed at 6 percent per year on the unpaid principal. Pozzi, Inc., also borrowed $ 120,000 on October 9, 1963, from the same bank, and this loan was secured by a chattel mortgage on the equipment of the business which it was acquiring from petitioners. Pozzi, Inc., agreed to repay to the bank $ 139,200 in 48 monthly installments of $ 2,900 each, which includes interest at the rate of 4 percent.
Petitioners on October 14, 1963, transferred*27 to Pozzi, Inc., free of all encumbrances, absolute title to the real property and the assets of the business.
Title Insurance and Trust Co., on or shortly after October 14, 1963, recorded the deed to the subject property subject to the note *124 of Pozzi, Inc., and first deed of trust to the Bank of Marin in the sum of $ 50,000.
Title Insurance and Trust Co. disbursed to Pacific National on October 16, 1963, $ 75,000, including the $ 50,000 borrowed by Pozzi, Inc., on the subject real property and $ 25,000 previously deposited with the title company as downpayment on the purchase of the petitioners' business.
The Bank of Marin remitted on October 14, 1963, to Pacific National its cashier's check in the amount of $ 120,000 representing proceeds of the loan of Pozzi, Inc., secured by a chattel mortgage.
The parties, pursuant to their agreement, established an escrow at Pacific National, No. 3-1992, and as early as October 15, 1963, Pacific National held the sum of $ 200,000 as escrow holder. Pozzi, Inc., had deposited, either directly or indirectly, $ 195,000 of this total. The title company remitted $ 75,000 into the Pacific National escrow, including the $ 50,000 borrowed by*28 Pozzi, Inc., from the Bank of Marin secured by the realty, and the $ 25,000 which Shamrock had paid as a portion of the downpayment under the August 22, 1963, agreement. The Bank of Marin sent the moneys borrowed by Pozzi, Inc., on the personalty of the business, i.e., $ 120,000, to Pacific National at the behest of Pozzi, Inc. Petitioners deposited into escrow the $ 5,000 previously paid to them by Shamrock. Accordingly, a sum equal to the full purchase price agreed to by the parties, $ 200,000, was deposited in cash as collateral security.
Pacific National through its trust officer purchased on October 22, 1963, the following Pacific National time certificates of deposit:
1. $ 30,000, at 1%, due January 2, 1964;
2. $ 8,500, at 3 3/4%, due July 1, 1964;
3. $ 8,500, at 3 3/4%, due January 2, 1965;
4. $ 8,500, at 3 3/4%, due July 1, 1965; and
5. $ 144,500, at 4%, due October 22, 1965.
The latter purchase was made because of the probability of a premature payoff of the purchase price, and also because a certificate of deposit has to be held for a minimum period of 2 years in order that the owner thereof may earn interest at the rate of 4 percent per year.As of November 30, *29 1966, Pozzi, Inc., had paid Pacific National the principal payments when due, plus 6-percent interest, as determined by Pacific National, on the unpaid balance of the purchase price. Pozzi, Inc., made its payments in the form of a cashier's check or certified check. When Pacific National received each check, it then wrote its own check in each instance in favor of petitioners' account at Crocker-Citizens National Bank of Novato, Calif. Simultaneously, Pacific National collected the proceeds from the then matured certificate of deposit and paid them, plus the accrued interest thereon, to *125 Pozzi, Inc., with its check. The general practice has been that a messenger or the general manager of Shamrock has personally delivered Pozzi, Inc.'s check for payment, taking back Pacific National's check of the proceeds due the buyer from the matured certificate of deposit.
Pacific National was a solvent institution at all times in question, having enjoyed many years of uninterrupted service in the San Francisco Bay area.
The reason why Pozzi, Inc., entered into the provisions of the sales agreement and the basic escrow agreement respecting installment payments and Shamrock's guaranties*30 as to Pozzi, Inc.'s performance thereof was because that was the only way the petitioners would sell their business and properties here in issue.
In their income tax return for 1963 the petitioners included as a part thereof a schedule entitled "Installment Sales Computation" in which the description of the property was shown as "Business," the date acquired as 1950 and 1961, date sold as 1963, the gross sales price as $ 200,000, adjusted cost as $ 103,666.09, and net profit as $ 96,339.91. No amount was shown as payment received during the year nor was any amount shown in the schedule or otherwise in the return as taxable gain for the year.
In determining the deficiency in issue the respondent determined that the sale of the petitioners' business and assets did not qualify as an installment sale and that the gain realized was includable in the petitioners' return for 1963. The respondent also determined that a capital gain of $ 89,978.28 was realized on the sale and that of that amount $ 44,989.14 computed as shown below, was includable as taxable gain in the petitioners' 1963 income tax return:
| Gain on sale of goodwill | $ 7,000.00 |
| Gain on sale of other assets | 82,978.28 |
| Total | 89,978.28 |
| Less 50-percent deduction | 44,989.14 |
| Gain includable in income | 44,989.14 |
*31 ULTIMATE FINDINGS
Aside from an amount to be agreed upon and paid for inventory, the petitioners were willing to sell their business and assets for $ 200,000 and Shamrock desired to purchase them for that sum. On October 14, 1963, the date on which the petitioners transferred free of all encumbrances absolute title to the business and assets, Shamrock was ready, willing, and able to make payment in full of the total sales price. On that date, receipt of the total sales price was available to the petitioners *126 at their command. The sale of the properties was not a statutory installment sale.
Petitioners declined to accept immediate payment in full. Instead, they arranged with the buyer that $ 200,000, an amount equal to the sales price, be deposited in a bank escrow as security for installment payments of the sales price of $ 200,000 later to be made by the buyer semiannually over a 10-year period.
Under the foregoing circumstances, the entire sales price of $ 200,000 was available to and constructively received by petitioners in the year 1963, since it was then within their power and control to have received the full sum for their business and assets.
The arrangement for*32 the sales price to be disbursed semiannually by Pacific National to the petitioners was made to comply with the insistence of petitioners that the sale be made on the basis of installment payments and as that was the only way the petitioners would sell their business and assets.
The sale did not constitute a true statutory installment sale and petitioners are not entitled to report gain from the sale on the installment basis but must report the gain in 1963 because in 1963 the full purchase price was either actually received by them in the form of a financial benefit or, at the least, constructively received by them.
A deduction of $ 2,000 taken by petitioners for payment in 1963 to Begley and Deaton, public accountants, has not been shown to have been allowable by petitioners either as an ordinary and necessary business expense or as a reduction of the proceeds received by petitioners from the sale of their business and assets.
OPINION
The petitioners take the position that the arrangement which finally evolved between them and Shamrock and Pozzi, Inc., under which they transferred their business and assets to the latter, qualified as an installment sale under section 453 of the *33 Code of 1954, and that the respondent's determination with respect thereto was erroneous and should not be sustained. The petitioners recognize that the burden of sustaining their position was upon them and urge that they have fully sustained it. The respondent, however, contends otherwise.
The purpose of the installment method of reporting income is to permit the spreading of the tax over the period during which payments of the sales price are made and thereby to enable the seller to actually realize the profit arising out of each installment before the tax was paid so that the tax could be paid from the proceeds collected rather than be advanced by the taxpayer. S. & L. Bldg. Corporation v. Commissioner, 60 F. 2d 719 (C.A. 2, 1932); Consolidated Dry Goods Company v. United States, 180 F. Supp. 878 (D. Mass. 1960); Thomas F. Prendergast, Executor, 22 B.T.A. 1259">22 B.T.A. 1259, 1262 (1931).
*127 Under section 453(b)(2)(A) of the Code a seller of property is not entitled to report on the installment basis where the payments (exclusive of evidences of indebtedness of the purchaser) actually*34 and/or constructively received during the year of the sale exceed 30 percent of the selling price of the property. Williams v. United States, 219 F. 2d 523 (C.A. 5, 1955); Williams v. United States, 185 F. Supp. 615">185 F. Supp. 615 (D. Mont. 1960).
The statutory provisions authorizing the use of the installment method of reporting income are relief provisions and are exceptions to the general rule as to the year for reporting income. Being such they must be strictly construed. Cappel House Furnishing Co. v. United States, 244 F. 2d 525, 529 (C.A. 6, 1957); Blum's, Incorporated, 17 B.T.A. 386">17 B.T.A. 386, 389 (1929). A transaction purporting to be a sale on the installment basis that lacks reality will be no more effective in avoiding taxes than any other type of sale. Griffiths v. Commissioner, 308 U.S. 355">308 U.S. 355 (1939); Williams v. United States, 219 F. 2d 523 (C.A. 5, 1955).
The petitioners have requested that we make certain findings of fact, the implications of which would absolve petitioners from responsibility*35 for the detailed and elaborate escrow arrangements under which the amount of the sales price, $ 200,000, was deposited in cash in escrow by the buyer of the properties in issue and the manner in which future installment payments of the sales price made by the buyer would be remitted to the petitioners and portions of the $ 200,000 deposited in escrow would be remitted to the buyer. From our consideration of the record we are satisfied that the escrow arrangements were attributable to the requests and demands made by petitioners and were not attributable to any demand made by the buyer.
The petitioners also have requested that we make certain findings of fact relative to their reason or motive in causing the sale in issue to take the form shown herein. In our view whatever may have been such reason or motive, the fact remains that receipt of the total sales price of the properties was available to petitioners at their command at the time of the transfer of the properties to the buyer. Effect must be given to the existence of such command.
Griffiths v. Commissioner, supra, involved the installment sales provisions of the Revenue Act of 1932. In*36 holding adversely to the taxpayer, the Supreme Court there said:
The facts leave little scope for legal explication. Griffiths had a claim for fraud against Lay which, when satisfied, wiped out the loss for which he had received an earlier deduction. Had satisfaction of the claim come to him without any conduit, it would have indisputably been his income. The claim having been recognized by Lay and cast into a form realizable by Griffiths, a lawyer's ingenuity devised a technically elegant arrangement whereby an intricate outward appearance was given to the simple sale from Griffiths to Lay and the *128 passage of money from Lay to Griffiths. That was the crux of the business to Griffiths, and that is the crux of the business to us.
We cannot too often reiterate that "taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed -- the actual benefit for which the tax is paid." Corliss v. Bowers, 281 U.S. 367">281 U.S. 367, 378. And it makes no difference that such "command" may be exercised through specific retention of legal title or the creation of a new equitable but controlled interest, or the*37 maintenance of effective benefit through the interposition of a subservient agency. Cf. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465. "A given result at the end of a straight path," this Court said in Minnesota Tea Co. v. Helvering, 302 U.S. 609">302 U.S. 609, 613, "is not made a different result because reached by following a devious path." Legislative words are not inert, and derive vitality from the obvious purposes at which they are aimed, particularly in the provisions of a tax law like those governing installment sales in § 44 of the Revenue Act of 1932. Taxes cannot be escaped "by anticipatory arrangements and contracts however skillfully devised * * * by which the fruits are attributed to a different tree from that on which they grew." Lucas v. Earl, 281 U.S. 111">281 U.S. 111, 115. * * *
This is not to say however that had petitioner herein actually carried through an installment sale transaction he would be prevented from so reporting it even though the payments were made in installments at his insistence alone and even though the buyer was willing and prepared to pay the entire purchase price at once.
*38 In substance this transaction brings about the same result as though petitioners had collected the full sales price of the properties sold at once and invested the same in a promissory note bearing 6-percent interest. This we think is the "straight path" and petitioners' escrow arrangement the "devious path" referred to above.
In our view, the principles enunciated by the Supreme Court in the foregoing case and its holding therein are applicable and controlling here and accordingly we have found as a fact that the sale of the properties here involved was not a statutory installment sale.
The remaining issue has been disposed of by our finding that the deduction of a payment of $ 2,000 made to public accountants has not been shown to have been allowable either as an ordinary and necessary business expense or as a reduction of the proceeds received by petitioners from the sale of their business and assets.
Decision will be entered for the respondent.