An option offered by one corporation to another to buy lands at
a specified price was accepted late in 1916 by a notice from the
vendee, in which it declared itself ready to close the transaction
and pay the price as soon as the transfer papers were prepared by
the vendor. The vendor did not prepare the papers, transfer or
tender title or possession, or demand or receive the purchase
price, until early in 1917, when the transaction was closed.
Held that, as unconditional liability of the vendee was
not created in 1916, the vendor, though it kept its accounts on the
accrual basis, was not
Page 281 U. S. 12
entitled under § 13(d) of the 1916 Revenue Act to enter the
purchase price as income of that year and to make return and have
the tax computed on that basis, which clearly did not reject 1916
income. P.
281 U. S.
13.
30 F.2d 680 reversed.
Certiorari, 280 U.S. 538, to review a judgment of the circuit
court of appeals which reversed an order of the Board of Tax
Appeals, 7 B.T.A. 1193, sustaining a finding of the Commissioner of
Internal Revenue.
MR. JUSTICE BUTLER delivered the opinion of the Court.
The respondent, a Texas corporation, for some time prior to 1917
was engaged in operating a sawmill, selling lumber, and buying and
selling timber lands. December 27, 1916, it gave to the Southern
Pine Company a ten-day option to purchase its timber lands for a
specified price. The latter was solvent and able to make the
purchase. On the same day, title was examined and found
satisfactory to the Pine Company. It arranged for the money needed,
and, December 30, 1916, notified respondent that it would exercise
the option. On that day, respondent ceased operations and withdrew
all employees from the land. January 5, 1917, the papers which were
required to effect the transfer were delivered, the purchase price
was paid, and the transaction was finally closed.
Page 281 U. S. 13
Respondent kept its accounts on the accrual basis, and treated
the profits derived from the sale as income in 1916. The
Commissioner of Internal Revenue determined that the gain had been
realized in, and was taxable for, 1917. The Board of Tax Appeals
sustained his finding. 7 B.T.A. 1193. The circuit court of appeals
reversed the Board. 30 F.2d 680.
The gain derived from this sale was taxable income. [
Footnote 1] If attributed to 1916, the
tax would be much less than if made in 1917. [
Footnote 2] Section 13(d) of the Revenue Act of
1916 provided that a corporation keeping its accounts upon any
basis other than that of actual receipts and disbursements, unless
such other basis failed clearly to reflect income, might make
return upon the basis upon which its accounts were kept, and have
the tax computed upon the income so returned. [
Footnote 3]
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.
Gober v.
Hart, 36 Tex. 139.
Cf. United States v. Anderson,
269 U. S. 422,
269 U. S. 441;
American National Co. v. United States, 274 U. S.
99. The entry of the purchase price in respondent's
accounts as income in that year was not warranted. Respondent was
not entitled
Page 281 U. S. 14
to make return or have the tax computed on that basis, as
clearly it did not reflect 1916 income.
Judgment reversed.
[
Footnote 1]
§ 2(a), Act of September 8, 1916, 39 Stat. 756, 757. § 1200, Act
of October 3, 1917, 40 Stat. 300, 329.
[
Footnote 2]
§ 10, Act of September 8, 1916, 39 Stat. 756, 765. § 201, Act of
October 3, 1917, 40 Stat. 300, 303.
[
Footnote 3]
39 Stat. 756, 771.
