On petition to Review the Decision of the Tax Court of the United States.
Before BRATTON, HUXMAN, and MURRAH, Circuit Judges.
The question in this case is whether a loss sustained by petitioner as the result of the sale of a farm during the tax year in question was deductible under Section 24(b)(1)(B) of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, § 24.*fn1
Petitioner was a family corporation largely created for the purpose of handling the assets left by W. A. Drake, who died intestate. The assets of the corporation consisted mostly of farm lands. Included among them was a farm known as the Anderson farm. Petitioner entered into a written agreement with Frank L. Bartels on October 11, 1940,*fn2 which resulted in a sale of this farm to Bartels. Bartels paid for the farm by transferring 443 shares of petitioner's stock to the corporation and assuming an outstanding mortgage. The transaction resulted in an admitted loss to petitioner. It deducted this loss from its income tax return for the applicable tax year. The Commissioner disallowed the deduction and assessed a deficiency tax. The Tax Court sustained the Commissioner, and petitioner has appealed.
It is conceded that immediately prior to the institution of the negotiations which resulted in the sale of the Anderson farm to Bartels, he was the owner, individually and through his family, of more than fifty per cent in value of petitioner's outstanding stock within the meaning of Section 24 of the Revenue Act. On October 11, 1940, the day on which the contract was executed, 354 shares of the stock, a part of the consideration, were transferred to the corporation on its books. Thereafter Bartels owned, individually and through his family, less than fifty per cent in value of the outstanding stock of the corporation. The balance of the consideration was not paid until some time subsequent to October 11, 1940, and the deed to the farm was not executed until December 24, and was delivered to Bartels about January 9, 1941.
Section 24(b)(1)(B) specifically provides that a corporation may not deduct a loss resulting from a transaction between it and one who owns, directly or indirectly, more than fifty per cent in value of the corporation's outstanding stock. Petitioner recognizes the force and effect of this statute, but contends that it does not apply here because Bartels was not the owner of more than fifty per cent of the stock at the time the transaction resulting in the sale of the Anderson farm became binding on the parties. Its position is that the contract of October 11 was a mere option to purchase, that it conferred no rights upon petitioner and cast no enforceable obligations upon Bartels. With this we cannot agree.
The distinguishing characteristics of an option contract are that it imposes no binding obligation upon the person holding it. Suburban Improvement Co. v. Scott Lumber Co., 4 Cir., 59 F.2d 711, 87 A.L.R. 555. The contract here did more than confer a mere privilege upon Bartels to buy or not to buy as he saw fit. It is true that the first part of the contract was conditional and that it provided that the corporation would convey the land if Bartels would first make the payments of the consideration as provided for in the contract and perform the covenants required of him therein.But it did more than this. In the contract Bartels specifically agreed to pay the purchase price and agreed to pay interest from January 1, 1941, and all taxes after the year 1940. A reading of the entire contract leads us to conclude that it was more than a mere option to purchase. It was a binding agreement to purchase. Had Bartels refused to make the balance of the payments, the corporation could have tendered the deed into court and demanded judgment for the balance due. That the contract gave the corporation the right to cancel in the event of default by Bartels did not convert an otherwise binding contract into an option contract. Suburban Improvement Co. v. Scott Lumber Co., supra. Bartels did not have the right to cancel. He was bound to perform.
The case of Stelson v. Haigler, 63 Colo. 200, 165 P. 265, 3 A.L.R. 550, upon which petitioner relies, does not sustain its position. A careful reading of that case will reveal marked differences between the contract there and the one under consideration here. A case much more in point by the Colorado Supreme Court is Cullen v. Park Land Co., 67 Colo. 210, 184 P. 303.
Petitioner emphasizes a line of decisions which hold that a loss must be sustained during the taxable year in which a deduction is claimed, and that it must be manifested by a closed transaction or an identifiable event. These decisions have no value here. If the question were whether petitioner had taken the deduction in the proper year, these cases would be applicable. But here it is not a question as to the year in which the loss occurred. Admittedly it occurred during the taxable year in which it was claimed. The right to deduct this loss depends upon the nature of the transaction out of which it arose. It arose out of a transaction with an individual who owned, directly or indirectly, more than fifty-one per cent in value of the outstanding stock of petitioner.
It is immaterial whether title to the stock passed to the corporation before title to the land passed to Bartels, or vice versa, or whether title passed at the same time. The transaction out of which the loss occurred had its beginning with the contract of October 11, 1940, which we have held was a binding and enforceable contract from the date of its execution. This places the transaction squarely within the purview of the Act, and petitioner was not entitled to the claimed deduction.