[196]*196OPINION.
Murdock: The Commissioner determined for the year 1933 a deficiency of $51,178.95 in income tax and a deficiency of $4,229.42 in excess profits tax of the petitioner and its affiliated companies. The sole issue for decision is whether or not the Commissione»»erred in including in consolidated income for 1933, $425,000 representing payments received by the affiliated companies in prior years under a contract with the Texas Gulf Sulphur Co. The facts have been stipulated and no findings of fact need be made.
The petitioner owned practically all of the stock of its subsidiary, the New York & Virginia Mining & Mineral Co., hereinafter referred to as Mineral. Mineral owned about 6,500 acres of mineral lands and rights in Carroll County, Virginia. The petitioner, on July 7, 1930, entered into a written contract with the Texas Gulf Sulphur Co., hereinafter referred to as Texas. The contract provided that Texas had the right to purchase all of the stock of Mineral owned by the petitioner or the mineral lands and rights owned by Mineral for the sum of $3,750,000. Texas could retain the option from year to year until 1935 by paying $300,000 on August 1, 1930, and $125,000 on the first day of August in each succeeding year, up to and including August 1, 1934. Texas could make the purchase at any time by paying the purchase price. All of the annual payments were to be credited as a part of the purchase price in case the option was exercised. There was a provision for continuing the option beyond August 1, 1935, by the payment of $150,000 on the first day of August of each year, but those payments were not to be credited as a part of the purchase price. Texas was permitted to explore the lands and remove ore for test purposes. Texas was not obligated to make further payments in case it failed to exercise the option and allowed it to lapse, but in that event the petitioner “shall retain” all payments already made.
The first payment of $300,000 was received on or about August 1, 1930. A second payment of $125,000 was received on or about August 1, 1931. The contract was not carried out precisely in accordance with its terms. Several supplemental contracts were entered into in order to include additional lands to be acquired by advances from the purchaser, to provide for the placing of a deed in escrow, and to provide for some changes in the payments to be made in order to continue the option. Advances of small amounts were made, additional lands were acquired, and deeds were placed in escrow. The Texas Co. failed to make a required payment of $125,000 on August 1, 1932. But thereafter, on September 21, 1932, a supplemental contract was entered into which continued the option, with some modifications or changes, and by this and other supplemental contracts, [197]*197the last of which was entered into on August 1, 1933, the time for further payment was extended until February 1, 1934. No further payment was ever made. The Texas Co. notified the petitioner in writing on December 26, 1933, that the option would not be exercised, no further continuance was desired, and repayment of advances made for the purchase of additional lands was demanded. The payments and expenditures made by Texas and its subsidiary were charged off their books as a loss at that time. Early in the following year, the escrow deeds were returned to the petitioner and the advances were returned to the Texas Co.
When the Texas Co. abandoned the option in 1933, the $425,000 theretofore received by the petitioner was freed of the requirement that it be applied as a part of the purchase price in case of the exercise of the option. Those two payments had been mentioned in the original consolidated returns filed for 1930 and 1931 as nontaxable income, representing amounts received under an option agreement covering the sale of real property. Amended consolidated returns for 1930 and 1931 were filed on May 10, 1934, in which the above stated amounts were included in taxable income for the years in which received. The tax shown to be due by those amended returns was paid. The petitioner and its affiliates kept their books and made their income tax returns in accordance with an accrual method of accounting.
Mineral had acquired the properties prior to March 1, 1913. The fair market value of the properties on March 1, 1913, was in excess of cost and both the cost and the fair market value on March 1, 1913, were in excess of $425,000.
The Commissioner in determining the deficiencies included in the consolidated income for 1933 the total payments of $425,000 received in 1930 and 1931 under the agreement. He explained that the transaction was not completed for income tax purposes until Texas, in 1933, surrendered its rights under the option to buy the lands and to have the payments in question applied as a part of the purchase price. He held that the entire amount was realized as income in 1933. He then scheduled an overassessment for the income taxes paid on the $425,000 under the amended returns filed for 1930 and 1931. The issue for decision is whether those two payments received in 1930 and 1931 were taxable income for 1933.
The petitioner argues that the payments were either income when received, or were a return of capital which should have been irrevocably applied as a recovery of a part of the basis of the property, so that in neither event would the payments represent income in 1933. Neither of these arguments offers a proper solution of this case. It was impossible to tell in 1930 and 1931, when the payments were received, whether they would ultimately represent income to [198]*198the petitioner or a return of capital. They were to be applied against the purchase price in case of the exercise of the option. Had the option been exercised, they would have represented a return of capital, that is, a recovery of a part of the basis for gain or loss which the property had in the hands of the seller. In that event they would not have been income and their return as income when received would have been improper. Cf. Higgins Estate, Inc., 30 B. T. A. 814. But in case of termination of the option and abandonment by the Texas Co. of its right to have the payments applied as a part of the purchase price, it would be apparent for the first time that the payments represented clear gain to the petitioner. In that case, since no property would be sold, there would be no reason to reduce the basis of that retained.
Thus it was impossible for either the taxpayer or the Commissioner to determine in 1930 and 1931 whether or not the payments would eventually represent income and how they should be reported. Obviously those years could not be held open for income tax purposes to await the final outcome of such contracts. The taxpayer in this case, after the option to purchase had been surrendered, filed amended returns reporting the payments as income for the years in which received. But returns must be filed in the light of facts known at the time the returns are due. Some other, taxpayer might not choose to file amended returns. Then the statute of limitations would foreclose the Commissioner and prevent the collection of taxes lawfully due. If the Commissioner is to make an orderly and uniform collection of taxes in such cases, the tax liability for those earlier years must be determined and closed by collection, without waiting to see whether or not the option is exercised.
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[196]*196OPINION.
Murdock: The Commissioner determined for the year 1933 a deficiency of $51,178.95 in income tax and a deficiency of $4,229.42 in excess profits tax of the petitioner and its affiliated companies. The sole issue for decision is whether or not the Commissione»»erred in including in consolidated income for 1933, $425,000 representing payments received by the affiliated companies in prior years under a contract with the Texas Gulf Sulphur Co. The facts have been stipulated and no findings of fact need be made.
The petitioner owned practically all of the stock of its subsidiary, the New York & Virginia Mining & Mineral Co., hereinafter referred to as Mineral. Mineral owned about 6,500 acres of mineral lands and rights in Carroll County, Virginia. The petitioner, on July 7, 1930, entered into a written contract with the Texas Gulf Sulphur Co., hereinafter referred to as Texas. The contract provided that Texas had the right to purchase all of the stock of Mineral owned by the petitioner or the mineral lands and rights owned by Mineral for the sum of $3,750,000. Texas could retain the option from year to year until 1935 by paying $300,000 on August 1, 1930, and $125,000 on the first day of August in each succeeding year, up to and including August 1, 1934. Texas could make the purchase at any time by paying the purchase price. All of the annual payments were to be credited as a part of the purchase price in case the option was exercised. There was a provision for continuing the option beyond August 1, 1935, by the payment of $150,000 on the first day of August of each year, but those payments were not to be credited as a part of the purchase price. Texas was permitted to explore the lands and remove ore for test purposes. Texas was not obligated to make further payments in case it failed to exercise the option and allowed it to lapse, but in that event the petitioner “shall retain” all payments already made.
The first payment of $300,000 was received on or about August 1, 1930. A second payment of $125,000 was received on or about August 1, 1931. The contract was not carried out precisely in accordance with its terms. Several supplemental contracts were entered into in order to include additional lands to be acquired by advances from the purchaser, to provide for the placing of a deed in escrow, and to provide for some changes in the payments to be made in order to continue the option. Advances of small amounts were made, additional lands were acquired, and deeds were placed in escrow. The Texas Co. failed to make a required payment of $125,000 on August 1, 1932. But thereafter, on September 21, 1932, a supplemental contract was entered into which continued the option, with some modifications or changes, and by this and other supplemental contracts, [197]*197the last of which was entered into on August 1, 1933, the time for further payment was extended until February 1, 1934. No further payment was ever made. The Texas Co. notified the petitioner in writing on December 26, 1933, that the option would not be exercised, no further continuance was desired, and repayment of advances made for the purchase of additional lands was demanded. The payments and expenditures made by Texas and its subsidiary were charged off their books as a loss at that time. Early in the following year, the escrow deeds were returned to the petitioner and the advances were returned to the Texas Co.
When the Texas Co. abandoned the option in 1933, the $425,000 theretofore received by the petitioner was freed of the requirement that it be applied as a part of the purchase price in case of the exercise of the option. Those two payments had been mentioned in the original consolidated returns filed for 1930 and 1931 as nontaxable income, representing amounts received under an option agreement covering the sale of real property. Amended consolidated returns for 1930 and 1931 were filed on May 10, 1934, in which the above stated amounts were included in taxable income for the years in which received. The tax shown to be due by those amended returns was paid. The petitioner and its affiliates kept their books and made their income tax returns in accordance with an accrual method of accounting.
Mineral had acquired the properties prior to March 1, 1913. The fair market value of the properties on March 1, 1913, was in excess of cost and both the cost and the fair market value on March 1, 1913, were in excess of $425,000.
The Commissioner in determining the deficiencies included in the consolidated income for 1933 the total payments of $425,000 received in 1930 and 1931 under the agreement. He explained that the transaction was not completed for income tax purposes until Texas, in 1933, surrendered its rights under the option to buy the lands and to have the payments in question applied as a part of the purchase price. He held that the entire amount was realized as income in 1933. He then scheduled an overassessment for the income taxes paid on the $425,000 under the amended returns filed for 1930 and 1931. The issue for decision is whether those two payments received in 1930 and 1931 were taxable income for 1933.
The petitioner argues that the payments were either income when received, or were a return of capital which should have been irrevocably applied as a recovery of a part of the basis of the property, so that in neither event would the payments represent income in 1933. Neither of these arguments offers a proper solution of this case. It was impossible to tell in 1930 and 1931, when the payments were received, whether they would ultimately represent income to [198]*198the petitioner or a return of capital. They were to be applied against the purchase price in case of the exercise of the option. Had the option been exercised, they would have represented a return of capital, that is, a recovery of a part of the basis for gain or loss which the property had in the hands of the seller. In that event they would not have been income and their return as income when received would have been improper. Cf. Higgins Estate, Inc., 30 B. T. A. 814. But in case of termination of the option and abandonment by the Texas Co. of its right to have the payments applied as a part of the purchase price, it would be apparent for the first time that the payments represented clear gain to the petitioner. In that case, since no property would be sold, there would be no reason to reduce the basis of that retained.
Thus it was impossible for either the taxpayer or the Commissioner to determine in 1930 and 1931 whether or not the payments would eventually represent income and how they should be reported. Obviously those years could not be held open for income tax purposes to await the final outcome of such contracts. The taxpayer in this case, after the option to purchase had been surrendered, filed amended returns reporting the payments as income for the years in which received. But returns must be filed in the light of facts known at the time the returns are due. Some other, taxpayer might not choose to file amended returns. Then the statute of limitations would foreclose the Commissioner and prevent the collection of taxes lawfully due. If the Commissioner is to make an orderly and uniform collection of taxes in such cases, the tax liability for those earlier years must be determined and closed by collection, without waiting to see whether or not the option is exercised.
Thus it is necessary to exclude such payments from the income of the year in which received and to include them for the later year when, for the first time, a satisfactory determination' of their character for income tax purposes can be made. The other party to the contract in the taxable year for the first time released and abandoned its right under the agreements to have the payments applied against the purchase price, and charged off its loss. The recipient then knew for the first time that it could retain the payments without any obligation to apply them against the purchase price. Its property was then free of the option. It had lost nothing, but had retained everything with- which it started and had acquired $425,000 in addition. The $425,000 was then income.
The taxpayer argues that, since the funds were received in 1930 and 1931 with the right to retain them forever and to use them without restriction, they should have been accrued as income for those years. Although they were received without any obligation to re[199]*199turn them, there was one condition attached to their receipt. That is, they had to be applied against the purchase price in case the option was exercised. That one condition is the determining factor in this case. Until it was removed in 1933, the question of the liability of the recipient for income tax upon the payments had to be held in abeyance. Similar cases of forfeiture arise under contracts of sale and are treated the same way. Calvin T. Graves, 17 B. T. A. 1318; Henry Heldt, 16 B. T. A. 1035; Nat Webb, Jr., 22 B. T. A. 1249; Laurens Trust Co., 3 B. T. A. 331; Home State Bank, 15 B. T. A. 121; Title & Trust Co., 33 B. T. A. 25; Joseph Frost, 37 B. T. A. 190.
Since the petitioner never elected to use the installment method of reporting its profit from the proposed sale, the possibilities of the use of that method need not be discussed. The argument is made that the payments were solely for the purpose of retaining the option and, since the option cost the petitioner nothing, the payments were pure gain at the time received. If this argument were supported by the facts it would be' unanswerable, but the facts show that these particular payments were not merely for the purpose of continuing the option1 but were to be a part of the purchase price in case the option was exercised. Cases involving royalties are distinguishable. Royalties have been held to be income at the time received where they represent a payment for the right to remove or use some of the property even though they are to be applied against the purchase price. The owner, of course, offsets this income by depreciation and depletion deductions which permit him to recover his basis tax-free despite the fact that the entire amount of the royalties is included in income. Here the payments were not of that character. The method originally adopted by the petitioner in reporting these payments and that adopted by the Commissioner are consistent and proper.
The final argument advanced by the petitioner is that the option, under which payments aggregating $425,000 were made, lapsed in 1932, and, if the Commissioner’s theory that gain was realized on the option when it expired is correct, the income in this case was realized in 1932 rather than in 1933. It is true that thei payment of $125,000 due on August 1,1932, was not paid, but shortly thereafter in that same year the parties, by further agreement, revived the option and continued it, so that the payments theretofore made were not forfeited at that time. The petitioner at the end of that year still could have been required to apply these payments as a part [200]*200of the purchase price in case the Texas Co. later chose to exercise its existing rights under the option to buy the property.
Reviewed by the Board.
Decision will be entered for the respondent.