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    Nannie Carr Harris, Incompetent, and Robert A. Eubanks, Guardian v. Commissioner of Internal Revenue, 477 F.2d 812, 4th Cir. (1973)

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    This document summarizes a court case regarding whether $110,000 paid into an escrow account on behalf of an incompetent taxpayer should be considered constructively received by the taxpayer in 1964 for tax purposes. The Tax Court held that it should not be considered constructively received because the guardian of the incompetent taxpayer was acting as an agent of the court in negotiating and approving the sale, so the taxpayer did not have unilateral control over the sale proceeds. The Commissioner appealed, arguing that the taxpayer did have the ability to receive the full cash payment.

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    Nannie Carr Harris, Incompetent, and Robert A. Eubanks, Guardian v. Commissioner of Internal Revenue, 477 F.2d 812, 4th Cir. (1973)

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    This document summarizes a court case regarding whether $110,000 paid into an escrow account on behalf of an incompetent taxpayer should be considered constructively received by the taxpayer in 1964 for tax purposes. The Tax Court held that it should not be considered constructively received because the guardian of the incompetent taxpayer was acting as an agent of the court in negotiating and approving the sale, so the taxpayer did not have unilateral control over the sale proceeds. The Commissioner appealed, arguing that the taxpayer did have the ability to receive the full cash payment.

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    Filed: 1973-05-04 Precedential Status: Precedential Citations: 477 F.2d 812 Docket: 72-1343

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    This document summarizes a court case regarding whether $110,000 paid into an escrow account on behalf of an incompetent taxpayer should be considered constructively received by the taxpayer in 1964 for tax purposes. The Tax Court held that it should not be considered constructively received because the guardian of the incompetent taxpayer was acting as an agent of the court in negotiating and approving the sale, so the taxpayer did not have unilateral control over the sale proceeds. The Commissioner appealed, arguing that the taxpayer did have the ability to receive the full cash payment.

    Copyright:

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    62 views9 pages

    Nannie Carr Harris, Incompetent, and Robert A. Eubanks, Guardian v. Commissioner of Internal Revenue, 477 F.2d 812, 4th Cir. (1973)

    Uploaded by

    Scribd Government Docs
    This document summarizes a court case regarding whether $110,000 paid into an escrow account on behalf of an incompetent taxpayer should be considered constructively received by the taxpayer in 1964 for tax purposes. The Tax Court held that it should not be considered constructively received because the guardian of the incompetent taxpayer was acting as an agent of the court in negotiating and approving the sale, so the taxpayer did not have unilateral control over the sale proceeds. The Commissioner appealed, arguing that the taxpayer did have the ability to receive the full cash payment.

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    of 9

    477 F.

    2d 812
    73-1 USTC P 9411

    Nannie Carr HARRIS, Incompetent, and Robert A. Eubanks,


    Guardian, Appellee,
    v.
    COMMISSIONER OF INTERNAL REVENUE, Appellant.
    No. 72-1343.

    United States Court of Appeals,


    Fourth Circuit.
    Argued Oct. 5, 1972.
    Decided May 4, 1973.

    William L. Goldman, Atty., Tax Div., Dept. of Justice (Scott P. Crampton,


    Asst. Atty. Gen., Mayer Rothwacks and William A. Friedlander, Attys.,
    Tax Div., Dept. of Justice, on brief), for appellant.
    James H. Johnson, III, Chapel Hill, N. C. (Haywood, Denny & Miller,
    Chapel Hill, N. C., on brief), for appellee.
    Before BOREMAN, Senior Circuit Judge, and WINTER and RUSSELL,
    Circuit Judges.
    BOREMAN, Senior Circuit Judge:

    This is an appeal by the Commissioner of Internal Revenue from a decision of


    the United States Tax Court, 56 T.C. 1165.

    In the spring of 1962, Robert A. Eubanks, the duly qualified guardian of


    taxpayer, Nannie Carr Harris, an incompetent, negotiated with one Robert I.
    Lipton for the sale of certain improved real estate owned by taxpayer in Chapel
    Hill, North Carolina. On May 18, 1962, Eubanks, as such guardian, and Lipton
    executed a contract providing for the sale of the property, subject to the
    required approval of the Superior Court of Orange County, North Carolina.1
    One Thousand Dollars was to be paid upon securing the necessary judicial
    approval and the balance on or before August 1, 1962.

    Pursuant to the contract and the pertinent North Carolina statutes, Eubanks filed
    a petition with the Clerk of the Superior Court of Orange County on May 21,
    1962, seeking authority to sell the property for $156,500, alleging as grounds
    therefor the low net income from the property, the insufficiency of the income
    to provide the support needed by taxpayer and to satisfy certain debts owed by
    her. On the same day, the Superior Court ordered (1) that Eubanks offer the
    property to Lipton for $156,500, (2) that Eubanks file a report of the offer, and
    (3) that the sale be confirmed after ten days if no objections or upset bids were
    filed. Also on May 21, 1962, Eubanks made the offer and filed the report as
    ordered, and Lipton made the $1,000 down payment called for in the contract.
    The petition, court order and report filed May 21 did not deal with the
    disposition of sale proceeds.

    It appears that sometime between May 21, 1962, and June 1, 1962, during the
    10-day period before the sale could be confirmed, Eubanks was advised that a
    reduction in income tax could be effected if the purchase price were payable in
    installments. On June 1, 1962, he filed a supplemental petition, seeking
    approval of an arrangement whereby Lipton would pay $46,500 upon delivery
    of the deed and would deposit the balance of $110,000 with First Federal
    Savings and Loan Association of Durham, North Carolina, as escrow agent,
    with instructions to the agent to pay $27,500 plus interest to the guardian on
    January 2 of each of the following four years. In addition to this supplemental
    petition, Eubanks' attorney sent a letter to the Clerk in which he approximated
    the tax savings if the receipts from the sale of the property were reported over a
    period of five years. By order2 entered June 1, 1962, the Superior Court
    confirmed and approved the sale and authorized the plan of payment as
    requested in the supplemental petition.

    Subsequently, the closing date of the contemplated transaction was extended


    and Lipton assigned all his rights in the property to W. J. Darnell, George S.
    Goodyear, and George F. Lattimore, Jr. (hereinafter referred to as the
    assignees). The property was ultimately deeded to the assignees on or about
    August 31, 1963, pursuant to an order 3 entered by the Superior Court on August
    23, 1963.

    Under the agreement between Eubanks and the assignees, payment of the
    purchase price was to be substantially as set forth in the confirmation order of
    June 1, 1962, with only the payment dates changed to reflect the passage of
    time. Ultimately, the sum of $6,000 was paid during or before 1963, the sum of
    $40,500 was paid on or about January 17, 1964, and, also on January 17, 1964,
    the sum of $110,000 was paid to First Federal Savings and Loan Association of
    Durham pursuant to an escrow agreement4 of that date.

    In her tax return for 1964, taxpayer included in her taxable income $40,500,
    representing that portion of the sale price actually received by her on January
    17, 1964.5 The Commissioner determined a deficiency of $30,757.32, ruling
    that (1) the $110,000 paid to First Federal Savings and Loan Association, as
    escrow agent, and (2) $4,070.04 interest credited to the escrow account in 1964,
    were constructively received by taxpayer in 1964. The Tax Court recognized
    the established rule that where payment is made by the purchaser to a third
    party at the seller's behest the seller has constructively received the payment
    for tax purposes but held that the rule did not apply here because the $110,000
    was paid to First Federal Savings and Loan Association at the direction of the
    Superior Court rather than by direction of taxpayer or her guardian. The Tax
    Court determined a deficiency of only $226.67.6 We reverse as to the $110,000
    deposited in the escrow account. The Commissioner does not appeal the Tax
    Court's holding as to the interest credited to the escrow account during 1964.

    Section 451(a) of the Internal Revenue Code of 1954, 26 U.S.C., provides:

    9 amount of any item of gross income shall be included in the gross income for
    The
    the taxable year in which received by the taxpayer, unless, under the method of
    accounting used in computing taxable income, such amount is to be properly
    accounted for as of a different period.
    10

    Treasury Regulations Section 1.4512(a), 26 C.F.R., sets forth the general rule
    with respect to constructive receipt of income:

    11
    Income
    although not actually reduced to a taxpayer's possession is constructively
    received by him in the taxable year during which it is credited to his account, set
    apart for him, or otherwise made available so that he may draw upon it at any time,
    or so that he could have drawn upon it during the taxable year if notice of intention
    to withdraw had been given.
    12

    It is clear that if taxpayer had not been incompetent and had made the same
    escrow agreement acting for herself, or if the escrow arrangement had been
    entered into solely by Eubanks acting on behalf of taxpayer as her guardian
    without the supervision of the local court, the $110,000 payment to the escrow
    agent would be treated as constructively received by her in 1964. Williams v.
    United States, 219 F.2d 523 (5 Cir. 1955); Rhodes v. United States, 243 F.
    Supp. 894 (W.D. S.C.1965); Pozzi v. Commissioner, 49 T.C. 119 (1967).
    Lipton had signed on May 18, 1962, a contract of sale calling for payment in
    cash on or before the date set for closing the transaction. Further, on January
    17, 1964, Lipton's assignees, the ultimate purchasers, were ready, willing and
    able to pay the entire remainder of the purchase price, $150,500, and in fact did

    irrevocably part with the full amount thereof on that date. Sale proceeds, or
    other income, are constructively received when available without restriction at
    the taxpayer's command; the fact that the taxpayer has arranged to have the sale
    proceeds paid to a third party and that the third party is, with taxpayer's
    agreement, not legally obligated to pay them to taxpayer until a later date, is
    immaterial. See Griffiths v. Commissioner, 308 U.S. 355, 60 S.Ct. 277, 84 L.
    Ed. 319 (1939); Hicks v. United States, 314 F.2d 180 (4 Cir. 1963). The sole
    question presented, therefore, is whether this rule is inapplicable for the reason
    that, where the property of an incompetent is being sold, the terms of the sale
    and the disposition of the sale proceeds must be approved by the local court
    under North Carolina law.
    13

    In his brief filed with the Tax Court, the Commissioner argued as follows:

    14
    Respondent's
    [Commissioner's] position is that the entire consideration was
    constructively received in 1964 since it was within the power and control of the
    petitioner to have received the funds at that time.
    ******
    15
    ***
    16
    17

    It is the respondent's position that the circumstances of this case are such that,
    when the purchase price was paid into the escrow account for the benefit of the
    petitioner, there was constructive receipt of the full amount. When negotiations
    were completed and the contract entered into on May 18, 1962, it was the
    intention of both parties that the sale would be a cash transaction. On that date
    petitioner was ready, willing and able to close the transaction for a cash
    payment of $156,500. On the day the sale was approved by the Court,
    petitioner became equitably entitled to the full purchase price. This contractual
    right was an asset which he could sell or otherwise transfer. It was within
    petitioner's power and control to receive the purchase in cash, but instead he
    elected to have it delivered to the bank under an escrow agreement.

    18

    The Tax Court noted that implicit in this argument is the assumption that
    taxpayer at one time had an enforceable right to receive the total sale proceeds
    in cash but that she then decided to voluntarily put herself under some legal
    disability with respect to payment, i. e., the escrow arrangement. The Court
    reviewed the applicable North Carolina statutory and case law and determined
    that, in North Carolina, when a guardian of an incompetent sells real property
    under order of the court, the guardian is merely an "agent" of the court, and the
    sale is not consummated until it is confirmed by the resident judge, which

    confirmation represents the consent of the court to the sale. Pike v. Wachovia
    Bank and Trust Company, 274 N.C. 1, 161 S.E.2d 453 (1968). The Tax Court
    then concluded that Eubanks was merely acting for the Superior Court of
    Orange County in contracting for the sale of taxpayer's property and that the
    May 18, 1962, contract of sale created no rights in any of the parties unless and
    until the sale was confirmed by the resident judge. Since the confirmation was
    contained in the order of June 1, 1962, which order also authorized and directed
    the use of the escrow arrangement, the court held that Eubanks, on behalf of
    taxpayer, never had the power to receive the full purchase price in 1964, and
    thus did not constructively receive that amount in 1964.
    19

    We find no error in the Tax Court's analysis of the respective powers of


    Eubanks, as guardian, and the Superior Court of Orange County. We agree that,
    under North Carolina law, Eubanks could not enter a binding agreement for the
    sale of taxpayer's real property without the confirmation of the resident judge.
    The error of the Tax Court was in regarding the state court's role in the
    proceedings as representing an interest adverse to, or independent of, the
    interests of the incompetent taxpayer, and in regarding the state court's order to
    place the funds in escrow as a denial to the taxpayer and her guardian of
    dominion over the payment. North Carolina Gen. Stat. Sec. 33-31,7 which
    requires judicial supervision of the sale of an incompetent's property, actually
    supplements the guardianship protection afforded the incompetent. The
    resident judge must ensure that any sale is made "on such terms as may be
    most advantageous to the interest of the ward."

    20

    In City Bank Co. v. McGowan, 323 U. S. 594, 65 S.Ct. 496, 89 L.Ed. 483
    (1945), the Supreme Court rejected the distinction between the acts of an
    incompetent and those of a court acting in her behalf. The question there was
    whether a transfer of the decedent's property, made pursuant to court order
    because the decedent was incompetent, was in contemplation of the decedent's
    death, which fact would make the property includible in the decedent's estate
    for federal estate tax purposes. The Court stated, 323 U.S. at 598-599, 65 S. Ct.
    at 498:

    21 issue is a narrow one. Literally Mrs. Vail neither made the transfers nor did she
    The
    have any motive with respect to them. But a court stood in her place and
    unquestionably had the function of effectuating a transfer of her property and of
    determining what motive or purpose would have actuated her had she been
    competent to act. It seems to us that it is sticking in the bark to say that, in the
    circumstances, the transfers are not within the section because Congress did not add
    a phrase to the effect that where a court made the transfer, acting in lieu of the
    incompetent owner, such a transfer should be governed by the statute.

    22 hold, therefore, that where, as in New York, the court is to substitute itself as
    We
    nearly as may be for the incompetent, and to act upon the same motives and
    considerations as would have moved her, the transfer is, in legal effect, her act and
    the motive is hers.
    23

    The act of the Superior Court of Orange County in directing, upon the request
    of Eubanks, that the $110,000 be placed in escrow was "in legal effect" the act
    of the taxpayer. We hold that the escrow deposit was constructively received,
    for income tax purposes, in 1964.

    N.C.Gen.Stat. Sec. 33-31 (1966 Repl.Vol.):


    Special proceedings to sell; judge's approval required.-On application of the
    guardian . . . by petition, verified upon oath, to the superior court, showing that
    the interest of the ward would be materially promoted by the sale . . . of any
    part of his estate, real or personal, . . . a decree may thereupon be made that a
    sale . . . be had by such person, in such way and on such terms as may be most
    advantageous to the interest of the ward; all petitions filed under the authority
    of this section wherein an order is sought for the sale . . . of the ward's real
    estate . . . shall be filed in the superior court of the county in which all or any
    part of the real estate is situated; . . . no . . . conveyance of the title [shall be]
    made, unless confirmed and directed by the judge, and the proceeds of the sale
    . . . shall be exclusively applied and secured to such purposes and on such trusts
    as the judge shall specify. . . .
    In the case of a private sale, such as the one here, the sale may be confirmed if
    no upset bids are submitted within ten days after the report of sale is filed.
    N.C.Gen. Stat. Sec. 1-339.37 (1969 Repl.Vol.).

    The Superior Court summarized the proceedings, and concluded:


    This cause again coming on to be heard and being heard and it appearing to the
    court that under a prior order entered in this matter Robert A. Eubanks,
    guardian of Nannie Carr Harris, incompetent, reported to the court that he had
    an offer for the property described in the pleadings from Robert I. Lipton,
    Trustee, through Foushee-Olsen Realty Company for $156,500.00, of which
    sum $6,500.00 is due and payable to Foushee-Olsen Realty Company as
    commissions; the said report has remained on file in this office for more than
    ten days as required by law; no objections or upset bids have been filed and
    Robert A. Eubanks, guardian for Nannie Carr Harris, incompetent, has filed a
    supplementary petition in which he prays that he be permitted to accept a down

    payment of $46,500.00 and that the remainder of the purchase price be


    deposited by Robert I. Lipton, Trustee, or his assigns with First Federal Savings
    and Loan Association of Durham, N. C., as escrow agent, with irrevocable
    authorization to the escrow agent to pay to Robert A. Eubanks, guardian of
    Nannie Carr Harris, incompetent, on the 2nd day of January 1963, the sum of
    $27,500.00, plus accumulated interest and on the 2nd day of January, 1964,
    1965, and 1966, each, the sum of $27,500.00 plus accumulated interest so that
    the taxable income from the sale of this property can be reported by the
    guardian on an installment sale basis and over a period of five years; and it
    appearing to the court that it would be to the best interest of the estate of
    Nannie Carr Harris, incompetent, that this method of payment for the said
    property would be advantageous to the estate and should be approved by the
    court.
    NOW, THEREFORE, IT IS ORDERED, ADJUDGED AND DECREED, that
    the sale of the property described in the pleadings by Robert A. Eubanks,
    guardian of Nannie Carr Harris, incompetent, to Robert I. Lipton, Trustee, or
    his assigns, for the full sum of $156,500.00 be and the same is hereby in all
    respects confirmed and fully approved.
    IT IS FURTHER ORDERED, ADJUDGED AND DECREED, that the said
    Robert A. Eubanks, guardian of Nannie Carr Harris, incompetent, be and he is
    hereby authorized and permitted to accept the sum of $46,500.00 in cash and
    Robert I. Lipton, Trustee, or his assigns, is authorized to deposit with First
    Federal Savings and Loan Association of Durham, N. C., as escrow agent,
    under an irrevocable escrow agreement the remaining sum of $110,000.00
    which escrow agreement shall authorize First Federal Savings and Loan
    Association of Durham, N. C., as escrow agent, to pay to Robert A. Eubanks,
    guardian of Nannie Carr Harris, incompetent, on the 2nd day of January, 1963,
    from the said funds $27,500.00 plus accumulated interest and on the 2nd day of
    January of the years 1964, 1965, and 1966, each, the sum of $27,500.00 plus
    accumulated interest to each date until transfer of the said funds to Robert A.
    Eubanks, guardian of Nannie Carr Harris, incompetent, has been completed, or
    to the duly qualified representative of Nannie Carr Harris should she die before
    the escrow agreement terminates.
    IT IS FURTHER ORDERED AND DECREED, that Robert A. Eubanks,
    guardian of Nannie Carr Harris, incompetent, shall and he is hereby authorized,
    empowered and directed to execute and deliver to Robert I. Lipton, Trustee, or
    his assigns, a good and sufficient deed in fee simple, with taxes, insurance and
    rents adjusted as of the date of the closing of this matter and upon payment of
    $46,500.00 and delivery to him of a copy of the above mentioned escrow
    agreement between Robert I. Lipton, Trustee, or his assigns, and First Federal

    Savings and Loan Association of Durham, N. C., relative to the balance of


    $110,000.00.
    3

    In a second supplemental petition to the Superior Court filed on August 23,


    1963, Eubanks reported that: (1) he had been unable to complete the sale of the
    property to Lipton; (2) Lipton had assigned his rights in the matter to Goodyear,
    Lattimore and Darnell; (3) the assignees had arranged through Goodyear
    Mortgage Corporation to finance the purchase of the property and the erection
    of a multiple unit motel and business building on the property for $850,000; and
    (4) the assignees would authorize one Lee W. Settle, Trustee in the deed of trust
    securing the indebtedness to Goodyear Mortgage Corporation, and the
    Goodyear Mortgage Corporation, to pay the first funds disbursed by the
    mortgagee in payment of the purchase price in the amount of $46,500, and that
    the Goodyear Mortgage Corporation would deposit the balance of $110,000
    under the escrow agreement earlier contemplated
    The Superior Court's Order of August 23, 1963, provided in pertinent part:
    ORDERED, ADJUDGED AND DECREED that Robert A. Eubanks, Guardian
    of Nannie Carr Harris, incompetent be and he is hereby authorized, empowered
    and directed to execute a fee simple deed to the property described in the
    pleadings to George S. Goodyear, George F. Lattimore, Jr. and W. J. Darnell
    and is further authorized, empowered and directed to enter into a contract with
    the said parties, their spouses, and Lee W. Settle, Trustee, and Goodyear
    Mortgage Corporation to the effect that the first monies disbursed by Goodyear
    Mortgage Corporation on the . . . [demand] note of $850,000.00 [executed by
    the assignees payable to the Goodyear Mortgage Corporation] shall be paid to
    Robert A. Eubanks, guardian of Nannie Carr Harris, incompetent, and on or
    before December 15, 1963 and he may provide in that contract for the payment
    of $46,500.00 on or before the said date and for the payment of the remainder
    through an escrow agreement over a period of four (4) years as set out in an
    order of this Court dated June 1, 1962, and he is further authorized and directed
    to see that his deed to George S. Goodyear, George F. Lattimore, Jr. and W. J.
    Darnell, the deed of trust securing an indebtedness to Goodyear Mortgage
    Corporation, and an agreement relative to payments are filed for registration
    simultaneously in the Office of the Reister of Deeds of Orange County and to
    see that there are no intervening liens against the said property.

    The escrow agreement between Lee W. Settle, Trustee, and the First Federal
    Savings and Loan Association, provided in part:
    Whereas, the order of the Clerk of the Superior Court of Orange County and
    approval by the Resident Judge of the Fifteenth Judicial District of the Superior

    Courts of North Carolina, authorized and permitted the party of the first part
    [Settle] to deposit the balance of the purchase price and in the sum of
    $110,000.00 with the party of the second part, as Escrow Agent, and under the
    following irrevocable terms and conditions, . . . .
    5

    Taxpayer reported the receipt of $5,000 of the proceeds of the sale on her 1963
    individual income tax return and made an election to report the sale on the
    installment basis. On her 1964 return, she reported the receipt of $40,500 as a
    longterm capital gain installment on the 1963 installment sale. The issue here is
    whether the amount of the 1964 installment was understated and whether the
    amount deposited in escrow should have been included in the 1964 tax return

    This deficiency of $226.67 was apparently due to the fact that taxpayer
    originally claimed $10,000 as the basis of the property sold, the Commissioner
    used a basis of $1,000 in determining the deficiency, and the parties ultimately
    stipulated a basis of $6,000

    See footnote 1

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