31 T.C. 722">*723 Respondent determined a deficiency in income tax and an addition thereto for underestimation of estimated tax against petitioners for the year 1952 in the respective amounts of $ 1,283.77 and $ 1,022.23. The questions presented for decision are (1) whether Kenneth W. Daehler, employed as a salesman by a real estate broker, realized taxable income in the nature of a commission upon the purchase through his employer of real estate for his own account and (2) whether petitioners are liable for an addition to tax under section 294 (d) (2) of the Internal Revenue Code of 1939 for substantial underestimation of their estimated tax for 1952. Petitioners concede that the real estate taxes of $ 445.82 paid by them on Ocean Ranch Villas, which they acquired on July 27, 1952, is not an allowable deduction, but is a capital expenditure.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found as stipulated.

Petitioners are husband and wife, and are residents of Pompano, Florida. They filed their1959 U.S. Tax Ct. LEXIS 265">*267 joint income tax return for 1952 with the director of internal revenue for Florida.

Kenneth W. Daehler, hereafter referred to as petitioner, was a real estate salesman, and during 1952 was employed as such by Anaconda Properties, Inc., hereafter referred to as Anaconda, a registered real estate broker located in Fort Lauderdale. Fort Lauderdale is located in Broward County. Petitioner specialized in the selling of ocean front property.

In 1952, an Anaconda salesman worked on a sliding scale of commissions, ranging from 50 to 75 per cent of the commissions received by Anaconda on the sales made by the salesman. On the first $ 300,000 of his sales a salesman would receive 50 per cent of Anaconda's commission. As the volume of his sales increased, his percentage of commissions increased, first to 55 per cent, then to 60 per cent, and at $ 700,000 of sales he became entitled to 70 per cent of Anaconda's commission. When his sales amounted to $ 1,000,000, his commission became 75 per cent of Anaconda's commission.

31 T.C. 722">*724 In the event one of Anaconda's salesmen became the purchaser of property listed with Anaconda, the sale would be effected in the following manner: The owner of1959 U.S. Tax Ct. LEXIS 265">*268 the property would be advised that the prospective purchaser was one of Anaconda's salesmen and the price he was to receive, if the offer was accepted, would be quoted to him. He would also be advised that on that price no commission would be charged. The salesman would then make two payments, one of the quoted price to the seller and the other to Anaconda in the amount which would have been Anaconda's share of the commission if the sale had been made by the salesman to an outside party and the net price to the seller had been in the amount the seller had in fact received. There would be no payment by the salesman of the amount he would have received as his commission on the sale if purchaser had been other than himself.

Petitioner had noticed the sign of M. A. Hortt, a registered real estate broker in Fort Lauderdale, on a parcel of land at Willingham Beach. Willingham Beach is in or near Pompano Beach, which is in Broward County but outside Fort Lauderdale. The property consisted of lots 8 through 14, of block 1, in Willingham Beach, and was owned in fee by Earl M. and Ruth L. Hicks.

At or about July 1, 1952, petitioner called Hortt's office and made inquiries with respect 1959 U.S. Tax Ct. LEXIS 265">*269 to the said property. His thought was that he might procure a listing of the property and find a customer therefor. Hortt was on vacation, and his discussion was with Hortt's secretary. Petitioner gave his name, the name of his employer, and explained the purpose of his call. He learned that the property was listed exclusively with Hortt and that the listed price was $ 60,000. He was advised that in the event the property was sold through another real estate broker the commission would be divided on a 50-50 basis. At that time the established commission for selling vacant property in the area was 10 per cent of the selling price.

For some time, petitioner had been looking for a piece of ocean front property in Fort Lauderdale, with the intention of acquiring it for his own account. It was his purpose to improve the property, if and when acquired. He had not been able, however, to find the "right" or "suitable" property, and gradually became interested in the purchase of the Hicks property, even though it was not in Fort Lauderdale. He checked the property with an abstract company and found that it included an abandoned street 40 feet in width, in respect of which he could 1959 U.S. Tax Ct. LEXIS 265">*270 get only a quitclaim deed.

Taking into account the going price for the land and the fact that as to the portion represented by the abandoned street the title was questionable, petitioner was unwilling to pay the asking price of $ 60,000. Taking into account the further fact, however, that 31 T.C. 722">*725 the volume of his sales had reached the point that his part of Anaconda's commissions on sales of property made by him was 70 per cent, and on a gross price of $ 52,500 the actual cost of the property to him would be $ 50,662.50, he decided to make an offer of $ 52,500 for the property. He conferred with Anaconda's sales manager, H. Ronald Horne, as to procedure, and was advised to make a written offer of his proposal and to submit therewith a check in the amount of 10 per cent of the offered price. An offer to purchase was accordingly prepared on a form used by Anaconda, in which it was recited that petitioner offered $ 52,500 for the described property, which offer was signed by petitioner as "purchaser." He also executed a check, payable to Anaconda, in the amount of $ 5,250, as earnest money, for submission with the offer. The balance of $ 47,250 was to be paid in cash at the date1959 U.S. Tax Ct. LEXIS 265">*271 of closing. The offer and the check were dated July 15, 1952.

Horne, at the request of petitioner, went to Hortt's office and discussed the offer with Hortt's secretary. He stated that he had a customer who wanted to purchase the property at a cash price of $ 52,500, and asked if that offer would be acceptable. She was of the view that the amount offered was not enough, but, in Horne's presence, telephoned Hortt, who was in North Carolina, informing him of the offer. Hortt advised her that the decision was for Hicks and that she should call Hicks, who was then at the Mayo Clinic in Rochester, Minnesota. Hicks was called, and accepted the offer. His acceptance was confirmed by telegram received the next day. No previous offer had been made for the property, and if Hicks had not been obligated to pay or if he had been released from the requirement to pay or bear the 10 per cent brokerage commission on the sale, he would have sold the property to anyone for the sum of $ 47,250, the net amount, exclusive of certain taxes and incidental costs, he did receive.

Learning that petitioner's earnest money check for $ 5,250 was made payable to Anaconda, Hortt's secretary insisted that 1959 U.S. Tax Ct. LEXIS 265">*272 the check should be made payable to Hortt, and later, on the same day, petitioner executed a check for $ 5,250 in favor of Hortt, which check was delivered to Hortt's secretary. It was not until the contract offer and check had been delivered to her that she knew that petitioner was the customer Horne had referred to.

The sale was closed on or about July 28, 1952, when petitioner delivered a check for $ 47,250, the balance of the stated purchase price. He received a warranty deed for the lots and a quitclaim deed for the portion represented by the abandoned street. Upon consummation of the sale, and in settling with Hicks, 10 per cent of the contract price of $ 52,500, or $ 5,250, was retained by Hortt as commission on the 31 T.C. 722">*726 sale, and pursuant to the agreement between Hortt and Anaconda, Hortt paid to Anaconda one-half of that amount. Hortt's check for $ 2,625 was delivered to Anaconda on July 28, 1952.

On July 29, 1952, Anaconda paid petitioner $ 1,837.50, which amount represented 70 per cent of the $ 2,625 it had received from Hortt. On Anaconda's record of the sale of the property, $ 1,837.50 was shown as petitioner's commission. The Withholding Statement (Form W-2) 1959 U.S. Tax Ct. LEXIS 265">*273 as prepared and filed by Anaconda on behalf of petitioner and showing commissions paid to him did not include the said $ 1,837.50.

Petitioners did not include the $ 1,837.50 in the commissions they reported on their income tax return for 1952.

Petitioners filed their joint declaration of estimated tax for 1952 with the director of internal revenue for Florida, declaring an estimated income tax for 1952 of $ 7,500. Their income tax for the year 1951 was $ 10,108.60. For the taxable year 1952, they reported their tax liability as $ 23,722.06, and respondent determined their tax liability to be $ 25,005.83.

OPINION.

The main question to be decided is whether the amount petitioner received from Anaconda upon the purchase of the property in question is taxable income, as determined by respondent, or is a reduction in the purchase price of the property, as contended by petitioner.

We do not think the facts support respondent's position.

The evidence shows Hicks, the owner, received for his property the net amount of $ 47,250, which amount he would have accepted had he not been obligated to pay or if he had been released from the requirement to pay or bear a 10 per cent brokerage commission1959 U.S. Tax Ct. LEXIS 265">*274 on the sale. He was obligated to pay a commission to Hortt, his real estate broker, and was not interested as to whom, if anyone, Hortt would pay part of his commission. As far as Hicks was concerned he was glad to accept what he was offered and was paid for the property.

The evidence further shows, in our opinion, that the cost of the property to petitioner was not $ 52,500 as respondent claims, but was a lesser amount.

After petitioner became interested in purchasing the property on his own account he considered three things in deciding what he would pay for the property, the going price of the property, the questionable title to that part of the property represented by the abandoned street, and the amount that under normal conditions he would receive as a commission if he sold the property to an outside party. He realized that because the property was listed with Hortt the latter would receive his commission and that under the customary practice and the 31 T.C. 722">*727 understanding between Hortt and Anaconda, Anaconda would receive 50 per cent of Hortt's commission. He knew at the time he made the offer he would receive back a definite amount to which he would ordinarily have been1959 U.S. Tax Ct. LEXIS 265">*275 entitled. In other words, his offer to buy was based on the proposition that the actual cost of the property to him would be $ 52,500, the amount of the formal offer, less $ 1,837.50, or $ 50,662.50.

Had petitioner not been a real estate salesman and had he offered to buy the property at a cost of $ 47,250 to the seller plus a commission of 5 per cent, instead of 10 per cent, for Hortt, and the offer had been accepted, would it be said that he had realized a taxable gain in not paying the full 10 per cent commission? We think not. He is in no different position than he would have been had he made an offer to his employer to buy the property by paying $ 47,250 to the owner, $ 2,625 to Hortt, and $ 787.50 to Anaconda. It is true that petitioner first called Hortt with the idea of selling the property to some third party and had he done so, Anaconda and he would have earned and realized a commission on the basis of their arrangement with Hortt. He thereafter became interested in the property as an investment of his own. He was not as the transaction resulted a salesman but a purchaser of the property at a cost to him of $ 50,662.50, and we think the respondent erred in determining1959 U.S. Tax Ct. LEXIS 265">*276 that petitioner realized a commission on his purchase. We so hold. Cf. Benjamin v. Hoey, 139 F.2d 945.

Petitioners paid an income tax for the year 1951 in the amount of $ 10,108.60 and the income they reported on their joint return for 1952 showed a tax liability of $ 23,722.06, yet on their declaration of estimated tax for 1952, they disclosed an estimated tax of only $ 7,500. It is obvious that that amount is less than 80 per cent of their tax liability and also substantially less than the tax they paid for 1951. Consequently, they are liable for an addition to tax under section 294 (d) (2) of the 1939 Code for substantial underestimation of their 1952 estimated tax. The statute makes it mandatory for such addition to be paid. See A. E. Hickman, 29 T.C. 864; DeWitt M. Sherwood, 20 T.C. 733; and H. R. Smith, 20 T.C. 663.

Decision will be entered under Rule 50.

Pierce, J., dissenting: The $ 1,837.50 which petitioner received from Anaconda was an employee's commission paid to him for personal services rendered by him to such employer. 1959 U.S. Tax Ct. LEXIS 265">*277 It was computed at a 70 per cent rate, by taking into consideration the volume of business transacted by petitioner under his employee arrangement with said 31 T.C. 722">*728 employer; and it was at the same rate as that which would have been paid to him in the case of any other sales brought about by him. This compensation for services rendered, definitely constituted gross income under section 22 (a) of the 1939 Code.

Moreover, there is no evidence that the compensation paid to petitioner by his employer in any way entered into the price negotiations between petitioner and Hicks, the owner of the real estate. What actually happened was this. Petitioner made a written offer of $ 52,500 for a parcel of real estate owned by Hicks, which Hicks had listed for sale with one Hortt, as the exclusive real estate agent therefor. This $ 52,500 offer was communicated to Hicks by Hortt's representative; and Hicks accepted the offer. Petitioner did not divulge that he was the purchaser, until after Hicks had already agreed to sell the property for $ 52,500. The sale was then consummated at said contract price. Petitioner paid the $ 52,500 with two checks totaling that amount. The deed was1959 U.S. Tax Ct. LEXIS 265">*278 executed; and stamps for $ 52.50 (reflecting the $ 52,500 price) were affixed thereto. Hicks paid a prearranged 10 per cent commission to Hortt, totaling $ 5,250 (which again reflected the sale price of $ 52,500). The result was that Hicks became entitled to compute his gain from the transaction on the basis of the gross selling price of $ 52,500, less deductions for the $ 5,250 commission and for the expenses of the sale. Consistently the cost basis of the property to petitioner likewise was $ 52,500. There was no agreement between Hicks and petitioner that the price would be reduced by any rebate or discount.

Following said real estate transaction, Hortt received the abovementioned commission of $ 5,250; and he split the same on a 50-50 basis with Anaconda, the other broker involved. Thus each broker received gross income, in the form of sales commissions, of $ 2,625. Anaconda then paid petitioner, as its employee, $ 1,837.50, based on the volume of business which petitioner had done for Anaconda. Anaconda deducted this payment as compensation paid to its salesman; and petitioner, the salesman, received said amount as an employee's compensation.

I would have held that said1959 U.S. Tax Ct. LEXIS 265">*279 $ 1,837.50 constituted ordinary gross income to petitioner as an employee of Anaconda, under section 22 (a) of the 1939 Code. It in no way constituted a rebate or discount of the sales price agreed upon and paid by petitioner, in his transaction with Hicks.