Before CLARK, Chief Judge, and SWAN and MEDINA, Circuit Judes.
Petitioner asks review of a decision of the Tax Court of the United States, reported at 19 T.C. 1040, holding it taxable on all income earned in 1942 and 1943 from the operation of its busses pursuant to certain franchises acquired by it in 1941 from Frontier Coach Lines, Inc. It contests the interpretation given by the Commissioner and the Tax Court to the agreement of purchase and sale between it and Frontier. That agreement conveyed the franchises to petitioner outright, but provided that part of the consideration therefor should consist of earnings from the franchises in the five years following the agreement. An elaborate formula provided for the allocation of earnings for these five years, during which petitioner was bound to continue operations unless Frontier consented to abandonment, change, or alteration of routes. The earnings allocated to Frontier were to be put in escrow by petitioner, and it is the taxability of these earnings to petitioner that is here under consideration.
Whether an agreement of purchase and sale has conveyed all of the property interests involved so as to make the purchaser fully taxable on all of the resultant earnings or whether the contract has reserved an interest in the seller on which the seller is taxable is a question of the intent of the parties in making the agreement. This intent may be inferred from the wording of the agreement and from the surrounding circumstances. Thomas v. Perkins, 301 U.S. 655, 57 S. Ct. 911, 81 L. Ed. 1324; Anderson v. Helvering, 310 U.S. 404, 60 S. Ct. 952, 84 L. Ed. 1277. We agree with the conclusion of the Tax Court that the facts here point to the outright sale of a capital asset without reservation of interest. The purchase agreement specified, inter alia:
"1. The Buyer agrees to buy from the Seller and the Seller agrees to sell to the Buyer the operating rights of the Seller upon routes * * * more specifically described hereinabove * * *.
"2. Seller will irrevocably transfer title to the operating rights to the Buyer on the Transfer Date * * *.
"3. The Buyer, in consideration of the transfer of the operating rights, agrees to make payments to the Seller as follows:
"(a) The Buyer agrees to pay to the Seller on the Transfer Date Three Thousand Five Hundred Dollars ($3,500) in cash.
"(b) The Buyer agrees to make payments to the Seller on the basis of the gross annual revenue from and mileage of operations by the Buyer during a period commencing on the Transfer Date and terminating five years thereafter * * *.
"7. It is understood and agreed by and between the Seller and the Buyer that, from and after the Transfer Date, the operating rights of the Seller as described in paragraph 1 of this Agreement shall be unified with the operating rights of the Buyer, and that the Buyer shall have complete jurisdiction and control over operations under these rights and shall assume complete responsibility for same."
These provisions indicate that no control was reserved in the Seller.
This reading is re-enforced by the history of the agreement. It appears that the parties for a long time disagreed as to the proper valuation to be placed on the franchises, which had not been profitable in the hands of Frontier. To solve this problem, the parties first resorted to a lease arrangement with option to buy to enable the making of a more accurate appraisal of value. Only when this expedient was disapproved by the Interstate Commerce Commission was recourse had to the Purchase Agreement now before us. It is logical to say, therefore, that the device of contingent payments was used as a way of arriving at a fair purchase price. And if the escrow payments represented purchase money they could not at the same time represent a reservation of interest in the seller. We therefore agree with the conclusion reached by Judge Raum in his carefully reasoned opinion below.
This interpretation is in accord with the reading given to a similar agreement by the Tenth Circuit in United States v. Jones, 10 Cir., 194 F.2d 783. Other cases - both those relied on by the petitioner, such as Anderson v. Helvering, supra, 310 U.S. 404, 60 S. Ct. 952; Thomas v. Perkins, supra, 301 U.S. 655, 57 S. Ct. 911; Peck v. C.I.R., 2 Cir., 77 F.2d 857, certiorari denied Peck v. Helvering, 296 U.S. 625, 56 S. Ct. 148, 80 L. Ed. 444; Central Life Assur. Soc. Mut. v. C.I.R., 8 Cir., 51 F.2d 939; Bettendorf v. C.I.R., 8 Cir., 49 F.2d 173; Shellabarger v. C.I.R., 7 Cir., 38 F.2d 566, and those cited by the Commissioner, which include Burnet v. Logan, 283 U.S. 404, 51 S. Ct. 550, 75 L. Ed. 1143; Northern Trust Co. of Chicago v. United States, 7 Cir., 193 F.2d 127, certiorari denied 343 U.S. 956, 72 S. Ct. 1051, 96 L. Ed. 1356; and De Guire v. Higgins, 2 Cir., 159 F.2d 921, certiorari denied 331 U.S. 858, 67 S. Ct. 1752, 91 L. Ed. 1865 - are sufficiently different in their facts as not to be controlling with respect to the narrow factual issue upon which this decision must turn.There is nothing in the law to which they advert inconsistent with our result here. Hamme v. C.I.R., 4 Cir., 209 F.2d 29, certiorari denied 347 U.S. 954, 74 S. Ct. 679, 98 L. Ed. 1099, does appear to suggest rather broadly that any participation in net profits constitutes a reservation of an "economic interest" for tax purposes; but the actual decision was as to the taxability of receipts from a permanent mineral royalty right reserved by a vendor.
Since the escrow payments were thus part of the purchase price for the franchises, they constituted funds expended for the acquisition of a capital asset and were not a deductible business expense. See I.R.C. § 24(a) 2. Furthermore the Commissioner was correct in assessing the taxes on the income in the year in which it was earned by the taxpayer. The fact that the proper allocation of escrow payments between petitioner and ...