Whitney, Exec. v. Halibut

Brune, C. J., delivered the opinion of the Court. Richard H. Whitney, executor and sole legatee under the will of Richard H. Sears, deceased, brought this suit against Hali ⁵²² but, Inc. and its transferee, H.I.S. Corporation, primarily for specific performance of a provision in a contract of sale of real estate between Sears as vendor and Halibut as vendee by which, the vendee agreed to pay the vendor’s federal income tax resulting from his capital gain on the sale. The controversy on this appeal grows.out of that provision, the full text of which is set forth.later. (Halibut and its transferee either are closely affiliated or have been merged, and will be treated as one in this opinion.) The Circuit Court for St. Mary’s County entered a monetary decree in favor of the plaintiff, Whitney, for $2,095.12 and denied all other and further relief.

Whitney appeals, claiming that much more is due him. The contract was executed on November 20, 1958. Under it Sears agreed to sell and Halibut to purchase two tracts of land in St. Mary’s County, known as “Society Hill,” for a stated price of $250,000. Of this amount $50,000 (including a deposit of $5,000) was to be paid upon execution and delivery of a deed, and the balance of $200,000, to be secured by a purchase money mortgage from Halibut to Sears, was to be paid in ten annual instalments of $20,000 each, with interest at 4%, with provisions for prepayment through the application of 50% of the proceeds of sale of lots, and against such payments partial releases of the mortgage were to be given.

The contract further provided that the vendee “grants to the Vendor life occupancy of the house now being occupied by Richard H. Sears together with five (5) acres * * * in addition to the above considerations.” A deed and mortgage embodying the above provisions were duly executed and delivered and the $50,000 payment was made on February 5, 1959. Under the terms of the mortgage the first annual instalment of $20,000 was to be paid on February 5, 1960. For a consideration this payment was subsequently postponed by agreement between the parties. In addition to the above provisions the contract of sale contained others which were not embodied in the deed or mortgage.

Among them were an agreement by the vendee to. develop the tract by sections and not to reduce prices of lots once established by more than 25% without the consent of the “mortgagor” (evidently meaning the vendor-mortgagee), the capital ⁵²³ gains tax provision in controversy, and in paragraph 10 a successor clause and ,an integration clause. The capital gains tax provision was one of several typed into paragraph 2 following a printed introductory clause stating that “the premises * * * are to be conveyed subject to the following encumbrances and restrictions:” (a somewhat curious introduction to what followed). Five typed paragraphs were added. The first required that the soil pass a percolation test, the second contained the sale and partial release of mortgage clause above mentioned, the third contained the development by sections provision and the restriction on price reductions, also mentioned above, and the fourth provided for Sears’ life occupancy of the house and five surrounding acres.

The fifth of these paragraphs, which is at the heart of the controversy, reads as follows: “The Vendees hereby agree to pay to the Vendor [’] s account the Federal Income Tax that the Vendor shall be required to pay resulting from the capital gains on the above sale; this tax to be paid by the Vendee when the Vendor’s tax is due and payable to the U.S. Government. It is understood and agreed that the Vendee shall not be responsible for any penalty or interest on any payment due unless the penalty or interest is a result of an act of negligence on the part of the Vendee.” Paragraph 10 of the contract of sale is printed and reads as follows: “That the stipulations aforesaid are to apply to and bind the heirs, executors, administrators, successors and assigns of the respective parties hereto; and that said stipulations contain the final and entire agreement between said parties, neither of which shall be bound by any terms, conditions, warranties or representatives [sic], oral or written, not herein set forth.” Sears received payment of $50,000 on account of the sale price of the property in February, 1959. He filed no federal income tax return in or for that year and died in August, 1960, ⁵²⁴ without having done so. Indeed, it is probable that he never filed any federal income tax return at any time.

The trial judge commented in his opinion drily, and we think aptly, that “the proof shows that Mr. Sears was not only tax conscious but also allergic to paying income taxes.” The appellant, as Sears’ executor, did file an income tax return for his decedent for the year 1959. In computing it he used such data as he could find with regard to the cost of the Society Hill property to Sears. On these data Sears’ cost appeared to be $45,809.00, and his capital gain based on a selling price of $250,000, amounted to $204,191.00. He claims that this is the basis upon which Halibut’s obligation is to be computed.

In filing the 1959 return he elected to report the sale as an instalment sale. Though he took the position in the trial court that Halibut was liable for the tax computed on a lump sum basis, which would amount according to his calculation to $68,063.07, he has abandoned this claim in this Court and now appears to assert that computing the tax on the basis of an instalment sale, the appellee’s liability over the life of the contract will aggregate $23,383.87. This figure is said to be the amount which Sears would have had to pay (apart from interest and penalties) if he had lived. The appellee sets up several contentions which we outline as follows: (1) that under the contract it is obligated to pay only the capital gains tax for which Sears himself became liable and that it has no obligation to pay any such taxes for which his estate or his legatee may become liable in respect of payments made after Sears’ death; (2) that any liability which it may have to Sears’ executor on account of the 1959 payment made to Sears during his life is to be computed on his maximum capital gain being $100,000, because Sears represented that it would not exceed that amount; (3) that even if it has a liability to Sears’ executor or to his legatee in respect of subsequent payments, it is likewise to be computed on a gain of $100,000, not of $204,191; and (4) that if it has any liability to Sears’ executor or to. his legatee in respect of subsequent payments, the amount thereof is to be reduced by the share of the federal estate tax on Sears’ estate allocable to the value of the income portion of the contract of sale.

Both the amount of Halibut’s liability and the estate tax deduction are ⁵²⁵ less if the gain is taken as $100,000 than if it is taken as $204,191. We are indebted to counsel on both sides for a condensation of the record, and computations submitted by experts for each side help to bring the tax problems into clearer focus. Each of the computations, except for the year 1959, appears to involve one or more assumptions, the correctness of which we are not prepared to accept; but they are helpful, if not conclusive. Both sides appear to agree that any amount or amounts which the vendee may be obligated to pay in respect of the vendor’s Federal capital gains tax constitute additional capital gains income to the decedent or his estate or his legatee, as the case may be, in the year or years of payment by the vendee.

(See Old Colony Trust Co. v. Commissioner of Internal Revenue, 279 U. S. 716; United States v. Boston & Maine Railroad, 279 U. S. 732; Brown, Shifting the Burden of Income Taxes by Contract, 96 U. Pa. L. Rev. 822; and cases collected in 2 Mertens, Federal Income Taxation, § 1128, n. 79; also 140 A.L.R. 517 ; C. B. Shaffer, 29 B.T.A. 1315.) The trial court admitted parol evidence with regard to negotiations and conversations with Sears before and to some extent after the execution of the contract. Much of it came from persons who were officers, directors or stockholders of Halibut at the time when the contract was executed, and some of it pertained to negotiations before Halibut was incorporated. There was also testimony from other witnesses having no such interest.

Much of this testimony was directed to showing that Sears represented that his capital gain on the sale at a price of $250,000 would not exceed $100,000, which means, of course, that his cost of the property was not less than $150,000. From this evidence the trial judge concluded “that the assurance of Mr. Sears, the vendor, that the sale would be subject to the capital gains tax on $100,000 formed part of the consideration for the sale and that the defendants, relying upon his representations, should not be held liable for a tax on a greater amount.” It also showed that Sears had agreed to report his gain on the basis of an instalment sale, which would have the effect of spreading his capital gains tax over a period of years. The judge also pointed out that Sears and his wife had ac ⁵²⁶ quired the major portion of the property (795 acres) in 1925, that during “the long period that Mr. Sears owned the property, the amount expended in capital improvements and the proof of expenditures was within- his personal knowledge,” and further that “[h]ad he cooperated with the defendants in preparing his tax return during his lifetime” — Halibut having sought more than once to get him to furnish data to an accountant so that the return could be prepared and filed — “and had he not displayed an utter indifference for the Internal Revenue Laws of the U. S. by failing to file any return, he may have been able to substantiate his claim that $100,000 was the capital gains on the sale.” The trial court, in construing the clause of the contract here in controversy was “of the opinion that when the vendor died, income taxes ceased after his death and that the only capital gains tax due was on the $50,000 paid on the purchase price during the lifetime of the vendor.” The figure of $2,095.12 was arrived at on the basis of the vendee’s obligation being limited to a total capital gain to the vendor of $100,000. The appellant objected to the admission of the testimony above referred to on two grounds, both of which he presses here.

The first ground is limited to the testimony of the officers, directors and stockholders of Halibut and is founded upon Code (1957), Art. 35, § 3, commonly known as the Dead Man’s Statute. These witnesses were not parties to the suit, and under the statute the fact that they are officers, directors or stockholders of a corporation which is a party does not bar them from testifying in a suit between the corporation and the decedent’s executor and legatee as to transactions with the plaintiff’s decedent; Guernsey v. Loyola Federal Savings and Loan Assn., 226 Md. 77 , 172 A. 2d 506 ; Downes v. Md. & Del. R. R. Co., 37 Md. 100 . See also Flach v. Gottschalk Co., 88 Md. 368, 377-78, 41 A. 908 .

Cf. South Baltimore Co. v. Muhlbach, 69 Md. 395, 401-02 , 16 A. 117 . The second ground of objection to testimony relating to Sears’ representation that his capital gain on the sale would not exceed $100,000 is the parol evidence rule, reinforced here by the integration clause of the contract and the Statute of Frauds. The rule that parol evidence is inadmissible to vary or contra- ⁵²⁷ diet the terms of a written instrument is stated in many decisions of this Court, among them Markoff v. Kreiner, 180 Md. 150, at 154 , 23 A. 2d 19 , and Coster v. Arrow Bldg. & Loan Assn., 184 Md. 342, at 349 , 41 A. 2d 83 .

These cases also state the rule ( 180 Md. at 157 and 184 Md. at 349 ) that a contract within the Statute of Frauds cannot he partly in writing and partly in parol. To state the parol evidence rule in its usual form is not, however, to apply it, and its practical application presents many problems. Rinaudo v. Bloom, 209 Md. 1, 9 , 120 A. 2d 184 . The parol evidence rule is involved in countless cases and has been the subject of extensive comment and a good deal of criticism by legal writers.

It would be idle to attempt an extensive review of the literature. Professor Corbin has made an excellent analysis and exposition of the subject in his chapter on it in Volume 3 (revised, 1960) of his work on Contracts, §§ 573-596. In § 573, p. 357, he states the substance of the rule in this way: “When two parties have made a contract and have expressed it in a writing to which they have both assented as the complete and accurate integration of that contract, evidence, whether parol or otherwise, of antecedent understandings and negotiations will not be admitted for the purpose of varying or contradicting the writing.” He then characterizes it as “a rule that scarcely deserves to be called a rule of evidence of any kind, and a rule that is as truly applicable to written evidence as to parol evidence.” Its name has distracted attention, he says, from the real issues that are involved which “may be any one or more of the following: (1) Have the parties made a contract? (2) Is that contract void or voidable because of illegality, fraud, mistake, or any other reason?

(3) Did the parties assent to a particular writing as the complete and accurate ‘integration’ of that contract?” He next states (p. 360): “In determining these issues, or any one of them, there is no ‘parol evidence rule’ to be applied. On these issues, no relevant evidence, whether parol or otherwise is excluded. No written document is sufficient, standing alone, to determine any one of them * * See also our comments and citations of authority on first receiving and considering parol evidence in order to determine the applicability of the parol evidence rule in Rinaudo v. Bloom, supra, ⁵²⁸ 209 Md. at 10 , and the general comments on developments in the law with regard to the parol evidence rule in the preface to Professor Corbin’s revised Volume 3. As the Rinaudo case holds in accord with views previously-expressed by Professor Corbin now embodied in § 578, op. cit. supra, pp. 405-407, an integration clause is not necessarily conclusive.

To like effect, see the more recent case of Fowler v. Benton, 229 Md. 571, 583 , 185 A. 2d 344 . The