Opinion
Docket No. 1766-68.
1970-02-24
RALPH DESSAUER AND REBECCA DESSAUER, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Thomas H. Krise, for the petitioners. James J. McGrath, for the respondent.
Thomas H. Krise, for the petitioners. James J. McGrath, for the respondent.
Subchapter S corporations of which taxpayer was a majority stockholder made a ‘disposition’ of installment obligations to an unrelated finance company. Deficiencies were determined for 1964 and 1965 and additional deficiencies were proposed in an amendment to answer. Held, basis was properly determined by the Commissioner under sec. 453(d)(2), I.R.C. 1954, and gain or loss on the disposition is to be calculated from the difference between amount of cash received from finance company and basis. Sec. 453(d), I.R.C. 1954.
TIETJENS, Judge:
The Commissioner determined deficiencies in petitioners' Federal income tax for taxable years 1964 and 1965 in the amounts $101,224.14 and $7,429.53, respectively. In addition, by an amendment to answer, the Commissioner proposes additional deficiencies in the amounts of $40,419.50 and $4,429.46 for 1964 and 1965, respectively. By virtue of concessions by the parties, the only issue for decision is the amount of gain or loss occasioned by the disposition of certain conditional sales contracts under section 453(d), I.R.C. 1954.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioners Ralph and Rebecca Dessauer, husband and wife, resided in Springfield, Mo., at the time the petitioner herein was filed. They filed their joint Federal income tax returns for taxable years 1964 and 1965 with the district director of internal revenue at Indianapolis, Ind.
During the years in issue, petitioner Ralph owned 70 percent of the outstanding stock of Huddleston Bros. Sales, Inc. (Huddleston), and 100 percent of the outstanding stock of Washington Trailer Sales, Inc. (Washington). Both Huddleston and Washington were valid subchapter S corporations for the years in issue. Both corporations reported income on a fiscal year basis with the years ending September 30 and January 31 for Huddleston and Washington, respectively. Both corporations were engaged the retail sales of mobile homes and sold the mobile homes on conditional sales contracts, reporting the income therefrom on the installment basis. After receiving a downpayment in the year of sale, the corporations borrowed money from an unrelated finance company by executing notes in a face amount equal to the outstanding time balance of the installment contract. The installment contracts were transferred to the finance company by a pledge agreement. In addition the corporations made certain guarantees and agreed to collateral loan reserves. The foregoing constituted a disposition of the installment contracts. (On page 11 of their brief it is stated ‘Petitioner does not rely on the prior claim in the Petition that no disposition had been made.’)
For the years in question, the following schedule contains pertinent data relative to the disposition of the installment obligations for both Huddleston and Washington:
+--------------------------------------------------------------------------+ ¦¦ ¦Principal balance ¦Cost ¦ ¦ ++---------------+-----------------------+-----------------------+---------¦ ¦¦Total sales 1 ¦ ¦ ¦amount of¦ ++---------------+-----------------------+-----------------------+---------¦ ¦¦ ¦For ¦At ¦For ¦At ¦loan 2 ¦ ++---------------+-----------+-----------+-----------+-----------+---------¦ ¦¦ ¦fiscal year¦disposition¦fiscal year¦disposition¦ ¦ ++---------------+-----------+-----------+-----------+-----------+---------¦ ¦¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------------------------------------------------+
Huddleston Fiscal year ending 9/30/64 $1,020,863.74 $671,558.00 $613,495.91 $582,208.21 $531,871.20 $679,126.76 Fiscal year ending 9/30/65 1,815,249.63 1,192,905.31 1,067,071.43 1,027,254.04 918,893.92 1,198,530.25
Washington Fiscal year ending 1/31/64 1,917,546.66 1,271,463.88 1,164,099.32 1,085,838.64 994,140.82 1,301,084.26 FN2 The amount advanced by the finance company generally was equal to the unpaid cash balance on the installment contract, insurance paid by the corporations on behalf of the customer and finance income to the corporations—being the difference between time charges to the customer and finance charges to the corporations.
In their tax returns for the years in question the corporations did not view the transactions with the finance company as amounting to a ‘disposition’ of the obligations and hence did not reflect any amount as a gain or loss. The Commissioner determined that the transactions with the finance company were a ‘disposition and increased the corporations' income accordingly based on deferred income figures as calculated by the corporations.
Subsequent to the issuance of the statutory notice, the Commissioner proposed additional deficiencies based on information gathered from a detailed examination of certain workpapers as to finance income realized upon the disposition of the obligations. These proposed additional deficiencies also considered the finance income as deferred income.
OPINION
The only issue for our consideration is the amount of gain or loss, if any, to be reported by petitioners by virtue of the transactions with the finance company. This issue will be resolved by the provisions of section 453(d) I.R.C. 1954,
whose pertinent parts read as follows:
Decision will be entered under Rule 50. All statutory references are to the Internal Revenue Code of 1954 unless otherwise specified.
Sales includes finance charges. Income Tax Regs., sec. 1.453-2(c)(2).FN2 Total contract price is the same as total sales. Income Tax. Regs., sec. 1.453-2(c)(2). -------- Notes:
Total sales or total time sales price is the cash sales price plus finance charges.
SEC. 453(d). GAIN OR LOSS ON DISPOSITION OF INSTALLMENT 0BLIGATIONS.
(1) GENERAL RULE.— If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and
(A) the amount realized, in the case of satisfaction at other than face value or a sale or exchange, or
(B) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange.
Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received.
(2) BASIS OF OBLIGATION.— The basis of an installment obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.
Initially, the basis of the obligation must be established. Petitioner contends that the basis figures are those computed by the corporations,[F N2] since they were used by the Commission in his statutory notice and the amendment to answer and therefore the Commissioner may not now revise these figures. The Commissioner does not agree and urges us to accept figures based on computations made under section 453(d)(2) from stipulated figures.
We accept the Commissioner's calculations under section 453(d)(2). From the outset, petitioner has known that the Commissioner was proceeding under section 453(d). Further, the stipulation of facts entered herein expressly excludes an agreement as to the computation of basis for purposes of section 453(d). It also appears that the reason for the delay in making a determination under section 453(d) stems from the inadequacy of the corporations' tax returns and the records of the finance company in the first instance and not from a lack of diligence on the Commissioner's part.
The Commissioner on brief determined the basis of the obligations to be $542,365.68 and $942,278.69 for Huddleston in 1964 and 1965, and $1,024,949.25 were correct.[F N3]
Having determined the correct basis for the obligations, we next proceed to the question of gain or loss. Petitioner has conceded that a ‘disposition’ of the obligations occurred. However, the parties assumed that by virtue of such a concession the gain or loss computation was governed by paragraph (1)(B) because it, too, talks of a ‘disposition’ and petitioners argued on brief and presented testimony at trial on the ‘fair market value’ of these obligations.
The label ‘disposition’ is not something in and of itself which automatically calls paragraph (1)(B) into operation. The term ‘disposition’ as used in 453(d)(1) is part of very broad language, i.e., ‘distributed, transmitted, sold or otherwise disposed of,‘ the purpose of which is to terminate the availability of the installment method of reporting income when the attendant circumstances indicate that the vendor under the installment obligation has received all the proceeds that he would have received if there had been a sale for cash. At such a time the privilege of using the installment method ceases and the income is to be reported in full.
Once it is determined that use of the installment method is no longer permissible, the gain or loss resulting from the ‘disposition’ of the obligations is to be calculated under either 453(d)(1)(A) or (B). Here the parties apparently proceeded under (1)(B) because of the term ‘disposition’ appearing therein. This we think was not necessary under the facts of this case.
In our Findings of Facts we found the corporations and the finance companies to be unrelated and we have no other evidence before us to indicate that the transactions were other than at arm's length. This being so, we think, as did the Fifth Circuit in Hegra Note Corporation v. Commissioner, 387 F.2d 515 (C.A. 5, 1967), affirming a Memorandum Opinion of this Court, that it is not important to pigeonhole the transactions as either within 453(d) (1)(A) or (1) (B) for the result should be the same under either. The essential point is that the corporations voluntarily exchanged the installment obligations for cash, therefore under (1)(A), the amount realized is the amount of cash received under (1)(B), the fair market value of the obligations is also the amount of cash received, for as we have found, the parties were dealing at arm's length, and ‘Absent a readily ascertainable value * * * the values ‘of * * * two properties exchanged in an arms-length transaction are either equal in fact, or are presumed to be equal.‘‘ United States v. Davis, 370 U.S. 65, 72 (1962).
We therefore hold that the gain or loss on the transfer of the installment obligations is to be calculated from the difference between amount of cash received and the basis figures determined by the Commissioner.
+------------------------------+ ¦2 These would be as follows: ¦¦ +------------------------------+
Huddleston FYE Basis 9/30/64 $531,871.20 9/30/65 918,893.92
Washington FYE 1/31/64 994,140.82
+-----------------------------------------------------------------------------+ ¦3 The Commissioner proceeded at follows (sec. 1.453-9(b)(3), ex. 1, Income ¦ ¦Tax Regs.): ¦ +-----------------------------------------------------------------------------+
Huddleston FYE 9/30/64 Selling price of property 1 $1,020,863.74 Cost 582,208.21 Total profit 438,655.53 Total contract price 2 1,020,863.74
Proportion of each payment returnable as $438,655.53 income -------------=42.9%. $1,020,863.74 Face value of notes $949,852.32 Amount of income returnable were the notes satisfied in full $949,852.32 X 42.9% 407,486.64 Basis of obligations 542,365.68 [As to the other basis figures, the Commissioner made similar computations.]