Maidman Realty Corp. v. Commissioner, 54 T. C. 611 (1970)

The installment method under IRC Section 453 requires multiple payments, and Section 1239 does not apply to sales between commonly controlled corporations.

Summary

Maidman Realty Corp. sold property to Tenth Avenue Corp. , both owned by Irving Maidman, with payment deferred to 1971. The court ruled that Maidman could not use the installment method under IRC Section 453 for tax reporting due to the absence of multiple payments in the year of sale. Additionally, the court held that Section 1239, which converts capital gains to ordinary income in sales between related parties, did not apply to sales between two corporations controlled by the same individual, as the statute specifically targets sales between individuals and their controlled corporations, not intercorporate transactions.

Facts

Maidman Realty Corp. , a New York corporation, sold real property to Tenth Avenue Corp. on July 1, 1960, for $500,000. The payment was structured as a $400,000 mortgage assumption and a $100,000 purchase-money mortgage due on July 1, 1971. No payment was received in the year of sale. Both corporations were solely owned by Irving Maidman. Maidman Realty reported the sale as a long-term capital gain using the installment method on its tax return for the year ending June 30, 1960. The Commissioner of Internal Revenue challenged this, asserting the gain should be reported as ordinary income under Section 1239 due to the common ownership.

Procedural History

The Commissioner determined a deficiency in Maidman Realty’s federal income tax for the year ending June 30, 1961. Maidman Realty contested this determination before the Tax Court. The court considered two issues: the eligibility of Maidman Realty to use the installment method and the application of Section 1239 to the sale.

Issue(s)

1. Whether Maidman Realty Corp. can use the installment method under IRC Section 453 for the sale of real property when no payment was received in the year of sale and the contract calls for a single future payment?
2. Whether Section 1239(a) applies to convert the gain on the sale between two corporations controlled by the same individual into ordinary income?

Holding

1. No, because the installment method requires multiple payments, and the sale did not meet this criterion.
2. No, because Section 1239(a) does not apply to sales between commonly controlled corporations, as it targets sales between individuals and their controlled corporations.

Court’s Reasoning

The court interpreted IRC Section 453 to require multiple payments for the installment method, citing historical definitions of an “installment” and legislative intent to allow deferred recognition only for installment contracts. The court rejected Maidman Realty’s argument that the elimination of the “initial payments” requirement in the 1954 Code also eliminated the need for multiple payments. On the second issue, the court examined the legislative history of Section 1239 and determined it was designed to prevent individuals from selling depreciable assets to their controlled corporations to gain tax advantages. The court found no statutory or regulatory basis to extend Section 1239 to sales between two corporations controlled by the same individual, as the statute specifically refers to sales between an individual and a corporation they control, not between two corporations.

Practical Implications

This decision clarifies that the installment method requires multiple payments, impacting how taxpayers structure sales to defer tax liabilities. Practitioners must ensure that sales contracts provide for payments in the year of sale to qualify for installment reporting. The ruling also limits the application of Section 1239 to sales between individuals and their controlled corporations, not to intercorporate transactions, affecting how transactions between commonly controlled entities are taxed. This may influence corporate structuring and transaction planning to avoid unintended tax consequences. Subsequent cases have followed this interpretation, reinforcing the distinction between individual and intercorporate sales under Section 1239.