SCOTUS Reports

Tag: Section 453

  • Berman v. Commissioner, 163 T.C. No. 1 (2024): Interplay of Installment Method and Section 1042 Deferral in Tax Law

    Berman v. Commissioner, 163 T. C. No. 1 (U. S. Tax Court 2024)

    In Berman v. Commissioner, the U. S. Tax Court ruled that taxpayers who sold stock to an ESOP under an installment agreement and elected to defer gain under Section 1042 could still use the installment method under Section 453 to report gains. The court reconciled these provisions, allowing gain recognition to be deferred until payments were received, impacting how gains are reported and deferred in tax planning involving ESOPs and installment sales.

    Parties

    Edward L. Berman and Ellen L. Berman were petitioners in Docket No. 202-13, and Annie Berman was the petitioner in Docket No. 388-13. The respondent in both cases was the Commissioner of Internal Revenue.

    Facts

    In 2002, Edward and Annie Berman each sold shares of E. M. Lawrence, Ltd. to the E. M. Lawrence Employee Stock Ownership Plan (ESOP) for $4. 15 million, receiving promissory notes as payment. They reported making Section 1042 elections on their 2002 tax returns to defer recognition of the gains. In 2003, they purchased floating rate notes (FRNs) as qualified replacement property (QRP) within the replacement period but later engaged in Derivium 90% loan transactions, effectively selling the FRNs. The Commissioner issued notices of deficiency for 2003-2008, asserting that the entire deferred gain should be recognized in 2003 due to the sale of the QRP.

    Procedural History

    The Commissioner issued notices of deficiency to the Bermans for tax years 2003 through 2008, asserting unreported long-term capital gains due to the sale of QRP in 2003. The Bermans filed petitions with the U. S. Tax Court for redetermination. Cross-motions for partial summary judgment were filed, focusing on whether the Bermans could use the installment method under Section 453 to report the recapture of gains triggered by the disposition of their QRP in 2003.

    Issue(s)

    Whether taxpayers who elected to defer gain under Section 1042 for the sale of stock to an ESOP in an installment sale are precluded from using the installment method under Section 453 to report the recapture of those gains upon disposition of the qualified replacement property?

    Rule(s) of Law

    Section 453 of the Internal Revenue Code mandates that income from an installment sale be taken into account under the installment method unless the taxpayer elects otherwise. Section 1042 allows a taxpayer to defer recognition of gain on the sale of qualified securities to an ESOP if qualified replacement property is purchased within the replacement period. The court must reconcile these provisions, as Section 1042(e) states that gain shall be recognized upon disposition of QRP “notwithstanding any other provision of this title. “

    Holding

    The court held that the Bermans’ Section 1042 elections did not preclude them from using the installment method under Section 453 to report gains from the ESOP stock sales. The court determined that the gains “which would be recognized” under Section 1042(a) in the absence of the election were subject to the installment method, and thus, the timing and amount of gain recognition were to be determined under Section 453 when payments were received.

    Reasoning

    The court reconciled Sections 1042 and 453 by interpreting the phrase “which would be recognized” in Section 1042(a) to refer to the gain that would be recognized absent the Section 1042 election, which in an installment sale scenario would be governed by Section 453. The court noted that Congress was presumed to be aware of the operation of Section 453 when enacting Section 1042. The Bermans did not elect out of Section 453, and thus, the installment method applied to the timing of gain recognition. The court further held that the basis of the QRP should be adjusted under Section 1042(d) by the amount of gain deferred, and upon disposition of the QRP, the gain on the deemed sale was calculated accordingly. The court’s decision was based on statutory interpretation, the legislative history of Section 453, and the policy of allowing taxpayers to defer gain recognition until payments are received, consistent with the installment method.

    Disposition

    The court granted the Bermans’ motion for partial summary judgment and denied the Commissioner’s motion, ruling that the Bermans could report the recaptured gains under the installment method for the years in which they received payments.

    Significance/Impact

    The decision in Berman v. Commissioner clarifies the interplay between Sections 1042 and 453, providing guidance on how gains from installment sales to ESOPs can be deferred and reported. This ruling has significant implications for tax planning involving ESOPs, as it allows taxpayers to defer recognition of gains until payments are received under the installment method, even if they have made a Section 1042 election. The case underscores the importance of considering both statutory provisions in structuring such transactions and may influence future tax court decisions and IRS guidance on the application of these sections.

  • Professional Equities, Inc. v. Commissioner, 89 T.C. 165 (1987): Validity of Regulations Governing Wraparound Installment Sales

    Professional Equities, Inc. v. Commissioner, 89 T. C. 165 (1987)

    Temporary regulations governing wraparound installment sales were held invalid as inconsistent with the statutory language and purpose of the installment method under section 453 of the Internal Revenue Code.

    Summary

    Professional Equities, Inc. challenged the IRS’s application of temporary regulations to their wraparound installment sales, which required reducing the total contract price by the underlying mortgage. The Tax Court invalidated these regulations, ruling they were inconsistent with section 453 of the Internal Revenue Code. The court upheld the method established in Stonecrest Corp. v. Commissioner, where the full sales price is used in calculating the contract price for wraparound sales, ensuring that gain recognition aligns with the actual receipt of payments. This decision reinforces the statutory purpose of spreading gain recognition over the payment period and impacts how similar sales are taxed.

    Facts

    Professional Equities, Inc. purchased undeveloped land and resold it using wraparound mortgages. These mortgages included the unpaid balance of the seller’s existing mortgage, with the buyer paying the seller directly. The IRS challenged the company’s tax reporting, asserting that the temporary regulations required the contract price to be reduced by the underlying mortgage, thereby increasing the proportion of gain to be recognized in the year of sale. Professional Equities argued that these regulations conflicted with the established judicial interpretation in Stonecrest and the statutory language of section 453.

    Procedural History

    Professional Equities filed a timely petition in the United States Tax Court challenging the IRS’s determination of a deficiency in their fiscal 1981 income tax. The court reviewed the validity of the temporary regulations and their application to the company’s wraparound installment sales.

    Issue(s)

    1. Whether the temporary regulations promulgated in 1981, which required the total contract price in wraparound installment sales to be reduced by the underlying mortgage, are valid under section 453 of the Internal Revenue Code.

    Holding

    1. No, because the temporary regulations are inconsistent with the statutory language and purpose of section 453, which mandates a constant proportion of gain recognition based on payments received.

    Court’s Reasoning

    The court analyzed the statutory language of section 453, which requires gain to be recognized as a proportion of payments received, and found that the temporary regulations conflicted with this mandate by using two different proportions for gain recognition, thus accelerating gain into the year of sale. The court emphasized the purpose of the installment method, which is to spread gain recognition over the payment period, and found that the regulations failed to align with this purpose. The decision relied on the precedent set in Stonecrest Corp. v. Commissioner, where the court established that in wraparound sales, the full sales price should be used in calculating the contract price. The court also noted that Congress, through the Installment Sales Revision Act of 1980, had not altered the critical language of section 453 relevant to wraparound sales, and the temporary regulations were not supported by the changes made in the Act. The court concluded that the regulations were invalid due to their inconsistency with the statutory intent and the established judicial interpretation.

    Practical Implications

    This decision reinforces the method of taxing wraparound installment sales established in Stonecrest, requiring the full sales price to be used in calculating the contract price. It impacts how similar sales should be analyzed and reported for tax purposes, ensuring that gain recognition aligns with the actual receipt of payments. Legal practitioners must be aware of this ruling when advising clients on installment sales, as it invalidates the temporary regulations that sought to accelerate gain recognition. The decision also underscores the importance of judicial interpretations in shaping tax law, particularly when statutory language remains unchanged despite regulatory attempts to alter established practices. Subsequent cases involving wraparound sales have applied this ruling, further solidifying its impact on tax practice.

  • Hunt v. Commissioner, 88 T.C. 1135 (1987): Application of Installment Sale Rules to Wraparound Mortgages

    Hunt v. Commissioner, 88 T. C. 1135 (1987)

    In an installment sale, the excess of mortgage liability over the seller’s basis is not treated as a payment received in the year of sale if the buyer does not assume or take the property subject to the mortgage.

    Summary

    In Hunt v. Commissioner, the Tax Court held that in an installment sale involving a wraparound mortgage, the excess of the mortgage liability over the seller’s basis is not considered a payment received in the year of sale under Section 453 of the Internal Revenue Code, unless the buyer assumes the mortgage or takes the property subject to it. The court applied the Stonecrest line of cases, emphasizing that the buyer, Southland Capital Corp. , did not assume the underlying debt nor was the property taken subject to it. The decision clarified that the installment sale method could be used without immediate tax on the mortgage excess, as long as the seller was expected to continue paying the underlying debts from the sale proceeds. This ruling has significant implications for structuring real estate transactions to defer tax liability.

    Facts

    Petitioners D. A. Hunt, Dewey A. Hunt, Jr. , and William J. Hunt sold an apartment complex, King Edward Village (KEV), to Southland Capital Corp. on March 26, 1973, for $2,701,000. The payment structure included a $5,000 initial payment, a $2,541,000 all-inclusive mortgage, and a $155,000 purchase money note. The sale was subject to existing underlying mortgages totaling $1,963,222. 69, which exceeded the sellers’ combined basis in KEV by approximately $400,000. The Hunts were expected to continue paying these underlying debts. Southland did not assume the underlying debts, nor did it take the property subject to them.

    Procedural History

    The IRS determined deficiencies in the Hunts’ federal income tax for 1973, asserting that the excess of the underlying mortgage over the Hunts’ basis should be treated as a payment received in that year. The Hunts contested this determination, and the cases were consolidated for trial before the Tax Court. The court reviewed the applicability of Section 453 and its regulations to the transaction.

    Issue(s)

    1. Whether the amount by which each petitioner-husband’s share of the outstanding indebtedness on the apartment complex exceeds his adjusted basis therein constitutes payment received in the year of sale under Section 453.
    2. Whether the amount of this indebtedness is included in the total contract price only to the extent of this excess under Section 453.

    Holding

    1. No, because Southland did not assume the underlying debt nor take the property subject to it, the excess of mortgage liability over basis is not treated as a payment received by petitioners in 1973.
    2. No, because the mortgages are not excluded from the total contract price for determining the proportion of gain under Section 453(a)(1).

    Court’s Reasoning

    The court applied the Stonecrest line of cases, which distinguishes between a buyer assuming a mortgage and taking property subject to it. The court found that Southland did not assume the underlying debt, and the property was not taken subject to it, as the Hunts were expected to continue paying the underlying mortgages out of the sale proceeds. The court rejected the IRS’s argument that the transaction’s wraparound mortgage structure should lead to a different result, emphasizing that the legal obligations of the parties did not change with the conveyance of title. The court also noted that the IRS’s interpretation would lead to a harsh and perverse result, contrary to the purpose of the statute and regulation. The court’s decision was influenced by the policy considerations of preventing tax abuse while allowing legitimate deferral of gain under Section 453.

    Practical Implications

    This decision clarifies that in structuring installment sales with wraparound mortgages, the excess of mortgage liability over the seller’s basis is not treated as a payment received in the year of sale if the buyer does not assume the mortgage or take the property subject to it. This ruling allows sellers to defer tax on the gain from such sales, provided they continue to pay the underlying debts. Legal practitioners should ensure that the transaction documents clearly reflect the parties’ intentions regarding the underlying debt to avoid unintended tax consequences. The decision also highlights the importance of the Stonecrest line of cases in interpreting the installment sale regulations, which may influence how similar cases are analyzed in the future. Subsequent cases and changes in tax law, such as the Installment Sales Revision Act of 1980, should be considered when applying this ruling.

  • Porterfield v. Commissioner, 73 T.C. 91 (1979): When Escrow Funds Do Not Constitute Payment for Installment Sale Purposes

    Porterfield v. Commissioner, 73 T. C. 91 (1979)

    For installment sale purposes, funds placed in escrow solely as security for the purchaser’s debt do not constitute a payment in the year of sale.

    Summary

    C. J. Porterfield sold a ranch and received a promissory note secured by certificates of deposit in escrow. The IRS argued these escrowed funds constituted a payment under Section 453, disallowing installment sale treatment. The Tax Court disagreed, holding that the escrow was merely security, not payment, allowing Porterfield to report the gain using the installment method. This case clarifies that funds in escrow as security are not considered payments under Section 453, impacting how similar transactions are structured and reported for tax purposes.

    Facts

    In 1972, C. J. Porterfield sold his ranch to Henry B. Clay for $369,852. 50. As part of the payment, Clay issued a $178,000 promissory note to Porterfield, secured by certificates of deposit placed in an escrow account. The escrow was established to secure Clay’s note, and both parties treated it as security only, with Clay making direct payments on the note. Porterfield reported the sale using the installment method under Section 453 of the Internal Revenue Code. The IRS challenged this, arguing the escrow funds were a payment, necessitating full recognition of the gain in 1972.

    Procedural History

    The IRS issued a deficiency notice disallowing installment sale treatment, asserting the entire gain should be included in 1972’s income. Porterfield petitioned the U. S. Tax Court, which heard the case and issued its opinion on October 15, 1979.

    Issue(s)

    1. Whether the certificates of deposit placed in escrow constituted a payment in the year of sale under Section 453 of the Internal Revenue Code?

    Holding

    1. No, because the escrow was intended and treated by the parties as security for the purchaser’s debt, not as a payment.

    Court’s Reasoning

    The court focused on the intent and practice of the parties regarding the escrow. It cited previous cases like Oden v. Commissioner, where the court looked beyond the terms of written agreements to the actual intent and conduct of the parties. Here, the escrow was established to secure Clay’s note, and both parties regarded it as such, with Clay making all payments directly. The court emphasized that for Section 453 purposes, “evidences of indebtedness of the purchaser” are not considered payments, and the escrow funds were treated as such security. The court rejected the IRS’s argument that the escrow funds were a payment, citing the parties’ understanding and practice as overriding the written agreement’s language.

    Practical Implications

    This decision impacts how escrow arrangements are structured and reported for tax purposes in installment sales. It clarifies that if funds are placed in escrow solely as security and the parties treat them as such, they are not considered payments under Section 453. This ruling allows sellers to defer recognition of gain when the escrow’s purpose and operation align with security rather than payment. Practitioners should ensure clear documentation and adherence to the security intent in similar transactions. Subsequent cases have followed this principle, reinforcing the need for careful structuring of escrow arrangements to qualify for installment sale treatment.

  • Bostedt v. Commissioner, 70 T.C. 487 (1978): When Buyer’s Assumption of Seller’s Commission Liability Counts as Payment in Installment Sales

    Bostedt v. Commissioner, 70 T. C. 487 (1978)

    The assumption of a seller’s commission liability by the buyer in a property sale is treated as a payment in the year of sale for purposes of the 30-percent limitation under the installment method of reporting gain.

    Summary

    In Bostedt v. Commissioner, the Tax Court held that when a buyer assumes the seller’s real estate commission liability as part of the purchase agreement, this assumption must be treated as a payment received by the seller in the year of sale. The case involved Earl C. Bostedt, who sold his motel and elected to report the gain using the installment method under section 453 of the Internal Revenue Code. The key issue was whether the buyer’s assumption of the seller’s $12,750 commission to the broker should be considered part of the initial payment, which would affect the seller’s ability to use the installment method due to the 30-percent limitation rule. The court found that such an assumption is indeed part of the payment, thereby disqualifying Bostedt from using the installment method.

    Facts

    Earl C. Bostedt sold his motel, the Casa Blanca, on February 2, 1971, for approximately $282,000, electing the installment method of reporting the gain under section 453 of the Internal Revenue Code. The sale included $6,500 for personal property, $250 for goodwill, $56,250 for real property, and $219,000 for improvements. Bostedt incurred selling expenses of $13,408, including a $12,750 commission to Carbray & Co. The buyer assumed two existing mortgages totaling $188,885. 50 and paid $36,318 in cash. Additionally, the buyer took on a $12,750 liability to pay the commission directly to Carbray & Co.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Bostedt’s 1971 federal income taxes and challenged his use of the installment method. Bostedt petitioned the U. S. Tax Court, which ruled that the assumption of the commission liability by the buyer was to be treated as a payment in the year of sale, thereby affirming the deficiency as computed by the Commissioner.

    Issue(s)

    1. Whether the buyer’s assumption of the seller’s commission liability constitutes a payment received by the seller in the year of sale for purposes of section 453(b)(2)(A) of the Internal Revenue Code.

    Holding

    1. Yes, because the assumption and payment of the seller’s commission liability by the buyer is considered part of the payment received by the seller in the year of sale, as per the precedent set in Wagegro Corp. v. Commissioner.

    Court’s Reasoning

    The Tax Court relied on the precedent established in Wagegro Corp. v. Commissioner, where the payment of a seller’s legal fee by the buyer was treated as part of the purchase price. The court distinguished this case from others (like Irwin, Marshall, and Horneff) where the liabilities assumed were ordinary business liabilities not directly part of the purchase price. The court emphasized that in Bostedt’s case, the assumption of the commission was a prescribed part of the consideration for the sale and thus should be treated as a payment in the year of sale. The court quoted from Wagegro Corp. , stating that the payment to discharge the seller’s obligation to the broker was tantamount to a payment to the seller. The court also noted that under the Golsen rule, it was bound to follow the Ninth Circuit’s decision in Marshall but found Bostedt’s case distinguishable on factual grounds.

    Practical Implications

    This decision clarifies that for the purposes of the 30-percent limitation under section 453(b)(2)(A), any liability of the seller assumed by the buyer as part of the purchase agreement must be included in the initial payment calculation. This ruling affects how taxpayers structure sales agreements and elect to use the installment method. It requires sellers to consider all forms of payment, including assumed liabilities, when calculating whether they meet the 30-percent threshold. Legal practitioners advising on real estate transactions must now carefully account for such liabilities in their clients’ tax planning. Subsequent cases have cited Bostedt to determine the applicability of the installment method, and it serves as a reminder to consider all aspects of the transaction when assessing tax consequences.

  • Maddox v. Commissioner, 69 T.C. 854 (1978): When Mortgage Payoff in Sale Precludes Installment Reporting

    Maddox v. Commissioner, 69 T. C. 854 (1978); 1978 U. S. Tax Ct. LEXIS 164

    When existing mortgages are paid off with new loans obtained by the buyer at closing, the payoff constitutes a payment to the seller, precluding installment method reporting under Section 453 of the IRC.

    Summary

    In Maddox v. Commissioner, the U. S. Tax Court ruled that the payoff of existing mortgages with new loans secured by the buyers at the time of sale constituted payments to the sellers in the year of sale. The petitioners, David and Dorothy Maddox, sold several properties with the terms of the sale requiring the buyers to obtain new loans to pay off the existing mortgages. The court held that these payoffs were payments under Section 453 of the Internal Revenue Code, and since the payments exceeded 30% of the selling price, the sales did not qualify for installment reporting. The decision emphasizes that the extinguishment of the sellers’ liabilities through the new loans was equivalent to receiving additional cash, thus not aligning with the purpose of installment reporting.

    Facts

    David and Dorothy Maddox owned 12 parcels of real property, each encumbered by a mortgage or trust deed. In 1972 and 1973, they sold these properties under escrow agreements that required the buyers to obtain new loans secured by the properties, with the proceeds used to pay off the existing mortgages. The Maddoxes had no further liability or interest in the properties after the sales. The IRS determined that these transactions resulted in payments exceeding 30% of the selling price in the year of sale, disqualifying the sales from installment reporting.

    Procedural History

    The Commissioner of Internal Revenue assessed deficiencies in the Maddoxes’ federal income taxes for 1972 and 1973. The Maddoxes petitioned the U. S. Tax Court to challenge these deficiencies, arguing that their sales qualified for installment reporting. The case was submitted under Rule 122 of the Tax Court Rules of Practice and Procedure, and the court found that the payoff of existing mortgages with new loans constituted payments under Section 453, thus ruling against the Maddoxes.

    Issue(s)

    1. Whether the payoff of existing mortgages with new loans obtained by the buyers at closing constituted payments to the sellers in the year of sale under Section 453 of the IRC.

    Holding

    1. Yes, because the cancellation and payment of the sellers’ liabilities in the year of sale with new loans obtained by the buyers constituted payments to the sellers, and these payments exceeded 30% of the selling price, disqualifying the sales from installment reporting.

    Court’s Reasoning

    The court applied Section 453 of the IRC, which allows for installment reporting if payments in the year of sale do not exceed 30% of the selling price. The court distinguished between assuming a mortgage and paying off a mortgage with a new loan. In this case, the buyers did not assume the Maddoxes’ mortgages; instead, they obtained new loans to pay off the existing mortgages, extinguishing the Maddoxes’ liability. The court cited cases like Batcheller and Wagegro Corp. , which established that the payoff of a seller’s liability in the year of sale constitutes a payment under Section 453. The court also noted that the purpose of the installment method was to relieve taxpayers from paying tax on anticipated profits when only a small portion of the sales price was received in cash. The court concluded that the Maddoxes’ situation did not align with this purpose, as they received the equivalent of cash through the payoff of their mortgages.

    Practical Implications

    This decision impacts how real estate transactions involving mortgage payoffs are analyzed for tax purposes. Sellers must recognize that if a buyer uses a new loan to pay off an existing mortgage at closing, this constitutes a payment in the year of sale, potentially disqualifying the sale from installment reporting. Legal practitioners advising clients on real estate sales should consider structuring transactions to avoid such payoffs if installment reporting is desired. The decision also has broader implications for tax planning in real estate transactions, as it emphasizes the importance of understanding the nuances of mortgage assumptions versus payoffs. Subsequent cases have applied this ruling, reinforcing the principle that mortgage payoffs with new loans are treated as payments under Section 453.

  • Rickey v. Commissioner, 54 T.C. 680 (1970): Payments in Year of Sale and Installment Method Accounting

    54 T.C. 680 (1970)

    Payments offset against a taxpayer’s debt to the purchaser in the year of sale are considered ‘payments’ received in the year of sale for the purposes of the installment method of accounting, even if the formal offset occurs after the close of the taxable year.

    Summary

    John H. Rickey sold stock in two corporations to Hyatt Corporation. The sale agreement stipulated that Hyatt would offset debts Rickey owed to the corporations (and thus to Hyatt after the acquisition) against the purchase price payments. Although the formal offset of a substantial portion of the payment was scheduled for January of the following year, the Tax Court held that this amount was constructively received in the year of sale because the debt offset was predetermined and the taxpayer never had control over those funds. As a result, payments in the year of sale exceeded 30% of the selling price, disqualifying Rickey from using the installment method of reporting gain. The court also denied ordinary loss treatment under Section 1244 for separate stock, finding the written plan requirement was not met.

    Facts

    Petitioner John H. Rickey owned all stock of Rickey Enterprises and 50% of Rickey’s Studio Inn Hotel. In 1962, Rickey negotiated to sell these stocks to Hyatt. The sale contract, executed March 31, 1962 and closed April 2, 1962, set a purchase price and payment terms. A key term involved offsetting debts Rickey and related companies owed to Enterprises and Studio Inn against the purchase price. An audit revealed Rickey owed a substantial net amount. While 29% of the purchase price was structured for payment in 1962 (cash at closing and within 30 days post-audit), a larger portion was nominally due January 2, 1963. However, due to the offset, a significant portion of the January 1963 payment was effectively cancelled against Rickey’s debt. Rickey sought to report the gain on the installment method.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in Rickey’s income tax for 1962 and 1964, disallowing installment sale treatment and ordinary loss deductions. Rickey petitioned the Tax Court. The Tax Court addressed two issues: the propriety of installment method reporting and the eligibility for ordinary loss treatment under Section 1244. The Tax Court ruled against Rickey on both issues.

    Issue(s)

    1. Whether payments received in the year of sale, including amounts offset against the seller’s debt to the buyer, exceeded 30 percent of the selling price, thereby precluding installment method reporting under Section 453.
    2. Whether the taxpayer was entitled to ordinary loss treatment under Section 1244 on the worthlessness of stock in Rick’s Swiss Chalet, Inc.

    Holding

    1. No, because the payment due January 2, 1963, was effectively received in 1962 due to the offset agreement, causing total payments in the year of sale to exceed 30% of the selling price.
    2. No, because the stock was not issued pursuant to a written plan that met the requirements of Section 1244, specifically regarding the offering period.

    Court’s Reasoning

    Installment Method: The court emphasized substance over form. It found that the deferral of the January 2, 1963 payment was a mere formality to circumvent the 30% rule. The offset mechanism ensured Rickey would never actually receive the January payment in cash; it was immediately applied to reduce his debt to Hyatt. The court quoted Commissioner v. Court Holding Co., stating, “To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.” The court likened the situation to cases where taxpayers received constructive payments via debt cancellation or prearranged offsets in the year of sale, citing James Hammond and United States v. Ingalls. The court concluded that the $193,541.48 offset was effectively received in 1962.

    Section 1244 Loss: The court found that the corporate minutes and stock permit did not constitute a qualifying written plan under Section 1244. The resolution lacked any indication of awareness of Section 1244 or intent to offer its tax advantages. Furthermore, the plan did not specify a period, ending within two years, for offering the stock. While the permit had a termination date, it was renewable, failing to establish a definitive two-year limit from the plan’s adoption. The court cited Godart v. Commissioner, emphasizing the need for “some substantially contemporary objective evidence that the plan was adopted with ยง 1244 in view.” Such evidence was absent.

    Practical Implications

    Rickey v. Commissioner serves as a crucial reminder that the IRS and courts scrutinize the substance of transactions, especially in tax planning. For installment sales, structuring payments to fall just under the 30% threshold in the year of sale is insufficient if other aspects of the transaction indicate constructive receipt of additional payments. Debt offsets, especially prearranged ones, are treated as actual payments in the year of sale. Legal professionals must advise clients that complex payment schemes designed solely to manipulate tax outcomes are vulnerable to being recharacterized based on economic reality. For Section 1244 stock, meticulous documentation of a written plan, explicitly referencing Section 1244 and adhering strictly to the regulatory requirements regarding offering periods, is essential to ensure ordinary loss treatment for stock losses. This case reinforces the importance of clear, contemporaneous evidence of intent to comply with Section 1244 when establishing a plan to issue small business stock.