42 T.C. 72 (1964), 93589, Reaver v. C. I. R.

Docket Nº:93589.
Citation:42 T.C. 72
Opinion Judge:DRENNEN, Judge:
Attorney:Hugh R. Dowling and John W. Mooers, for the petitioners. Louis J. DeReuil, for the respondent.
Judge Panel:WITHEY, J., concurs in the result. OPPER, J., dissents.
Case Date:April 13, 1964
Court:United States Tax Court

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42 T.C. 72 (1964)




No. 93589.

United States Tax Court.

April 13, 1964

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Hugh R. Dowling and John W. Mooers, for the petitioners.

Louis J. DeReuil, for the respondent.

Petitioners sold a 35-acre tract of land, on which they lived and conducted an airport operation, to a church in 1958 for a cash down-payment of $1,000 and notes totaling $181,600, payable in monthly and annual installments, without interest, over a period of years. Petitioners received $2,600 on the purchase price during 1958, which they included in gross receipts from their business on their original income tax return for 1958 which, due to reasonable cause, was not filed until October 1959. After auditing petitioners' returns for 1958 and 1959, respondent determined that the entire gain on the sale of the property was taxable to petitioners as long-term capital gain in 1958. Thereafter, on August 11, 1961, petitioners filed an amended return for 1958 reporting the sale as a capital transaction and electing to report the gain thereon on the installment method. Held, petitioners are entitled to return the income and profit on the sale of the real estate on the installment method provided in section 453(b), I.R.C. 1954. Held, further, petitioners are not liable for the addition to tax for negligence under section 6653(a). I.R.C. 1954. Held, further, petitioners are liable for the addition to tax under section 6654(a), I.R.C. 1954.


Respondent determined a deficiency in petitioners' income tax for the year 1958 in the amount of $40,199.98, and in additions to tax under sections 6653(a) and 6654(a), I.R.C. 1954,[1] in the respective amounts of $2,010 and $31.23.

The primary issue for decision is whether petitioners are entitled to return gain and pay tax on their gain from the sale of a 35-acre tract of land in 1958 on the installment method. If it is held that petitioners are not to employ the installment method of returning taxable gain from the sale, we must determine whether two notes received by petitioners in 1958 as consideration for the sale of the property had an ascertainable fair market value; and if so, what that value was in 1958.

Secondary issues for decision are whether petitioners are liable for the additions to tax under sections 6653(a) and 6654(a) of the Code. Other issues raised in the pleadings were conceded by petitioners.


Some of the facts have been stipulated and are found accordingly. Petitioners, John P. Reaver and Opal P. Reaver (hereinafter respectively referred to as John and Opal), were husband and wife who resided in Panama City, Fla., in 1958. They filed a joint Federal income tax return for the year 1958 with the district director of internal revenue, Jacksonville, Fla., on October 22, 1959. They filed an amended joint Federal income tax return for the year 1958 on August 11, 1961. They did not file a declaration of estimated tax for the year 1958.

In 1958 John operated an airport in Panama City, Fla. The business was conducted on a tract of land on 11th Street in Panama City. The property covered approximately 35 acres of land. Located on the property was a hangar for aircraft and a one-story concrete building near the hangar which served as a shop for the repair of aircraft and as an office for the business. Also on the property was a two-bedroom residence where John and Opal lived.

Opal assisted John in the operation of the airport. She was a mechanical engineering draftsman, a licensed pilot, and a licensed airplane mechanic. She repaired aircraft and maintained the books and records of the business. In their business, John and Opal rebuilt

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damaged aircraft, arranged for charter flights, and offered flight instruction. Their airport was known as a fixed base operation, and they could offer night flying instructions to students. They also had aircraft for rent.

In January 1958 John's health deteriorated and he was unable to work at the airport for a full day. A physical examination in the early part of 1958 revealed that he had a serious heart condition and he was advised by a local physician to contact a heart specialist in Philadelphia, Pa. In May 1958 John went to Philadelphia for examinations. He was told that his heart condition was serious and that it required surgery. He was advised to stay in Philadelphia for observation, but John and Opal had to return to Panama City to arrange their affairs before John could spend the necessary time in Philadelphia for preliminary examinations and for the operation for his heart condition. In late June 1958 John returned to Philadelphia for the preliminary examinations and for observation to determine if he could undergo the operation. On July 24, 1958, the operation was performed and John was permitted to return to Panama City in August 1958. However, he was told he could not engage in work until early 1959. Whether the operation had been a success was not known in August 1958 when John left Philadelphia. During John's hospitalization in Philadelphia, Opal stayed with him in Philadelphia for approximately 3 weeks during the critical stage of his illness, but she thereafter had to return to Panama City to take care of their child and the airport business.

In 1958 members of the Central Baptist Church, Inc., Panama City (hereinafter called Central Baptist), became interested in having the church purchase the property used by petitioners for their airport. They approached John with their idea of purchasing the property and after first refusing, John then agreed to sell the property to the church. Central Baptist was formed April 28, 1958, as a successor to the Oakland Terrace Baptist Church, which was formed in May 1957. In April 1958 the membership of Central Baptist was approximately 75. On June 20, 1958, John and Opal and Central Baptist executed a contract of sale for petitioners' 35-acre tract in Panama City for a total purchase price of $182,600. Central Baptist paid petitioner the sum of $250 in cash and agreed to pay the further sum of $750 in cash within 20 days after execution of the contract of sale. Central Baptist was to execute promissory notes in the amount of $181,600 for the balance of the purchase price. On June 25, 1958, John and Opal executed a deed for their 35-acre tract and delivered the deed to Central Baptist. On the same date Central Baptist executed two promissory notes payable to John and Opal. The first note was in the principal sum of $13,400 and provided that Central Baptist was to pay this principal sum in 24 monthly installments, the first 5

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payments being in the amount of $400 each, and the remaining 19 monthly payments in the amount of $600 each. The note was non-interest bearing. This note contained a ‘ Guaranty’ stating that nine individuals jointly and severally promised to pay the note which was endorsed by the nine individuals. The second note was in the principal sum of $168,200 which was payable in annual installments of $15,800 on September 1, 1960, and thereafter in eight annual installments of $19,050 each. The note was noninterest bearing and was not endorsed by any individuals.

In 1958 Central Baptist paid to petitioners, in consideration for the property, $1,000 in cash under the contract of sale and the total amount of $1,600 in payments on the first installment note.

At some time in 1958, prior to concluding the sale of the property to Central Baptist, John discussed the sale of the property with a certified public accountant in Panama City. The accountant explained to him generally the installment method of accounting for gain on a deferred payment sale but suggested to John that if a deferred payment sale was completed in 1958 that John come back to see him before his 1958 tax return was due to be filed and he would prepare his return for him.

Central Baptist began to move into the property shortly after June 25, 1958, but because of John's illness and his absence from Panama City, Opal could not move the business from the property entirely and Central Baptist occupied only one-half of the hangar building where they began conducting church services. Petitioners' airport business was conducted in the other half of the hangar. Opal was in charge of the business and of the move from the property.

In 1959 Opal undertook preparation of petitioners' 1958 income tax return, but she was delayed in completing the return because some of the records of the business had been moved to a warehouse during her absence when Central Baptist began to occupy the hangar. Opal filed petitioners' joint income tax return for 1958 on October 22, 1959. She did not request an extension of time within which to file the return for 1958 which was due April 15, 1959, but she wrote a letter of transmittal to the district director of internal revenue, Jacksonville, Fla., explaining her reasons for filing their return out of time. Petitioners' original return for 1958 was accepted by respondent as having been filed out of time for reasonable cause.

Opal's failure to prepare, and petitioners' failure to file, a timely return for 1958 was due to reasonable cause and was not due to willful neglect.

In preparing petitioners' return Opal used records which had been maintained for the airport business. She used one book which she maintained which consisted of sheets of notebook paper tied together with twine, with one sheet for each month of the year 1958, upon

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which were recorded cash receipts and disbursements, the sources of receipts or payees of payments, and generally what a payment or a receipt was for. The cash downpayment and the monthly payments received in 1958...

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