Bostedt v. Comm'r of Internal Revenue

• Decision Date: 27 June 1978
• Docket Number: Docket No. 5395-75.
• Citation: 70 T.C. 487
• Parties: EARL C. BOSTEDT and JOY E. BOSTEDT, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

70 T.C. 487

EARL C. BOSTEDT and JOY E. BOSTEDT, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 5395-75.

United States Tax Court

Filed June 27, 1978.

Petitioners sold their motel business. As part of the transaction, the purchaser paid petitioners' sales commission liability. Held, the assumption by the purchaser of the seller's sales commission liability is treated as a payment in the year of sale for purposes of the 30-percent limitation of sec. 453(b)(2)(A). Wagegro Corp. v. Commissioner, 38 B.T.A. 1225 (1938), followed; Irwin v. Commissioner, 390 F.2d 91 (5th Cir. 1968), revg. 45 T.C. 544 (1966); United States v. Marshall, 357 F.2d 294 (9th Cir. 1966); Horneff v. Commissioner, 50 T.C. 63 (1968), vacated and remanded by unpublished order (3d Cir. 1969), distinguished. Robert N. Kolb, for the petitioners.

William E. Saul, for the respondent.

IRWIN, Judge:

The Commissioner determined a deficiency in petitioners' Federal income taxes for the calendar year 1971 in the amount of $8,492. Due to concessions by petitioners, the only issue remaining for decision is whether petitioners' sale of their motel business qualifies for the installment method of reporting under section 453.¹

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts, along with attached exhibits, are incorporated herein by this reference.

The petitioners, Earl C. and Joy E. Bostedt, husband and wife, resided in Santa Cruz, Calif., at the time of filing their petition herein. They filed their joint Federal income tax return for the calendar year 1971 with the Internal Revenue Service Center in Fresno, Calif. Since Joy E. Bostedt is a party hereto solely by reason of having filed a joint income tax return with her husband for the year in issue, Earl C. Bostedt alone will hereafter be referred to as petitioner.

On February 2, 1971, petitioner sold a motel, known as the “Casa Blanca,” and elected the installment method of reporting gain from such sale under section 453. The total sales price for the motel was approximately $282,000 and was allocated as follows: $6,500 to the personal property, $250 to goodwill, $56,250 to real property, and the remaining $219,000 to improvements. The adjusted bases of these components were $9,050, 0, $38,735, and $92,275, respectively. The cost incurred by petitioner in selling the property was $13,408, of which $13,100 was allocable to the land, improvements, and goodwill (based upon sales price ratios). The remainder was allocable to the personalty. Of the total selling expenses, $12,750 represented a real estate brokerage commission payable to Carbray & Co.

Part of the sales proceeds consisted of an assumption by the buyers of two notes encumbering the motel property, including improvements, in the amounts of $151,116.51 and $37,768.99. In addition, the sellers received net cash in the amount of $36,318. The remainder of the proceeds consisted of an unsecured personal note to the seller in the amount of $4,000, a third mortgage note to the seller in the amount of $40,364.50, and a fourth mortgage note in the amount of $12,750 to Carbray & Co. in satisfaction of the sales commission owed by petitioner to the brokers in the transaction.

In reporting the sale on his income tax return, petitioner elected the installment method of reporting the gain realized, utilizing the following computation:

+----------------------------------------------------+
                ¦(1) Portion of sales price allocable to¦¦           ¦
                +---------------------------------------++-----------¦
                ¦land, improvements, and goodwill2      ¦¦$275,500.00¦
                +----------------------------------------------------+
                

(2) Amount received in year of sale
                (a) Cash                                                  35,482.69
                (b) Mortgages assumed                          188,885.50
                Less: Adjusted basis
                (including selling
                expenses allocable to
                these assets)3                                 144,110.00
                Excess of mortgages
                assumed over adjusted basis                               44,775.50
                Total proceeds deemed received in year of sale            80,258.19
                

Thus, under petitioner's computation, the proceeds deemed received in the year of sale amount to less than 30 percent of the selling price.

Respondent, on the other hand, recomputed the transaction as follows:

+----------------------------------------------------+
                ¦(1) Portion of sales price allocable to¦¦           ¦
                +---------------------------------------++-----------¦
                ¦land, improvements, and goodwill       ¦¦$275,500.00¦
                +----------------------------------------------------+
                

(2) Amount received in year of sale
                (a) Cash                                        35,482.69
                (b) Liability of petitioner
                paid out of sales proceeds                      12,456.75
                (c) Mortgages assumed                188,885.50
                Less: Adjusted basis (including
                selling expenses
                allocable to these assets)           144,110.00
                Excess of mortgages assumed
                over adjusted basis                             44,775.50
                

  92,714.94
                

Under respondent's method of computation, petitioner is deemed to have received proceeds in excess of 30 percent (34 percent) of the sales price in the year of sale and cannot qualify for the installment method of reporting under section 453.

OPINION

The specific question to be answered in determining whether petitioner can qualify for installment reporting under section 453 is whether the buyer's assumption of the seller's commission liability is a payment received in the year of sale.

Initially, we note that both parties assumed the rule in Kirschenmann v. Commissioner, 488 F.2d 270 (9th Cir. 1973), revg. 57 T.C. 524 (1972), would be applicable to the case before us under our rule in Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940 (1971).⁴ However, while the rule in Kirschenmann may be applicable in computing the amount of payment in the year of sale, it is not relevant to a resolution of the issue now before us. Rather, irrespective of the decision in Kirschenmann, we must determine whether the vendee's assumption of the vendor's expenses of sale constitutes a payment in the year of sale for purposes of section 453(b)(2)(A).

The effect of the assumption by the purchaser of liabilities of the seller for purposes of section 453(b)(2)(A) has been an area of controversy. The cases which dot this area do not cut clear lines of demarcation. The problem in the case before us involves more than merely deciding on what side of a line the facts in this case may fall; rather, we must determine if there is a line at all.

This Court has consistently held that assumption and payment by the buyer of liabilities of the seller constitutes a payment in the year of sale for purposes of section 453(b)(2)(A). Horneff v. Commissioner, 50 T.C. 63 (1968), vacated and remanded by unpublished order (3d Cir. 1969); Irwin v. Commissioner, 45 T.C. 544 (1966), revd. 390 F.2d 91 (5th Cir. 1968); Cisler v. Commissioner, 39 T.C. 458 (1962); Hammond v. Commissioner, 1 T.C. 198 (1942); Wagegro Corp. v. Commissioner, 38 B.T.A. 1225 (1938); Batcheller v. Commissioner, 19 B.T.A. 1050 (1930). Cf. Watson v. Commissioner, 20 B.T.A. 270 (1930). This result was also reached in Lucas v. Schneider, 47 F.2d 1006 (6th Cir. 1931), cert. denied 284 U.S. 622 (1931), and Sterling v. Ham, 3 F. Supp. 386 (S.D. Me. 1933). Similarly, in Riss v. Commissioner, 368 F.2d 965 (10th Cir. 1966), affg. a Memorandum Opinion of this Court, it was held that cancellation of the seller's indebtedness to the purchaser as partial consideration for the purchase constitutes payment received in the year of sale.

However, in some of the more recent cases, several Courts of Appeals have not agreed that assumption and payment of a seller's liability always constitutes a payment in the year of sale. Irwin v. Commissioner, 390 F.2d 91 (5th Cir. 1968), revg. 45 T.C. 544 (1966); United States v. Marshall, 357 F.2d 294 (9th Cir. 1966); Horneff v. Commissioner, supra. But while these more recent cases might be read as entirely disapproving of the position of this Court, we believe their import is much narrower in nature and does not necessarily conflict with our past position in all factual situations. Specifically, we believe that even if we were to accede to the reasoning of these Courts of Appeals decisions, and even though we are here bound to follow the result in Marshall, ⁵ the case before us is distinguishable in a critical factual aspect from the situations which obtained in Irwin, Marshall, and Horneff. In each of these cases the liabilities assumed and paid were ordinary liabilities of a going business which was sold, and their eventual payment by the purchaser was apparently not part of the purchase price as such.

A practical distinction may be drawn between those situations in which the buyer purchases a business and, thus, a group of assets and liabilities (some of which liabilities are later paid in the ordinary course of business), and those cases in which the purchaser's assumption of or cancellation of the seller's liabilities was part...