Cisler v. Comm'r of Internal Revenue
| Decision Date | 27 November 1962 |
| Docket Number | Docket No. 91573. |
| Citation | 39 T.C. 458 |
| Court | U.S. Tax Court |
| Parties | STEPHEN A. CISLER, JR. AND RACHEL W. CISLER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
OPINION TEXT STARTS HERE
Robert E. Hatton, Esq., for the petitioners.
Arthur Clark, Jr., Esq., for the respondent.
In 1952 petitioner sold his preferred and common stock in Radio Kentucky, Inc., to the corporation for the total sum of $60,000 of which $15,700 was the price of the preferred and $44,300 the price of the common. Since petitioner's adjusted cost basis for the preferred stock equaled the sales price, there were no gain or loss. For the common stock, which had a cost basis of zero, he received in 1952 the amount of $8,000 in cash and the corporation assumed his indebtedness of $20,000 to third parties. The remainder of the sales price for the common stock was received by petitioner in 1953. Held, that the assumption of the indebtedness by the corporation was includable as part of the ‘initial payments,‘ thus resulting in petitioner having received an amount in excess of 30 percent of the selling price in the year of sale. Therefore, petitioner was not entitled to use the installment basis for reporting the gain on the sale of his common stock under section 44(b), I.R.C. 1939.
Respondent determined a deficiency in income tax and an addition to tax under section 294(d)(1)(A) of the Internal Revenue Code of 1939 for the taxable year 1952 in the amounts of $9,250.50 and $825.41, respectively.
The only issue for decision is whether the petitioners received more than 30 percent of the sales price of their preferred and common stock in Radio Kentucky, Inc., in the taxable year 1952 so as to disqualify the gain for installment sales treatment under section 44(b) of the Internal Revenue Code of 1939.1 Additional issues presented by the pleadings have been disposed of by stipulation of the parties.
All of the facts were stipulated and are so found.
Stephen A. Cisler, Jr., and Rachel W. Cisler are husband and wife and presently reside in Louisville, Kentucky. Their joint Federal income tax return for the taxable year 1952 was prepared and filed, while they resided in San Mateo, California, with the district director of internal revenue at San Francisco.
Prior to January 1, 1952, Stephen A. Cisler, Jr. (hereinafter referred to as the petitioner), owned 314 shares of preferred stock and 917 shares of common stock in Radio Kentucky, Inc. Petitioner's adjusted cost basis in the 314 shares of preferred stock was $15,700, and he had no adjusted cost basis in the 917 shares of common stock.
On November 10, 1951, the petitioner borrowed $25,000 from Charles Barham, Jr., and Emmalou W. Barham of Charlottesville, Virginia, and pledged to them, among other things, his 917 shares of common stock in Radio Kentucky, Inc., as collateral security for the loan. Petitioner's common stock was, at that time, subject to a prior agreement with F. Eugene Sandford and Edwin E. S. Weldon under which they held a first option to repurchase the petitioner's stock. For this reason Sandford and Weldon were made parties to the agreement between the petitioner and the Barhams. The agreement provided, in part, as follows:
1. The Lenders will lend the Borrower the sum of Twenty-five Thousand Dollars ($25,000.00), the loan to be evidenced by a collateral note of the Borrower in the fact amount of Twenty-five Thousand Dollars ($25,000.00) of even date herewith payable in monthly installments beginning March 15, 1952, with a payment of One Thousand Dollars ($1,000.00) on the fifteenth day of July, 1952, and each and every month thereafter until the debt is paid in full. Said note shall bear interests at the rate of five per cent (5%) per annum payable monthly.
4. As additional consideration for said loan the Borrower shall pay to the Lenders on or before the fifteenth day of each month beginning January 1, 1952, a sum equal to two per cent (2%) of the gross income of Bay Radio, Inc., in the preceding calendar month with a minimum, however, of Two Hundred Dollars ($200.00) per month, for a period of fifteen (15) months, and thereafter a sum equal to one per cent (1%) of said gross income monthly thereafter, until said loan is paid, with a minimum of One Hundred Dollars ($100.00) per month.
On September 18, 1952, the petitioner entered into an agreement with Radio Kentucky, Inc., which provided, in pertinent part, as follows:
THAT WHEREAS the party of the second part is the owner and holder of 314 shares of the preferred stock of the party of the first part and 917 shares of common stock of the party of the first part and has agreed to sell all of his said holdings, and
WHEREAS at a special meeting of the stockholders of the party of the first part, due notice of which was given and all stockholders being present and voting, it was moved, seconded and duly carried that the party of the first part purchase it capital stock, both preferred and common, from the party of the second part at a price of $50.00 per share for the preferred stock and $48.30 pe7 share for the common stock, making a total purchase price of $60,000.00, which said purchase price would be payable under the following terms and conditions:
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¦(1) That the party of the first part cancel the indebtedness of ¦ ¦
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¦the party of the second part to it of ¦$13,633.53¦
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¦and makes cash payment herewith to second party of ¦2,066.47 ¦
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¦ ¦$15,700.00¦
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¦(2) Cash of $8,000.00 on the completion of the following ¦ ¦
¦conditions: ¦ ¦
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¦(a) the execution of this agreement, subject to FCC approval, ¦ ¦
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¦(b) the transfer of 314 shares of preferred stock of Radio ¦ ¦
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¦Kentucky, Inc. to Radio Kentucky, Inc., ¦ ¦
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¦(c) execution of irrevocable power of attorney to Treasurer of ¦ ¦
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¦Radio Kentucky, Inc., for transferring 917 shares of common ¦ ¦
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¦stock of Radio Kentucky, Inc., now pledged as collateral on a ¦ ¦
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¦loan hereinafter referred to in 3 below, and ¦ ¦
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¦(d) the execution and delivery to Radio Kentucky, Inc. of a ¦ ¦
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¦letter of agreement from the holder of a note of $25,000.00, ¦ ¦
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¦signed, S. A. Cisler, Jr., accepting pre-payment of the balance ¦ ¦
¦due on said note. ¦ ¦
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¦(3) The party of the first part agrees to assume the indebtedness ¦ ¦
¦of the party of the second part in favor of Charles Barham, Jr., ¦ ¦
¦and Emmalou W. Barham, which said indebtedness is payable in five ¦ ¦
¦installments, the first four of said installments being for the ¦ ¦
¦principle [sic] sum of $1000.00 each and the fifth and final ¦ ¦
¦installment being in the sum of $16,000.00 the first of said ¦ ¦
¦installments being due and payable October 15, 1952 and a like ¦ ¦
¦installment being due the 15th of each and every month thereafter ¦ ¦
¦until February 15, 1953 when the final of $16,000.00 installment ¦ ¦
¦is due (all interest on this indebtedness to be paid by S. A. ¦ ¦
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¦Cisler, Jr.), said installment of principle totaling ¦$20,000.00¦
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¦(4) For the remaining portion of said purchase price the party of ¦ ¦
¦the first part will execute unto the party of the second part four¦ ¦
¦notes the first three of said notes being in the principal sum of ¦ ¦
¦$4,000.00 each and fourth and final note in the sum of $4,300.00, ¦ ¦
¦one each of said notes being due and payable on or before May 15, ¦ ¦
¦1953, August 15, 1953 and January 15, 1954 and a final note due ¦ ¦
¦March 15, 1954, with interest from February 15, ¦ ¦
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¦1953 at the rate of 5% per annum ¦16,300.00 ¦
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¦Grand Total ¦60,000.00 ¦
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It is further agreed to between the parties hereto that this sale of the holdings...
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