51 T.C.M. (CCH) 355
ROBERT N. FAILLA AND ANN MARIE FAILLA, Petitioners
COMMISSIONER OF INTERNAL REVENUE, Respondent
ANN MARIE FAILLA TRUST, ANN MARIE FAILLA, TRUSTEE, Petitioners
COMMISSIONER OF INTERNAL REVENUE, Respondent
Nos. 29077-83, 29078-83.
United States Tax Court
January 29, 1986
SAMUEL N. REIKEN, for the petitioners.
WILLIAM F. HALLEY, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
In these consolidated cases, respondent determined deficiencies in Federal income tax against petitioners as follows:
| Robert N. Failla and Ann Marie Failla
| Ann Marie Failla Trust
| Ann Marie Failla Trustee
| Docket No. 29078-83
After concessions in docket No. 29077-83, the issue presented for decision is whether the sale by Robert N. Failla of his Aero Gear Machine and Tool Corporation stock to the Ann Marie Failla Trust should be regarded as a bona fide installment sale for purposes of section 453. 
FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Robert N. Failla (‘ Robert‘ or ‘ petitioner‘ ) and Ann Marie Failla (‘ Ann Marie ‘ ) were husband and wife and residents of Short Hills, New Jersey, at the time their petition was filed. Robert and Ann Marie timely filed joint Federal income tax returns for their taxable years 1978, 1979, and 1980. Ann Marie, as trustee of the Ann Marie Failla Trust, timely filed Forms 1041, Fiduciary Income Tax Returns, for the Trust's taxable years ended March 31, 1979, March 31, 1980, and March 31, 1981. Aero Gear Machine and Tool Corporation (‘ Aero Gear‘ ) was a New Jersey corporation organized in 1955. Aero Gear was engaged in the manufacture of aerospace gears used in helicopter transmissions, accessory gear boxes for commercial aircraft engines, and gas turbine gear boxes for gas compression, electrical generation, and fluid flow. Petitioner joined Aero Gear in 1973, and became a shareholder some three or four years later. For more than two years prior to April 14, 1978, Aero Gear's sole shareholders were petitioner, who owned 44 of the outstanding 100 shares, and William Spitz (‘ Spitz‘ ), who owned 56 shares. Aero Gear never paid any dividends to its shareholders. In late 1976, Robert was contacted by William Vandersteel, a representative of Ampower, a New Jersey corporation and the American representative of Lohmann and Stuldtfutt (‘ L& S‘ ). L& S was a member of the Mannesmann group, a West German conglomerate. Vandersteel stated that L& S was a distributor of gear units interested in the acquisition of a gear manufacturing company in the United States. Robert stated that he and Spitz were interested in such an arrangement. Representatives of L& S visited Aero Gear twice in 1977 to survey the facilities and review the corporation's financial statements. After doing this, they stated that they would consider Aero Gear as a potential acquisition. In August 1977, Robert and Spitz traveled to Germany, where they met with representatives of G.L. Rexroth GmbH (‘ Rexroth‘ ), another wholly owned subsidiary of Mannesmann, and discussed the possibility of Rexroth's acquisition of Aero Gear. The results of the meeting were set forth in a document entitled ‘ Main points of agreement between Messrs. Spitz and Failla * * and G.L. Rexroth GmbH * * *,‘ dated August 12, 1977. The document provided, in pertinent part, as follows: 1. The sellers sell 100% of the shares of the Aerogear Corporation (afterwards called ‘ the Company‘ ), Little Ferry, to the buyer, provided, that the Board of the buyer resp. the Mannesmann AG give their approval to this acquisition. 2. As selling price of the shares the buyer shall pay $2.750.000, - to the sellers after signing the final contract. 3. The sellers shall as managers of the Company receive a salary of $50.000, - per year, each. 6. The search for land and qualified employees for the designing department shall start immediately after the approval of the acquisition by the Mannesmann AG. The document was signed by Spitz, Robert, and the representatives of Rexroth. Petitioner and Spitz agreed to furnish Rexroth's representatives with additional financial data, a detailed list of Aero Gear's customers, the extent and nature of Aero Gear's present and future business with the said customers, and information concerning the anticipated needs and approximate cost of manufacturing equipment should an acquisition take place. A memorandum entitled ‘ Main points of contract concerning Aero Gear Corp., ‘ dated March 10, 1978, and prepared by Rexroth recites, in pertinent part: 1) G.L. Rexroth forms a new company ‘ American Lohmann Corp.‘ or similar in the next weeks. 2) This new company buys the assets and assumes the liabilities from Aero Gear resp. from the shareholders of Aero Gear. For that is necessary an actual list of all assets (fixed assets, stocks, debtors etc.) and all liabilities up to the actual date of purchase, f.i. April lst. These assets must be revaluated with the actual value at the date of purchase. The balance (assets minus liabilities) coming out is $2.750.000, -. The assets should include a goodwill for taking over the whole business of $200.000, -. 3) Payment by G.L. Rexroth the new company (A-L) is made as follows: 70% after closing of the contract 30% at Sept. 30th 1979, if Mr. Spitz and Mr. Failla are still working for the company 6) Perhaps the question of profit of Aero Gear for the period Jan. lst to March 3lst 1978 is raised by Mannesmann, because the first intention was, to purchase the company retrospective on Jan. lst 1978. Eventually this question has to be discussed. 7) The promised bonus to the sellers is $750.000, -, which amount is to be paid under certain conditions in 1982 will be settled in the employment contracts of Mr. Spitz and Mr. Failla. In early March 1978, Rexroth retained Harold Berger, a Philadelphia, Pa., attorney, as its counsel in the negotiations with Aero Gear. Aero Gear thereupon retained William D. Lipkind, a West Orange, New Jersey, attorney, as its counsel. On March 20, 1978, Rexroth sent a telex letter to Berger and instructed him to deal with the Aero Gear matter and to revise (1) the agreement between Aero Gear and American Lohmann Corporation (‘ Lohmann‘ ) for the purchase of the assets of Aero Gear, (2) the employment contracts of Spitz and Robert with Lohmann, (3) the lease contracts between Aero Gear and Lohmann with respect to the land and buildings, located in Little Ferry and Hillside, New Jersey, owned by Spitz and petitioner, and (4) Lohmann's by-laws. The telex provided, in pertinent part, as follows: our schedule is as follows: 1. mid april 78 signing of the contracts acc. to paragraph 1, presumably on 14.4.78. 2. 1.5.78 taking over the assets. the new company american lohmann corporation should be incorporated before mid april. at the same time the contracts as to paragraph 1 should also be ‘ ready for signature.‘ in concrete this means: week commencing 20th march . . . preparing of contracts by yourself and mr. max s. mayer week commencing 27th march . . . presentation of contracts to mr. spitz and mr. failla, so that they have the possibility to discuss the same with their consultants. week commencing 3rd april . . . execution - necessary contract modifications and final discussion between both parties, resp. their consultants. Spitz was provided with a copy of the aforementioned telex. In late March 1978, Robert and Ann Marie met with Lipkind to discuss the potential consequences of the proposed sale of the assets of Aero Gear and its subsequent liquidation. Ann Marie expressed her concern that upon the sale and subsequent liquidation of Aero Gear, Robert was to receive a substantial amount of money. Given the fact that Robert had been involved in a Chapter 11 bankruptcy proceeding in 1972, in connection with his involvement with another company, Ann Marie doubted his ability to manage money. Ann Marie wanted to safeguard any proceeds to be received from the said sale and subsequent liquidation and believed that she owned half of Robert's stock. Ann Marie was informed by Lipkind that she had no direct right to Robert's shares except, probably, by way of equitable distribution, upon divorce. Lipkind suggested an installment sale of Robert's stock to a trust as a means of protecting the money; Ann Marie and her children would be the beneficiaries of the said trust. Lipkind discussed the ‘ Rushing Trust,‘ and the then existing case law. Lipkind further informed Robert and Ann Marie that if the trust was created, the sale of the stock of Aero Gear by Robert to the trust had to be made in all events, regardless of whether the transaction with the Mannesmann group was consummated. Robert and Ann Marie were also apprised of the risk of making an installment sale of the stock to the trust and having the proposed sale not occur, viz, that the trust would have to come up with money in accordance with the terms of the sale. With reference to the identity of the trustee of the proposed trust, Lipkind recommended that a bank be appointed trustee in order to avoid potential problems with the Internal Revenue Service. Ann Marie stated her belief that she was qualified to administer the trust as ably as any bank, and without...