Frane v. Comm'r of Internal Revenue (In re Estate of Frane), Docket No. 288-89

• Court: United States Tax Court
• Writing for the Court: NIMS
• Citation: 98 T.C. 341,98 T.C. No. 26
• Parties: ESTATE OF ROBERT E. FRANE, DECEASED, JANET M. FRANE, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentJANET M. FRANE AND ESTATE OF ROBERT E. FRANE, DECEASED, JANET M. FRANE, PERSONAL REPRESENTATIVE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Docket Number: 21626-89.,Docket No. 288-89
• Decision Date: 31 March 1992

98 T.C. 341
98 T.C. No. 26

ESTATE OF ROBERT E. FRANE, DECEASED, JANET M. FRANE, PERSONAL REPRESENTATIVE, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, RespondentJANET M. FRANE AND ESTATE OF ROBERT E. FRANE, DECEASED, JANET M. FRANE, PERSONAL REPRESENTATIVE, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 288-89

21626-89.

United States Tax Court

Filed March 31, 1992.

In 1982, D sold to his four children equal amounts of common stock in his wholly owned corporation, S. The purchase agreement stated that the purchase price for the S stock was equal to the stock's fair market value, which was determined by appraisal to equal $141,050 for each block of stock sold. Pursuant to the purchase agreement, D and each of his children executed a promissory note in the principal amount of $141,050, payable in 20 annual installments, with interest payable annually at a rate of 12 percent on any unpaid principal. Each promissory note contained a provision that unless sooner paid the obligations would be “cancelled and extinguished as though paid” upon the death of D. Also, pursuant to the purchase agreement, D and each child executed a collateral pledge and security agreement which stated that the total purchase price of the S stock was $141,050.

At the time of the sale, D's life expectancy exceeded the 20-year term of the promissory notes. However, D died in 1984 after receiving two payments on each promissory note. D reported gain attributable to the two payments received from the sale of the S stock under the installment method of accounting. No gain attributable to the installment obligations held at D's death was reported on his final income tax return.

HELD, the installment obligations held by D at his death were cancelled within the meaning of sec. 453B(f), I.R.C. As a result, each installment obligation is treated as if it were disposed of in a transaction other than a sale or exchange by D. Sec. 453B(f)(1), I.R.C. HELD, FURTHER, the six-year period of limitations on assessment and collection under sec. 6501(e), I.R.C., is applicable to D's final return.

[98 T.C. 341]

David L. Cornfeld, David T. Karzon, Jr., and Donald W. Paule, for petitioners.

Steven W. LaBounty, for respondent.

[98 T.C. 342]

OPINION NIMS, CHIEF JUDGE:

Petitioner in docket No. 288-89 is the Estate of Robert E. Frane, Deceased (the Estate), Janet M. Frane, Personal Representative. By statutory notice of deficiency dated October 4, 1988, respondent determined a deficiency in the Federal income tax of the Estate for the fiscal year ending June 30, 1985, of $103,981.42. In an amendment to answer, respondent asserted an increase in the Estate's deficiency of $6,734.00, for a total deficiency of $110,715.42. The increased deficiency asserted by respondent is based entirely on facts stipulated by the parties.

Petitioners in docket No. 21626-89 are Janet M. Frane and the Estate of Robert E. Frane, Deceased, Janet M. Frane, Personal Representative. By statutory notice of deficiency dated June 7, 1989, respondent determined a $103,866 deficiency in the final joint Federal income tax liability of Robert E. Frane (decedent) and Janet M. Frane for the year 1984. As will be explained below, the deficiency determined by respondent in docket No. 21626-89 is an alternative position to that asserted in docket No. 288-89.

These cases were consolidated for trial, briefing, and opinion. For convenience, the taxpayers in both cases will be referred to as petitioners throughout. Unless otherwise indicated, section references are to the Internal Revenue Code as in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.

After concessions by the parties, the issues remaining for decision are: (1) Whether the Estate realized income in respect of a decedent under section 691 as a result of installment obligations held by decedent for which the unpaid principal and interest owed to decedent were deemed cancelled and extinguished as though paid upon his death; (2) in the alternative, whether such deemed cancellation and extinguishment of the installment obligations caused the recognition of income under section 453B which was required to be reported on the final return of the decedent and his wife; and (3) whether the six-year period of limitations on assessment and collection under section 6501(e) is applicable to decedent's final joint income tax return.

[98 T.C. 343]

The parties submitted these cases fully stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

BACKGROUND

At the times of the filing of the petitions in these cases, Janet M. Frane, decedent's wife and personal representative of the Estate, resided in Webster Groves, Missouri. The fiduciary income tax return (Form 1041) of the Estate for the taxable year ending June 30, 1985, was timely filed with the Internal Revenue Service Center at Kansas City, Missouri. The final joint income tax return (Form 1040) of decedent and his wife for the calendar year 1984 was timely filed on April 15, 1985, with the Internal Revenue Service Center at Kansas City, Missouri.

Sometime in March 1982, decedent organized Sherwood Grove Co. (Sherwood), a Missouri corporation. At that time, decedent transferred $1,000 and 150,000 shares of common stock of Consolidated Grain and Barge Co. to Sherwood in exchange for 5,000 shares of no par value common stock of Sherwood and 89,485 shares of no par value convertible preferred stock of Sherwood.

On May 10, 1982, decedent sold 1,250 shares of common stock of Sherwood to each of his four children pursuant to separate, but identical, purchase agreements. With respect to the purchase price, each purchase agreement reads in part as follows:

The purchase price, for the shares of stock being purchased hereunder shall be the appraised fair market value of such shares as of this date, such appraisal to be made by A.G. Edwards & Sons, Inc., St. Louis, Missouri. The purchase price hereunder shall be payable in twenty (20) equal annual payments of principal and interest * * *. Such purchase price shall be represented by a promissory note of Purchaser substantially in the form attached as Exhibit A which shall be secured by a collateral pledge of such stock * * *. In addition, such note shall provide that in the event of Seller's death prior to the final payment of principal and interest under said note, the unpaid principal and interest of such note shall be deemed cancelled and extinguished as though paid upon the death of Seller.

Pursuant to the purchase agreement, on May 10, 1982, each of decedent's four children executed a promissory note in the principal amount of $141,050, wherein each child was obligated

[98 T.C. 344]

to decedent for payment of 20 equal annual installments commencing on May 10, 1983. The promissory note further required interest to be paid annually at a rate of 12 percent on any unpaid principal. The $141,050 purchase price was based upon the determination of A.G. Edwards & Sons, Inc., that such price reflected the fair market value of 1,250 shares of Sherwood common stock at the time of purchase. As required by the purchase agreement, each promissory note contained the following provision (the cancellation provision):

Unless sooner paid, all sums due hereunder, whether principal or interest, shall be deemed cancelled and extinguished as though paid upon the death of Robert E. Frane.

Also pursuant to the purchase agreement, on May 10, 1982, decedent and each of his four children executed a collateral pledge and security agreement which reads in part as follows:

WHEREAS, pursuant to a Purchase Agreement * * * Pledgee has this day sold to Pledgor 1,250 shares of the capital stock of Sherwood Grove Company * * * for the aggregate sum of * * * [$141,050]; which amount is represented by Pledgor's Promissory Note in the principal amount of [$141,050] * * *.

WHEREAS, Pledgor has agreed to secure the obligation of Pledgor under the Note and the Agreement by the assignment, pledge and delivery to Pledgee, as collateral security therefor, of Pledgor's certificate(s) representing the 1,250 shares of the Corporation's capital stock owned by Pledgor duly endorsed in blank * * *.

At the time of the sale of the Sherwood stock, decedent was 53 years of age, and his life expectancy as determined from the United States Department of Commerce statistics exceeded the 20-year term of the promissory notes. However, decedent died on July 15, 1984, approximately two years after the sale of the stock. Decedent had received two payments totaling $4,812 on each note prior to his death, leaving an unpaid principal balance on each of $136,238.

Gain from the sale of the Sherwood stock was reported on the joint income tax returns of the decedent and his wife for the years 1983 and 1984 under the installment method of accounting pursuant to section 453 and the regulations thereunder pertaining to contingent payment sales.

In 1983, decedent received a principal payment of $1,958 from each of his four children with respect to the purchase of

[98 T.C. 345]

the Sherwood stock. On Form 6252 (Computation of Installment Sale Income) attached to their 1983 joint income tax return, decedent and his wife reported $1,955 of each payment as capital gain income after applying a gross profit ratio equal to .9982270 (see sec. 15A.453-1(b)(2)(i), Temporary Income Tax Regs., 46 Fed. Reg. 10709 (Feb. 4, 1981)).

In 1984, decedent received a principal payment of $2,854 from each of his four children with respect to the purchase of the Sherwood stock. On Form 6252 attached to their 1984 joint income tax return, decedent and his wife reported $2,849 of each payment as capital gain income after applying a gross profit ratio of .9982270. On part II of Schedule D (Capital Gains and Losses) attached to their 1984 return, decedent and his wife also reported a long-term capital loss totaling $964. The capital...