Horneff v. Comm'r of Internal Revenue

• Decision Date: 16 April 1968
• Docket Number: Docket No. 870-66.
• Citation: 50 T.C. 63
• Parties: J. CARL HORNEFF AND LULA HORNEFF, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

50 T.C. 63

J. CARL HORNEFF AND LULA HORNEFF, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 870-66.

Tax Court of the United States.

Filed April 16, 1968.

[50 T.C. 63]

Romolo J. Dicintio, for the petitioners.

Peter J. Picotte II, for the respondent.

Petitioners sold their sole proprietorship business pursuant to an agreement dated Aug. 29, 1961, for a stated consideration of $50,000 and the assumption by the purchasers of all business liabilities which totaled $44,031.45. The purchasers made payments of $30,378.93 on these liabilities, all of which were due and payable in 1961. Petitioners also received cash of $3,625. Held, petitioners do not qualify for installment reporting of the gain on the sale of their business under sec. 453, I.R.C. 1954, because they received in excess of 30 percent of the selling price in the year of sale. The liabilities assumed and paid ($30,378.93) by the purchasers in the year of sale are included as part of the initial-year payments. Irwin v. Commissioner, 390 F.2d 91 (C.A. 5, 1968), reversing45 T.C. 544, and United States v. Marshall, 357 F.2d 294 (C.A. 9, 1966), not followed.

OPINION DAWSON, Judge:

Respondent determined a deficiency in the income tax of petitioners for the year 1961 in the amount of $1,960.50.

The only issue for decision is whether the petitioners, who sold their sole proprietorship business in 1961, received payments in excess of 30 percent of the selling price during that year so that they were precluded from using the installment method provided by section 453¹ in reporting income from the sale. Petitioners have conceded the disallowance of depreciation claimed in the amount of $2,278.65.

All of the facts have been stipulated and are incorporated herein by this reference.

J. Carl Horneff and Lula Horneff (herein called petitioners) are husband and wife who resided in Audubon, N.J., at the time the petition was filed in this proceeding. They filed their joint Federal income tax return for the year 1961 with the district director of internal revenue at Camden, N.J.

Prior to September 1, 1961, the petitioner, J. Carl Horneff, was engaged in the business of manufacture and retail sale of venetian blinds and storm windows as a sole proprietorship, under the trade name Sunbeam Venetian Blind, with his place of business located at 6312 Westfield Avenue, Pennsauken, N.j. Petitioner reported his income from the business in accordance with the accrual method of accounting and on a calendar year basis Petitioners reported all other items of income and deductions on their 1961 joint Federal income tax return in

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accordance with the cash receipts and disbursements method of accounting.

On August 29, 1961, the petitioners entered into an agreement with William J. Reiss and his wife, Alma M. Reiss (herein called the purchasers), for the sale of the proprietorship business including the land and building. The agreement provides, in pertinent part, as follows:

THIS AGREEMENT, made this 29th day of August, 1961, between Joseph Carl Horneff, Lula Elizabeth Horneff, his wife, Joseph Carl Horneff, t/a Sunbeam Venetian Blind Co., of the Township of Pennsauken, County of Camden and State of New Jersey, of the first part, hereinafter called the ‘Sellers,‘ and William J. Reiss and Alma M. Reiss, his wife, of the Borough of Haddon Heights, County of Camden and State of New Jersey, of the second part, hereinafter called the ‘Buyers.’

WITNESSETH, that the Sellers and Buyers respectively agree to sell and buy ALL THAT land and premises situate in the Township of Pennsauken, County of Camden and State of New Jersey:

(Description omitted.)

2. Sellers agree to sell and Buyers agree to buy from the Sellers, all of that certain stock of goods, wares, merchandise, materials, supplies, fixtures, machinery, equipment (excluding the jeep, private automobiles of Sellers, two (2) motorcycle tote tractors, private desk and chair and addressograph machine), trade name of Sunbeam Venetian Blind Co., and Holiday Storm Window Products, good will including all accounts receivable and payable belonging to said Sellers, and forming a part of and/or now located at 6312 Westfield Avenue, Pennsauken, New Jersey.

3. Sellers hereby agree to grant and convey to Buyers a Deed for the premises hereinabove described and a Bill of Sale for all the inventory, equipment, fixtures, trade name and good will attached to said business now operated by Sellers under the trade name of Sunbeam Venetian Blind Co. and Holiday Storm Window Products, for and in consideration of the sum of Fifty Thousand ($50,000.00) Dollars, which consideration shall be paid in the manner following:

(a) Buyers shall pay the sum of Fifteen Hundred ($1500.00) Dollars upon the execution of this contract, which shall be held in escrow by Joseph W. Zampino, Esquire, 115 N. 4th Street, Camden 2, New Jersey, said sum to be returned to Buyers in the following events:

(1) In the event title to be delivered shall not be marketable and insurable by a reputable title company and not be free and clear of all encumbrances including municipal liens and assessments and liability for assessments for improvements now constructed, or authorized and not yet assessed.

(2) In the event the Sellers shall not have complied with all the requirements and conditions of the Bulk Sales Law of the State of New Jersey.

(b) The balance of $48,500.00 shall be payable as follows: One Hundred Twenty-Five ($125.00) Dollars per week commencing September 8, 1961, and commencing each and every week thereafter to and including December 29, 1961; and further payment of Eight Thousand Five Hundred ($8500.00) Dollars on January 2, 1962, and the balance of Thirty-Seven Thousand Eight Hundred Seventy-Five ($37,875.00) Dollars payable not less than Fifty Two Hundred ($5200.00) Dollars per year at the rate of One Hundred ($100.00) Dollars per week, but not more than Seventy-Five Hundred ($7500.00) Dollars per year until the entire balance shall have been paid in full, it being understood that none of the said purchase price of $50,000.00 shall bear any interest.

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(c) Buyers agree to assume all of the liabilities of Sellers in connection with said business and to continue to make the payments due upon the obligations if and when they fall due.

Sellers agree to co-endorse any note or obligation for Buyers during the term of the mortgage which is to be executed in connection with the sale of the premises hereinafter described.

4. It is understood and agreed by and between the Sellers and Buyers, that should the net worth of said business as of September 1, 1961, be less than $35,000.00, the said purchase price of $50,000.00 shall be reduced by the exact amount by which the said net worth is less than $35,000.00.

A trial balance will be prepared to determine said purchase price, which trial balance shall be subject to audit and certification by the Sellers and inspection and approval of Buyers.

5. Sellers hereby authorize Buyers to take possession and control of said real estate and business effective September 1, 1961, it being understood and agreed that immediately following the execution of this agreement and prior to the closing thereof as herein provided, the Sellers shall make and deliver to the Buyers a full and detailed inventory showing the quantity and so far as possible, with the exercise of reasonable diligence, of each article to be included in the sale as of August 31, 1961, which said inventory the Buyers shall retain. The Sellers shall further furnish to the Buyers a written list of the names and addresses of the creditors of the Seller with the amount of the indebtedness due and owing to each as certified by the Sellers under oath to be a full, accurate and complete list of his creditors and of his indebtedness as of August 31, 1961. At least ten days prior to the closing, Buyers shall notify personally or by registered mail, every creditor whose name and address is stated in said list, of the proposed sale, and of the time, date and place of said closing, and this sale shall not be consummated or completed until all of such steps have been taken. In the even (sic) the Sellers shall fail to furnish such inventory or such list of creditors as herein provided, then this contract shall become null and void and the moneys retained in escrow shall be returned to the Buyers, together with Buyers' reasonable expense, or the Buyers may prosecute any legal or equitable action to which the Buyers may be entitled.

6. Sellers further hereby agree to enter a covenant not to engage in, either directly or indirectly, the same or similar business for a period of five (5) years and within a radius of thirty (30) miles.

7. Settlement is to take place at the office of Joseph W. Zampino, Esquire, 115 N. 4th Street, Camden 2, New Jersey, or any reputable title company within five (5) days after the provisions of the Bulk Sales Act shall have been complied with, at which time Sellers shall deliver a special Warranty Deed for premises hereinbefore described and a bill of sale for all the inventory, equipment, fixtures, trade name and good will and Buyers shall concurrently therewith execute a mortgage to Sellers for the unpaid purchase price.

8. Such part of purchase price, if any, unpaid at time of settlement, is to be delivered to Joseph W. Zampino, Esquire, or said title company, to be disbursed after said title company has completed the necessary continuation search to cover the record date of said Deed.

9. In the even (sic) that such title cannot be made by the Sellers as above, and the Buyers are unwilling to accept such title as the Sellers can make, then at Buyers' option, the above payment or payments shall be returned to the Buyers together with the reasonable expenses of examining the title and making survey, or the Buyers may prosecute any legal or equitable action to which the Buyers may be entitled.

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10. In the event of the Buyers not...