Irwin v. CIR, No. 24182.

• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)
• Writing for the Court: BROWN, , and BELL and THORNBERRY, Circuit
• Citation: 390 F.2d 91
• Parties: Ivan IRWIN, Jr. and Ann Vanston Irwin et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Docket Number: No. 24182.
• Decision Date: 20 February 1968

390 F.2d 91 (1968)

Ivan IRWIN, Jr. and Ann Vanston Irwin et al., Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 24182.

United States Court of Appeals Fifth Circuit.

February 20, 1968.

390 F.2d 92

Neil J. O'Brien, Dallas, Tex., Wynne, Jaffe & Tinsley, Dallas, Tex., for petitioners.

Lester R. Uretz, Chief Counsel, Hu S. Vandervort, Atty., I.R.S., Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Stuart A. Smith, Attys., Dept. of Justice, Washington, D. C., Harold C. Wilkenfeld, Atty., Dept. of Justice, Washington, D. C., for respondent.

Before BROWN, Chief Judge, and BELL and THORNBERRY, Circuit Judges.

GRIFFIN B. BELL, Circuit Judge:

The sole issue for determination on this review of a Tax Court decision is whether the gain realized by appellant taxpayers on the sale of their business is taxable in full in the year of sale. The Tax Court, sustaining the Commissioner of Internal Revenue, held that it was. The taxpayers contend that they were entitled to report the gain on the installment method as provided in § 453(b) (1) (B) of the Internal Revenue Code of 1954.¹ The issue narrows

390 F.2d 93

to the question whether taxpayers as sellers lost the right to return the gain on the installment basis by reason of the payment by the purchasers during the year of sale of liabilities due by the sellers to third persons and assumed by purchasers. The inclusion of these payments would make the total payment received during the year of sale exceed thirty per cent of the selling price and thus eliminate the gain from installment basis treatment. 26 U.S.C.A. § 453(b) (2) (A) (ii). The judgment of the Tax Court is due to be affirmed if the payment of these assumed liabilities by the purchasers to third persons during the year of sale are, under the statute, "payments in the year of sale" to the taxpayers; otherwise not. We hold they were not and reverse.²

In 1959 taxpayers sold their insurance business, which was operated as a partnership, for the total amount of $471,539.64. The purchasers paid $81,539.64 in cash at the closing and delivered promissory notes to taxpayers for the balance of $390,000.00. No part of this balance was paid in 1959. In addition, the purchasers assumed the partnership business liabilities existing as of May 1, 1959, in the amount of $271,186.95. No part of this sum was due purchasers. They paid a total of $237,974.05 during 1959, the year of sale, on these liabilities. These payments were made in the regular course of the business and included insurance premium notes payable, accounts payable to insurance companies, payroll taxes, and various automobile notes and other accounts payable. The Tax Court considered the $237,974.05 payment of these business liabilities by the purchasers as part of the payment received by the taxpayers as sellers in the year of sale within the meaning of § 453(b) (2) (A) (ii), supra. As a result, according to the Tax Court, taxpayers received more than thirty per cent of the selling price during the year of sale and thus were not entitled to report their gain from the sale on the installment basis.

This case presents a square conflict between the decision of the Tax Court in this case and a decision of the Court of Appeals for the Ninth Circuit which was

390 F.2d 94

decided just nine days prior to the Tax Court decision. United States v. Marshall, 9 Cir., 1966, 357 F.2d 294. The facts in the Marshall case were that the taxpayers, husband and wife, sold their proprietorship to a corporation. A part of the sales price was to be paid by the assumption of the current liabilities of the proprietorship by the purchaser corporation. The balance of the purchase price was represented by a promissory note. The current liabilities of the proprietorship were paid by the corporation in the year of sale in the ordinary course of business. The Commissioner disallowed the installment method of reporting the gain on the sale, contending that taxpayer received more than thirty per cent of the selling price in the year of sale. This depended on whether the sums paid by the corporation on the assumed current liabilities of the proprietorship (taxpayers) were to be included as a payment received by sellers in the year of sale

The Court of Appeals, affirming the ruling of the District Court in favor of the taxpayer and against the contention of the Commissioner, concluded that the payment of the current obligations by the purchaser should not be included as payment received by the sellers during the year of sale within the meaning of the thirty per cent qualification, § 453(b) (2) (A) (ii), supra. The applicable Treasury Regulation, 26 CFR § 1.453-4,³ relating to the sale of real property and the exclusion of the amount of an assumed mortgage as a "payment" except as it exceeds basis was extended to cover the personal property situation.

The court noted that the purpose of the installment payment provision was to relieve taxpayers from having to pay an income tax in the year of sale based on the full amount of anticipated profits when in fact they had received in cash only a small portion of the sales price, citing Commissioner of Internal Revenue v. South Texas Lumber Company, 1948, 333 U.S. 496, 503, 68 S.Ct. 695, 92 L.Ed. 831. See also Burnet v. S & L Building Corporation, 1933, 288 U.S. 406, 53 S.Ct. 428, 77 L.Ed. 861. The court also noted that the Treasury Regulation, supra, had been extended, by analogy, to

390 F.2d 95

the sale of personal property, citing I.T. 2468, VIII-1 Cum.Bull. 159, at 160 (1929), and a dictum in Stephen A. Cisler, Jr., 39 T.C. 458, 466 (1962)

The Tax Court was of the view that the decided cases indicated that a payment of assumed obligations in the year of sale had to be included as a payment within the thirty per cent statutory qualification. We have examined the cases cited by the Tax Court as authority for this proposition. No one...