Irwin v. Comm'r of Internal Revenue, Docket Nos. 1543-63— 1545-63.

Citation45 T.C. 544
Decision Date17 March 1966
Docket NumberDocket Nos. 1543-63— 1545-63.
PartiesIVAN IRWIN, JR., AND ANN VANSTON IRWIN, ET AL,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Neil J. O'Brien and Jim A. Watson, for the petitioners.

Williard A. Herbert, for the respondent.

Petitioners were partners in an insurance agency business. In 1959 they sold their partnership interests to a single buyer who assumed all of the partnership liabilities. Each petitioner-partner received an installment note on which no payments were due during the year of sale plus a small amount of cash which was less than 30 percent of the selling price. However, the buyer paid substantially all of the assumed liabilities in the year of sale. Respondent determined that the installment method could not be used by petitioners in 1959 to report the gains. Held: Petitioners do not qualify for installment reporting of the gains on sales of their interests under section 453, I.R.C. 1954. The partnership liabilities paid by the purchaser in the year of sale must be deemed part of the initial-year payments. HOYT, Judge:

Respondent determined the following deficiencies in petitioners' 1959 income taxes:

+--------------------------------------------------------------+
                ¦Petitioners                             ¦Docket No.¦Deficiency¦
                +----------------------------------------+----------+----------¦
                ¦Ivan Irwin, Jr., and Ann Vanston Irwin  ¦1543-63   ¦$11,401.45¦
                +----------------------------------------+----------+----------¦
                ¦Barney Vanston and Margaret Vanston     ¦1544-63   ¦56,707.98 ¦
                +----------------------------------------+----------+----------¦
                ¦Edmund F. Vanston and Jacqueline Vanston¦1545-63   ¦13,920.12 ¦
                +--------------------------------------------------------------+
                

The sole issue for decision is whether upon a sale of their partnership business the petitioner-partners received payments in excess of 30 percent of the selling price in 1959, the year of sale, and are, therefore, precluded from using the installment method to report the income from the sale. The issues in docket No. 1544-63 with respect to the basis of the farm held by the partnership of Vanston, Hailey and Joy and the useful life of the rental building have been resolved by stipulation.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulation of facts and exhibits referred to therein are incorporated herein by this reference. The copetitioners in each case, Ivan and Ann V. Irwin, Barney and Margaret Vanston, and Edmund F. and Jacqueline Vanston, are husbands and wives, all residing in Dallas, Tex. They timely filed their respective joint Federal income tax returns for the year 1959 with the district director of internal revenue at Dallas, Tex. All of the petitioners used the cash basis of accounting for the taxable year 1959.

Prior to May 1, 1959, Barney Vanston & Co., a general partnership, hereinafter referred to as the partnership, was owned by certain of the petitioners as follows:

+--------------------------------------+
                ¦Barney and Margaret Vanston¦70 percent¦
                +---------------------------+----------¦
                ¦Edmund F. Vanston          ¦15 percent¦
                +---------------------------+----------¦
                ¦Ann Vanston Irwin          ¦15 percent¦
                +--------------------------------------+
                

Edmund F. Vanston and Ann Vanston Irwin are the children of Barney and Margaret Vanston. Petitioners Ivan Irwin and Jacqueline Vanston, son-in-law and daughter-in-law, respectively, of Barney and Margaret Vanston, are parties to this case solely by reason of having filed joint returns with their respective spouses. Hereinafter, references to petitioners' shall be to the four petitioners who were partners in the partnership.

The partnership was in the business of conducting a managing general fire and casualty insurance agency. In conducting such a business the partnership did not itself sell insurance policies; it entered into agency agreements with large casualty insurance companies pursuant to which it represented these companies in developing and managing designated territories. The partnership located local agents in the territory and the local agents in turn entered into agreements with the insurance companies (often through the partnership acting as agent for the companies) under which they were authorized to sell insurance for the companies.

The local agents sold insurance policies to the public and collected the premiums from the policyholders. After a local agent sold a policy and collected the premium, he retained his commission and remitted the balance of the premium to the partnership. The partnership, after receiving these remittances from local agents, deducted therefrom a small percentage as its commission, and then remitted the balance to the insurance company.

The partnership operated on the accrual basis of accounting. Upon receipt of the information from a local agent that a policy had been sold, the partnership made entries in its books debiting ‘Accounts Receivable, Agents' for the amount due from the local agent, crediting ‘Accounts Payable to Insurance Companies' for the amount due to the insurance companies, and crediting commission income for the amount the partnership was entitled to retain. In a typical transaction, where a policy was sold for a $100 premium and the local agent was entitled to a 20-percent commission, and the partnership to a 10-percent commission, the partnership would make the following entry upon learning of the sale by the local agent:

+-----------------------------------------------+
                ¦Accounts Receivable, Agents            ¦$80¦   ¦
                +---------------------------------------+---+---¦
                ¦Accounts Payable to Insurance companies¦   ¦$70¦
                +---------------------------------------+---+---¦
                ¦Commission Income                      ¦   ¦10 ¦
                +-----------------------------------------------+
                

The parties have stipulated into evidence a managing general agent's agreement between the partnership and Ohio Farmers Indemnity Co. This agreement is stipulated as being typical of those which created the managing general agent relationship between the partnership and the various insurance companies which it represented. The stipulated agreement contains the following relevant paragraph:

V. The Managing General Agent shall remit to the Company for all balances not later than ninety (90) days after the close of the month in which the business was written. It is especially provided that before the close of the year all balances be paid to at least the end of September. It further is understood and agreed that the Managing General Agent shall be responsible for collection and payment of all premiums due the Company, whether collected or not and whether collectible or not. (Emphasis added.)

On its balance sheets the partnership showed the balance of Accounts Receivable, Agents, as an asset and the balance of Accounts Payable to Insurance Companies as a current liability. It also made use of a Reserve for Doubtful Accounts, which was shown as a reduction of total receivables.

During the early months of 1959 Barney Vanston entered into negotiations on behalf of the partnership with Kenneth Murchison and Kenneth Murchison, Jr., of Dallas, with a view to the sale of the partnership business to the Murchisons.

By document dated May 1, 1959, the petitioners assigned the entire partnership business to Barney Vanston & Co., Inc., a newly organized corporation, controlled by the Murchisons. None of the petitioners had any interest in this corporation at any time. Under the assignment agreement the purchaser agreed to pay the selling petitioners the sum of $471,539.64.2 At the closing, the purchaser paid $81,539.64 in cash and delivered to the sellers promissory notes for the balance of.$390,000. The cash and notes were distributed in accordance with the respective partnership interests as follows:

The notes were payable in monthly installments, with the first payment on each note due on January 1, 1960.

In the May 1, 1959, assignment contract, the purchaser acquired all of the assets of the partnership, and agreed to assume all of the partnership liabilities existing as of May 1, 1959. The assets conveyed had a book value and tax basis of $349,189.86. Constituting more than two-thirds of this total was the asset, Accounts Receivable, Agents, in the amount of $236,535.17. The liabilities assumed by the purchaser were as follows, as shown in the partnership balance sheet attached to the assignment contract:

+--------------------------------------------------+
                ¦Premium notes payable                  ¦$69,623.46¦
                +---------------------------------------+----------¦
                ¦Accounts payable to insurance companies¦194,299.67¦
                +---------------------------------------+----------¦
                ¦Accrued payroll taxes                  ¦1,480.70  ¦
                +---------------------------------------+----------¦
                ¦Notes payable (automobiles)            ¦3,596.51  ¦
                +---------------------------------------+----------¦
                ¦Accounts payable (other)               ¦2,186.61  ¦
                +---------------------------------------+----------¦
                ¦Total                                  ¦271,186.95¦
                +--------------------------------------------------+
                

Constituting more than 70 percent of the total liabilities was the item ‘Accounts Payable to Insurance Companies,‘ all due to be paid not later than 90 days after the ‘business was written.’

The purchaser made payments on these accounts during the remainder of 1959, and as of December 31, 1959, the balances remaining were as follows:

+--------------------------------------------------+
                ¦Premium notes payable                  ¦$30,777.51¦
                +---------------------------------------+----------¦
                ¦Accounts payable to insurance companies¦0         ¦
                +---------------------------------------+----------¦
                ¦Accrued payroll taxes                  ¦0         ¦
                +---------------------------------------+----------¦
                ¦Notes payable (automobiles)            ¦2,435.39  ¦
...

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