Marshall v. United States
| Decision Date | 30 September 1964 |
| Docket Number | No. 2922-SD.,2922-SD. |
| Court | U.S. District Court — Southern District of California |
| Parties | James H. MARSHALL and Thelma Marshall, Plaintiffs, v. UNITED STATES of America, Defendant. |
Harlan F. Harmsen of Driscoll, Harmsen & Wilkins, San Diego, Cal., for plaintiffs.
Francis C. Whelan, U. S. Atty., Los Angeles, Cal., by Loyal E. Keir and Herbert D. Sturman, Asst. U. S. Attys., Los Angeles, Cal., for the United States.
The case was presented for decision on an agreed statement of facts.
It raises a question heretofore undecided, namely —
Whether the assumption by the purchaser of the accounts payable of the plaintiffs-sellers' business constituted "payments actually received in that year" of sale under Section 453 of the Internal Revenue Code of 1954?
Plaintiffs, husband and wife, were engaged in an agricultural business as sole proprietors. For legitimate business reasons, a corporation was formed to purchase the assets of said business, with the plaintiffs owning 60% of the shares. On April 1, 1959, the sale was consummated for the sum of $110,513.22, payable in the following manner: the corporation assumed the current liabilities amounting to $25,568.86, and also assumed an account payable to plaintiffs for $9,944.36, and executed a promissory note payable to the plaintiffs for the balance of the purchase price, viz., $75,000. During the remainder of 1959, the corporation paid in the ordinary course of business the current liabilities ($25,568.86) and the plaintiffs received payment in full of their $9,944.36 account and an additional sum of $4,000 on the $75,000 promissory note.
Since plaintiffs' adjusted basis of these business assets was $90,225.83, there was a long-term capital gain of $20,287.39. Plaintiffs reported said gain on their joint 1959 federal income tax return on the installment method provided under Section 453 of the Internal Revenue Code of 1954. The Commissioner of Internal Revenue disallowed the installment method of reporting said gain, contending that more than 30% of the selling price was "actually received" by plaintiffs in 1959, making the entire amount of said gain taxable in 1959.
After paying the deficiency and penalties assessed by the Commissioner for 1959, in connection with this gain, plaintiffs brought the present suit to recover this assessment together with interest thereon.
Income from the casual sale of personal property may be reported on the installment method if, in the taxable year of the sale, there are no payments, or the payments (exclusive of evidences of indebtedness of the purchaser) do not exceed 30% of the selling price. 26 U.S.C. § 453. The reason for such a provision in the Internal Revenue Code was clearly stated in Commissioner of Internal Revenue v. South Texas Lumber Co., (1948) 333 U.S. 496, 503, 68 S.Ct. 695, 700, 92 L.Ed. 831:
"The installment basis of reporting was enacted, as shown by its history, to relieve taxpayers who adopted it 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."
A quick review of the facts clearly indicates that the present case is typical of those transactions that should be reported on the installment basis. Out of the selling price of some $110,000, plaintiffs received nothing at the time of the transaction in the form of cash; during the remainder of 1959, they "received in cash only" approximately $14,000, out of which "small portion of the sales price" the government has extracted the total tax payable on the long-term capital gain of approximately $20,000. The fact that plaintiffs are lawfully entitled to receive the balance owing on the promissory note of $71,000 does not seem to be as important to the government as does the fact that the current liabilities of $25,000 were paid by the corporation in the same year they were assumed.
When the installment basis of reporting income relates to a real estate transaction, it is well settled that the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, is not to be considered as a part of the "payments actually received in that year" of sale. Sec. 1.453-4(c), Income Tax Regs. (1964); J. W. McWilliams (1929) 15 B.T.A. 329; Denco Lumber Co. (1962) 39 T.C. 8.
In this case, we are concerned with a casual sale of personal property rather than a real estate transaction; both types of these transactions are covered by the same Section 453 of the Internal Revenue Code ...
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Irwin v. CIR
...Regulation, 1.453-4, supra. In Marshall the taxpayers operated an agricultural business as a proprietorship. See Marshall v. United States, S.D.Cal., 1964, 241 F.Supp. 30. The sales price was $110,513.22 which included, inter alia, the assumption of $25,568.86 in current liabilities of the ......
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Horneff v. Comm'r of Internal Revenue
...in the present case. When the Irwin case was decided this Court was aware of the District Court decision in Marshall v. United States, 241 F.Supp. 30 (S.D. Cal. 1964), and the decision was mentioned in our opinion as being in conflict with W. H. Batcheller, 19 B.T.A. 1050 (1930), and the ra......
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United States v. Marshall
...dictum to the same effect in Stephen A. Cisler, Jr., (1962) 39 T.C. 458, 466. In the case at bar the District Court held (Marshall v. United States, 241 F. Supp. 30) that the assumption of current business obligations by the purchasing corporation was analogous to the assumption of a mortga......
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Irwin v. Comm'r of Internal Revenue, Docket Nos. 1543-63— 1545-63.
...whether the regulation relied on by petitioners extends to nonmortgage liabilities. Petitioners also rely upon Marshall v. United States, 241 F. Supp. 30 (S.D. Calif. 1964), a recent District Court case now on appeal in the Ninth Circuit. The controversy in Marshall centered around whether ......