Oden v. Comm'r of Internal Revenue
| Decision Date | 21 June 1971 |
| Docket Number | 294-68.,Dockets Nos. 5546-67,293-68 |
| Parties | J. EARL ODEN AND EDITH ODEN, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Joe P. Mathews, for the petitioners.
John W. Dierker, for the respondent.
In 1963, petitioners reported the proceeds from the sale of certain property under the installment sale provisions of sec. 453, I.R.C. 1954. Respondent determined that petitioners were not entitled to use that method on the ground that they received more than 30 percent of the selling price in the year of sale. Held, on the record, respondent's determination sustained.
The Commissioner determined deficiencies an income tax as follows:
+-------------------------------+
¦Docket No. ¦Year ¦Amount ¦
+-------------+------+----------¦
¦ ¦ ¦ ¦
+-------------+------+----------¦
¦5546-67 ¦1963 ¦$16,843.16¦
+-------------+------+----------¦
¦293-68 ¦1963 ¦17,360.9 ¦
+-------------+------+----------¦
¦294-68 ¦1963 ¦9,755.9 ¦
+-------------------------------+
The only issue for decision is whether petitioners were entitled to use the installment method of reporting income as provided in section 453 of the Internal Revenue Code of 1954.2
Some of the facts have been stipulated by the parties. The stipulation and the exhibits attached thereto are incorporated herein by this reference.
Petitioners are J. Earl Oden (hereinafter Earl) and his wife Edith Oden, John S. Braziel (hereinafter John) and his wife Betty Braziel, and James Ray Oden (hereinafter James) and his wife Patsy C. Oden. Each of the aforementioned couples filed a joint Federal income tax return for the taxable year 1963 with the district director of internal revenue in Dallas, Tex.
James and his wife resided in Abilene, Tex., at the time of the filing of the petitions herein, whereas the other petitioners resided in Comanche, Tex., at the time.
During the year at issue, Earl, John, and James were equal partners in the partnership of Oden, Braziel & Oden (hereinafter sometimes referred to as O.B. & O.). They also owned the following interests in the Choice Baking Co., Inc. (hereinafter Choice):
+--------------------------------------+
¦ ¦ ¦Stock ownership (shares) ¦
+-----+-----+--------------------------¦
¦Earl ¦ ¦400 ¦
+-----+-----+--------------------------¦
¦John ¦ ¦400 ¦
+-----+-----+--------------------------¦
¦James¦ ¦200 ¦
+-----+-----+--------------------------¦
¦ ¦Total¦1,000 ¦
+--------------------------------------+
On April 1, 1961, Choice, with the consent of its shareholders, elected to be taxed under section 1372, thereby causing the stockholders to be taxed as individuals in accordance with the provision of subchapter S of the Internal Revenue Code of 1954. This election was effective during the year at issue.
On February 15, 1963, Choice and the O.B. & O. partners agreed to sell certain personal and real property for a total consideration of $364,457 to the Norris Dairy Products Co. Employees' Profit Sharing Trust (hereinafter Norris Trust). 3
Of this total purchase price, Norris Trust agreed to pay $112,000 while Norris Dairy agreed to pay the remainder.4
On the closing date, March 18, 1963, Norris Dairy paid $23,000 in cash5 toward its obligation and executed a promissory note in the amount of $229,457 to the order of Choice, Earl, James, and John. This note was payable in three consecutive annual installments as follows:
+-------------------------------+
¦Due date ¦Amount due ¦
+------------------+------------¦
¦February 15, 1964 ¦$76,485.66 ¦
+------------------+------------¦
¦February 15, 1965 ¦76,485.66 ¦
+------------------+------------¦
¦February 15, 1966 ¦76,485.68 ¦
+-------------------------------+
The note provided that there would be no interest on any installment prior to its maturity. However, it further stated that each installment of the note would draw interest from the date due until paid at the rate of 10 percent per annum.
The document purporting to be an agreement to sell was dated February 15, 1963, and provided that the promissory note was to be secured as follows: Norris Dairy agreed to place with the Mercantile National Bank in Dallas (hereinafter sometimes referred to as Mercantile National) three certificates of deposit6 (hereinafter sometimes referred to as certificates) issued by the First National Bank of Dallas (hereinafter referred to sometimes as First National), each certificate being in an amount equal to one-third of the total principal amount of the note. This document was explicit with respect to these certificates and it stated as follows:
These certificates of deposit are to be payable to the order of * * * (Norris Dairy) on the dates that each installment payment is due on the note. It is agreed that these certificates of deposit shall be subject to a first chattel mortgage or pledge lien in favor of Sellers. As long as said note is not in default the interest7 accruing on said certificates * * * shall belong to and be the property of * * * (Norris Dairy) and may be drawn by * * * (Norris Dairy).
The Norris Trust also executed a promissory note on the closing date in the amount of $112,000. This note was identical to the note executed by the Norris Dairy in all but one respect: it was payable in five, rather than three, consecutive annual installments. The due date and amount of each installment were:
+---------------------------+
¦Due date ¦Amount due ¦
+--------------+------------¦
¦Feb. 15, 1964 ¦$33,600 ¦
+--------------+------------¦
¦Feb. 15, 1965 ¦19,600 ¦
+--------------+------------¦
¦Feb. 15, 1966 ¦19,600 ¦
+--------------+------------¦
¦Feb. 15, 1967 ¦19,600 ¦
+--------------+------------¦
¦Feb. 15, 1968 ¦19,600 ¦
+---------------------------+
The document dated February 15, 1963, also recited that this note would be secured by certificates of deposit, each certificate having a principal amount and maturity date corresponding to the principal amount and maturity date of each installment of the note. The interest, at the rate of 3 1/2 percent per year, on these certificates was payable to the Norris Trust, unless it was in default on its note. These certificates were likewise placed in escrow with Mercantile National.
On March 18, 1963, Norris signed a document called a collateral pledge agreement which stated that the pledged property consisted of the eight certificates of deposit described heretofore. Moreover, this document specifically recited that Choice and the O.B. & O. partners had a first and superior lien on the pledged property, but that they were not considered the owners thereof.
The escrow agreement, dated March 19, 1963, and entered into by Norris, Choice, Earl, James, John, and Mercantile National provided, in pertinent part, as follows:
2. Escrow Holder8 shall not surrender possession of any of said certificates of deposit to any person or party whatever except as follows:
(a). Upon receipt by Escrow Holder of cash or a Bank Cashier's check payable either to Escrow Holder or Pledgees9 not later than three (3) days after the due date of each of the certificates of deposit described above in an amount equal to the principal amount of such certificates as are then due, then Escrow Holder shall release and deliver to Pledgors10 such certificates or certificate as are then due and remit to Pledgees, in care of State National Bank, Comanche, Texas, the amount or bank cashier's check payable to Pledgees which has been received by Escrow Holder.
The certificates of deposit were endorsed in blank when they were deposited in escrow.
Despite the procedure outlined in the escrow agreement, on at least each of two occasions that a certificate of deposit became due, the certificate was presented to First National for payment by a messenger of Mercantile National with the following instructions:
Your instructions (are) to cause to be issued your bank's cashier's check for the principal sum of the Certificate of Deposit payable as follows:
Choice Baking Company, Inc., J. E. Oden; James Oden and J. S. Braziel Interest at 3 1/2 percent which has been earned to the maturity is to be credited to the commercial account with your bank of Norris * * *
It was the usual practice of Mercantile National to present each matured certificate for payment and to have the principal amount thereof issued to petitioners regardless of whether Norris was in default on the notes.
The parties to the sale intended and agreed that the certificates of deposit were to be presented for payment at maturity and that the proceeds therefrom were to be released as payment to the sellers immediately thereafter.
All the transactions in connection with the certificates of deposit were entered into the accounting books of Norris which relied upon First National and Mercantile National to handle the collection of the certificates of deposit as they became due.
The First National Bank of Dallas made a loan to Norris in connection with the purchase of assets in question. This loan, which was personally guaranteed by Stanley Norris, the president and sole stockholder of Norris Dairy, was not secured in any respect by the certificates of deposit. In fact, First National waived any rights it might have had against the certificates. Norris used part or all of this loan to obtain the certificates in question from First National.
It was the sellers who insisted that the buyers purchase certificates of deposit. Insofar as the buyers were concerned they had no preference as to which maturity dates were to be put on the certificates.
OPINIONOn February 15, 1963, Choice and the O.B. & O. partners, viz, the petitioners herein, agreed to sell certain personal and real property for a total consideration of $364,457 to Norris....
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