Riss v. CIR, No. 8530.

CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)
Writing for the CourtPICKETT and SETH, Circuit , and CHRISTENSEN
Citation368 F.2d 965
PartiesRobert B. RISS and Georgina Riss, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Docket NumberNo. 8530.
Decision Date10 November 1966

368 F.2d 965 (1966)

Robert B. RISS and Georgina Riss, Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 8530.

United States Court of Appeals Tenth Circuit.

November 10, 1966.


368 F.2d 966

William B. Bundschu, Kansas City, Mo., for petitioners.

Thomas L. Stapleton, Attorney, Department of Justice, Washington, D. C. (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson and Stephen H. Paley, Attorneys, Department of Justice, on the brief), for respondent.

Before PICKETT and SETH, Circuit Judges, and CHRISTENSEN, District Judge.

SETH, Circuit Judge.

This appeal concerns the installment method of reporting income under § 453 of the Internal Revenue Code of 1954. The petitioner-taxpayer,1 Robert B. Riss, seeks reversal of the decision of the Tax Court holding that the taxpayer received in excess of thirty per cent of the sale price of certain corporate stock in the sale year of 1957, thus precluding the taxpayer's use of § 453 to report income from an installment sale on the installment method.

The facts, as stipulated or developed by the record, and about which there is no dispute, are simplified and summarized as follows:

In late 1954, David Rapoport and Harris Klein organized the Astor-Broadway

368 F.2d 967
Holding Corporation (hereinafter referred to as Astor) for the purpose of acquiring certain property interests in New York City. Rapoport and Klein owned the outstanding stock of Astor. Astor contracted to acquire the following property: The fee to a warehouse at 426 Lafayette Street (the warehouse); leasehold interests in 770 Broadway (the South building) and 780 Broadway (the North building). The North and South buildings had once housed the Wanamaker Department Store, but the buildings were vacant when the contract was negotiated. The sale price of the property interests described above was $5,806,000, of which Astor was to initially pay in cash $1,057,000. Astor gave mortgages for the balance in the sums of $825,000 on the warehouse and $3,925,000 on the leasehold interests in the North and South buildings

To secure funds for the initial cash payments of $1,057,000, Rapoport and Klein approached the taxpayer and his father (the Riss family). The Riss family agreed to provide funds, and in 1955 the Riss family entered into a fifty per cent partnership agreement with Rapoport and Klein. At the same time the Riss family also bought fifty per cent of Astor's outstanding stock. Immediately after Astor acquired the property interests the leaseholds on the North and South buildings and the right to operate the warehouse were transferred to the Riss family-Rapoport-Klein partnership; the partnership then leased the properties back to Astor for operation. The partnership was in the nature of a joint venture operating the properties through Astor.

During the term of the partnership, which was dissolved on July 11, 1956, the warehouse was profitably leased. The partners agreed that the South building could be profitable only if it were remodeled into an office building, and the partnership obtained financing and commenced remodeling. Prospective creditors insisted, however, that the properties be transferred back to Astor from the partnership, and this was done.

The partnership operated at a loss during its existence, and upon its termination in July 1956, the taxpayer and his father (together with Rapoport and Klein) were each liable to the partnership for his share of the book capital deficit in the sum of $127,000. The liabilities of the partnership were then nearly five million dollars. The Riss family's combined partnership liability of $254,000 for capital deficit was transferred to Astor's books as receivables when the partnership was dissolved and the property interests were transferred back to Astor.

The taxpayer's sister, Louise Riss, acquired a one-third interest in Astor's shares then held by the taxpayer and his father; thus the taxpayer, his sister, and his father each owned an undivided one-third interest in fifty per cent of Astor's outstanding stock after termination of the partnership.

Disagreement arose between the Riss family and Rapoport and Klein concerning the operation of Astor, and in January 1957 the Riss family agreed to sell their stock to Astor for $1,778,000, to be paid for by Astor as follows: Cash down payment, $424,000; installment obligation, $1,100,000; and cancellation by Astor of the Riss family's partnership indebtedness, $254,000. In 1957, the year of sale, the Riss family received the cash down payment and seven monthly installments on Astor's $1,100,000 obligation, a total of $482,000 in cash, which is less than thirty per cent of the sale price. But, as mentioned, Astor also agreed to cancel the Riss family's partnership indebtedness to it of $254,000. If the cancelled indebtedness is added to the cash received by the Riss family in 1957 the total payment received by the Riss family in the year of sale is $736,000, which exceeds thirty per cent of the sale price and prevents the taxpayer's use of § 453 to report income from an installment sale on the installment method.

Although "taxpayer" and "Riss family" are used interchangeably herein, it is understood that the individual taxpayer (and his wife) were taxed on only one-third

368 F.2d 968
of the Riss family's gain on the stock sale to Astor

The Tax Court held that cancellation by Astor of the Riss family's partnership indebtedness constituted part of the payment received in the year of sale; the correctness of this determination is the primary issue in this appeal.

Cancellation of a seller's indebtedness to the purchaser as partial consideration for the purchase has been held equivalent to receipt by the seller of that part of the sale price. See W. H. Batcheller, 19 B.T.A. 1050; James Hammond, 1 T.C. 198; Stephen A. Cisler, Jr., 39 T.C. 458; Taylor v. Commissioner of Internal Revenue, 298 F.2d 198 (4th Cir.); United States v. Hall, 307 F.2d 238 (10th Cir.); Newmark v. C. I. R., 311 F.2d 913 (2d Cir.). Similarly, assumption by a purchaser of the seller's obligation to third parties has been held equivalent to receipt by the seller of that part of the sale price. Burnet v. S. & L. Building Corp., 288 U.S. 406, 53 S.Ct. 428, 77 L.Ed. 861; Lucas v. Schneider, 47 F.2d 1006 (6th Cir.); Stephen A. Cisler, Jr., supra; James Hammond, supra; J. W. McWilliams, Williams v. C. I. R. 15 B.T.A. 329. "When a taxpayer's obligations are assumed by another or are reduced or canceled as part of a business transaction, and the taxpayer is thereby enriched, taxable income may result." 2 Mertens, Federal Income Taxation, § 11.19 (rev. ed. 1961).

The taxpayer in the case at bar, however, contends that the Tax Court here erred by including the cancelled indebtedness as payments received in the sale year 1957 because (1) cancellation of the indebtedness by Astor, absent a novation, did not discharge the Riss family's contingent personal liability to creditors of the partnership, and (2) cancellation of the indebtedness was meaningless because Astor was insolvent and such cancellation was therefore prohibited by New York statutes.

Taxpayer's first point, that cancellation of the...

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18 practice notes
  • Likins-Foster Honolulu Corp. v. CIR, No. 10060-10061.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
    • 16 d4 Outubro d4 1969
    ...to assume the mortgage obligations, together with the release of the mortgagors by the mortgagees. See Riss v. C. I. R., 10 Cir., 368 F.2d 965, 968; Newmark v. C. I. R., 2 Cir., 311 F.2d 913; Clarke v. United States, 94 F.Supp. 543, 548 (E.D.Pa.); and 2 Mertens, Federal Income Taxation, § 1......
  • Bostedt v. Comm'r of Internal Revenue, Docket No. 5395-75.
    • United States
    • United States Tax Court
    • 27 d2 Junho d2 1978
    ...cert. denied 284 U.S. 622 (1931), and [70 T.C. 491] Sterling v. Ham, 3 F. Supp. 386 (S.D. Me. 1933). Similarly, in Riss v. Commissioner, 368 F.2d 965 (10th Cir. 1966), affg. a Memorandum Opinion of this Court, it was held that cancellation of the seller's indebtedness to the purchaser as pa......
  • Hogue v. CIR, No. 71-1569.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
    • 4 d4 Maio d4 1972
    ...Revenue v. Scottish American Investment Co., 323 U.S. 119, 65 S.Ct. 169, 89 L.Ed. 113 (1944); Riss v. Commissioner of Internal Revenue, 368 F.2d 965 (10th Cir. 1966). Whether a loan or guaranty is proximately related to an independent trade or business is a question of fact turning on the i......
  • Faris v. Commissioner, Docket No. 6635-85
    • United States
    • U.S. Tax Court
    • 26 d1 Setembro d1 1988
    ...fair market value is to be determined from all of the facts and circumstances in each case. Riss v. Commissioner 66-2 USTC ¶ 9754, 368 F.2d 965 (10th Cir. 1966), affg. a Memorandum Opinion of this Court Dec. 27,489(M); Dec. 27,061(M); McShain v. Commissioner, supra at 1004. It is, however, ......
  • Request a trial to view additional results
18 cases
  • Likins-Foster Honolulu Corp. v. CIR, No. 10060-10061.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
    • 16 d4 Outubro d4 1969
    ...to assume the mortgage obligations, together with the release of the mortgagors by the mortgagees. See Riss v. C. I. R., 10 Cir., 368 F.2d 965, 968; Newmark v. C. I. R., 2 Cir., 311 F.2d 913; Clarke v. United States, 94 F.Supp. 543, 548 (E.D.Pa.); and 2 Mertens, Federal Income Taxation, § 1......
  • Bostedt v. Comm'r of Internal Revenue, Docket No. 5395-75.
    • United States
    • United States Tax Court
    • 27 d2 Junho d2 1978
    ...cert. denied 284 U.S. 622 (1931), and [70 T.C. 491] Sterling v. Ham, 3 F. Supp. 386 (S.D. Me. 1933). Similarly, in Riss v. Commissioner, 368 F.2d 965 (10th Cir. 1966), affg. a Memorandum Opinion of this Court, it was held that cancellation of the seller's indebtedness to the purchaser as pa......
  • Hogue v. CIR, No. 71-1569.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
    • 4 d4 Maio d4 1972
    ...Revenue v. Scottish American Investment Co., 323 U.S. 119, 65 S.Ct. 169, 89 L.Ed. 113 (1944); Riss v. Commissioner of Internal Revenue, 368 F.2d 965 (10th Cir. 1966). Whether a loan or guaranty is proximately related to an independent trade or business is a question of fact turning on the i......
  • Faris v. Commissioner, Docket No. 6635-85
    • United States
    • U.S. Tax Court
    • 26 d1 Setembro d1 1988
    ...fair market value is to be determined from all of the facts and circumstances in each case. Riss v. Commissioner 66-2 USTC ¶ 9754, 368 F.2d 965 (10th Cir. 1966), affg. a Memorandum Opinion of this Court Dec. 27,489(M); Dec. 27,061(M); McShain v. Commissioner, supra at 1004. It is, however, ......
  • Request a trial to view additional results

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