Robinson v. Comm'r of Internal Revenue , Docket No. 5597-67.
| Decision Date | 15 April 1970 |
| Docket Number | Docket No. 5597-67. |
| Citation | 54 T.C. 772 |
| Parties | RAYMOND ROBINSON AND LILLIE H. ROBINSON, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
E. L. Cullum, for the petitioners.
F. Timothy Nicholls, for the respondent.
On Jan. 10, 1964, the petitioner sold his business under a contract providing for payments in installments without interest. At that time, the transaction met all the requirements of sec. 453(b) of the Internal Revenue Code of 1954 for the reporting of the gain on the installment method. On Feb. 26, 1964, Congress enacted sec. 483 of the Code which provided that, for purposes of the Code, where no interest payments are specified with respect to certain installment payments, a part of each installment payment shall be treated as interest. It was provided that sec. 483 should apply to payments made after Dec. 31, 1963, on account of sales occurring after June 30, 1963. Held, that sec. 483 retroactively applies to the petitioner's transaction with the result that the payment received by the petitioner in the taxable year of sale exceeded 30 percent of the selling price as reduced by unstated interest, and that, therefore, the petitioner was not entitled to report the gain upon the sale on the installment method provided by sec. 453(b).
The respondent determined a deficiency of $4,878.75 in income tax for the taxable year 1964. The only issue presented is whether the petitioner is entitled to report the gain upon the sale of his insurance agency in 1964 upon the installment method under section 453(b) of the Internal Revenue Code of 1954.
Some of the facts have been stipulated and the stipulations are incorporated herein by this reference.
The petitioners, husband and wife, filed a timely joint Federal income tax return for the taxable year 1964, and on November 22, 1967, filed an amended return for that year, with the district director of internal revenue, Little Rock, Ark.
At the time of the filing of the petition herein the legal residence of the petitioners was Little Rock, Ark. Since the petitioner Lillie H. Robinson is a party herein only because of having filed a joint return, the petitioner Raymond Robinson will hereinafter be referred to as the petitioner.
About September 1963 American Fidelity Assurance Co. (hereinafter referred to as American Fidelity) made a proposal to the petitioner to purchase from him his insurance agency, known as Robinson Insurance Agency of Little Rock, Ark. In October 1963 the petitioner consulted representatives of the Internal Revenue Service in Oklahoma City with respect to the requirements for reporting gain on the sale on the installment method and was advised that the sale could be reported on the installment method if the payments received in the year of sale did not exceed 30 percent of the selling price. The reporting of the gain on the installment method was a determining factor as to whether petitioner would sell the agency at that time. The petitioner then contacted his income tax adviser and together, on December 3, 1963, they met with the representatives of American Fidelity for the purpose of working out the details of the sale. At that time the selling price was agreed upon and it was further agreed that payments should be made in installments over a period of 5 years, and that the downpayment should not exceed 29 percent of the selling price in order to qualify the transaction as an installment sale for tax purpose. The petitioner instructed the accountant for the purchaser to draw up a contract upon that basis.
On January 10, 1964, the petitioner and American Fidelity entered into a written agreement whereby the petitioner agreed to sell and American Fidelity agreed to purchase the goodwill (value as going-business concern) of the petitioner's insurance agency for $73,187.23. It was further agreed that $21,187.23 of the selling price should be paid on January 10, 1964, and that the balance of $52,000 should be paid in installments of $13,000 per year beginning January 10, 1965, and payable on the 10th of January of each year thereafter until paid, without interest.
Pursuant to the terms of the above contract, the petitioner received from American Fidelity on January 10, 1964, the amount of $21,187.23, and thereafter received the installment payments in accordance with the contract until the full amount of the stated purchase price was paid.
As of January 10, 1964, the contract entered into between the petitioner and American Fidelity met all the conditions and qualifications set forth in section 453(b) of the Internal Revenue Code of 1954 for reporting gain upon the installment method.
On February 26, 1964, Congress enacted section 224 of the Revenue Act of 1964 (Pub. L. 88-272), which amended part III of subchapter E of chapter 1 of the Internal Revenue Code of 1954 by adding section 483.1
In their original 1964 joint Federal income tax return the petitioners treated the above sale as an installment sale and reported for that year taxable gain of $6,717.41 from the sale. Such gain was computed as follows:
+-----------------------------------------------+
¦$73,187.23¦Stated contract selling price ¦
+----------+------------------------------------¦
¦-26,779.49¦Cost of goodwill sold ¦
+----------+------------------------------------¦
¦46,407.74 ¦Total gain on sale ¦
+----------+------------------------------------¦
¦ ¦ ¦
+----------+------------------------------------¦
¦63.41% ¦Ratio of total gain to selling price¦
+----------+------------------------------------¦
¦ ¦ ¦
+----------+------------------------------------¦
¦21,187.23 ¦Downpayment received in 1964 ¦
+----------+------------------------------------¦
¦X.6341 ¦Ratio ¦
+----------+------------------------------------¦
¦13,434.82 ¦Capital gain realized in 1964 ¦
+----------+------------------------------------¦
¦-6,717.41 ¦One-half ¦
+----------+------------------------------------¦
¦6,717.41 ¦Reported capital gain for 1964 ¦
+-----------------------------------------------+
In the notice of deficiency the respondent applied section 483 to the above sale and computed unstated interest of $5,969.47 on the deferred payments. 2 The respondent then deducted this imputed interest from the stated sale price of $73,187.23, leaving a recomputed or adjusted sale price of $67,217.76. The respondent then determined that the downpayment of $21,187.23 was in excess of 30 percent of the adjusted selling price and therefore held that the petitioner was not entitled to employ the installment sales provisions of section 453(b) of the Internal Revenue Code of 1954. This portion of his computation was as follows:
+---------------------------------------------------------------------+
¦Total selling price, per contract ¦$73,187.23¦
+----------------------------------------------------------+----------¦
¦Less: Unstated interest ¦5,969.47 ¦
+----------------------------------------------------------+----------¦
¦ ¦ ¦
+----------------------------------------------------------+----------¦
¦Adjusted selling price ¦67,217.76 ¦
+----------------------------------------------------------+----------¦
¦Downpayment in 1964 ¦21,187.23 ¦
+----------------------------------------------------------+----------¦
¦30% of $67,217.76 ¦20,165.33 ¦
+----------------------------------------------------------+----------¦
¦ ¦ ¦
+----------------------------------------------------------+----------¦
¦Excess received in 1964 over 30% of adjusted selling price¦1,021.90 ¦
+---------------------------------------------------------------------+
Accordingly, the respondent determined that in the taxable year 1964 the petitioner had income from the sale as follows:
+----------------------------------------------------------+
¦Stated selling price ¦$73,187.23¦
+-----------------------------------------------+----------¦
¦Less: Unstated interest ¦5,969.47 ¦
+-----------------------------------------------+----------¦
¦ ¦ ¦
+-----------------------------------------------+----------¦
¦Adjusted selling price ¦67,217.76 ¦
+-----------------------------------------------+----------¦
¦Basis of goodwill sold ¦26,779.49 ¦
+-----------------------------------------------+----------¦
¦ ¦ ¦
+-----------------------------------------------+----------¦
¦Total gain ¦40,438.27 ¦
+-----------------------------------------------+----------¦
¦Less: Long-term capital gain deduction ¦20,219.14 ¦
+-----------------------------------------------+----------¦
¦ ¦ ¦
+-----------------------------------------------+----------¦
¦Taxable gain on sale ¦20,219.13 ¦
+-----------------------------------------------+----------¦
¦Gain reported on your return ($13,434.82 @ 50%)¦6,717.41 ¦
+-----------------------------------------------+----------¦
¦ ¦ ¦
+-----------------------------------------------+----------¦
¦Increase in taxable income ¦13,501.72 ¦
+----------------------------------------------------------+
In their amended income tax return for the taxable year 1964 which...
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