Rose v. Comm'r of Internal Revenue

• Decision Date: 08 October 1970
• Docket Number: Docket No. 2380-69.
• Parties: DAVID O. AND MARJORIE P. ROSE, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

55 T.C. 28

DAVID O. AND MARJORIE P. ROSE, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2380-69.

United States Tax Court

Filed October 8, 1970.

J. J. Fairbank, Jr., for the petitioners.

Marion B. Morton, for the respondent.

Sec. 483 was enacted on Feb. 26, 1964, and provided for the imputation of interest to certain deferred payments received upon the sale or exchange of property. On Jan. 1, 1964, petitioners sold a motel property on the installment basis with payments to be made over 15 years. The terms of the sale made no provision for interest. Respondent sought to tax (as interest income) parts of the deferred payments received by petitioners in 1965 and 1966. Held, the application of sec. 483 to a sale completed less than 2 months prior to its enactment was not violative of the due process clause of the fifth amendment. Held, further, respondent was not estopped from determining deficiencies for 1965 and 1966 where he had failed to make such a determination with respect to similar deferred payments received in 1964.

FORRESTER, Judge:

Respondent has determined deficiencies in income tax for the calendar years 1965 and 1966 in the respective amounts of $1,121.38 and $826.13.

The issues involved are (1) whether the application of section 483 of the Internal Revenue Code of 1954¹ to an installment sale consummated before the enactment of that section violates the due process clause of the fifth amendment of the Constitution, and (2) whether, with respect to that installment sale, respondent is estopped from applying section 483 to installment payments received in 1965 and 1966 where respondent had audited and approved petitioners' income tax return for 1964 but had failed to timely assess any tax with respect to similar payments received by petitioners in 1964.

OPINION

All of the facts have been stipulated and are so found. The stipulation and the exhibits appended thereto are incorporated herein by reference.

David O. Rose and Marjorie P. Rose are husband and wife. For the taxable years 1965 and 1966 they filed joint Federal income tax returns with the district director of internal revenue at Richmond, Va. During 1965 and 1966 and at the time of the filing of the petition herein, they resided in Richmond, Va.

Before and during 1965 and 1966 David O. Rose (hereinafter referred to as petitioner) was engaged in the business of buying, selling, and managing investment properties. His investments were principally in motel, hotel, and apartment realty in and around Richmond, but some of his holdings were also in unimproved real estate.

On May 1, 1961, petitioner acquired a property known as the Royal Motel. On January 1, 1964, when that property had an adjusted basis for land, buildings, furniture, and fixtures of $95,888.61, petitioner sold it to Doris Pugh for a total price of $303,300. As the parties had had extensive negotiations in the months preceding, the sale was consummated on the basis of an oral agreement. No downpayment was made at the time of sale and petitioner's selling expenses totaled $324.

The sales transaction involved the exchange of a deed to the property in return for a note secured by a first deed of trust on the property. The note, which was negotiable, provided for 180 consecutive monthly installment payments of $1,685 commencing on February 1, 1964, but it contained no provisions for interest.

Petitioner elected to report the gain from the sale on the installment basis under section 453. For the taxable year 1964, petitioner reported $10,854.36 of the gain realized as ordinary income in accordance with the recapture provisions of section 1245. For each of the taxable years 1965 and 1966, he received $20,220 as payments on the note, none of which was returned as interest.

The statutory notice of deficiency was mailed on March 7, 1969. As the statute of limitations on assessment for the taxable year 1964 had expired, only the taxable years 1965 and 1966 are in issue.

The principal question presented is whether, under section 483, a certain part of each installment payment must be reported as imputed interest income (i.e., ordinary income ineligible for capital gain treatment).

On February 26, 1964, section 483² was added to the Internal Revenue Code of 1954 by section 224 of the Revenue Act of 1964. Pub.L. 88-272, 78 Stat. 19, 77-79. Section 224(d) of the Revenue Act of 1964 provided that section 483 would apply—

to payments made after December 31, 1963, on account of sales or exchanges of property occurring after June 30, 1963, other than any sale or exchange made pursuant to a binding written contract (including an irrevocable written option) entered into before July 1, 1963. * * * Although petitioner was negotiating the sale of the motel during 1963, the sale was not consummated until January 1, 1964, and there is not evidence of any relevant binding written contract or option entered into before July 1, 1963. Cf. Consolidated Utilities Co. v. Commissioner 84 F.2d 548 (C.A. 5, 1936). Therefore, any installment payments received under the contract of sale would fall within the purview of section 483.

However, petitioner argues that the application of section 483 to installment payments received in 1965 and 1966 under an installment sale consummated prior to the official enactment of section 483 is unconstitutional because it violates the due process clause of the fifth amendment. He relies upon Untermyer v. Anderson, 276 U.S. 440 (1928), which held that the retrospective application of a gift tax statute to a bona fide gift made less than 2 weeks before the enactment of the statute was ‘arbitrary and invalid under the due process clause of the Fifth Amendment.’ 276 U.S.at 445. See also Nichols v. Coolidge, 274 U.S. 531 (1927).

The force of the Untermyer decision has been vitiated by a later estate tax case involving the retroactive application of a provision involving gifts in contemplation of death. There the Supreme Court stated:

But a tax is not necessarily and certainly arbitrary and therefore invalid because retroactively applied, and taxing acts having retroactive features have been upheld in view of the particular circumstances disclosed and considered by the Court. Milliken v. United States, 283 U.S. 15, 21 (1931). The Court carefully distinguished Untermyer and Nichols v. Coolidge, supra, and held that the retroactive levy of the disputed tax on a gift made in contemplation of death was constitutional. See also Sidney v. Commissioner, 273 F.2d 929, 932 (1960), affirming 30 T.C. 1155 (1958):

Taxpayers' due process argument is founded upon Untermyer v. Anderson, * * * The Supreme Court has distinguished the case on sic occasions² and has expressly followed it only once.³ If Untermyer remains authority at all, it is so only for the particular situation of a wholly new type of tax there under consideration. Mr. Justice Brandeis thought the Untermyer decision itself defied authority since ‘for more than half a century, it has been settled that a law of Congress imposing a tax may be retroactive in its operations,’ * * * (Footnotes omitted.)

In any event neither Untermyer nor Coolidge is applicable because neither involved income tax statutes. Albert K. Miller, 40 B.T.A. 515, 516 (1939), affd. 115 F.2d 479 (C.A. 9, 1940), certiorari denied 312 U.S. 703 (1941). It is a well-established constitutional rule that Congress may provide for the retroactive operation of income tax legislation which it enacts. E.g., Lynch v. Hornby, 247 U.S. 339, 343 (1918); Brushaber v. Union Pac R.R., 240 U.S. 1, 20 (1916); Sidney v. Commissioner, supra; Southeast Equipment Corporation, 33 T.C. 702, 705 (1960), affd. 285 F.2d 493 (C.A. 6, 1961); Niagara Searchlight Co., 20 T.C. 745, 746 (1953); Chester A. Souther, 39 B.T.A. 197, 219 (1936); (1936); Edgar Stanton et al., Executors, 34 B.T.A. 451, 460 (1936); affd. 98 F.2d 739 (1938), certiorari denied 305 U.S. 650 (1938). Such operation is constitutional as long as the legislation is not ‘harsh, arbitrary, or unfair,’ Southeast Equipment Corporation, supra at 706, and provided that it is clear that Congress intended the results emanating from the legislation's retroactive application. See Shwab v. Doyle, 258 U.S. 529, 534, 536 (1922); Kress v. United States, 159 F.Supp. 338, 341 (Ct.Cl. 1958).³

In the instant case the short period of actual retroactivity was neither arbitrary nor unreasonable. Furthermore, in passing the Revenue Act of 1964, Congress intended that section 483 be applied retroactively not only to the types of transactions expressly contemplated therein, but ‘for all purposes of the Code.’ Raymond Robinson, 54 T.C. 772, 778 (1970), an appeal (C.A. 8, Aug. 28, 1970).

Therefore, we conclude that section 483 is applicable in determining petitioner's income tax liability for 1965 and 1966.

Since the sale was consummated on January 1, 1964, and the note provided for monthly payments beginning on February 1, 1964, petitioner would also have been liable in 1964 for tax at the ordinary rates on...