Silverman v. Comm'r of Internal Revenue (In re Estate of Silverman)
| Decision Date | 21 January 1992 |
| Docket Number | Docket No. 21209-88. |
| Parties | ESTATE OF MOSE SILVERMAN, DECEASED, ROSE SILVERMAN, EXECUTRIX, AND ROSE SILVERMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Pursuant to a plan of merger, in 1982, P's exchanged their shares of stock in a state-chartered stock savings and loan association for passbook savings accounts and certificates of deposit in the acquiring federally chartered mutual savings and loan association. No part of the principal of the certificates of deposit could be withdrawn for 6 years. P's did not report the gain realized on the transaction because they considered the merger to be a tax-free reorganization. In 1985, the United States Supreme Court decided Paulsen v. Commissioner, 469 U.S. 131 (1985), holding that exchanges of this type did not qualify as tax-free reorganizations. P's filed an amended Federal income tax return for 1982, treating the exchange as an installment sale. P's paid tax on the gain attributable to passbook savings accounts received, but treated the certificates of deposit as delayed payment obligations. R issued a statutory notice treating the stock exchange as a fully taxable disposition that did not qualify as an installment sale.
HELD: P's were entitled to report the gain on the disposition of their stock under the installment method. William Rochester, for petitioners.
Steven J. Foster, for respondent.
Respondent determined a deficiency in petitioners' Federal income taxes for 1982 in the amount of $98,196. The issue for decision is whether petitioners are entitled to use the installment method to report the gain on exchange of their shares of stock in a savings and loan association for savings accounts of another savings and loan association.
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Mose Silverman and Rose Silverman were husband and wife. Mose Silverman died in January 1983. Rose Silverman individually and as Executrix of the Estate of Mose Silverman, timely filed a joint Federal income tax return for the 1982 tax year. Mrs. Silverman subsequently filed an amended 1982 return on behalf of herself and her husband on August 1, 1987. Mrs. Silverman resided in Oakland, California, at the time the petition was filed. Probate of the Estate of Mose Silverman, deceased, was conducted in California Superior Court for San Mateo County.
In 1982, Mr. and Mrs. Silverman owned 29,162 shares of stock in Olympic Savings and Loan Association (Olympic). On October 21, 1982, Coast Federal Savings and Loan Association (Coast), a federally chartered mutual savings and loan association, offered to acquire all outstanding shares of stock of Olympic in exchange for Coast savings accounts in the principal amount of $28.5487 per share.
The Exchange Offer provided that:
In accepting the Exchange Offer, an Olympic Savings stockholder will receive savings accounts in Coast Federal as follows:
(1) 30% of the Exchange Price paid to each stockholder will be in a withdrawable statement savings account of Coast Federal, bearing interest, commencing on the effective date of the transaction, at a rate of 5-1/2% per annum, compounded daily, with an effective yield of 5.65%, (the “Statement Savings Account”);
(2) 70% of the Exchange Price paid to each stockholder will be in a NONWITHDRAWABLE fixed-rate six-year statement savings account of Coast Federal, bearing interest, commencing on the effective date of the transaction, at the rate of 6-1/2% per annum, compounded daily, with an effective yield of 6.72%, and payable semi-annually commencing six months from the effective date of the transaction (the “Term Account”). [Emphasis in original.]
Mr. and Mrs. Silverman accepted the Coast offer and received $249,761 principal amount of statement savings accounts, and $582,776 principal amount of term accounts in exchange for their Olympic stock. The term accounts were certificates of deposit. Mr. and Mrs. Silverman's term accounts were issued and held as follows:
+----------------------------------------------------------+
¦Account No. 1 ¦Account holder ¦Principal amount ¦
+-----------------+---------------------+------------------¦
¦(1) 1-710523-0 ¦Mose Silverman or ¦$194,245.35 ¦
+-----------------+---------------------+------------------¦
¦ ¦Rose Silverman ¦ ¦
+-----------------+---------------------+------------------¦
¦(2) 1-710525-5 ¦Mose Silverman ¦97,142.66 ¦
+-----------------+---------------------+------------------¦
¦(3) 1-710527-1 ¦Mose Silverman or ¦97,122.68 ¦
+-----------------+---------------------+------------------¦
¦ ¦Ruth Silverman TR U/A¦ ¦
+-----------------+---------------------+------------------¦
¦ ¦Nov. 1, 1982 ¦ ¦
+-----------------+---------------------+------------------¦
¦(4) 1-710529-7 ¦Rose Silverman ¦97,142.66 ¦
+-----------------+---------------------+------------------¦
¦(5) 1-710531-3 ¦Rose Silverman or ¦97,122.68 ¦
+-----------------+---------------------+------------------¦
¦ ¦Ruth Silverman TR U/A¦ ¦
+-----------------+---------------------+------------------¦
¦ ¦Nov. 1, 1982 ¦ ¦
+-----------------+---------------------+------------------¦
¦ ¦ ¦ ¦
+----------------------------------------------------------+
Mr. and Mrs. Silverman received a passbook for each account issued. These passbooks were basically identical to those evidencing any other account at Coast. If a passbook represented a certificate of deposit, the passbook stated that it was a “certificate of deposit.” All Coast's passbooks stated on the first page that they were “Not transferable except on the books of the Association.” The only situation in which title to one of Coast's certificates of deposit could be changed was if the owner or one of the joint owners died. In such a case, title would be vested in the executor or administrator of the decedent's estate.
The passbooks evidencing the term accounts received in the exchange, in addition to stating they were certificates of deposit, contained the following language: “Per Stock Exchange Offer.” This language indicated that, in addition to the usual restrictions on certificates of deposit, the account was subject to the terms of the exchange offer. Pursuant to the exchange offer, no part of the principal amount of the term accounts could be withdrawn for 6 years from the effective date of the exchange. Interest, payable semi- annually, could be withdrawn during the term of the account. Finally, holders of the term accounts were limited with respect to the amounts they could borrow against the accounts as follows;
B. Term Accounts. Term Accounts may not be pledged as security for a “share loan” until one year following the effective date of the transaction. Starting at the first anniversary of the effective date, however, the owner of the Term Account will be entitled to borrow, through the vehicle of a “share loan” secured by the Term Account, at an interest rate of 8-1/2%, with a minimum loan term of three months, up to a total of:
(1) 18% of the initial principal amount of the Term Account during the second year of the account's term.
(2) 36% of the initial principal amount of the Term Account during the third year of the account's term.
(3) 54% of the initial principal amount of the Term Account during the fourth year of the account's term.
(4) 72% of the initial principal amount of the Term Account during the fifth year of the account's term.
(5) 90% of the initial principal amount of the Term Account during the sixth year of the account's term.
The exchange was effective and the term accounts were issued to Mr. and Mrs. Silverman on November 22, 1982.
The term accounts were not readily tradable in an established securities market.
Mose Silverman's Last Will and Testament (the Will) provided that the residue of his estate, which included the Coast term accounts, was to go to Mrs. Silverman and Tommy F. Angell, an attorney, in trust for the benefit of Mrs. Silverman for her life and the balance to their daughter Ruth Elaine Silverman upon Mrs. Silverman's death. Probate of the Estate of Mose Silverman was concluded pursuant to an order of the California Superior Court on July 3, 1984.
On August 10, 1984, term account (1) was closed and the balance transferred into two new term accounts. The first account, in the amount of $95,615.53, was opened in the name of Rose Silverman and Tommy F. Angell, Trustees Under the Will of Mose Silverman (1-711315- 0), and a second account, in the amount of $100,000, was established in the name of Rose Silverman as Executor of the Estate of Mose Silverman (1-711309-3). Pursuant to the order of the Probate Court, the two newly opened accounts and the two previously issued accounts under the name of Mose Silverman (term accounts (2) and (3) above) were revested in the name of Rose Silverman and Tommy F. Angell, Trustees Under the Will of Mose Silverman.
On their original 1982 return, Mr. and Mrs. Silverman treated the exchange as a nontaxable exchange pursuant to a corporate reorganization. In 1985, the United States Supreme Court, in Paulsen v. Commissioner, 469 U.S. 131 (1985), held that an exchange, very similar to the Coast/Olympic exchange, was not a tax-free corporate reorganization. On August 1, 1987, an amended return for 1982 was filed reporting the exchange of the Olympic stock for Coast accounts as an installment sale, treating the statement savings accounts as payment received, and the term accounts as the deferred payment obligation. Federal income tax was paid on...
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