Wilson v. Commissioner, Docket No. 6483-76.
| Decision Date | 04 August 1980 |
| Docket Number | Docket No. 6483-76. |
| Citation | 1980 TC Memo 288,40 TCM (CCH) 835 |
| Parties | Stanley E. Wilson and Christine Wilson v. Commissioner. |
| Court | U.S. Tax Court |
Allan Howeth and Kirk R. Manning, 1800 First Nat'l Bank Bldg., Fort Worth, Tex. for the petitioners. H. Steven New, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined deficiencies in petitioners' Federal income tax for the taxable years 1972 and 1973 in the respective amounts of $58,571.45 and $1,194.07.
Due to concessions of the parties, the sole issue for our decision is whether petitioners are entitled to utilize the installment method under section 453, Internal Revenue Code of 1954,1 in reporting gain from the sale to an irrevocable trust established for the benefit of their children of stock in a corporation being liquidated.
At the trial of the instant case respondent relied upon the anticipatory assignment of income theory. However, for the first time in his opening brief respondent set forth new theories of constructive receipt at the time of the sale of stock to the trust and the "substance and realities" of petitioners' sale.
Some of the facts have been stipulated. The stipulations of facts and accompanying exhibits are incorporated herein.
Stanley E. Wilson and his wife, Christine Wilson (herein petitioners), who timely filed their joint Federal income tax returns for the taxable years 1972 and 1973 with the Internal Revenue Service Center at Austin, Texas, resided at Fort Worth, Texas, at the time they filed their petition in this proceeding.
Mr. Wilson was an employee of radio station KFJZ, Fort Worth, Texas for several years when, in 1965, Texas State Net-Work, Inc. (TSN) purchased the radio station.2 Following the purchase of the radio station, Mr. Wilson became president of TSN, general manager of the station, and an owner of 10 percent of the outstanding stock of TSN.
As president of TSN, Mr. Wilson controlled most of its day-to-day operations but did not make overall policy decisions and did not dictate policy on corporate matters. Mr. Arnold Malkan, who owned 73.2 percent of all outstanding TSN stock, and was chairman of the board of directors, was responsible for such matters.
On June 10, 1971, the board of directors of TSN unanimously agreed to recommend to the shareholders that they adopt a plan for the complete liquidation and dissolution of TSN under the provisions of section 337. In addition, the board authorized the corporate officers to execute an Agreement for Sale and Purchase of Assets whereby TSN and its subsidiaries agreed to sell substantially all of their assets to Communications, Inc. of Austin, Texas (herein Communications). On December 22, 1971, the board adopted a plan of complete liquidation and authorized TSN officers to consummate the sale of assets to Communications as set forth in the provisions of the agreement of June 10, 1971.
In January 1972 petitioners contacted their attorney for the purpose of investigating the feasibility of establishing a trust for the benefit of their three children and selling their TSN stock to the trust.3 Following this meeting, petitioners' attorney contacted the Fort Worth National Bank trust department to discuss a trust agreement in which the bank would act as trustee. Petitioners' attorney also informed the bank that TSN was in the process of liquidation and proposed that petitioners sell all of their TSN stock to the trust for approximately $50,000 cash and $250,000 in notes, payable over a 10-year period. Negotiations between the bank and petitioners' attorney followed which involved the bank's decision to become trustee, revisions to the proposed trust agreement, and suggested types of investments to be utilized by the trust.
On February 26, 1972, the shareholders of TSN approved the plan of complete liquidation and authorized the officers and directors to sell TSN assets, pursuant to the plan. By November 1972 TSN had completed the sale of substantially all of its assets.4
On December 5, 1972, Mr. Malkan, as chairman of the board of directors, reported that the initial distribution in liquidation had been delayed by stock transfer agent requirements and requested the board of directors to authorize the transfer of stock owned by TSN to the TSN shareholders. The board of directors approved a resolution which authorized the secretary of TSN to direct the transfer agents to transfer the said shares to the shareholders of TSN.
Petitioners completed their negotiations with the bank and on December 6, 1972 created an irrevocable trust for the benefit of their children. The bank agreed to act as trustee. Under the trust agreement petitioners held the right to appoint any successor trustee provided that they appoint another bank having capital and surplus of at least $10,000,000 and in which they did not have a substantial interest either through stock ownership or otherwise. Contemporaneously, petitioners entered into an installment sale contract with the bank as trustee. Under the contract petitioners sold all of their stock in TSN (70,000 shares) to the trust for $300,000, payable $25,000 in cash prior to December 31, 1972, $25,000 in cash payable on January 15, 1973 and the remaining $250,000 covered by a 10-year promissory note payable in nine annual installments commencing January 15, 1974, of $20,000 each and a final installment of $50,000. At this time the bank was aware that the sale of TSN assets was completed and that the liquidation proceeds attributable to the shares it purchased from petitioners would soon be distributed to the bank as trustee.
Following the execution of the installment agreement, petitioners delivered a stock certificate representing 70,000 shares of TSN stock to the trustee. On December 8, 1972, the bank took the necessary measures to have the stock reissued in its name as trustee. From this date the bank was the record holder of the stock and operated independently and was beyond the control of petitioners. The board of directors of TSN approved the first liquidating distribution on December 15, 1972.
Petitioners' attorney notified the bank on December 20, 1972, that there had been a mistake in the valuation of the shares of stock in Dee Williams Manufacturing Corporation, an asset held by TSN which was to be distributed pursuant to the liquidation. Both the bank and petitioners assumed that this stock had a higher value than, in fact, it had. Consequently, the terms of the installment agreement and the promissory note were redrafted by changing the purchase price from $300,000 to $270,000 based upon a mutual mistake of fact.5 On December 20, 1972, TSN delivered to the trustee its allocable share of the initial liquidating distribution having a value of $266,000, consisting of cash and a promissory note.
On their joint Federal income tax return for the taxable year 1972 petitioners reported the sale of their TSN stock to the trust under the installment method provided in section 453. Consistent with this approach petitioners reported that portion ($12,037) received in 1972 pursuant to the installment agreement as long-term capital gain. The Commissioner, in his statutory notice of deficiency, made the following determination:
OpinionThe issue for our decision is whether petitioners are entitled to report the gain from the sale of their stock in a liquidating corporation under the installment method.
Mr. Stanley E. Wilson was an employee of radio station KFJZ Fort Worth, Texas for several years prior to the time Texas State Network, Inc. (herein TSN) purchased the radio station in 1965. After the radio station was purchased Mr. Wilson acquired 10 percent of all outstanding stock of TSN. In addition, Mr. Wilson became president of TSN as well as general manager of the radio station.
At a meeting held on June 10, 1971, the board of directors of TSN adopted a resolution recommending to the TSN shareholders that a plan of complete liquidation under section 337 be adopted. On December 22, 1971 the plan of liquidation was adopted calling for the sale of substantially all TSN assets and the distribution of the proceeds to TSN shareholders.
In January 1972, Mr. Wilson and his wife (herein petitioners) contacted their attorney for the purpose of exploring the possibility of establishing a trust for the benefit of their three children and selling their TSN stock to the trust under the installment method set forth in section 453. Petitioners' attorney notified the First National Bank, Fort Worth, Texas, and proposed the creation of a trust for petitioners' children with the bank as trustee. Negotiations followed which related to specific aspects of implementing the trust.
On February 26, 1972, the shareholders of TSN approved the plan of complete liquidation and authorized TSN to...
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