Wrenn v. Comm'r of Internal Revenue , Docket No. 7218-75.

• Decision Date: 23 December 1976
• Docket Number: Docket No. 7218-75.
• Citation: 67 T.C. 576
• Parties: PHILIP W. WRENN AND DOROTHY W. WRENN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

67 T.C. 576

PHILIP W. WRENN AND DOROTHY W. WRENN, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 7218-75.

United States Tax Court

Filed December 23, 1976.

Petitioners are husband and wife who effected a sale of various securities from husband to wife in 1973. All securities were transferred at date of sale while payments were to be made in monthly installments over a 15-year period. The sale was valid in all respects under Oregon law. Immediately after this transfer, the wife disposed of the shares she had received. Shortly thereafter she purchased shares in a specified mutual fund in an amount equal to the proceeds of sale in order to satisfy a security obligation arising out of the original installment purchase. Held, petitioners are not entitled to report the gain realized by the husband from their interspousal transfer pursuant to the provisions of sec. 453, I.R.C. 1954, because it has not been established that the transfer was a bona fide installment sale for tax purposes in substance as well as in form. Roy D. Lambert, for the petitioners.

Leo A. Reinikka, Jr., for the respondent.

OPINION

DAWSON, Chief Judge:

Respondent determined a deficiency of $56,387 in petitioners' Federal income tax for calendar year 1973. The sole issue presented for decision is whether gain realized by petitioner Philip W. Wrenn from the sale of common stocks to his wife may be reported in annual installments pursuant to the provisions of section 453, I.R.C. 1954.¹

This case was submitted for decision without trial in accordance with the provisions of Rule 122, Tax, Court Rules of Practice and Procedure. We adopt the stipulation of facts and exhibits attached thereto as our findings. All pertinent facts are set forth below.

Petitioners Philip W. Wrenn and Dorothy W. Wrenn are husband and wife whose legal residence was Wilsonville, Ore., at the time they filed their petition herein. They previously had filed a joint Federal income tax return for calendar year 1973 with the Internal Revenue Service Center at Ogden, Utah. The Federal income tax liability reported on that return was computed by use of the cash receipts and disbursements method of accounting.

Dorothy W. Wrenn is a successful businesswoman who is cited in Who's Who In America. She has authored two books which have been published by major publishing houses and served as director of the Editorial Bureau of the Metropolitan Life Insurance Co. Prior to her marriage to Philip W. Wrenn in 1970, she held the positions of editor-in-chief of Parent's Magazine and vice president of Parent's Magazine Enterprises.

During January 1973 each petitioner independently owned a significant amount of property and had a substantial personal net worth. Dorothy Wrenn's net worth lay in the range of $225,000 to $260,000, while Philip Wrenn's net worth exceeded $260,000.

Philip Wrenn owned shares of stock in a variety of publicly held corporations prior to January 21, 1973. On that date he sold all of his right, title, and interest in and to certain designated securities to Mrs. Wrenn under a contract labeled ‘Installment Sales Contract.’ The securities tendered were the separate property of Mr. Wrenn prior to that transfer, and became Mrs. Wrenn's separate property once the sale was effected. Under the terms of the installment sales contract, Mrs. Wrenn agreed to pay $250,000 for the securities, plus interest at 5 percent, in monthly payments of $1,926.98 ² for a period of 15 years beginning on April 1, 1973, to evidence her obligation by issuing Mr. Wrenn a promissory note, and to provide him with security for the payment of the agreed price by purchasing $250,000 in shares of the Fidelity Trend Fund. Each monthly payment represented amortized amounts of principal and interest. Mrs. Wrenn evidenced her obligation by means of a promissory ‘Installment Note’ which she gave Mr. Wrenn on the date of transfer. Once the contract of sale was executed, the securities sold thereby were subject to disposition solely at the will or whim of their new owner, Dorothy W. Wrenn. Mrs. Wrenn was under no obligation, contractual or otherwise, to dispose of such securities other than at her pleasure.

All of the securities purchased by Mrs. Wrenn from her husband on January 21, 1973, subsequently were sold by her on the open market during that same day for $250,874. Mrs. Wrenn had made numerous investments of her separate property in mutual funds prior to the instant transaction. As agreed in the sales contract, Mrs. Wrenn proceeded to purchase shares in the Fidelity Trend Fund worth $250,000 after the purchase of common stocks from her husband had been completed.

Petitioners reported portions of the installment payments received by Philip Wrenn during the calendar year 1973 as long-term capital gains on Schedule D of that year's return. Respondent subsequently rejected petitioners' use of the installment method on the ground that the purported installment sale lacked substance and could not be recognized for tax purposes. Citing Mrs. Wrenn's immediate resale of the shares purchased from her husband, respondent determined that no ‘business purpose’ had been established for the transaction, that a ‘sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title,‘ and that ‘the installment method may not be used to report the gain from a sale to a related taxpayer who pursuant to a prearranged plan resells the property, to a third party and receives full payment in the year of sale.’

The parties agree that the note and installment contract are valid and enforceable under Oregon law. Petitioners defend their installment sale election by asserting that the instant transfer was bona fide in nature and not so structured solely for purposes of tax avoidance. They argue that a bona fide section 453 installment sale does not need to be premised upon a business exigency and, in any event, that Philip Wrenn had a business purpose for effecting this transfer because he thereby increased his current return on investment from approximately 3 percent (from dividends) to 5 percent (from Mrs. Wrenn's interest). It is contended further that Mrs. Wrenn's unrestricted power to hold or sell the shares purchased from her husband solely at her will or whim negated any alleged prearrangement or agency relationship. Petitioners buttress this point by asserting that although as husband and wife they form a household unit, the mere fact of a marriage relationship in no way connotes an agency relationship. Moreover, they underscore the fact that they are two distinct taxpayers despite the proper filing of a joint Federal income tax return.

Respondent defends his disallowance of section 453 treatment by arguing that, despite the petitioners' compliance with all statutory prerequisites, the substance of this purported installment sale is different from its form. Although legal title to the securities was passed between the Wrenns, respondent seeks to telescope the various steps undertaken by them into one sale attributable to Philip Wrenn alone for tax purposes. In support of this position respondent stresses the close intrafamily relationship between buyer and seller, the immediate resale of the stocks by Mrs. Wrenn, the alleged absence of any substantial business purpose for Mr. Wrenn's election to use this form of sale, Mrs. Wrenn's immediate purchase of mutual fund shares as per the contract with the proceeds from her sale of common stocks, and the fact that after all steps were completed the family unit retained the entire sale receipts while reporting the gain in installments on a joint return. Respondent concludes that Mrs. Wrenn acted merely as her husband's agent by selling these stocks to a third party pursuant to a prearranged plan.

We must determine whether the facts presented warrant an imposition of the judicially created ‘substance over form’ doctrine to bar petitioners from claiming the section 453 installment sales treatment. As a relief measure, section 453 is to be narrowly construed. Cappel House Furnishing Co. v. United States, 244 F.2d 525, 529 (6th Cir. 1957). Taxpayers previously have been denied its benefits whenever the transfer in question was not found to have been a true installment sale. See, e.g., Griffiths v. Commissioner, 308 U.S. 355 (1939); Hindes v. United States, 326 F.2d 150 (5th Cir. 1964); Williams v. United States, 219 F.2d 523 (5th Cir. 1955); Everett Pozzi, 49 T.C. 119 (1967). Embodied within section 453 is a congressional desire to permit the spreading of the tax on a gain over the period during which payments of the sales price are made so that the seller can pay the tax out of his receipts rather than being forced to advance the tax collector his due prior to actual receipt. Everett Pozzi, supra at 126. Only one court has previously addressed the availability of installment sales treatment to either party to an interspousal transfer. Therefore, we will examine its decision in detail.

The United States District Court for the Middle District of North Carolina upheld installment sales treatment for an interspousal transfer of common stocks in Nye v. United States, 75-1 USTC par. 9510 (M.D.N.C. 1975). Charles and Mary Nye were husband and wife who filed joint Federal income tax returns for the taxable years in issue. Charles, an attorney, and Mary, a physician, each had developed a successful professional business prior to the transfer in question. The Nyes maintained separate checking accounts for the proceeds derived from the practice of their respective professions and from their individual investments. A joint account was maintained for living expenses.

Mary Nye invested a substantial sum of money in the stock of Colorcraft Corp. in 1964 upon...