$420,000.00	15% of Gross Sales Price
473,175.21	Payments on Mortgages and Accrued
	Interest
179,552.63	Progressive Mortgage Balance and
	Accrued Interest
3,105.59	15% of Farm Crop
1,269.21	Payment by Hyman to Brandon State
	Bank 1979
89.75	Payment by Hyman to Brandon State
	Bank 1979
10,027.27	Payment by Hyman to Hillsborough
	County Tax Collector
100.00	Filing Fee paid by Hyman
15,000.00	Legal Fees due Hyman from April 1975
	to Date of Sale
$1,102,319.66
2,302.36	Accrued Interest on the Above Amount
$1,104,622.02	Total Due Hyman by Graves

*239 On December 27, 1979, petitioner conveyed his interest in the Graves' property to Mrs. Graves.

The contract for sale between petitioner and Mrs. Graves was dated December 27, 1979. The stated purchase price was $1,030,982. The contract provided with respect to payment of the purchase price and closing as follows:

(b) Buyer shall, upon delivery of deed as hereinafter provided, execute and deliver to Seller a purchase money note and mortgage on said property in the amount of $929,622.00 bearing interest at 10% per annum, payable as follows: $729,622.00 and acc[sic] interest payable on or before 1/15/80, $100,000.00 plus accrued interest on or before 1/15/81 and 1/15/82. Said note and mortgage shall be in form reasonably satisfactory to Seller; shall contain an acceleration clause in the event of default by Buyer for thirty (30) days; shall give Buyer the right to prepay all or any part of the principal at any time or times with interest to date of payment only; * * *

(c) Buyer shall pay to Seller in cash or cashier's or certified check, $101,360.00 (or such greater or lesser amount as may be required to complete payment of purchase price) upon delivery of deed as hereinafter*240 provided, upon which the above deposit shall apply as a part.

* * *

3. Subject to the aforesaid curative period, this sale shall be closed and the deed shall be delivered on or before December 27, 1979, and Seller agrees to deliver occupancy and possession of said property to Buyer on or before December 27, 1979.

The $1,104,622.02 sum agreed upon by petitioner and Mr. Gormin was not the $1,030,982 amount received by petitioner because, prior to the closing between himself and Mrs. Graves, petitioner donated portions of his interest in the property to two charities, Tampa Jewish Federation and Congregation Beth Israel. Each charity received $36,820 for a total charitable contribution of $73,640, reducing the total amount to be received by petitioner to $1,030,982.02.

The sale by Mrs. Graves to Federated also took place on December 27, 1979. The Seller's closing statement showed the following:

Sales Price		$2,800,000.00
Less Purchase Money Mortgage		1,988,000.00

		812,000.00

Less:
Title Insurance	$6,000.00
Commission See below	*
State Stamps on Deed	11,2000.00
State Record 2 Deeds	20.00
1979 Taxes Credit 12/27/79
to 12/31/79	114.90 Cr.
Record S.M. six	24.00
Pay off Mortgage Fed Land Bank	71,463.88
*James W. Roberts, Jr. Inc.	24,360.00
*Coyle Pealty Inc.	24,360.00
Brandon State Bank	42,787.27
(5 loans)
Brandon State Bank
(Hold 5,725.04)
Record Affidavit	4.00
Survey	3,188.75

		-189,018.04

		$622,981.96

*241 Disbursement of part of proceeds authorized as follows:

Gormin, Geoghegan, etc. Trust Acct.	$397,981.86
Ruth H. Graves	$ 35,000.00
Balance of Proceeds to be used
for purchase of outstanding
interest of David Hyman, et al	($ 6,900.00 Gormin)
	($ 8,100.00 HB&C)

Federated executed a mortgage to insure the outstanding liabilities to Mrs. Graves in the amount of $1,988,000. Federated gave a promissory note to Mrs. Graves in the principal amount of $1,988,000 bearing 10 percent interest per annum. The note was to be paid as follows: on January 15, 1980, principal in the amount of $662,667 plus interest; on January 15, 1981, principal in the amount of $662,667 plus interest; and on January 15, 1982, principal in the amount of $662,666 plus interest.

The mortgage and note called for in the contract of sale between petitioner and Mrs. Graves were to be security for the outstanding debt. Petitioner did not receive the note or the mortgage to secure this indebtedness. While the closing documents were being prepared, Mrs. Graves' attorney and petitioner realized that because this property was being transferred to Federated they could not work out a*242 way by which Mrs. Graves could give a mortgage on the property to petitioner to secure a note to him. Petitioner told Mr. Gormin that he wanted him to receive to hold in escrow any funds other than the agreed down payment which otherwise would be due him from the 1979 payments.

On December 27, 1979, Mrs. Graves executed a document entitled "Assignment." This document provided in part as follows:

ASSIGNMENT

I, RUTH H. GRAVES, as assignor herein, for value received, hereby sell, assign, transfer and set over to GARY P. GORMIN, ESQUIRE, * * * assignee herein, the net proceeds of that certain sale between myself and Federated Department Stores occurring on December 27, 1979 and the proceeds for that certain note and mortgage executed by Federated Department Stores in my favor dated December 27, 1979 in the principal amount of ONE MILLION NINE HUNDRED EIGHTY-EIGHT THOUSAND AND NO/100 DOLLARS, ($1,988,000.00).

NOW, THEREFORE, in consideration of the premises, the parties agree that:

1. Escrow of Net Proceeds of Closing. Assignor hereby agrees that following disbursement of proceeds by ChelseaTitle and Guaranty Company from the above referenced sale, the remaining proceeds*243 shall be disbursed to assignee who shall place said funds in an interest bearing escrow amount. On or about January 2, 1980, the assignee shall disburse all remaining funds and accrued interest to David Hyman, as payment for the purchase of interest in the subject property.

2. Escrow of Proceeds of Note and Mortgage. Assignor hereby agrees that Federated Department Stores shall pay over to assignee the sums due to her on January 15, 1980 and assignor shall deposit such funds in escrow and disburse as soon as practicable as follows:

a. The remaining balance of sums due and owing to David Hyman arising from his sale in the subject property to the assignor, exclusive of $200,000.00 which sum shall be disbursed in accordance with a partial Assignment of Mortgage Proceeds dated December 27, 1979.

* * *

c. The balance of the net proceeds to the assignor.

3. Escrow and Disbursement of Proceeds for January 15, 1981 and January 15, 1982 of Note and Mortgage. Assignor hereby agrees that Federated Department Stores shall pay over to assignee the sums due to her on January 15, 1981 and January 15, 1982 and assignor shall deposit such funds in escrow and disburse as soon*244 as practicable as follows:

a. On January 15, 1981 and January 15, 1982, the assignee shall disburse to David Hyman the sum of $200,000.00 in accordance with the terms of a Partial Assignment of Mortgage Proceeds dated December 27, 1979.

* * *

c. The balance of all proceeds remaining on each of the dates as set forth to the assignor.

Federated paid the cash due on closing by check which was turned over to Mr. Gormin and placed by him in an account the funds from which were available on December 31, 1979. This account bore interest at the rate of 11 percent. The amount of $397,981.96 from the closing proceeds was held by Mr. Gormin to be paid over to petitioner.

On December 27, 1979, Mrs. Graves executed to petitioner a "Partial Assignment of Mortgage Proceeds." The partial assignment of mortgage proceeds provided in part as follows:

I, RUTH GRAVES, * * *, assignor herein, for value received, hereby sell, assign, transfer and set over to DAVID HYMAN, * * *, assignee herein, the sum of Two Hundred Thousand ($200,000.00) Dollars, with interest at the rate of ten (10%) percent per annum, which said sum is a portion of the amount to become due me on payment of that certain*245 mortgage, a copy of which is attached hereto and made a part hereof.

Payment of said $200,000.00, which is secured pursuant to this Assignment, shall be as follows:

On January 15, 1981, the principal sum of One Hundred Thousand ($100,000.00) Dollars, plus accrued interest.

On January 15, 1982, the principal sum of One Hundred Thousand ($100,000.00) Dollars, plus accrued interest.

Further, assignor hereby makes, constitutes and appoints assignee her attorney in fact, irrevocably, in her name or otherwise but at the expense of assignee, to have, use and take all lawful means for the recovery of the principal and interest up to the amount of $200,000.00 secured by the aforesaid mortgage, and in case of payment to discharge the mortgage as fully as assignor might, or could, do if this Assignment were not made.

On May 12, 1980, Mrs. Graves executed to petitioner a "Partial Assignment of Mortgage."

On January 15, 1980, Mr. Gormin received the payment due Mrs. Graves from Federated. From these funds and the money he had received at the closing, Mr. Gormin made the payment due petitioner in the amount of $729,622 together with accrued interest. On January 18, 1980, Mr. Gormin*246 transmitted an additional two days' interest to petitioner because the payment had not been received by petitioner until January 17, 1980.

On January 18, 1982, petitioner reconveyed to Mrs. Graves the interest in the Federated mortgage which was conveyed to him pursuant to the partial assignment of mortgage executed on May 12, 1980.

The total amount petitioner advanced to Mrs. Graves was $549,805 of which he had deducted $180,251 on prior returns. The parties agree that petitioner's basis for computing income or gain is $369,554 ($549,805 minus $180,251) and that his income or gain is to be computed as follows:

Total amount received:	$1,104,622.02
Less basis	369,554.00

	735,068.02

Petitioner on his 1979 Federal income tax return *247 Petitioner on his 1980 Federal income tax return reported a capital gain on the sale of "Improved Real Estate -- Graves Property" of $482,432 computed as follows:

GROSS PROFIT PERCENTAGE

Profit to be realized	681694.
divided by
Contract price	1030982.
equals
Gross Profit Percentage		66.12084

SCHEDULE OF RECEIPTS
	Principal	Total	Ordinary	Capital
Year	Receipts	Gain	Gain	Gain
1979	101360.	67020.		67020.
1980	729522.	482432.		482432.

Respondent in his notice of deficiency determined that petitioner received ordinary income of $403,428 in 1979 and $331,640 in 1980 computed as follows:

Taxable income in 1979:
Amounts received in 1979:
Cash at closing	$175,000
Escrowed proceeds (constructive receipt)	397,982
Assignment-Federated Department Store note	200,000
Total received in 1979	$772,982
Less Basis	369,554
Ordinary income in 1979	$403,428

Taxable income in 1980:
Net ordinary gain	$735,068
Less amounts properly reportable in 1979	403,428
Ordinary income in 1980	$331,640

OPINION

Respondent contends that the entire amount received by petitioner from his transactions*248 with Mrs. Graves, other than repayment of loan advances, should be characterized as interest from a loan transaction and therefore constitutes ordinary income to petitioner. Respondent's position is that this ordinary income cannot be converted to capital gain by the signing of documents designating this right to receive income as a sale of a property interest.

Petitioner contends that the entire amount he received from his transaction with Mrs. Graves was the sales price of his undivided 15 percent interest in real property which he had held for more than one year. Petitioner thus contends that the $735,068.02 difference in the sales price of his property interest, $1,104,622.02, and his basis, $369,544, is taxable as long-term capital gain.

Petitioner on brief proposes that if this Court does not agree that the entire $735,068.02 is long-term capital gain, the transaction should be bifurcated into two separate transactions (1) the sale of his 15 percent interest in the property for $420,000 and (2) the repayment of money advanced under the 1975 agreement with interest.

Respondent bases his argument that the money petitioner received is ordinary income in the form of interest*249 on his conclusion that petitioner received his 15 percent equity interest as security for the advances of funds for Mrs. Graves' benefit in accordance with the 1975 agreement. Based on this analysis, respondent contends that there was no sale or exchange of a capital asset by petitioner in 1974 and accordingly no capital gain on the transaction.

We agree with respondent that a taxpayer may not convert ordinary interest income to capital gain by attempting to transform the repayment of a loan into the sale of a capital asset. O'Hare v. Commissioner,641 F.2d 83">641 F.2d 83 (2d Cir. 1981), affg. a Memorandum Opinion of this Court, cert. denied 454 U.S. 829">454 U.S. 829 (1981); Real Estate Investment Trust v. Commissioner,334 F.2d 986">334 F.2d 986 (1st Cir. 1964), affg. 40 T.C. 921">40 T.C. 921 (1963), cert. denied 381 U.S. 911">381 U.S. 911 (1965). However, the facts here clearly show that petitioner did, in 1975, receive a capital asset within the meaning of section 1221 in the form of his 15 percent undivided interest in the Graves property. The cases cited by respondent for the proposition that courts have treated as disguised loans the transfer of an equity interest*250 to a lender where the original owner subsequently repurchases, are so factually distinguishable from the situation present in this case as to be inapposite. Here the 1975 agreement was for the transfer to petitioner of a 15 percent undivided interest in property. The deed which was recorded clearly made a transfer of that property.

In O'Hare v. Commissioner,supra, the Court concluded that the transaction was a loan rather than the sale of a capital asset and denied capital gain treatment. On the facts there present we concluded that the taxpayer had merely extended his credit in return for a fee, that he had no intention of buying property in his own right, and thus held title merely as part of a loan transaction until the property could be reconveyed to the seller when a third party buyer was found. The amount the taxpayer was to receive in payment upon the reconveyance was based on the length of time he held title to the property. The Second Circuit in its affirmance added that it was very unlikely that a true owner would have agreed to a profit based on timing of a sale rather than based on sales proceeds.

Similarly in Comtel Corp. v. Commissioner,45 T.C. 294">45 T.C. 294 (1965),*251 affd. 376 F.2d 791">376 F.2d 791 (2d Cir. 1967), also relied on by respondent, the taxpayer, Comtel, entered into a transaction purporting to be a stock purchase from Zeckendorf Hotel Corporation followed by a resale some seven months later at a substantial gain. We concluded that in substance the entire transaction was a loan. The Second Circuit emphasized five findings of fact in its affirmance: (1) Zeckendorf never intended for Comtel to be the true owner and never lacked the desire to acquire the stock; (2) Comtel was not permitted to sell or otherwise dispose of the stock; (3) the Comtel investors were interested in neither hotel ownership nor operation but rather desired a high yield, low risk investment; (4) the resale price had two variables, both indicative of compensation for the use of money -- interest on principal and Comtel's expenses; and (5) the Comtel profit was dependent not on the appreciated value of the stock but on a prearranged option price.

Unlike O'Hare or Comtel, petitioner intended to be the true record holder of title; he was not prohibited from selling or otherwise disposing of his interest, and in fact he gave away a percentage of it in the*252 form of two charitable contributions; he did not enter the transaction for financing purposes but as a true owner who would benefit from the appreciation in value of the property; the resale price was determined not as a fee based on the holding period or prearranged option price, indicative of interest, but rather was in the form that a true owner would demand -- a percentage of the proceeds. In addition, petitioner paid all amounts due on the substantial mortgages on the property and all other expenses associated with the property including expenses incurred in the production of sod which enabled the property to generate income.

Respondent is correct in noting that each case turns upon its own facts, Comtel Corp. v. Commissioner,supra, but in this case the facts do not indicate the true substance was a loan. On the contrary, the facts indicate petitioner was the true owner of a 15 percent undivided interest in the Graves property. Petitioner's uncontradicted testimony is that he regularly counseled clients facing foreclosure to, as a last resort, seek third party investors who would assume responsibility for the payment of mortgage debts in return for an*253 undivided percentage interest in the property and repayment of all advances. The facts in this case simply do not support respondent's argument that the entire transaction was a disguised loan. The facts do, however, support a conclusion that there was in part a loan transaction and in part a sales transaction.

Petitioner cannot reasonably expect to have capital gain treatment for payment of mortgage debts and other expenses and the interest on such advances, for attorney's fees and for interest on the outstanding balance he claims is due him. Therefore, the two transactions must be bifurcated and a determination made of how much of the amounts received at closing, from the claimed escrow and by assignment of mortgage proceeds, were, for tax purposes, received in the years 1979, 1980, 1981 and 1982 and to what extent these amounts constitute capital gain, ordinary income, or return of capital.

First, we must determine the amount of petitioner's basis, if any, in the undivided 15 percent interest in the property. Clearly he received $420,000 for his property interest which is 15 percent of the $2,800,000 sales price of the entire property. His gain is of course this sales price*254 less his basis in the property. Petitioner included no value for this 15 percent interest on his income tax return for the year he received the property, 1975. The year 1975 is not in issue here. However, in determining petitioner's capital gain on the sale of his 15 percent we must consider whether he did in fact have a basis in the property. Neither petitioner nor respondent produced evidence of the value, if any, of this property interest in 1975.

Petitioner testified that in 1975 there were outstanding mortgages on the property in approximately the following amounts:

Progressive Manufacturing Co.	$350,000
Federal Land Bank	90,000
Pan American Bank	100,000
Brandon State Bank	200,000
Total	$740,000

In 1975 Mrs. Graves could get no further loans on the property and faced its loss by foreclosure.

Although petitioner knew that there was discussion of Interstate 75 going by this property, that portion of the Interstate was not then under construction. The property was offered for sale in 1975, but was not sold until 1979. Considering all these facts, we conclude that the record does not support a present value in 1975 as distinguished from a potential*255 value of petitioner's 15 percent undivided interest in the heavily incumbered Graves property.

We have concluded that petitioner received a capital asset in the form of his 15 percent undivided interest in the property which had only a potential value in 1975. Since we conclude that the amount realized on the sale of petitioner's 15 percent interest was $420,000, this is the amount of petitioner's long-term capital gain. The remaining $684,622 of the amount received by petitioner in the transaction less the $369,554 return of capital to petitioner or $315,068 is ordinary income to petitioner. In order to determine how much of each of these amounts must be reported in each year it is necessary to address the remaining issues of whether there was a constructive receipt by petitioner of $397,000 in 1979, the year of receipt of money or money's worth from the assignment of mortgage proceeds, and the use of the installment sales method to report the gain from the sale of petitioner's interest in real property.

Respondent contends the amount of $397,982 was placed in escrow for petitioner in 1979 at his request at a time when it was subject to his control. For this reason respondent*256 contends that this $397,982 was constructively received by petitioner in 1979 and should have been reported as income in that year. Respondent relies on section 451(a) which requires inclusion in gross income of all amounts received by a taxpayer in a taxable year and section 1.451-1(a), Income Tax Regs., requiring inclusion of an amount in income when actually or constructively received.

Respondent argues that this issue turns upon whether the $397,982 was security in the event of a default by Mrs. Graves, and therefore subject to a substantial limitation or restriction, ^{Sprague v. United States,627 F.2d 1044">627 F.2d 1044 (10th Cir. 1980); Porterfield v. Commissioner,73 T.C. 91">73 T.C. 91 (1979).}

*257 Respondent, however, argues that when payments are made into a trust or escrow account and such payments will be used to meet the debtor's obligations to the creditor, those payments are deemed received when paid into the account. Trivett v. Commissioner,611 F.2d 655">611 F.2d 655 (6th Cir. 1979), affg. a Memorandum Opinion of this court; Williams v. United States,219 F.2d 523">219 F.2d 523 (5th Cir. 1955); Oden v. Commissioner,56 T.C. 569">56 T.C. 569 (1971); Pozzi v. Commissioner,49 T.C. 119">49 T.C. 119 (1967). Respondent looks to the terms of the assignment agreement between Mrs. Graves and her attorney which states that the proceeds of the Federated sale not used for other specified purposes should be disbursed to Mr. Gormin who "shall place such funds in an interest bearing escrow account to be disbursed to petitioner as payment for the purchase of his interest in the subject property". From this statement respondent concludes that the funds were to be used as payment of Mrs. Graves' obligation and thus were constructively received by petitioner.

Respondent argues that since in 1979 petitioner received more than a mere contract right to payment of the*258 remaining $929,622 to which he was entitled he is required to include as income in that year the $397,981.96 paid by Federated as a part of the purchase price of the property.

Respondent argues that the facts of this case show a self-imposed limitation by petitioner on receipt of the $397,981.96. Respondent equates the facts here to the facts in Oden v. Commissioner,supra, in which the taxpayer's rights to certificates of deposit were not restricted by the escrow arrangement; to Pozzi v. Commissioner,supra, in which it was concluded that the escrow was made solely at the behest of the taxpayers and thus was a self-imposed limitation; to Williams v. United States,supra, involving a self-imposed limitation by the taxpayer on his receipt of fully available income; and to Trivett v. Commissioner,supra, where the taxpayer obtained substantial ownership rights and consequently an economic benefit from the certificates of deposit.

Petitioner contends that since the $397,981.96 was not made available to him until 1980 when he received a payment of some $729,622 with interest, as called for in his sales*259 contract with Mrs. Graves, there was no constructive receipt. To support his argument, petitioner states that the assignment agreement was a replacement of the purchase money note and mortgage for which he contracted with Mrs. Graves to insure payment of the deferred portion of the purchase price. He further contends that the agreement was made prior to the time he had any right to the proceeds from the sale, and before he sold his interest to Mrs. Graves. Petitioner contends that since he was a cash basis taxpayer he did not receive the $397,982 until Mr. Gormin distributed the $729,622 to him with interest of $5,093.82 accrued between December 27, 1979 and January 15, 1980. ^{section 1.451-2(a), Income Tax Regs., where income is not constructively received until it is "credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time", or "if the taxpayer's control of its receipt*260 is subject to no substantial limitations or restrictions." According to petitioner, in 1979 he was prohibited from receiving any of the deferred balance and consequently this was a substantial limitation or restriction preventing constructive receipt. Petitioner relies on Reed v. Commissioner,723 F.2d 138">723 F.2d 138 (1st Cir. 1983), revg. a Memorandum Opinion of this Court.}

The record here shows that after petitioner and Mrs. Graves had signed a contract to sell the Graves property to Federated a dispute developed between them as to the amount of the proceeds to be paid to petitioner. The 1975 agreement provided that when the property was sold petitioner was to receive 15 percent of the sales price of the property for his 15 percent undivided interest and be reimbursed for his advances for mortgage payments and operation of the farm with 9-1/2 percent interest. There was no provision in the 1975 agreement with respect to attorney's fees to be paid to petitioner. The 1975 agreement also provided that the first receipts were to be used to pay off mortgages and to reimburse petitioner for his advances. The original dispute between petitioner and Mrs. Graves concerned whether*261 the 1979 agreement covered approximately $200,000 petitioner had paid on the Progressive mortgages on which Mrs. Graves was guarantor and the farm was security. This matter was settled between the parties and in addition it was agreed that petitioner would receive a $15,000 attorney's fee. As part of the settlement of their dispute the parties agreed that the transaction would be framed as a sale by petitioner of his interest in the property to Mrs. Graves with petitioner to receive a down payment in 1979 and notes and a mortgage to secure the balance of $929,622 which was to be paid in the following years. While we have held that this agreement was ineffectual to convert an amount representing interest income into capital gain, it was a binding agreement between the parties as to payment to petitioner. Petitioner modified his right under the 1975 contract to be reimbursed for his advances out of the first payments after the mortgages were paid off in return for recognition by Mrs. Graves of his right to receive the amount of his advances with the Progressive mortgage and attorney's fees.

If the contract for the note and mortgage to secure the $929,622 payment had been carried*262 out there would have been an agreed deferred payment of a part of the purchase price. However, when the final papers were being drawn it became apparent that Mrs. Graves could not grant a mortgage on the property since the property was being sold to Federated to produce the funds to pay petitioner as well as Mrs. Graves. At that juncture petitioner suggested that the funds be paid to Mrs. Graves' lawyer to be held for payment to him in 1980. Mrs. Graves then made an assignment of the proceeds of the Federated sale to her attorney, Mr. Gormin, to be paid by him to petitioner in 1980. The mortgages still on the property had been paid off with 1979 proceeds. In our view the assignment to Mr. Gormin substituted for the note and mortgage which it was not possible for Mrs. Graves to give to petitioner. This factual situation is different from the type of "escrow" cases relied on by respondent and is also factually distinguishable from Reed v. Commissioner,supra, relied on by petitioner. This is merely a case of parties agreeing to a deferred payment of part of the sales price to be received for property and then finding it necessary to substitute a different arrangement*263 for the note and mortgage which was to secure the deferred payment. In this respect this case is comparable to the situation in Schniers v. Commissioner,69 T.C. 511">69 T.C. 511 (1977) and cases discussed therein at pages 516-517. We therefore hold that petitioner did not constructively receive in 1979 the $397,982 paid over to Mr. Gormin in that year.

Respondent contends that petitioner received $200,000 in 1979 by the assignment of mortgage proceeds to him in that year. Petitioner argues that the $200,000, represented by the assignment to him in 1979 of mortgage proceeds should not be included in his income for that year because the assignment was intended merely to serve as security for the payment of Mrs. Graves' obligation in that amount to him.

Whether an assignment of a third party obligation is security for another's indebtedness or payment of a debt depends on the facts and circumstances surrounding the transaction. If the facts show that the third party obligations are transferred in satisfaction of the buyer's obligation to pay and the seller is to look only to those third party obligations for payment, the assignment of the third party obligations constitutes*264 payment of the debt by and receipt of income from the seller. Sprague v. United States,627 F.2d 1044">627 F.2d 1044, 1049 (10th Cir. 1980). Petitioner contends that the facts and circumstances in this case indicate that the assignment was not intended as payment and therefore there is no income from the assignment to him in 1979 of an obligation which is a cash equivalent, relying on Sprague v. United States,supra.^{*265 In Sprague v. United States,supra, the Court determined that the letters of credit involved were given as security for the payment of notes and could only be drawn on upon default by the purchaser on his notes.}

The distinction in letter of credit and certificate of deposit cases such as those relied upon by petitioner here and the Court in the Sprague case and the facts in the instant case lies in the economic substance of the transaction. Where the facts show that the purchaser's payment obligation was terminated so that in substance the seller was looking to another source for payment, letters of credit or certificates of deposit have been held to constitute payment. See Griffith v. Commissioner,73 T.C. 933">73 T.C. 933 (1980); Pozzi v. Commissioner,49 T.C. 119">49 T.C. 119 (1967); Oden v. Commissioner,56 T.C. 569">56 T.C. 569 (1971). Cf. Porterfield v. Commissioner,73 T.C. 91">73 T.C. 91 (1979), where we held that certificates of deposit which were intended by the parties only as security did not constitute payment.

In the instant case unlike in the Sprague case, after the assignment the "purchaser" (Mrs. Graves), was relieved*266 of her continuing obligation to pay the "seller" (petitioner). In this case payment from the third party, Federated, was not conditioned upon Mrs. Graves' default. On the contrary, petitioner looked to and expected to be paid from the assignment. The record fails to explain whether, when, and from whom petitioner did, in fact, receive payment for the $200,000 obligation which was the subject of the assignment of the Federated mortgage. Since the record indicates petitioner reconveyed the assigned mortgage to Mrs. Graves in January, 1982 presumably he was paid. As we recently reiterated in Davis v. Commissioner,88 T.C. 122">88 T.C. 122, 143 (1987):

The rule is well established that the failure of a party to introduce evidence within his possession and which, if true, would be favorable to him, gives rise to the presumption that if produced it would be unfavorable. * * * This is especially true where, as here, the party failing to produce the evidence has the burden of proof or the other party to the proceeding has established a prima facie case. * * * [Wichita Terminal Elevator Co., v. Commissioner,6 T.C. 1158">6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947).]*267

Respondent contends that it is well settled that the receipt of a transferable third party obligation is income in the year of receipt. Watson v. Commissioner,613 F.2d 594">613 F.2d 594 (5th Cir. 1980), affg. 69 T.C. 544">69 T.C. 544 (1978); Freeman v. Commissioner,303 F.2d 580">303 F.2d 580 (8th Cir. 1962), affg. 36 T.C. 779">36 T.C. 779 (1961); Holmes v. Commissioner,55 T.C. 53">55 T.C. 53 (1970); Georgia-Florida Land Co. v. Commissioner,16 B.T.A. 1253">16 B.T.A. 1253 (1929).

We agree with respondent that it is well settled that transferable third-party obligations of a solvent obligor are to be included in income in the year received.

On the facts here present we conclude that petitioner did in fact receive a cash equivalent by the assignment to him of $200,000 of the obligations of Federated. See Watson v. Commissioner,supra;Freeman v. Commissioner,supra;West Shore Fuel, Inc. v. United States,598 F.2d 1236">598 F.2d 1236 (2d Cir. 1979).

Respondent contends the mortgage assignment should be valued at the full face value. He argues that petitioner, having produced no evidence of a lesser value, has failed*268 to rebut the presumption of correctness which attaches to respondent's determinations. Rule 142(a). Petitioner argues that this is not a question of value but whether the assignment was security or payment. Because we have concluded the assignment was a cash equivalent, thus payment, it is necessary to determine the value of the cash equivalent received. The Supreme Court has stated that "negotiable notes are regarded as the equivalent of cash receipts, to the extent of their fair market value, for the purposes of recognition of income." Schlude v. Commissioner,372 U.S. 128">372 U.S. 128, 136 n. 10 (1963). Thus under the authority of Schlude we hold the fair market value of the assigned mortgage is properly includable in petitioner's 1979 income. The obligations here involved bore interest at the rate of 10 percent, which was the highest legal interest rate in Florida at that time and were from a very solvent debtor. Based on these facts, we conclude that the fair market value of these notes was approximately equal to their face value. We hold that the fair market value of the assigned notes is includable in petitioner's 1979 income and that under the facts of this case*269 the face value of the notes is their fair market value.

Petitioner argues that if he and Mrs. Graves had intended the assignments to constitute payment, she would have on her 1979 income tax return reported the assignment as the disposition of an installment obligation. Petitioner contends that since the record has no evidence of Mrs. Graves' having done this, the implication is an intention for the transaction to be merely security. Based on our conclusions that the receipt of the mortgage assignment did constitute payment, we will not fully address this argument. However, it should be noted that there is no evidence that Mrs. Graves did not report the transaction as the disposition of an installment obligation.

In our view the terms of the assignment whereby Mrs. Graves did (1) "sell, assign, transfer and set over to David Hyman" the sum of $200,000.00 of proceeds due her from Federated, and (2) appoint petitioner her attorney in fact authorized to pursue recovery of the interest and principal, and to discharge the mortgages as fully and completely as she could have had the assignment not been made, along with petitioner's testimony that he looked to the assignment for payment, *270 support the conclusion that Mrs. Graves had so parted with the incidents of ownership that she had disposed of her installment obligation and not merely placed it as security.

Based on the foregoing discussion we conclude that petitioner had 1979 receipts from the transaction with respect to the Graves property of $375,000 composed of the $175,000 cash on closing and charitable contribution payments, plus the $200,000 assignment of mortgage proceeds. In 1980 petitioner had receipts other than current interest of $729,622 from the Graves transaction which was the amount paid to him on January 15, 1980.

Finally, it is necessary to determine to what extent, if any, petitioner is entitled to report any of the gain or income on the installment basis. Section 453(b) applicable to the year 1979 provides for reporting income from the sale of real property or a casual sale of personal property on the installment basis where there are no payments in the year of sale or the payments in that year exclusive of evidences of indebtedness of the purchaser do not exceed 30 percent of the selling price. We have held that petitioner in 1979 made a sale of his 15 percent undivided interest in the*271 Graves farm for $420,000 and also entered into an agreement which in substance covered his reimbursement for funds he had advanced with interest thereon. Although the form used for the repayment of petitioner's advances with interest was designated a "sale" we have concluded that in substance it was a return of the capital he advanced and receipt of ordinary income in the form of attorney's fees and interest. Therefore, the only amount to which the installment sale provisions could be applicable is the sale of petitioner's real property interest for $420,000. The problem is the allocation of the $375,000 we have held that petitioner received in 1979 between the real property sale and the return of money advanced with interest thereon and attorney's fees.

Under the 1975 agreement between petitioner and Mrs. Graves, petitioner's first payments would be a return of his advances. However, in discussing whether petitioner constructively received $397,462 in 1979 we concluded that the December 1979, agreement for sale of property between petitioner and Mrs. Graves replaced the method of payment provisions of the 1975 agreement. Since the nature of this 1979 agreement was in the form*272 of the entire payment being for petitioner's 15 percent undivided interest in the Graves farm, no provision was made as to how the 1979 payment would be apportioned. In the absence of such an agreement, we conclude that the $375,000 received by petitioner in 1979 should be allocated among the items which it discharged in part on a pro-rata basis.

When this apportionment is made, it is obvious that petitioner has received in 1979 more than 30 percent of the sales price of $420,000 for the real property he sold and therefore does not qualify for the installment sale provisions of section 453(b). ^{*273 in 1980 from the transaction here involved shall be apportioned in a manner similar to the apportionment of the 1979 receipt to determine the ordinary income reportable by petitioner in 1980. Since petitioner's entire capital gain is reportable in 1979, the portion of the 1980 receipt allocable to the sale of petitioner's 15-percent undivided interest in the Graves farm is not again taxable in the year 1980.}

Decision will be entered under Rule 155.

Footnotes

1. Hereinafter petitioner will refer solely to Benjamin D. Hyman.↩
2. Unless otherwise indicated all section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue and all rule references are to the Tax Court Rules of Practice and Procedure.↩
3. On his 1979 return petitioner also claimed the two charitable deductions of $36,820 each ($73,640 total) with the explanation that each gift was made on December 21, 1979, of a 1/200 interest in real property valued at fair market value. It appears that to arrive at the value used petitioner considered the value of a 15 percent interest in the property to be $1,104,622. Also to reconcile the closing statement on the closing of Mrs. Graves' sale to Federated it appears that the $73,640 was paid to the charities from the 1979 cash proceeds of the closing from the following computation:
↩
$397,981.86 to Mr. Gormin
101,360.00 to petitioner
35,000.00 to Mrs. Graves
6,900.00 to Mr. Gormin
8,100.00 to HB-C
$549,341.86 $622,981.96 cash received at
closing
549,341.86
$ 73,640.10 Assigned to
charities
4. Sec. 453(b) provides as follows:
SEC. 453. INSTALLMENT METHOD.
(b) Sales of Realty and Casual Sales of Personalty. --
(1) General Rule. -- Income from --
(A) a sale or other disposition of real property, or
(B) a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding $1,000.
(2) Limitation. -- Paragraph (1) shall apply only if in the taxable year of the sale or other disposition --
(A) there are no payments, or
(B) the payment (exclusive of evidences of indebtedness of the purchaser) do not exceed 30 percent of the selling price.
(3) Purchaser evidences of indebtedness payable on demand or readily tradable. -- In applying this subsection, a bond or other evidence of indebtedness which is payable on demand, or which is issued by a corporation or a government or political subdivision thereof (A) with interest coupons attached or in registered form (other than one in registered form which the taxpayer establishes will not be readily tradable in an established securities market), or (B) in any other form designed to render such bond or other evidence of indebtedness readily tradable in an established securities market, shall not be treated as an evidence of indebtedness of the purchaser.↩
5. Sec. 1.451-2(a), Income Tax Regs.↩, states in pertinent part: "income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions."
6. Because of a delay in receiving the proceeds from Federated, January 17, 1980, Gormin transferred an additional two days' interest to petitioner.↩
7. Petitioner relies primarily on Korstad v. Commissioner,T.C. Memo. 1983-147. In Korstad the issue was whether the taxpayer's receipt of a bank letter of credit was a year of sale "payment" so that the taxpayer exceeded the 30 percent limitation of section 453(b) and thus was disqualified from installment reporting. The taxpayer had agreed to sell real property on an installment basis. For business reasons the purchaser required title be transferred to it on closing. In order for the taxpayer to have some security against buyer default, the purchase agreement was amended to secure the installments with an irrevocable letter of credit. The purchaser signed an unsecured demand note to the bank and the bank issued the letter of credit to the taxpayer. In order to draw upon the letter of credit, which was assignable, the taxpayer was required to provide the bank with a statement that he had not been paid by purchaser. For four consecutive years purchaser defaulted on payment to the taxpayer who then drew on the letter of credit. In the fifth year, the taxpayer received payment from purchaser, but it had been advanced directly from the bank. The taxpayer reported the sale on the installment basis but respondent contended the fair market value of the letter of credit was year of sale income. This Court noted that it has concluded letters of credit were cash equivalents and thus "payments" where in substance the letter of credit was "the economic substitute for the obligation" instead of security for the purchaser's obligation. Korstad v. Commissioner,45 TCM 1032, 1034, 52 P-H Memo T.C. par. 83,147 (1983). See Griffith v. Commissioner,73 T.C. 933">73 T.C. 933 (1980).
We concluded under the facts in the Korstad case that the installment sale and letter of credit were motivated by valid business reasons, the deferred payment arrangement was not established simply to enable taxpayer to use installment reporting and since taxpayer could not draw upon the letter of credit unless and until purchaser defaulted, the letter of credit served as security and not as payment. For reasons stated herein, we find Korstad↩ distinguishable from the instant case.
8. Based on this formula 420,000
1,104,622 of the $375,000 should be considered as the 1979 payment on the sales price of petitioner's 15 percent undivided interest in the Graves farm. Likewise $369,000
1,104,000 of the $375,000 should be considered a return of capital and the balance ordinary income. The details of the apportionment to each individual item may be made by the parties.↩

Document Info

Docket Number： Docket No. 1253-85.

Citation Numbers： 53 T.C.M. 727, 1987 Tax Ct. Memo LEXIS 223, 1987 T.C. Memo. 224

Filed Date： 4/30/1987

Precedential Status： Non-Precedential

Modified Date： 11/20/2020

Authorities (12)

Comtel Corporation v. Commissioner of Internal Revenue , 376 F.2d 791 ( 1967 )

H. N. Watson, Jr., and Wife, Shirley Watson v. Commissioner ... , 613 F.2d 594 ( 1980 )

John E. Reed v. Commissioner of Internal Revenue , 723 F.2d 138 ( 1983 )

Real Estate Investment Trust of America v. Commissioner of ... , 334 F.2d 986 ( 1964 )

William J. O'Hare and Patricia E. O'Hare v. Commissioner of ... , 641 F.2d 83 ( 1981 )

H. O. Williams and Mrs. Ada L. Williams v. United States , 219 F.2d 523 ( 1955 )

R. Paul Sprague and Mary G. Sprague v. United States , 627 F.2d 1044 ( 1980 )

Schulde v. Commissioner , 83 S. Ct. 601 ( 1963 )

mercedes-frances-freeman-trust-the-citizens-bank-trustee-leila-b , 303 F.2d 580 ( 1962 )

West Shore Fuel, Inc. v. United States of America, Ruth A. ... , 598 F.2d 1236 ( 1979 )

Ulysses G. Trivett, Jr. And Violet W. Trivett v. ... , 611 F.2d 655 ( 1979 )

Wichita Term. El. Co. v. Commissioner of Int. R. , 162 F.2d 513 ( 1947 )

View All Authorities »

$397,981.86	to Mr. Gormin
101,360.00	to petitioner
35,000.00	to Mrs. Graves
6,900.00	to Mr. Gormin
8,100.00	to HB-C
$549,341.86	$622,981.96	cash received at
		closing
	549,341.86
	$ 73,640.10	Assigned to
		charities