DocketNumber: Docket No. 5395-75
Citation Numbers: 70 T.C. 487, 1978 U.S. Tax Ct. LEXIS 96
Judges: Irwin
Filed Date: 6/27/1978
Status: Precedential
Modified Date: 1/13/2023
*96
Petitioners sold their motel business. As part of the transaction, the purchaser paid petitioners' sales commission liability.
*487 The Commissioner determined a deficiency in petitioners' Federal income taxes for the calendar year 1971 in the amount of $ 8,492. Due to concessions by petitioners, the only issue remaining for decision is whether petitioners' sale of their *488 motel business qualifies for the installment method of reporting under
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation of facts, along with attached exhibits, are incorporated herein by this reference.
The petitioners, Earl C. and Joy E. Bostedt, husband*98 and wife, resided in Santa Cruz, Calif., at the time of filing their petition herein. They filed their joint Federal income tax return for the calendar year 1971 with the Internal Revenue Service Center in Fresno, Calif. Since Joy E. Bostedt is a party hereto solely by reason of having filed a joint income tax return with her husband for the year in issue, Earl C. Bostedt alone will hereafter be referred to as petitioner.
On February 2, 1971, petitioner sold a motel, known as the "Casa Blanca," and elected the installment method of reporting gain from such sale under
Part of the sales proceeds consisted of an assumption by the buyers of two notes encumbering the motel property, including improvements, in the amounts of $ 151,116.51 and $ 37,768.99. In addition, the sellers received net cash in the amount of $ 36,318. The remainder of the proceeds consisted of an unsecured personal note to the seller in the amount of $ 4,000, a third mortgage note to the seller in the amount of $ 40,364.50, and a fourth mortgage note in the amount of $ 12,750 to Carbray & Co. in satisfaction of the sales commission owed by petitioner to the brokers in the transaction.
*489 In reporting the sale on his income tax return, petitioner elected the installment method of reporting the gain realized, utilizing the following computation:
(1) Portion of sales price allocable to | ||
land, improvements, and goodwill 2 | $ 275,500.00 | |
(2) Amount received in year of sale: | ||
(a) Cash | 35,482.69 | |
(b) Mortgages assumed | 188,885.50 | |
Less: Adjusted basis | ||
(including selling | ||
expenses allocable to | ||
these assets) 3 | 144,110.00 | |
Excess of mortgages | ||
assumed over adjusted basis | 44,775.50 | |
Total proceeds deemed received in year of sale | 80,258.19 |
*100 Thus, under petitioner's computation, the proceeds deemed received in the year of sale amount to less than 30 percent of the selling price.
Respondent, on the other hand, recomputed the transaction as follows:
(1) Portion of sales price allocable to | ||
land, improvements, and goodwill | $ 275,500.00 | |
(2) Amount received in year of sale: | ||
(a) Cash | 35,482.69 | |
(b) Liability of petitioner | ||
paid out of sales proceeds | 12,456.75 | |
(c) Mortgages assumed | 188,885.50 | |
Less: Adjusted basis (including | ||
selling expenses | ||
allocable to these assets) | 144,110.00 | |
Excess of mortgages assumed | ||
over adjusted basis | 44,775.50 | |
92,714.94 |
*101 Under respondent's method of computation, petitioner is deemed to have received proceeds in excess of 30 percent (34 percent) of the sales price in the year of sale and cannot qualify for the installment method of reporting under
*490 OPINION
The specific question to be answered in determining whether petitioner can qualify for installment reporting under
Initially, we note that both parties assumed the rule in
The effect of the assumption by the purchaser of liabilities of the seller for purposes of
This Court has consistently held that assumption and payment by the buyer of liabilities of the seller constitutes a payment in the year of sale for purposes of
However, in some of the more recent cases, several Courts of Appeals have not agreed that assumption and payment of a seller's liability always constitutes a payment in the year of sale.
A practical distinction may be drawn between those situations in which the buyer purchases a business and, thus, a group of assets and liabilities (some of which liabilities are later paid in the ordinary course of business), and those cases in which the purchaser's assumption of or cancellation of the seller's liabilities was
While there is a theoretical comparability between the facts involved in cases such as
We believe that the purchaser's assumption of the seller's commission expense liability in the instant case falls within this latter group of cases. In
The $ 750 fee paid by the purchaser in discharge of the vendor's obligation to the law firm must be regarded as part of the purchase price.
The instant case is factually indistinguishable from
1. All statutory references are to the Internal Revenue Code of 1954, as in effect for the year in issue.↩
2. The amounts set forth in the table are only those portions allocable to the land, improvements, and goodwill. The cash received was allocated based upon the relative selling prices of the components sold. The sale of the personal property resulted in a net loss to which the provisions of
3. Both parties assumed the case of
4. In
Respondent states on brief that his acceptance of the rule of
5. Under
Jack E. Golsen and Sylvia H. Golsen v. Commissioner of ... , 445 F.2d 985 ( 1971 )
Robert B. Riss and Georgina Riss v. Commissioner of ... , 368 F.2d 965 ( 1966 )
United States v. James H. Marshall and Thelma Marshall , 357 F.2d 294 ( 1966 )
Walter Kirschenmann v. Commissioner of Internal Revenue , 488 F.2d 270 ( 1973 )
Lucas v. Schneider , 47 F.2d 1006 ( 1931 )
Ivan Irwin, Jr. And Ann Vanston Irwin v. Commissioner of ... , 390 F.2d 91 ( 1968 )