DocketNumber: Docket No. 6483-76.
Citation Numbers: 40 T.C.M. 835, 1980 Tax Ct. Memo LEXIS 291, 1980 T.C. Memo. 288
Filed Date: 8/4/1980
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
GOFFE,
Due to concessions of the parties, the sole issue for our decision is whether petitioners are entitled to utilize the installment method under
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.
FINDINGS OF FACT
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*293 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 Network, 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*294 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.
*295 On February 26, 1972, the shareholers 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*296 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 bnak 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*297 and 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.
*298 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
(a) It is determined that long-term capital gain attributed to a 1972 disposition of 70,000 shares of Texas State Network stock is taxable in the amount of $128,000.02 as shown below instead of $12,037.00 reported on the return because (1) it has not been established that stock rather than liquidating proceeds was disposed of in 1972, and (2) it has not been established that you are entitled to report the transaction on the installment basis. Taxable income for 1972 is increased by the difference of $115,963.02.
Liquidating distribution TSN stock | $270,000.05 |
Less: Miscellaneous item not received | 4,000.00 |
Net amount received | $266,000.05 |
Less: Basis of stock | 10,000.00 |
Gain realized | $256,000.05 |
Less: Section 1202 deduction | 128,000.03 |
Taxable capital gain as revised | $128,000.02 |
*299 OPINION
The 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*300 set forth in
On February 26, 1972, the shareholders of TSN approved the plan of complete liquidation and authorized TSN to sell its assets. By November 1972 TSN had completed the sale of substantially all of its assets. Remaining assets were stocks in various corporations owned by TSN which TSN intended to distribute in kind upon final liquidation. TSN also set aside a portion of the proceeds from the sale of their assets in order to meet contingent liabilities.
On December 6, 1972, petitioners and the bank, in its capacity as trustee, entered into a written agreement which established the trust for petitioners' children. In conjunction with this agreement, petitioners and the bank executed an installment sale contract whereby petitioners sold their TSN stock to the trust. The installment contract provided for payments by the trust over a 10-year period with a total purchase price of $300,000. 6 At this time the*301 bank was aware of TSN activities relating to its plan of complete liquidation.
Petitioners delivered their stock certificates to the bank on December 8, 1972 and the bank immediately had the TSN stock issued in its name as trustee. On December 15, 1972 the board of directors authorized the initial distribution in liquidation and the trustee as a shareholder, on December 20, 1972, received its allocable share which had a value of $266,000.
Respondent contends that petitioners are not entitled to utilize the provisins of
In his opening statement at the trial of this case, counsel for respondent unequivocally informed the Court and counsel for petitioners that his position was based upon an anticipatory assignment of income theory. In addition, counsel for respondent informed the Court that the facts in the instant case were distinguishable from those in
For the first time in his opening brief respondent asserted that the "substance and realities" of the transaction regarding petitioners' stock sale demonstrated that petitioners attempted to defer their gain from such sale while incurring no real economic risk by accepting installment payments from the trust. On reply brief petitioners contend that respondent's "substance and realities" theory constitutes undue surprise and places them in a disadvantaged posture. Petitioners, relying*303 upon
Our inherent authority is to decide cases upon issues properly before us. This case may well have presented opportunities for applying section 482 or some theory within the assignment-of-income area; however, these opportunities were lost when respondent failed to inform petitioner either in the statutory notice, in his answer, or at trial of his intended theory for sustaining the deficiency. Accordingly, we modify our prior opinion and hold that petitioner realized none of the gain from the sale of the truck trailers.
In affirming the Court of Appeals held
Although the most appropriate times to advise the taxpayer of the Commissioner's theories to sustain an assessment would be first in the notice of deficiency and then in the*304 Commissioner's answer, we do not hold that the Commissioner necessarily loses his right to pursue a theory or Code section that is not specifically raised before or at trial.The basic consideration is whether the taxpayer is surprised and disadvantaged when the Commissioner has failed to plead section 482.
The arguments relating to the "substance and realities" theory, i.e., no risk incurred by petitioners upon the sale of their stock, constitutes a new theory, see
In response to respondent's theory, i.e., anticipatory assignment of income, asserted at trial, petitioners rely upon
At the outset we feel compelled to state what this case is not about. In the first place, there is no attempt here to change the character of the gain involved and convert what would be ordinary income into capital gain. The gain realized by the taxpayers on the liquidation of the corporations, whether derived through sale on the installment basis to the trust or directly from the liquidation proceeds, would be entitled to capital gains treatment. Secondly, this is not a case where one taxpayer has attempted to shift the gain to a second taxable entity in order to reap the benefits of the second entity's lower tax rate. The price the trusts paid the taxpayers*310 for the stock was the full value of the stock, including the appreciation in value which would be realized upon liquidation. * * * [
Accordingly, the Court rejected respondent's reliance upon the anticipatory assignment of income theory because no income was assigned. The facts in the instant case clearly demonstrate what this case is not about, as in
After holding that respondent's theory of anticipatory assignment of income did not apply, the Court went on to decide whether the interjection of the trusts insulated the taxpayers from constructive receipt of the liquidation proceeds
1. All section references are to the Internal Revenue Code of 1954, as amended.↩
2. TSN was organized and incorporated under the laws of Texas.↩
3. As of July 1972 and at all pertinent times thereafter, petitioners owned seven percent of all outstanding TSN stock.↩
4. TSN retained shares of stock it held in various corporations and contemplated that these shares would be distributed in kind to the shareholders as a liquidation distribution.↩
5. In negotiating the price finally paid by the bank for petitioners' TSN stock, petitioners and the bank based $266,000 of the purchase price on the value of the cash, notes, and shares of various stock held by TSN to be received as a liquidating distribution, with $4,000 being allocated to contingent claims owed to TSN, after deducting outstanding liabilities of TSN.↩
6. On December 20, 1972 petitioners and the bank agreed to change the purchase price of the TSN stock from $300,000 to $270,000 due to a mutual mistake of fact.↩
7. Most recently we have confirmed our position in
8. It is curious to us that respondent, on opening brief, argues that the bank acted as a mere agent of petitioners while in his reply brief makes no objection to petitioners requested finding of fact to the contrary. Due to his failure to object we find this fact as requested by petitioners.↩
John P. Kinsey and Edith B. Kinsey v. Commissioner of ... , 477 F.2d 1058 ( 1973 )
W. B. Rushing v. Commissioner of Internal Revenue , 441 F.2d 593 ( 1971 )
Virginia K. Jones v. United States , 531 F.2d 1343 ( 1976 )
Edwin W. Hudspeth and Maxine G. Hudspeth v. United States , 471 F.2d 275 ( 1972 )
commissioner-of-internal-revenue-v-transport-manufacturing-and-equipment , 478 F.2d 731 ( 1973 )