Funsten v. Commissioner

E. M. FUNSTEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Funsten v. Commissioner Docket No. 102068. United States Board of Tax Appeals 44 B.T.A. 1166; 1941 BTA LEXIS 1221; August 5, 1941, Promulgated *1221 Petitioner made two casual sales of stock in the taxable year, the total consideration in each case being a promissory note payable on or before five years from date. In each case a payment of an amount less than 30 percent of the purchase price was made on the note in the year of sale. Held, that the payment made in each case was an "initial payment" under section 44(b) of the Revenue Act of 1936, and petitioner is entitled to return on the installment basis the gain realized in each transaction. Stanley S. Waite, Esq., for the petitioner. Carroll Walker, Esq., for the respondent. LEECH *1166 Respondent determined a deficiency of $3,335.53 in petitioner's income tax for the calendar year 1936. This deficiency arises from the action of respondent (1) in increasing petitioner's taxable income by the amount of $5,510.17 as capital gain realized in the taxable year upon the sale of capital assets, which gain petitioner returned upon the installment basis, and (2) in disallowing a deduction of $107.50 for taxes paid. Error is assigned only in the first mentioned adjustment. FINDINGS OF FACT. Petitioner is a resident of St. Louis, *1222 Missouri, and filed his return for the calendar year 1936 with the collector of internal revenue for the first district of Missouri. *1167 On December 5, 1936, petitioner sold ten shares of stock of the R. E. Funsten Co. which he had held for more than ten years. Seven shares were sold to F. H. Johnson for a consideration of $18,107.39 and three shares to Wm. F. McKeone for a consideration of $7,760.31. In each case the purchaser gave his promissory note, payable on or before five years after date in the total sum of the purchase price of the stock. The note signed by Johnson was as follows: December 5, 1936. On or before five years from date I promise to pay to the order of E. M. Funsten, or order for value received, the sum of Eighteen thousand one hundred seven dollars and thirty nine cents ($18,107.39) with interest from November 27, 1936 at the rate of 6 per cent per annum. This note is given in payment of 7 shares of the R. E. Funsten Company's stock this day transferred to me and in my name. Any dividends that are declared and paid on this stock during the life of this note are to be applied on this note in payment of principal and interest and the stock*1223 is to be attached to this note as security until said note is paid in full. [Signed] FRED H. JOHNSON It is agreed that in the event that this note is not fully paid at its maturity it shall be extended on terms named above for an additional five years. [Signed] E. M. FUNSTEN The note given by McKeone is identical in wording with the Johnson note, except for the number of shares and the amount of the obligation. Petitioner at the time of the sale of this stock was the president of the R. E. Funsten Co. and the purchasers were employees of that company. Prior to their purchase of the stock and the execution of the notes there were several meetings with respect to the transactions and the purchasers were assured that there would be a substantial dividend paid by the company on the stock prior to the close of the calendar year and that this dividend would serve as a down payment on the stock. In accordance with this assurance a dividend of $650 per share was declared and paid by the company on December 16, 1936. The entire amount of these dividends received by Johnson and McKeone, in the sums of $4,550 and $1,950, respectively, was paid by these parties on their notes. *1224 The following payments of principal were made by F. H. Johnson on his note for $18,107.39: Dec. 16, 1936 $4,550.00 Feb. 1, 1937 6,500.00 Mar. 1, 1937 1,000.00 June 3, 1937 2,100.00 July 1, 1937 1,000.00 Dec. 15, 1937 $2,057.39 Mar. 1, 1938 900.00 Total $18,107.39 On March 1, 1938, this note was fully paid, both principal and interest, and the note and seven shares of stock were on that date surrendered to F. H. Johnson. *1168 The following payments of principal were made by Wm. F. McKeone on his note for $7,760.31: Dec. 16 1936 $1,950.00 June 6, 1937 1,200.00 Dec. 15, 1937 540.31 July 1, 1938 370.00 Dec. 1, 1938 500.00 Jan. 3, 1939 $100.00 May 3, 1939 500.00 Nov. 22, 1939 200.00 Jan. 3, 1940 400.00 Dec. 2, 1940 600.00 Interest has been paid to December 31, 1940. Petitioner elected to return the gain derived from both sales on the basis provided for in section 44(a) of the Revenue Act of 1936, that is, petitioner returned in his Federal income tax return for 1936 that portion of the payment received on each of the notes which the gross profit to be realized on each sale when payment was completed bore*1225 to the total contract or sales price. The amount so computed and returned in the year 1936 as capital gain on the sale to F. H. Johnson was $1,294.43, and on the sale to Wm. F. McKeone, $554.75. In each case the payment received in 1936 did not exceed 30 percent of the selling price. OPINION. LEECH: Respondent contends that these two sales of stock by petitioner were not sales on the installment plan. He argues that the obligation in each case made no definite provision for installment payments but merely bound the purchaser to pay the total amount on or before five years from the date of purchase, and that the provision for the application of dividends paid on the stock to the reduction of principal of the notes was a purely contingent obligation which would only arise in the event that a dividend was declared and paid. He takes the position that unless the transaction is an installment sale the gain thereon is taxable in full in the year of the transaction and does not fall within the provisions of section 44(a) or (b) of the Revenue Act of 1936. 1 *1226 *1169 In this respondent overlooks the fact that the sales here are not by an individual who regularly sells personal property on the installment plan but are casual sales of personal property. The right to return the income therefrom on the installment basis is to be determined under section 44(b), which does not require that the sale be one providing for the payment of the purchase rrice in fixed installments, but requires merely that it be a casual sale of personal property for a price exceeding $1,000, where the initial payments do not exceed 30 percent of the selling price. That section defines "initial payments" as the payments received in cash or property other than the evidences of indebtedness of the purchaser during the taxable period in which the sale is made. It is quite evident that the transactions in question are squarely within the provisions of subsection (b) since we have decided that payments made within the taxable year of the sale, although not required in the contract, must be considered as includable in the initial payment. *1227 Wagegro Corporation,38 B.T.A. 1225; Mrs. W. M. Bludworth,7 B.T.A. 495. The fact that casual sales such as those present, though not sales upon the installment plan, come within the provisions of subsection (b) appears to have been recognized by respondent. Article 44-1 of Regulations 94 provides in part that: The income from a casual sale or other casual disposition of personal property (other than property of a kind which should properly be included in inventory) may be reported on the installment basis only if (1) the sale price exceeds $1,000 and (2) the initial payments do not exceed 30 per cent of the selling price. See also G.C.M. 1162, VI-1 C.B. 22. Respondent argues that the decision of the present question is controlled by James McCutcheon & Co.,30 B.T.A. 1177; Thomas F. Prendergast, Executor,22 B.T.A. 1259; and Walnut Realty Trust,23 B.T.A. 850. We think none of these three cases are in point. In the McCutcheon case the sale was by a security company and manifestly occurred in the regular course of business. It did not fall within subsection (b) because it*1228 was not a casual sale and our denial of the right to return the income upon the installment basis was premised upon our holding that the transaction was not an installment sale. Walnut Realty Trust involved facts wholly dissimilar to those here. There the total consideration was received in the taxable year and the mere fact that a portion of it consisted of notes of others than the purchaser did not eliminate these notes as a part of the initial payment and, upon that basis, such payment was far in excess of 30 percent of the purchase price. In Thomas F. Prendergast, Executor, the sale was of real estate to a corporation for a consideration consisting of two of its corporate $50,000 bonds payable ten years after date. In that case neither were installments or an initial payment within section 44(b), *1170 supra, contemplated and none was made. Here such payments were both contemplated and made. We hold petitioner entitled to return upon the installment basis the capital gain realized upon these sales of stock. Decision will be entered under Rule 50. Footnotes 1. SEC. 44. INSTALLMENT BASIS. (a) DEALERS IN PERSONAL PROPERTY. - Under regulations prescribed by the Commissioner with the approvel of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit realized or to be realized when payment is completed, bears to the total contract price. (b) SALES OF REALTY AND CASUAL SALES OF PERSONALTY. - In the case (1) of 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, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 30 per centum of the selling price (or, in case the sale or other disposition was in a taxable year beginning prior to January 1, 1934, the percentage of the selling price prescribed in the law applicable to such year), the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this section. As used in this section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. ↩