Case Name: Estate of Robert E. Frane, Deceased, Janet M. Frane, Personal Representative, Petitioner v. Commissioner of Internal Revenue, Respondent; Janet M. Frane and Estate of Robert E. Frane, Deceased, Janet M. Frane, Personal Representative, Petitioners v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1992-03-31
Citations: 98 T.C. 341
Docket Number: Docket Nos. 288-89, 21626-89
Parties: Estate of Robert E. Frane, Deceased, Janet M. Frane, Personal Representative, Petitioner v. Commissioner of Internal Revenue, Respondent Janet M. Frane and Estate of Robert E. Frane, Deceased, Janet M. Frane, Personal Representative, Petitioners v. Commissioner of Internal Revenue, Respondent
Judges: Parker, Shields, Hamblen, Cohen, Clapp, Swift, Jacobs, Gerber, Wright, Parr, Wells, Ruwe, and Colvin, JJ., agree with the majority opinion.
Reporter: Reports of the Tax Court of the United States
Volume: 98
Pages: 341–367

Head Matter:
Estate of Robert E. Frane, Deceased, Janet M. Frane, Personal Representative, Petitioner v. Commissioner of Internal Revenue, Respondent Janet M. Frane and Estate of Robert E. Frane, Deceased, Janet M. Frane, Personal Representative, Petitioners v. Commissioner of Internal Revenue, Respondent
Docket Nos. 288-89, 21626-89.
Filed March 31, 1992.
David L. Cornfeld, David T. Karzon, Jr., and Donald W. Paule, for petitioners.
Steven W. LaBounty, for respondent.

Opinion:
OPINION
NlMS, Chief Judge:
Petitioner in docket No. 288-89 is the Estate of Robert E. Frane, deceased (the estate), Janet M. Frane, personal representative. By statutory notice of deficiency dated October 4, 1988, respondent determined a deficiency in the Federal income tax of the estate for the fiscal year ending June 30, 1985, of $103,981.42. In an amendment to answer, respondent asserted an increase in the estate's deficiency of $6,734, for a total deficiency of $110,715.42. The increased deficiency asserted by respondent is based entirely on facts stipulated by the parties.
Petitioners in docket No. 21626-89 are Janet M. Frane and the Estate of Robert E. Frane, deceased, Janet M. Frane, personal representative. By statutory notice of deficiency dated June 7, 1989, respondent determined a $103,866 deficiency in the final joint Federal income tax liability of Robert E. Frane (decedent) and Janet M. Frane for the year 1984. As will be explained below, the deficiency determined by respondent in docket No. 21626-89 is an alternative position to that asserted in docket No. 288-89.
These cases were consolidated for trial, briefing, and opinion. For convenience, the taxpayers in both cases will be referred to as petitioners throughout. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions by the parties, the issues remaining for decision are: (1) Whether the estate realized income in respect of a decedent under section 691 as a result of installment obligations held by decedent for which the unpaid principal and interest owed to decedent were deemed canceled and extinguished as though paid upon his death; (2) in the alternative, whether such deemed cancellation and extinguishment of the installment obligations caused the recognition of income under section 453B which was required to be reported on the final return of the decedent and his wife; and (3) whether the 6-year period of limitations on assessment and collection under section 6501(e) is applicable to decedent's final joint income tax return.
The parties submitted these cases fully stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Background
At the times of the filing of the petitions in these cases, Janet M. Frane, decedent's wife and personal representative of the estate, resided in Webster Groves, Missouri. The fiduciary income tax return (Form 1041) of the estate for the taxable year ending June 30, 1985, was timely filed with the Internal Revenue Service Center at Kansas City, Missouri. The final joint income tax return (Form 1040) of decedent and his wife for the calendar year 1984 was timely filed on April 15, 1985, with the Internal Revenue Service Center at Kansas City, Missouri.
Sometime in March 1982, decedent organized Sherwood Grove Co. (Sherwood), a Missouri corporation. At that time, decedent transferred $1,000 and 150,000 shares of common stock of Consolidated Grain & Barge Co. to Sherwood in exchange for 5,000 shares of no par value common stock of Sherwood and 89,485 shares of no par value convertible preferred stock of Sherwood.
On May 10, 1982, decedent sold 1,250 shares of common stock of Sherwood to each of his four children pursuant to separate, but identical, purchase agreements. With respect to the purchase price, each purchase agreement reads in part as follows:
The purchase price for the shares of stock being purchased hereunder shall be the appraised fair market value of such shares as of this date, such appraisal to be made by A.G. Edwards & Sons, Inc., St. Louis, Missouri. The purchase price hereunder shall be payable in twenty (20) equal annual payments of principal and interest . Such purchase price shall be represented by a promissory note of Purchaser substantially in the form attached as Exhibit A which shall be secured by a collateral pledge of such stock . In addition, such note shall provide that in the event of Seller's death prior to the final payment of principal and interest under said note, the unpaid principal and interest of such note shall be deemed cancelled and extinguished as though paid upon the death of Seller.
Pursuant to the purchase agreement, on May 10,1982, each of decedent's four children executed a promissory note in the principal amount of $141,050, wherein each child was obligat ed to decedent for payment of 20 equal annual installments commencing on May 10, 1983. The promissory note further required interest to be paid annually at a rate of 12 percent on any unpaid principal. The $141,050 purchase price was based upon the determination of A.G. Edwards & Sons, Inc., that such price reflected the fair market value of 1,250 shares of Sherwood common stock at the time of purchase. As required by the purchase agreement, each promissory note contained the following provision (the cancellation provision):
Unless sooner paid, all sums due hereunder, whether principal or interest, shall be deemed cancelled and extinguished as though paid upon the death of Robert E. Frane.
Also pursuant to the purchase agreement, on May 10, 1982, decedent and each of his four children executed a collateral pledge and security agreement which reads in part as follows:
WHEREAS, pursuant to a Purchase Agreement Pledgee has this day sold to Pledgor 1,250 shares of the capital stock of Sherwood Grove Company for the aggregate sum of [$141,050]; which amount is represented by Pledgor's Promissory Note in the principal amount of [$141,050] .
WHEREAS, Pledgor has agreed to secure the obligation of Pledgor under the Note and the Agreement by the assignment, pledge and delivery to Pledgee, as collateral security therefor, of Pledgor's certificate(s) representing the 1,250 shares of the Corporation's capital stock owned by Pledgor duly endorsed in blank .
At the time of the sale of the Sherwood stock, decedent was 53 years of age, and his life expectancy as determined from the U.S. Department of Commerce statistics exceeded the 20-year term of the promissory notes. However, decedent died on July 15, 1984, approximately 2 years after the sale of the stock. Decedent had received two payments totaling $4,812 on each note prior to his death, leaving an unpaid principal balance on each of $136,238.
Gain from the sale of the Sherwood stock was reported on the joint income tax returns of the decedent and his wife for the years 1983 and 1984 under the installment method of accounting pursuant to section 453 and the regulations thereunder pertaining to contingent payment sales.
In 1983, decedent received a principal payment of $1,958 from each of his four children with respect to the purchase of the Sherwood stock. On Form 6252 (Computation of Installment Sale Income) attached to their 1983 joint income tax return, decedent and his wife reported $1,955 of each payment as capital gain income after applying a gross profit ratio equal to .9982270 (see sec. 15A.453-l(b)(2)(i), Temporary Income Tax Regs., 46 Fed. Reg. 10709 (Feb. 4, 1981)).
In 1984, decedent received a principal payment of $2,854 from each of his four children with respect to the purchase of the Sherwood stock. On Form 6252 attached to their 1984 joint income tax return, decedent and his wife reported $2,849 of each payment as capital gain income after applying a gross profit ratio of .9982270. On part II of Schedule D (Capital Gains and Losses) attached to their 1984 return, decedent and his wife also reported a long-term capital loss totaling $964. The capital loss was based upon a recomputation of the gross profit ratio pertaining to the four promissory notes. The 1984 return did not disclose (1) the recomputed gross profit ratio (or the reasons for the recomputation), (2) the calculations underlying the claimed capital loss, (3) the fact that the capital loss was attributable to the sale of the Sherwood stock, or (4) that no further payments were due under the notes. No other information with respect to the notes and transaction in question was reported in the 1984 return.
On its Federal estate tax return, the estate disclosed the promissory notes in question but did not include any balance due in respect thereof in decedent's gross estate. Respondent audited the estate tax return and issued a closing letter without making any adjustments to decedent's gross estate with respect to any balance due under the promissory notes.
On its Form 1041 for the taxable year ending June 30,1985, the estate did not report any gain attributable to the promissory notes held by decedent at his death.
Sherwood was liquidated in December 1986. Two of decedent's children reported long-term capital losses from the disposition of their Sherwood stock in connection with Sherwood's liquidation. In computing their claimed capital losses, each child reported a basis for the Sherwood stock equal to the principal amounts actually paid, $4,812. Decedent's two other children did not report any gain or loss attributable to the liquidation of Sherwood.
Discussion
These cases present us with a straightforward question of statutory analysis concerning the income tax consequences of installment obligations held by decedent for which, under the express terms of the obligations, all unpaid principal and interest owed to decedent were deemed canceled and extinguished as if paid upon his death.
As a preliminary matter, we note that respondent has characterized the type of transaction under consideration as a "death-terminating installment sale" or a "self-canceling installment note". While generalizations are sometimes helpful, our analysis in these cases is solely based upon the specific facts before us.
It is also important to note that both parties agree that the sale of the Sherwood stock by decedent to his children qualified as an installment sale under section 453 and that the obligations to pay decedent are "installment obligations" as that term is commonly used in the context of section 453. In short, respondent has not attempted to recharacterize the payments received by decedent in any way, nor has she challenged the adequacy of the consideration received by decedent for the Sherwood stock.
Respondent advances two arguments in support of her position that gain must be recognized as a consequence of the cancellation of all outstanding payments under the installment obligations. Respondent first asserts that because of the cancellation provision contained in each of the promissory notes, the estate recognized gain under section 691 and was required to report such gain on its fiduciary income tax return. See Rev. Rul. 86-72, 1986-1 C.B. 253. Specifically, respondent asserts that due to the cancellation provision, the installment obligations owed to decedent were canceled or became unenforceable as contemplated under section 691(a)(5). Respondent therefore concludes that the estate is deemed to have transferred such obligations, resulting in taxable gain under section 691(a)(2).
Respondent alternatively argues that by reason of the cancellation provision the installment obligations owed to decedent were canceled or otherwise became unenforceable as contemplated by section 453B(f). Respondent concludes that as a consequence taxable gain must be recognized under section 453B(a) and reported on decedent's final joint income tax return. In this regard, respondent asserts that the 6-year period of limitations on assessment and collection under section 6501(e) applies to decedent's final joint income tax return.
With respect to respondent's first argument, petitioners counter that decedent's death did not cause the unpaid balance of the installment obligations owed to him to become taxable under section 691. Rather, petitioners argue the obligations were "extinguished" by decedent's death, and thus no obligation survived his death to be canceled or transferred within the meaning of sections 691(a)(2) and (5). Similarly, in regard to respondent's alternative position, petitioners argue that the installment obligations owed to decedent were neither canceled nor otherwise became unenforceable within the meaning of section 453B(f). Petitioners also contend that the 6-year period of limitations under section 6501(e) is inapplicable because there was adequate information disclosed in their return to apprise respondent of the nature and amount of the omission from gross income. See sec. 6501(e)(l)(A)(ii).
Before we consider the competing claims, so to speak, of the decedent's final return and the estate's first return, we first consider the question of whether in any event income was recognized by reason of the deemed cancellation and extin-guishment to which we have referred.
Section 453B(a) provides in part:
SEC. 453B(a). GENERAL RULE. — If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and—
*
(2) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange.
Thus, under section 453B(a)(2), if an installment obligation is either (1) distributed, (2) transmitted, or (3) disposed of in a transaction other than a sale or exchange,- gain or loss will be recognized. The amount of gain or loss recognized is equal to the difference between the basis of the installment obligation, see sec. 453B(b), and its fair market value at the time of the transaction.
Section 453B(f) provides as follows:
SEC. 453B(f). Obligation Becomes Unenforceable — For purposes of this section, if any installment obligation is canceled or otherwise becomes unenforceable—
(1) the obligation shall be treated as if it were disposed of in a transaction other than a sale or exchange, and
(2) if the obligor and obligee are related persons (within the meaning of section 453(f)(1)), the fair market value of the obligation shall be treated as not less than its face amount.
Thus, any installment obligation which is canceled or otherwise becomes unenforceable shall be treated as if it was "disposed of in a transaction other than a sale or exchange". An installment obligation which is disposed of in a transaction other than a sale or exchange, in turn, is subject to tax under section 453B(a)(2) to the extent the obligation's fair market value at the time of the transaction exceeds basis. If the obligor and obligee are related persons within the meaning of section 453(f)(1) (e.g., parent and child), then the fair market value of the installment obligation for purposes of calculating the gain shall be no less than its face amount.
The facts of the present case fall squarely within section 453B(f). The promissory notes executed by decedent and his four children state:
Unless sooner paid, all sums due hereunder, whether principal or interest, shall be deemed cancelled and extinguished as though paid upon the death of Robert E. Frane. [Emphasis added.]
Pursuant to the express terms of this provision, the children's installment obligations to pay decedent were canceled upon decedent's death. Section 453B(f) explicitly provides that the cancellation of an installment obligation shall be treated as a taxable disposition of such obligation.
Petitioners, however, contend that the above provision was a "contingency" affecting the total purchase price to be paid for the stock. According to petitioners, the total purchase price to be paid for the stock depended upon whether decedent lived beyond the 20-year term of the promissory notes. In conjunction with the foregoing, petitioners posit that the term cancellation means "To destroy the force, effectiveness, or validity of. To annul or abrogate", quoting Black's Law Dictionary 187 (5th ed. 1979). Petitioners thus conclude that because the occurrence of the contingency (decedent's death) extinguished the children's obligations under the promissory notes by reducing the purchase price to be paid, the promissory notes were neither canceled nor otherwise became unenforceable within the meaning of section 453B(f).
Petitioners' assertion that the total purchase price to be paid for the stock was contingent upon decedent's death is unsupported by the facts before us. A contingent payment sale is defined as a sale or other disposition of property in which the aggregate selling price cannot be determined by the close of the taxable year in which such sale or disposition occurs. Sec. 15A.453-1(c)(1), Temporary Income Tax Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981). In contrast to this definition, the aggregate purchase price to be paid for the Sherwood stock was determinable at the time of the sale.
Each purchase agreement executed by decedent specifically states that the purchase price for the shares of the stock shall be the appraised fair market value as determined by A.G. Edwards & Sons, Inc. The parties stipulated that pursuant to such appraisal, the fair market value for each block of stock was $141,050. The purchase agreement also specifically states that such purchase price shall be represented by the promissory note and secured by a collateral pledge agreement. Each promissory note was made in the amount of $141,050. Moreover, each collateral security pledge states that decedent sold the stock "for the aggregate sum of [$141,050]; which amount is represented by Pledgor's Promissory Note in the principal amount of [$141,050]".
The language of the cancellation provision itself demonstrates the weakness in petitioners' argument. According to petitioners, "The import of this sentence is that upon Mr. Frane's death the Promissory Notes were treated as though they were fully paid in accordance with their terms." As so viewed, by treating the unpaid principal amount as being "fully paid", decedent's death in no way reduced the total agreed purchase price, $141,050. On the contrary, by treating the unpaid principal as being fully paid, the children's obligation to repay the remaining principal balance was canceled by decedent's death pursuant to the express terms of the cancellation provision. Therefore, decedent's death was not a "contingency" affecting the total purchase price of the stock.
We likewise reject petitioners' narrow view of the meaning of the term "canceled". While section 453B(f) does not contain a definition, it also does not contain any pertinent qualifying or limiting language. There is nothing in the statute that indicates anything other than that the common usage of the term "canceled" should be applied. Whether the term "canceled" is defined as to annul, abrogate, terminate, discharge, extinguish, or by any other synonym, given the broad sweep and explicit language of the statute, if section 453B(f) is to have any application at all, the term "canceled" must include any cessation of an obligation to pay that would otherwise continue to exist.
Our interpretation of section 453B(f) is fully supported by the legislative history. Section 453B(f) was enacted by the Installment Sales Revision Act of 1980, Pub. L. 96-471, 94 Stat. 2247, 2253. The Senate Finance Committee report accompanying section 453B(f) reads as follows:
M. Cancellation of Installment Obligation (sec. 2 of the bill and new sec. 45333(f) of the Code)
Present law
Under present law, some have argued that the installment obligation disposition rules can he avoided by maldng gift cancellations of the obligation or the installments as they come due. In other words, by making an installment sale and then cancelling the obligation or a number of installment payments, it is argued that the seller will incur no income tax liability, but possibly some gift taxes, and the buyer will have a cost basis in the property sold although no income tax cost will have been incurred on the transaction. If a direct gift is made, the donee's basis is generally the same as the donor's basis rather than a "cost" basis which reflects future payments which will never be made.
This cancellation technique is based on a District Court's decision in Miller v. Usry. [160 F. Supp. 368 (W.D. La. 1958).] In that case, the court held that the disposition rules for obligations disposed of other than by sale or exchange were directed at corporate transfers and should not be applied to a cancellation of the obligation where there has been no actual, real, or material gain to the taxpayer. The court did not consider the possible benefit to the donee from acquiring a cost basis through the installment sale. Next, the court held that the disposition rules for satisfaction at other than face value did apply to a cancellation but no tax was incurred because no amount was realized by the taxpayer.
Reasons for change
The committee believes that present law should be clarified to make it clear that the installment obligation disposition rules cannot be circumvented by cancelling the obligation.
Explanation of provision
The bill makes it clear that the cancellation of an installment obligation is treated as a disposition of the obligation.
[S. Rept. 96-1000, at 25-26 (1980), 1980-2 C.B. 494, 507-508.]
It is evident from the above langúage that the congressional purpose in enacting section 453B(f) was to make clear that any cancellation of an installment obligation should be treated as a disposition of that obligation. See American Offshore, Inc. v. Commissioner, 97 T.C. 579, 600 (1991). It is equally clear from the above language that the focus of section 453B(f) is whether the obligation has been canceled. Consistent with the language of the statute, there is no limiting language in the legislative history concerning the meaning of the term "cancellation". Congress enacted section 453B(f) to make it clear that the installment obligation disposition rules cannot be circumvented by canceling the obligation. S. Rept. 96-1000, supra at 26, 1980-2 C.B. at 507-508. In short, Congress intended that when income is deferred under the installment method, a cancellation of the obligation cannot prevent the remaining unreported income from being recognized under the installment obligation disposition rules.
Petitioners assert that Congress intended section 453B(f) only to be applicable to the cancellation technique in Miller v. Usry, 160 F. Supp. 368 (W.D. La. 1958), referred to in the Senate Finance Committee report. We find no support for petitioners' assertion either in the statute or the above-quoted legislative history. While it is certainly true that Congress intended to legislatively overrule the decision in Miller, see American Offshore, Inc. v. Commissioner, supra, Congress did not limit the application of section 453B(f) only to the exact Miller facts. Nor did Congress limit the. application of section 453B(f), as petitioners assert, to situations where the buyer may get a full cost basis even though the full purchase price was not paid due to the cancellation. We therefore decline to create such limitations on the applicability of section 453B(f) where Congress has not done so.
Petitioners next assert that even if the installment obligations were canceled under section 453B(f), the resulting transmission of the obligation at decedent's death falls outside the scope of section 453B by reason of section 453B(c).
Section 453B(c) provides that if an installment obligation is "transmitted" at death, then except as provided under section 691, section 453B shall not apply to such transmission. As previously indicated, section 453B(a)(2) provides that if an installment obligation is either (1) distributed, (2) transmitted, or (3) disposed of in a transaction other than a sale or exchange, gain or loss will be recognized. When an installment obligation is canceled, section 453B(f)(l) provides that such obligation is treated as if it were "disposed of in a transaction other than a sale or exchange", the third type of disposition event under section 453B(a)(2). In contrast, section 453B(c) specifically limits its application to an obligation that is transmitted at death, the second type of disposition event under section 453B(a)(2). Thus, because section 453B(f) specifically treats the cancellation of an installment obligation as a disposition other than a sale or exchange, section 453B(c) cannot by its own terms apply to a transaction governed by section 453B(f), there having been a disposition rather than a transmission of the installment obligation.
Petitioners lastly assert that even if section 453B(f) is applicable, no gain was recognized because the face amount of the promissory notes at the time of decedent's death was zero. Respondent contends that at the time of the cancellation the face amount of each note was equal to the unpaid principal that was canceled.
Section 453B(f) treats the cancellation of an installment obligation as a taxable disposition under section 453B(a)(2). For purposes of measuring the recognized gain, section 453B(a)(2) looks to the fair market value of the installment obligation "at the time of" the disposition. When an installment obligation is canceled, section 453B(f) provides that where, as here, the obligor and obligee are related persons within the meaning of section 453(f)(1), the fair market value of the installment obligation for purposes of calculating the gain shall be no less than its face amount. Therefore, under this statutory framework the fair market value of the installment obligations under consideration is the face amount of the notes at the time of the cancellation.
Petitioners' focus on the face amount of the obligation following the cancellation is misplaced. Under petitioners' theory there would never be any gain recognized when an installment obligation between related parties is canceled. Such a result is certainly not contemplated by the statute. Rather, the face amount of the obligations at the time they are canceled must be equal to the remaining unpaid principal amount that would have been paid had the obligation not been canceled (i.e., the amount realized from the cancellation). Cf. Commissioner v. Tufts, 461 U.S. 300, 313 (1983).
Accordingly, based on the foregoing analysis we hold that the installment obligations held by decedent were canceled within the meaning of section 453B(f). As a result, each installment obligation is treated as if it were disposed of in a transaction other than a sale or exchange by decedent. Sec. 453B(f)(l). Further, because the obligor (each of decedent's children) and the obligee (decedent) are related, gain was recognized equal in amount to the excess of the face amount of the obligations over basis "at the time of" the transaction — the date of decedent's death. Sec. 453B(a)(2), (f)(2). The face amount of each installment obligation is equal to the remaining unpaid principal amount which was canceled.
Section 691(a)(1) provides in part:
SEC. 691(a). Inclusion in Gross Income.—
(1) GENERAL RULE. — The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period shall be included in the gross income, for the taxable year when received, of:
(A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent
[Emphasis added.]
In essence, section 691(a)(1)(A) provides that "all items of gross income not properly includible in the decedent's [final income tax] return [as] determined under the method of accounting employed by him" acquired by the estate from the decedent will be taxable to the estate when received. Poorbaugh v. United States, 423 F.2d 157, 160 (3d Cir. 1970) (emphasis added); sec. 1.691(a)-l(b), Income Tax Regs. Thus, section 691(a)(1) does not apply to those items of gross income of decedent which are properly includable in his final income tax return. See Estate of Peterson v. Commissioner, 74 T.C. 630, 638 (1980), affd. 667 F.2d 675 (8th Cir. 1981); Estate of Sidles v. Commissioner, 65 T.C. 873, 879 (1976), affd. without published opinion 553 F.2d 102 (8th Cir. 1977); see also S. Rept. 1631, 77th Cong., 2d Sess., 1942-2 C.B. 504, 580; 3 Bittker & Lokken, Federal Taxation of Income, Estates and Gifts, par. 83.1, at 83-1-83-5 (2d ed. 1991); Ferguson et al., Federal Income Taxation of Estates and Beneficiaries 146 (1970).
Since our foregoing analysis has led us to conclude that the installment obligations were canceled within the meaning of section 453B(f) and therefore that gain was recognized under section 453B(a) at decedent's death, it follows that section 691(a) is not implicated in this case. The amounts of the items in question are not "items of gross income in respect of a decedent". They are, instead, items which are properly included in respect of the taxable period in which falls the date of decedent's death, and we so hold. By doing so we reject respondent's primary position based upon section 691 and accept instead her alternative position based upon section 453B.
We now turn to the issue of whether the 6-year period of limitations on assessment and collection under section 6501(e) is applicable to decedent's final joint income tax return.
The final joint income tax return for decedent and his wife for the calendar year 1984 was filed on April 15, 1985. The 3-year period of limitations on assessment and collection with respect to this return expired on April 15, 1988. See sec. 6501(a). Respondent, however, mailed the notice of deficiency pertaining to petitioners' 1984 return on June 7, 1989, approximately 4 years after the return was filed. As a consequence, if the 6-year period of limitations under section 6501(e) is not applicable, the notice of deficiency is untimely.
Section 6501(e)(1)(A) provides for a 6-year period of limitations on assessment and collection where there is an omission of more than 25 percent of the gross income stated in the return. Petitioners agree that any gain attributable to the cancellation of the installment obligations under section 453B exceeds 25 percent of the gross income reported in the return. Petitioners assert, however, that because there was adequate information disclosed in their return to apprise respondent of the nature and amount of any omission from gross income, under section 6501(e)(l)(A)(ii) such amount is not taken into account in determining whether the 6-year period is applicable.
Section 6501(e)(l)(A)(ii) provides that in determining whether there was an omission of gross income that exceeded 25 percent of the gross income reported in the return—
there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item. [Emphasis added.]
To avoid the application of the 6-year period of limitations, section 6501(e)(l)(A)(ii) requires a statement (i.e., disclosure) in the return that produces a "clue" with respect to the omission of gross income. Colony, Inc. v. Commissioner, 357 U.S. 28, 36 (1958). The statement containing the clue does not have to be a detailed revelation of every fact underlying the transaction. University Country Club, Inc. v. Commissioner, 64 T.C. 460, 470 (1975); Quick Trust v. Commissioner, 54 T.C. 1336, 1347 (1970), affd. 444 F.2d 90 (8th Cir. 1971). The statement must, however, be sufficiently detailed to apprise respondent and her agents as to the nature and amount of the transaction so that a decision as to whether to select the return for audit may be a reasonably informed one. Estate of Fry v. Commissioner, 88 T.C. 1020, 1023 (1987); University Country Club, Inc. v. Commissioner, supra at 469. See also Benderoff v. United States, 398 F.2d 132, 137 (8th Cir. 1968).
Petitioners point to the following information disclosed in their return to support their position: (1) Schedule D (Capital Gains and Losses) attached to the return stated that the gross profit ratio was recomputed, which resulted in a long-term capital loss totaling $964; (2) Form 6252 and attached statements included the original gross profit from the sale of the Sherwood stock, the original gross profit ratio of .9982270, and the reported gains for 1983 and 1984; and (3) the date of decedent's death was disclosed on the face of the return. Petitioners assert that this information was adequate to apprise respondent that they omitted from gross income the remaining unpaid principal under the promissory notes and would not thereafter report any further gain with respect to the sale of the Sherwood stock. We are not so persuaded.
The information alluded to by petitioners is insufficient to support a conclusion that the amount of the omitted item of gross income was disclosed "in a manner adequate to apprise the Secretary of the nature and amount of such item" as is required by the statute. The schedules and attachments failed to show that the recomputation of the gross profit ratio and resulting claimed capital loss were based upon the fact that petitioners were taking the position that no further payments were due under the promissory notes because of decedent's death. Although the date of decedent's death was listed on the face of the return, nowhere on the return was it disclosed that the sales of the Sherwood stock in exchange for the installment notes were transactions of decedent alone. Thus, the fact of decedent's death could not apprise respondent as to whether any further payments were to be received under the installment notes. Moreover, the 1984 return did not disclose (1) the recomputed gross profit ratio (or the reasons for the recomp-utation), (2) the calculations underlying the claimed capital loss, (3) the fact that the capital loss was attributable to the sale of the Sherwood stock, or (4) that no further payments were due under the notes. No other information with respect to the notes and transaction in question was reported in the 1984 return.
We cannot conclude, as petitioners urge, that the claimed capital loss due to a recomputed gross profit ratio is sufficient to provide respondent with a clue that the installment obligations pertaining to the sale of the Sherwood stock were canceled. Petitioners did not disclose that the recomputed gross profit ratio and the claimed capital loss related in any way to the sale of the Sherwood stock reported on the Form 6252. In this connection, on the Form 6252 and attached statements petitioners disclosed the same gross profit amount from the sale of the Sherwood stock and the same gross profit percentage that they reported in 1983. Petitioners then carried the reportable gain under each installment note to Schedule D. Thus, petitioners reported the capital loss attributable to a recomputed gross profit ratio together with the capital gain attributable to the sale of the Sherwood stock on Schedule D without any further information or explanation.
In our view, petitioners' reporting of the transaction in question is quite confusing and misleading when considered in the context of section 6501(e)(l)(A)(ii). This is particularly true given the fact that a recomputation of a gross profit ratio does not automatically lead to a conclusion that no further payments are due under an installment obligation. See sec. 15A.453-l(c)(2), Temporary Income Tax Regs., 46 Fed. Reg. 10712 (Feb. 4, 1981).
In short, petitioners failed to provide any pertinent information in their return concerning the treatment of the installment obligations to provide respondent with a clue as to the omission of income in question. Accordingly, we hold that there was no adequate disclosure within the meaning of section 6501(e)(l)(A)(ii), and thus the 6-year period of limitations under section 6501(e) is applicable to decedent's final joint income tax return.
To reflect the foregoing and concessions,
Decisions will be entered under Rule 155.
Reviewed by the Court.
Parker, Shields, Hamblen, Cohen, Clapp, Swift, Jacobs, Gerber, Wright, Parr, Wells, Ruwe, and Colvin, JJ., agree with the majority opinion.