Opinion ID: 221561
Heading Depth: 3
Heading Rank: 1

Heading: Sale of stock in Reliance Savings Association

Text: In 1986, the Felts sold 450,000 shares of stock in Reliance Savings Association for $10 per share, receiving in part notes from Specialty Finance, a d/b/a of David Felt, which were secured by the Reliance stock. The Tax Court treated the notes as cash equivalents and valued the notes at face value, which was the only measure of value it had before it. Based on this valuation, the Tax Court ruled that the Felts should have reported a capital gain on this transaction. The Felts challenge the treatment of the notes received in the sale of Reliance Savings Association stock as cash equivalents valued at face value and the taxable gain resulting. A promissory note may be treated as the equivalent of cash and taxable in the manner of cash unless the taxpayer can establish facts that support an exception to this general rule. Cowden v. Comm’r, 289 F.2d 20, 24 (5th Cir. 1961). The relevant exceptions are that the note was not made by a solvent obligor, was conditional and unassignable, subject to set-off, or not of 2 Case: 10-60512 Document: 00511547981 Page: 3 Date Filed: 07/21/2011 No. 10-60512 a type frequently transferred to lender or investors at a discount not substantially greater that than the generally prevailing premium for the use of money. Id. The taxpayers had the burden of proving facts that support an exception to the general rule and failed to present any evidence on these issues. See Olser v. Comm’r, 79 T.C. 456, 469, aff’d, 751 F.2d 1168 (11th Cir. 1985). The taxpayers argue also that the value of the Special Finance notes should be limited to the value of the collateral securing them, i.e. the Reliance Savings stock. The taxpayers did not make this argument to the Tax Court and we decline to consider it here. City of Waco, Tex. v. Bridges, 710 F.2d 220, 22728 (5th Cir. 1983); Dennis v. Comm’r, 473 F.2d 274, 282 (5th Cir. 1973). We also reject the taxpayers’ argument that no income should be recognized on the sale of stock in 1986 because regulators successfully prevailed in a suit to rescind the sale in 1988. The later rescission does not affect the taxpayers’ obligation to recognize the sale when it occurred in 1986. See N. Am. Oil Consol. v. Burnet, 286 U.S. 417, 424 (1932).