Court Opinion

ID: 4482480
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:30.808972+00
Date Added: 2024-06-11T14:54:01.875480
License: Public Domain

Tannenwald, J., dissenting: I would normally abjure disagreeing with the trier of the facts in a case such as this, where the issue involved is essentially factual. See Wingate E. Underhill, 45 T.C. 489 (1966). But the majority herein has put its stamp of approval on the decision of the trier of the facts by articulating a rationale which extends the “open transaction” doctrine of Burnet v. Logan, 283 U.S. 404 (1931), to a situation where the property received by the taxpayer not only had a fair market value but was also marketable, albeit at a discount.1 In my opinion, such an extension is totally unwarranted on the basis of the facts in this case. Admittedly, the determination of proper tax treatment by a cash basis taxpayer o'f a transaction, such as is involved herein, is not without its difficulties. See Wingate E. Underhill, supra 45 T.C. at 492-493. In large part, this is due to the fact that many of the decided cases are confusing in their application of concepts of “constructive receipt,” “cash equivalence,” and “negotiability.” See Cowden v. Commissioner, 289 F. 2d 20 (C.A. 5, 1961), reversing and remanding 32 T.C. 853 (1959). To me, there are several elements to be taken into account in determining whether a transaction should be considered as being “open” or “closed,” i.e., whether a taxpayer should be entitled to use the deferred-payment or cost-recovery method of reporting income therefrom. Among these, the “marketability” of the property involved is important, albeit not conclusive. In using this word, I do not mean that it is enough if the facts show that the property could be sold to a third party. Cf. Donald C. MacDonald, 55 T.C. 840, 860-861 (1971). Rather, marketability implies a recognizable group of prospective buyers so that it can be said that the property is of a type that “commonly change[s] hands in commerce.” See Harold W. Johnston, 14 T.C. 560, 565 (1950). In the usual case, a determination that the property has a fair market value will be determinative of its marketability.2 But this is not always the case, e.g., where property is exchanged for an annuity. Compare Simpson, J., dissenting in Estate of Lloyd C. Bell, 60 T.C. 469 (1973). See also Wingate E. Underhill, supra at 494. In this case, however, there is no need to dwell upon any distinction between fair market value and marketability because the facts clearly reveal that there was a market in the Seattle area for the obligations of the purchasers which the petitioner received. Indeed, I have great difficulty in reconciling the majority decision herein that the transaction remained “open,” which essentially rests on a finding of no fair market value in spite of evidence of marketability, with this Court’s very recent decision in Bell that the transaction therein was “closed” because the contract had a fair market value even though the evidence indicated that it was not marketable. That the obligations of the purchasers were not evidenced by a note or mortgage or by a negotiable instrument or that they could be sold only at a substantial discount does not require a decision in petitioner’s favor. These are simply elements which enter into a determination of marketability. See Wingate E. Underhill, 45 T.C. at 494. Particularly with reference to the discount element, the majority decision, in my opinion, escalates one guideline out of several into a governing criterion. In so doing, it ignores prior decisions of this Court where the presence of a substantial discount did not preclude a finding that the obligations involved were marketable. Cf. Joan E. Heller Trust, T.C. Memo. 1965-302, affirmed as to this issue 382 F. 2d 675 (C.A. 9,1967); Herbert Kaufman, T.C. Memo. 1964-127, reversed and remanded 372 F. 2d 789 (C.A. 4, 1966), on remand T.C. Memo. 1970-174, affd. 451 F.2d 175 (C.A.4,1971).3  All of the cases relied upon by petitioner and the majority are clearly distinguishable. The decisions in Estate of Coid Hurlburt, 25 T.C. 1286 (1956), and Harold W. Johnston, 14 T.C. 560 (1950), rested on an absence of fair market value (there was evidence of marketability) , with the Court also noting in Johnston that the amount of the purchase price was unascertainable. The same is true of the companion cases of Estate of Clarence W. Ennis, 23 T.C. 799 (1955), and Nina J. Ennis, 17 T.C. 465 (1951), the Court emphasizing in the former case that, although there was some evidence of marketability,4 a liquor license was involved and its renewal or suspension “had considerable bearing on the value of the contract” (see 23 T.C. at 802). In Western Oaks Building Corp., 49 T.C. 365, 376-377 (1968), the Court determined that the contracts were not fully transferable in commerce, although, in my opinion, too much emphasis was placed on the absence of negotiability. Cf. Cowden v. Commissioner, supra. The long and short of it is that all of the foregoing cases turn on their particular facts. The hard facts as revealed by this record are that the purchasers were personally liable on the contracts and were solvent, the contracts were marketable in the Seattle area, the purchasers were not in default, the contracts appear to have been recorded so that they were not unlike first mortgages,5 and there is no evidence as to the character and condition of the underlying property from which one could conclude that the petitioner’s ability to recover the purchase price was in serious doubt. Under these circumstances, it cannot be said that petitioner was not reasonably certain of recovering “his cost and a major portion of the discount.” See Wingate E. Underhill, 45 T.C. at 495. Accordingly, I would hold that the obligations constituted “property (other than money) received” by the petitioner and taxable to it in the year of sale. Sec. 1001. The result is that petitioner should be remitted to his alternative election of reporting on the installment method under section 453, an election which respondent has conceded was properly made. Sterrett, <7., agrees with this dissent.   1 note in passing that the application of this doctrine has been criticized even where the transaction fits the limited mold of Burnet v. Logan. See Simpson, J., dissenting in Stephens. Dorsey, 49 T.C. 606, 634 (1968).    Another way of looking at the problem conceptually is to say that the critical determination is whether the property is marketable and th,at, if such a determination is made, the fair market value of the property then becomes the measure of includability in determining the taxable amount.    In Kaufman, tlie differences between this Court and the Court of Appeals related to the quantum and not the concept of a discount. The reference in Cowden v. Commissioner, 289 F. 2d 20, 24 (C.A. 5, 1961), to “a discount not substantially greater than the generally prevailing premium for the use of money,” quoted in the majority opinion, is, to my mind, misleading. Taken literally, it would have the practical effect of rendering sec. 458 nugatory, especially when that section is considered in conjunction with sec. 483.    There is no indication in the opinion in Nina J. JSnnis that any such evidence was submitted.    Compare Wingate B. Underhill, 45 T.C. 489, 496 fn. 10 (1966).