Court Opinion

ID: 4486649
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:35.646479+00
Date Added: 2024-06-11T15:03:50.350947
License: Public Domain

HALPERN, J., dissenting. Apparently sensing some abuse that it must address (but does not identify), the majority concludes that an obligation that never came into being was somehow canceled. That conclusion is based on an interpretation of the word “canceled” that comports neither with common usage nor with the intent of Congress. Therefore, I dissent. As the majority has stated, the type of transaction under consideration is commonly referred to as either a “death-terminating installment sale” or “self-canceling installment note” (SCIN). For convenience only, I will hereinafter identify the transaction by the acronym SCIN. The Nature of a SCIN Before addressing the majority's opinion, it may be best to sort out the economic relationships inherent in a SCIN. From the majority opinion we know the following: the SClN's here in question were received in consideration for the sale of property. Respondent has not challenged the adequacy of that consideration. The property purchased was to be paid for in installments, but no payment was to be made following the death of the seller. From those facts, the following economic relationships emerge: the seller, in a real sense, financed the sale and, thus, must be viewed as a lender, receiving repayments of principal and earning (and receiving) interest. He also agreed to accept the economic risk that he would die before the amount lent (the purchase price of the property) was repaid. He was thus an insurer (or perhaps a gambler), and earned (and received) a risk premium. Despite earning a risk premium, however, decedent for tax purposes reported payments on the SCIN's only as' interest and section 453 installment payments (that is, as loan repayments), and respondent has accepted those characterizations. See majority op. pp. 344-345. So must we. Nevertheless, it is clear that, pursuant to the agreements with his children, decedent was to be compensated for bearing the risk that, if he died prematurely, no payment obligation would arise thereafter. The True Nature of the “Obligations” of Decedent's Children Notwithstanding that the parties to the SCIN's failed to separately identify the risk premium earned by decedent, the sale agreements between decedent and his children did not provide for an absolute right to payments totaling $141,050. Of course, each such agreement provided for the possibility of payments totaling $141,050. It was clear to all from the start, however, that there might or might not come into being an obligation to make some or all of the 20 potential payments. It is also clear that decedent, from the beginning, bore the risk that some or all of the potential payments would not be made. No obligation to make any payment was canceled here because, excepting those payments actually made, no obligation to make additional payments ever arose. That is the crucial aspect of the agreements in question, and the aspect about which the majority and I fundamentally disagree. The Majority's Consideration of the Definition of “Contingent Payment Sale” The regulations lend no support to the majority's interpretation of the children's obligations. The majority observes that a “contingent payment sale”, as defined in section 15A.453-1(c)(1), Temporary Income Tax Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981), is limited to 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 other disposition) occurs. Accordingly, the majority observes that — insofar as the purchase price for the stock was determinable at the time of the sales here at issue — those sales do not qualify as “contingent payment sales”, as that term of art was just defined. However, that observation, correct yet irrelevant, does not demonstrate that the potential payments that decedent might otherwise have received (had he lived) were not contingent. The purpose of section 15A.453-l(c)(l), Temporary Income Tax Regs., supra, is not to define whether a payment is or is not contingent. The purpose is twofold: (1) To determine whether an installment sale has occurred, and not some other type of transaction, such as a contribution to a partnership, where the transferor's ultimate reward is uncertain and may, in some sense, be described as contingent; (2) to provide rules for allocating basis to payments received in contingent payment sales. If the temporary regulation, instead of using the phrase “contingent payment sale” used the phrase “qualifying contingent payment sale”, it would be clear that where, as here, qualification for installment treatment is not at issue (respondent has conceded that issue) the temporary regulation is inapposite. Despite the regulation's somewhat inexact wording, it is clear, nonetheless, that it deals with nothing more than questions of qualification for installment sale treatment and basis recovery and has no relevance to the characterization of a right to payment as contingent or absolute. Moreover, it is highly doubtful that the regulation would be valid if it purported arbitrarily to limit the meaning of the word “contingent” in the manner suggested by the majority. Clearly, decedent and his children could have chosen to structure their transactions as simple sales of stock for specific, noncontingent rights to payment. However, they did not do so. All parties to the transactions knew that the purchasers of decedent's stock (decedent's children) might or might not be obligated to make some or all of the 20 potential payments. The assertion that the purchasers of decedent's stock were unequivocally obliged to make all 20 potential payments is indefensible. Yet that assertion is necessary to the majority's argument: for an obligation can only be canceled if it first arises. If the support the majority draws from section 15A.453-l(c)(l), Temporary Income Tax Regs., supra, is illusory there is no support for the majority's view that (1) at decedent's death, decedent's children were subject to an obligation to make further payments and (2) such (nonexistent) obligation was somehow canceled. The Majority's Reliance on the Parties' Inaccurate Description of Their Transaction The majority relies heavily on decedent's and his children's characterization of the transaction, as opposed to the obvious nature of that transaction itself. 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. According to the majority: The language of the cancellation provision itself demonstrates the weakness in petitioners' argument. * * * 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. [Majority op. p. 349; emphasis added.] Thus, by relying on the language of the so-called cancellation provision, the majority suggests that if the language of the promissory notes (between decedent and his children) were different, it would reach a different conclusion. Let us pursue the majority's argument. Suppose that, instead of the above provision, the promissory notes each contained the following language. THE PARTIES INTEND THIS TO BE A CONTINGENT PAYMENT SALE. The purchase price of the stock is variable, and will be somewhere between $0 and $141,050, depending upon how long seller lives. A condition precedent to each contingent payment is that seller be alive on the scheduled potential payment date. Consequently, if seller dies before any scheduled potential payment, the obligation to make such payment does not come into existence. In my hypothetical, the majority would be hard pressed persuasively to argue that the obligations of decedent's children to make payments subsequent to decedent's death (1) were not contingent, (2) arose, and (3) were thereafter canceled. Yet, how does the bargain represented by the hypothetical differ in any relevant respect from the bargain decedent and his children actually made? I contend that it does not. The logical and practical meaning of each bargain is simply that, if decedent dies, his children will not be obligated to make additional payments. Both bargains are, in substance, the same. By arguing that those bargains should be treated differently (when they are in fact the same), the majority has abandoned its role as interpreter of the law. It has accepted the words of the contract as a representation of facts, giving rise to an estoppel, rather than a mere statement of opinion about the transaction's legal status, which a court has a duty to reject if it believes such opinion is incorrect.1 As a Court of Appeals so aptly put it: “One should not be garroted by the tax collector for calling one's agreement by the wrong name.” Pacific Rock & Gravel Co. v. United States, 297 F.2d 122, 125 (9th Cir. 1961). The nature of the agreement between decedent and his children is at odds with the label those parties put upon it.2 We should not neglect our duty to be the arbiters of the law by allowing respondent to garrote petitioners because the parties to the transaction called their contingent payment sale by the wrong name. The majority argues that “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” Majority op. p. 350 (emphasis added). I agree. All I would require is that an obligation begin to exist before its cessation constitute a cancellation. The majority today holds that an obligation that never came into existence was somehow canceled. I cannot conceive of the cancellation of a nonexistent obligation. The majority thus uses the term “cancellation” in a sense that comports with neither any common use of the term nor the legislative history of section 453B(f). The Meaning of the Term “Canceled” “Cancel” is a legal term of art that, when used in connection with a contract, obligation, or instrument, means to annul it or do away with its terms and conditions prior to performance.3 The result of a cancellation is something at odds with, or inconsistent with, the terms of the contract, obligation, or instrument canceled. To end a contract in a manner inconsistent with its terms is the difference that distinguishes a cancellation from other words of art describing the termination of a contract. Where payments under a contract are contingent, the cessation of payments upon the occurrence of the contingency is in no way inconsistent with the terms of the contract. Thus, the contingent obligation to make payments under a contract may well be described as having been satisfied when, upon the happening of the contingency, no further obligation exists; the happening of the contingency does not, however, in a legal sense, cancel the obligation, since, under the terms of the contract, no further obligation comes into existence. Here, on the death of decedent, pursuant to the terms of the SCIN's held by him, any obligations of the makers thereof had been satisfied. Those obligations were not abrogated in advance of performance because no further performance was called for. The obligations had been satisfied by payment of all that under those obligations was (or would ever become) due. Thus, unless Congress intended the term “canceled” to have some extraordinary and novel meaning, the debt in question (represented by the SCIN obligations) was satisfied, and was not canceled.4  The Legislative History No Evidence of an Unusual Meaning The relevant legislative history, which is set forth in the majority's opinion, majority op. pp. 350-351, and need not be repeated here, fails to support the majority's view that Congress intended the term “cancellation” to have any unusual meaning. Indeed, the best the majority can muster is the observation that no language in the legislative history explicitly contradicts its extraordinary view.5 However, congressional silence on the point is insufficient to prove the majority's contention that Congress intended the term “canceled”, in section 453B(f), to have some unusual meaning. Thus, there is literally no evidence that Congress intended that a contract carried out in accordance with its terms might be viewed as canceled. No Policy Reason Supporting the Majority Holding While it is not the function of this Court to consider policy for the purpose of making policy choices, the majority's holding would gain support if the Code or legislative history suggested some policy concern, applicable to the present situation, that Congress wished to address through section 453B. However, there is nothing to suggest that Congress intended section 453B to apply to a contingent payment sale.6 The abuse with which Congress was concerned was noncontingent payment sales, where the unadjusted basis of the purchaser would, from the beginning, include all future payments and would not be reduced even if, upon death of the obligee, part of purchaser's obligation were abrogated and certain payments (for which basis “credit” had been given) never were made. In such case, the purchaser would have a fair market value basis despite having paid some lesser amount for the property and might achieve an economic but nontaxable profit. However, that abuse does not occur where property is sold for a SCIN because the obligor's cost basis in the purchased property in such a situation is no greater than his out-of-pocket cost. See sec. 1012; Denver & Rio Grande Western R. R. Co. v. United States, 205 Ct. Cl. 597, 505 F.2d 1266, 1269-1271 (1974) (contingent obligation excluded from cost basis); Graf v. Commissioner, 80 T.C. 944, 947 (1983) (“It is well settled that a taxpayer cannot include a contingent liability in his cost basis”.); Redford v. Commissioner, 28 T.C. 773, 777-778 (1957) (contingent portion of purchase price, not in fact paid, not added to cost basis). Regulations proposed by the Treasury specifically provide that the unadjusted basis of property is to be redetermined for cost recovery purposes on account of a contingent purchase price, with that basis being increased as the contingency occurs. Sec. 1.168-2(d)(3)(i) and (ii), Example (2), Proposed Income Tax Regs., 49 Fed. Reg. 5946 (Feb. 16,1984). Thus, the unadjusted basis of property acquired for a SCIN will not at any time include payments still contingent and the free step-up-in-basis abuse that concerned Congress in the context of a noncontin-gent payment sale will not here occur. Accordingly, I see no policy concern suggesting that Congress intended cancellation to have an unusual meaning or that otherwise indicates that section 453B(f) was intended to apply to the present situation. Inconsistency with Estate of Moss Moreover, the majority's holding is inconsistent with Estate of Moss v. Commissioner, 74 T.C. 1239 (1980), where we previously recognized the contingent nature of the payments potentially due under a SCIN. See also Cain v. Commissioner, 37 T.C. 185 (1961). In Estate of Moss, we held that a “self-cancellation” clause that becomes operable at the death of the obligee does not cause the unpaid balance (as of the moment before the obligee's death) of a promissory note to be included in the obligee's gross estate. Estate of Moss v. Commissioner, supra at 1246-1248. We based that holding upon the determination that, at the time of decedent's death, decedent had no interest in the notes. Id. at 1247 (“Since there is not interest remaining in decedent at his death, we hold that the notes are not includable in his gross estate.”). Our determination that, at death, decedent had no interest in the notes was based upon our determination that an interest in a SCIN is similar to a life estate, which is not canceled upon the death of the holder but simply ceases of its own accord. Id. Thus, in Estate of Moss, we recognized that decedent, at death, has no interest remaining and therefore no right to collect on a SCIN. Id. A fortiori, when decedent has no interest remaining and no right to collect, borrower has no obligation to pay. At decedent's death, borrower has no obligation capable of being canceled and decedent (or decedent's estate) has no rights upon which he (or his estate) can effect a cancellation. To suppose, as does the majority, that, at death, decedent canceled borrower's obligation to pay is to suppose — contrary to our express holding in Estate of Moss — that decedent had some interest he could relinquish and that borrower had some remaining obligation that could be canceled. The majority fails to explain whether or how its holding might be reconciled with Estate of Moss or with this Court's understanding of life estates in general. Inconsistency with Treatment of Private Annuities The majority's position is also irreconcilable with the Code's treatment of private annuities.7 Under section 72, a taxpayer who does not recover his entire investment from an annuity contract is permitted a deduction to the extent of his unrecov-ered investment. Sec. 72(b)(3). Obviously, that deduction is based upon the determination that the holder of a life annuity does not take into gross income amounts that, due to his death, are never received: for if such amounts were considered taken into gross income, no investment would be lost and no deduction would be appropriate. Thus, the Code recognizes that where a taxpayer's right to private annuity payments is contingent upon his being alive on a particular date, and the taxpayer is not alive on that date, the taxpayer does not have income in the amount to which he otherwise would have been entitled. The nature of obligor's potential obligation is the same for a SCIN as for a life annuity, insofar as such potential obligation only comes into existence if obligee is alive on the appropriate date. At death, the estates of an annuitant under a life annuity and an obligee of a SCIN are in precisely the same position: each has no right to additional payments because obligor's potential obligation to make additional payments never arose. Yet the majority has elected to ignore the equivalence of those two transactions. Without arguing, much less demonstrating, that the contingent nature of the potential payment obligation on a SCIN is any different from that in the private annuity context, the majority requires, for the SCIN alone, that the contingent, potential payment (that never occurs) must be taken into income. The majority has failed to provide a logical argument for such inconsistent treatment. The Slippery Slope Unfortunately, the majority's opinion may cause difficulties beyond those here apparent: all contingent payment transactions between related persons, where the maximum sales price exceeds some lesser contingent price, would be within the scope of today's ruling. The majority, presumably, would hope to limit the effect of its opinion to those contingent payment sales that fail to “qualify” under section 15A.453-a(c)(l), Temporary Income Tax Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981), but such limitation would rest on no firm principle. Under section 453B(f), if the obligor and the obligee are related persons within the meaning of section 453(f)(1), the fair market value of the obligation canceled is treated as not less than its face amount. Under the majority's rationale, an obligation that would have come into being, but for the occurrence of some contingency, is deemed canceled. There is no basis for supposing that the nature of the contingency leading to nonpayment is determinative of whether a cancellation has occurred. Thus, if the occurrence of a contingency unrelated to the value of the property sold constitutes a cancellation, the occurrence of a related contingency must do the same. Certainly, the majority has provided no principle for concluding otherwise. I am concerned that today's decision will cast doubt on the efficacy of the installment sale rules in all contingent payment sales between related persons.8  Conclusion For the reasons stated, I would hold that the notes here in question were not canceled nor did they otherwise become unenforceable within the meaning of section 453B(f). Thus, there was no disposition of the notes that would require any gain to be reported on decedent's final income tax return. Chabot, Kórner, Whalen, and Beghe, JJ., agree with this dissent.  See 1 Bittker & Lokken, Federal Taxation of Income, Estates and Gifts, par. 4.4.6 (Attempts by Taxpayers to Restructure Transactions) (2d ed. 1989).    The majority might contend that the “strong proof” doctrine supports its position. This Court has held that where a taxpayer has entered into a written agreement providing for specific terms, the tax consequences of which are at issue, strong proof must be adduced by the taxpayer seeking to establish a position at variance with the language of the agreement. See Peterson Machine Tool, Inc. v. Commissioner, 79 T.C. 72, 81 (1982), affd. 54 AFTR 2d 84-5407, 84-2 USTC par. 9885 (10th Cir. 1984); Lucas v. Commissioner, 58 T.C. 1022, 1032 (1972). Under that doctrine, the Court must determine whether the term in question “was in fact intended as a part of the contract, and also whether it had an independent economic significance in the agreement such that we might conclude it was a separately bargained-for element thereof.” Lucas v. Commissioner, supra at 1032-1033. First, it should be noted that the strong proof doctrine does not apply where, as here, the taxpayer does not attempt to vary the terms of the contract, as written, but merely to construe those terms. Smith v. Commissioner, 82 T.C. 705, 714 (1984); Peterson Machine Tool, Inc. v. Commissioner, supra at 82; Molasky v. Commissioner, T.C. Memo. 1988-173, affd. in part, revd. in part, and remanded 897 F.2d 334 (8th Cir. 1990). In the present case, petitioners do not argue that the so-called cancellation clause was not part of the bargain between decedent and his children; they simply contend that respondent's interpretation of that provision is incorrect. Second, even if the strong proof doctrine were applicable, it would not support the majority's position. Neither decedent nor his children would have bargained for the so-called cancellation provision, as an alternative to the above hypothetical provision, because, as observed earlier, the rights and obligations of the parties would have been the same under each. Therefore, the so-called cancellation provision, as interpreted by the majority, clearly lacks “independent economic significance in the agreement such that we might conclude it was a separately bargained-for element thereof.” Lucas v. Commissioner, supra at 1032-1033. Any reliance upon the strong proof doctrine would be misplaced.    See, e.g., Metropolitan Property & Liability Ins. Co. v. Commonwealth, 509 A.2d 1346, 1348 (Pa. Commw. Ct. 1986) (“Cancellation” of a contract “is a form of prospective relief, affecting the future rights and obligations of the parties towards each other.”), affd. 535 A.2d 588 (Pa. 1987); Jazlowiecki v. Nicoletti, 387 A.2d 1081, 1082 (Conn. Super. Ct. 1977) (“To ‘cancel’ an instrument means to blot it out, to set at naught the provision of the instrument canceled, to declare it void and to do away with an existing agreement.”); Horvine v. Greencastle Production Credit Association, 505 N.E. 2d 802, 805 (Ind. Ct. App. 1987) (“The Cancellation of a contract means that portion of the contract remaining unperformed is abrogated.”). See generally 6 Words and Phrases, Cancel; Cancellation (1966). See Black's Law Dictionary 206 (6th ed. 1990) (“To destroy the force, effectiveness, or validity of. To annul, abrogate, or terminate. Defacement or mutilation of instrument. Words of revocation written across instrument.”). Cf. Uniform Commercial Code sec. 2-106(3) and (4) (1989) (“termination” and “cancellation” defined and contrasted, but each occurring when a party puts an end to a contract prematurely).    A nice analogy in aid of understanding can be found in Prosser & Keeton, Torts sec. 49, at 332 (5th ed. 1984): “There is a genuine distinction between a satisfaction and a release. A satisfaction is an acceptance of full compensation for the injury; a release is a surrender of the cause of action, which may be gratuitous or given for inadequate consideration.”    That is not surprising, insofar as Congress can hardly be expected to disavow all potential unusual meanings but must assume that, absent some clear signal to the contrary, this Court will give words their usual (though perhaps technical) meanings.    It may be worthwhile to reiterate that the majority's conclusion that the transactions in question were not contingent sales is insupportable: Sec. 15A.453-l(cXl), Temporary Income Tax Regs., 46 Fed. Reg. 10711 (Feb. 4,1981), deals with qualification for installment treatment, which, because respondent has conceded the point, is not here at issue.    It is indisputable, I think, that sec. 453B© does not apply to private annuities. See S. Rept. 96-1000 (1980), 1980-2 C.B. 500 n.12 (“Another technique used for intra-family transfers involves the so-called ‘private annuity’ arrangement. The bill does not deal directly with this type of arrangement.”); H. Rept. 96-1042, at 10 n.12 (1980) (incorporating the same language).    Siblings are related persons within the meaning of sec. 453(f)(1). Thus, suppose that brother makes an installment sale of land to sister, sister to make four annual payments of $25x, except that sister need not make the final payment if, by its due date, certain zoning variances cannot be obtained. Putting aside the question of determining the face amount of the obligation if no further payments are due, would not the occurrence of the contingency there (failure to obtain the variance by the due date of the final payment) constitute a cancellation under the same logic that would say that a SCIN is canceled on the death of the obligor? If so, then has not doubt been cast on the efficacy of the installment sale rules in a class of transactions much larger than evidenced by Congress' concern with Miller v. Usry, 160 F. Supp. 368 (W.D. La. 1958), transactions?