Bob Frane


Court: United States Tax Court

Case Number: 288-89 21626-89.

Date: Mar 31, 1992


In 1982, D sold to his four children equal amounts of common stock in his wholly owned corporation, S. The purchase agreement stated that the purchase price for the S stock was equal to the stock’s fair market value, which was determined by appraisal to equal $141,050 for each block of stock sold. Pursuant to the purchase agreement, D and each of his children executed a promissory note in the principal amount of $141,050, payable in 20 annual installments, with interest payable annually at a rate of 12 percent on any unpaid principal. Each promissory note contained a provision that unless sooner paid the obligations would be “cancelled and extinguished as though paid” upon the death of D. Also, pursuant to the purchase agreement, D and each child executed a collateral pledge and security agreement which stated that the total purchase price of the S stock was $141,050.

At the time of the sale, D’s life expectancy exceeded the 20-year term of the promissory notes. However, D died in 1984 after receiving two payments on each promissory note. D reported gain attributable to the two payments received from the sale of the S stock under the installment method of accounting. No gain attributable to the installment obligations held at D’s death was reported on his final income tax return.

HELD, the installment obligations held by D at his death were cancelled within the meaning of sec. 453B(f), I.R.C. As a result, each installment obligation is treated as if it were disposed of in a transaction other than a sale or exchange by D. Sec. 453B(f)(1), I.R.C. HELD, FURTHER, the six-year period of limitations on assessment and collection under sec. 6501(e), I.R.C., is applicable to D’s final return. David L. Cornfeld, David T. Karzon, Jr., and Donald W. Paule, for petitioners. Steven W. LaBounty, for respondent.



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, KOERNER, WHALEN, and BEGHE, JJ., agree with this dissent.

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. Tax Court, 1992.

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