Warren Jones Co. v. Commissioner

524 F.2d 788 (9th Cir. 1975)

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Nature of the Case

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Facts

P sold an apartment for $153,000. P got a down payment of $20,000 and a 15-year promise to pay the remaining $133,000 at 8% interest. P financed the purchase for the buyers. The contract was the only evidence of the buyer's debt and no other notes or instruments passed between the parties. Upon receipt of the full purchase price, P was obligated to deed the apartment to the buyers. P elected to handle the transaction on the installment basis under 453. The IRS did not like that idea and assessed a tax on the difference between P's basis and the cash received plus the fair market value of the contract which was $117,980 with market discounts taken into account. P's adjusted basis was $61,913 and because he got only $20,000 and another $4,000 in payments he reported no gain on the sale. The tax court held that the $133,000 contract only had a cash and market value of $76,980. The tax court reasoned that requiring P to realize the fair market value of the contract in the year of sale would subject P to hardship. To raise the funds to pay off such a tax burden, P might be forced to sell the note at a substantial discount and also to treat any monies received after the first year of sale as ordinary income.