Bernice Patton Testamentary Trust v. United States

The Bernice Patton Testamentary Trust (the trust) (plaintiff) owned 25 percent of the common stock in two packing companies, Western Packing Company (Western) and Braunfel Meats, Inc. (Braunfel). In 1990, Western and Braunfel were acquired by a group of investors (the investors) and renamed W-B Acquisition Corporation (W-B). At the time of the acquisition, W-B was appraised to determine its fair market value. At the sale, the investors compensated the trust in the form of cash and a seller’s note. The cash paid exceeded the trust’s basis in the common stock, and the note stated a face amount but was not set to be paid in full until September 1995. In 1993, Carlton Foods, Inc. (Carlton) assumed the investor’s obligations, and fully satisfied all obligations under the note for a lesser amount than stated on the face value of the note in 1990. In 1990, the trust reported the sale on its income tax return as an open transaction, paying long-term capital-gains tax on the cash received in excess of the trust’s basis in the common stock but reporting that the note had no ascertainable value. The Internal Revenue Service (IRS) (defendant) audited the trust’s 1990 income tax return and issued a deficiency notice. The IRS stated that the trust should have utilized the installment-sales doctrine instead of the open-transaction doctrine because the note had a known fair market value. The installment-sales doctrine applies if at least one payment is set to be paid after the close of the taxable year in which the sale of the property occurred. The trust paid the deficiency but filed a claim for a refund. After denial of the trust’s claim, the trust filed a complaint and motion for summary judgment for a refund and interest in the United States Tax Court. The IRS filed a cross-motion for summary judgment.