Estate of Peterson v. Commissioner

Charley Peterson was a cattle farmer who signed a contract in July 1972 to deliver about 3,300 calves in merchantable condition at $0.49 per pound, with the date of delivery to be set by Peterson with five days’ notice. One group was to be delivered by November 1, 1972 and the other by December 15, 1972. No date was ever designated, nor were calves delivered by Peterson, because he died on November 9, 1972. His estate (plaintiff) designated several dates and delivered 2,929 calves, with 2,398 owned by Peterson’s estate and the other 531 owned by his sons. About two-thirds of the delivered calves were in found to have been in deliverable condition at the time of Peterson’s death, and the others were then too young. The estate reported the sale on its income-tax return. It calculated the gain by subtracting the fair market value of the calves on Peterson’s death from the sale amount. However, the Commissioner of Internal Revenue (the commissioner) (defendant) found that the gain was income in respect of a decedent (IRD) and found the gain by subtracting Peterson’s adjusted basis in the calves from the sales proceeds. The government then found an income tax deficiency of $185,384.10. The estate filed suit, and the tax court ruled for the estate, finding that the funds were not IRD and that the estate had properly calculated the gain and paid the correct amount due. The tax court applied a four-factor test to determine whether the proceeds were IRD: 1) whether the decedent entered a legally enforceable arrangement for the sale, 2) whether the decedent completed the preconditions of sale by performing all substantive acts, 3) if any economic contingencies could have disrupted the sale, and 4) whether the decedent would have been paid the proceeds. The commissioner appealed that tax-court ruling, arguing that as Peterson had completed the substantive acts for some of the calves—i.e., raised them until they were in deliverable condition—the sale of that portion should be considered IRD.