Reed v. Commissioner

In 1967, Reed (plaintiff), a cash-basis taxpayer and shareholder of Reed Electromech Corporation (Electromech), entered into an agreement granting Joseph Cvengros the right to purchase Reed’s Electromech stock. In November 1973, Cvengros gave notice that he would exercise his right to purchase the shares. Cvengros wanted to close the sale in 1973. Reed wanted to close early in 1974 so that he would have time to coordinate the sale of certain other securities on which he expected to take a loss. Reed wanted to write off the capital loss from those securities against the capital gain from the Electromech stock sale in 1974. With the end of the tax year approaching, Reed did not want to accrue capital gain in 1973 and capital loss in 1974. Ultimately, the parties agreed to hold the closing on December 27, 1973, but included a deferred-payment provision in the purchase-and-sale agreement. Under that provision, Cvengros placed the sale proceeds in escrow at the closing, and they were then disbursed to Reed on January 3, 1974. Reed did not enjoy any incidental benefits from the proceeds, such as investment income, while they were in escrow. The commissioner of internal revenue (defendant) found that Reed had realized income from the sale of his Electromech stock in 1973 at the time the funds were placed in escrow, and the tax court sustained the decision. Reed appealed to this court for review.