first year when the individual's rights in the property are not subject to a "substantial risk of forfeiture." The plans in this case provided that each employee had a vested interest of 100 percent in the amount allocated to his account at the end of each year of employment. Article IV, section 4, of both plans provided: Section 4. If a participating employee has been discharged by the Company for cause, such as any intentional act of proven dishonesty or any other intentional act which would injure the Company, such participating employee shall forfeit the entire amount allocated to his account, whether or not any part thereof shall have been previously vested, and he shall be entitled to no benefits under this Plan. The Committee shall determine, on the basis of facts given to it by the Company, whether the discharge of a participating employee is for cause. A discharged participating employee shall have the right, within ten (10) days after being notified by the Committee that he has been discharged for cause, to request arbitration of the matter. We hold that the probability that either of the petitioners would be discharged for cause from their wholly owned corporation, thereby forfeiting benefits under the Albets plans, is too remote to constitute a substantial risk of forfeiture. 10 Decision will be entered for the respondent. 10 This holding is consistent with Proposed Income Tax Reg. sec. 1.83-3(c), which provides in pertinent part: Sec. 1.83-3 [Proposed Income Tax Regs.] Meaning and use of certain terms. * * (c) Substantial risk of forfeiture—* Rights in property transferred to an employee (or beneficiary thereof) of a corporation who owns, directly or indirectly, more than 5 percent of the total combined voting power or value of all classes of stock of the employer corporation or of its parent or subsidiary corporation will not be considered subject to a substantial risk of forfeiture unless the possibility that the employee will not satisfy the requirement claimed to result in such risk is substantial; in determining whether the possibility is substantial, there will be taken into account (i) the employee's relationship to other stockholders and the extent of their control, potential control and possible loss of control of the corporation, (ii) the position of the employee in the corporation and the extent to which he is subordinate to other employees, (iii) the employee's relationship to the officers and directors of the corporation, (iv) the person or persons who must approve the employee's discharge, and (v) past actions of the employer in enforcing the provisions of the restrictions. * WARREN JONES COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 1929-73. Filed August 31, 1977. In a case involving the year of sale, 1968, this Court entered a decision based on an agreed-upon computation of the parties which was not considered by the Court. Warren Jones Co. v. Commissioner, 60 T.C. 663 (1973). That computation was wrong. Held, collateral estoppel is not applicable to require that the erroneous method of computation of the parties for the year 1968 be used in computing the amount of capital gain on the sale that must be included in taxpayer's income for the years 1969 and 1970. W. V. Clodfelter, for the petitioner. Thomas N. Tomashek, for the respondent. OPINION DRENNEN, Judge: Respondent determined deficiencies in petitioner's corporate income taxes for the taxable years ended October 31, 1969, and October 31, 1970, in the amounts of $1,936.98 and $668.66, respectively. One adjustment giving rise to the deficiencies has been conceded by petitioner. The principal issue presently in dispute is whether, in computing the gross profit percentage for an installment sale, the doctrine of collateral estoppel binds respondent to a stipulated computation for entry of decision incorporated in our decision in Warren Jones Co. v. Commissioner, 60 T.C. 663 (1973). That decision was entered for the taxable year ended October 31, 1968. The present case was submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. Among other items, it was stipulated that this Court's official file for Warren Jones Co. v. Commissioner, docket No. 424-71, would be considered as evidence in this case. The stipulation of facts and joint exhibits are incorporated herein by this reference. Warren Jones Co. had its principal office in Seattle, Wash., at the time the petition was filed in this case. It filed its income tax returns for the years in issue with the Western Service Center, Ogden, Utah. During its taxable year ended October 31, 1968, petitioner, a cash basis taxpayer, sold an apartment building known as "Wallingford Court Apartments" to the Storeys for a total price of $153,000, receiving a downpayment of $20,000. The balance of $133,000 was payable $1,000 per month over the next 15 years. Interest on the declining balance was payable at the rate of 8 percent per year. At the end of the 15-year period the balance due was to be paid in a lump sum and petitioner was to deliver a warranty deed to the property. During its 1968 taxable year petitioner received $24,000 from the purchasers, including the downpayment, with $20,457.84 allocable to principal and the rest to interest. Petitioner's basis in the property at the time of sale was $61,913.34. The only evidence of indebtedness associated with this transaction was a real estate contract executed by the Storeys. No notes, securities, or other such instrument passed between the purchasers and petitioner. The real estate contract had a fair market value of $76,980 at the time of the sale. (See 60 T.C. at 666.) On its income tax return for 1968 petitioner did not report any gain from the sale, claiming it would realize no profit until the basis of the property sold had been recovered. In the alternative, it elected to use the installment method of reporting (under sec. 453(b), I.R.C. 1954)1 if it was ultimately determined that it was not entitled to use the cost-recovery method of reporting gain on the sale. In a notice of deficiency issued for the year 1968 respondent determined that petitioner was not entitled to use the costrecovery method for reporting gain on the sale but agreed that petitioner was entitled to report the gain on the installment method. Respondent determined that petitioner's total profit on the sale was $90,479.51 and that its reportable gain in 1968 was $12,098.15, or 59.137 percent of the $20,457.84 of payments on principal received in 1968. Petitioner filed a petition in this Court alleging its right to report gain on the cost-recovery basis. Respondent denied this allegation but conceded that petitioner's alternative election of the installment method was proper. In Warren Jones Co. v. Commissioner, supra, this Court held petitioner properly deferred reporting gain from the sale on 1 All section references are to the Internal Revenue Code of 1954, as amended and in effect in the years in issue, unless otherwise specified. the ground the real estate contract was not "property (other than money)" under section 1001(b). Our holding was based on a determination that petitioner's real estate contract was not the equivalent of cash since it had a fair market value of only $76,980 and with an appropriate interest discount could not be sold for anywhere near its $133,000 face amount. The United States Court of Appeals for the Ninth Circuit reversed and remanded with directions to enter judgment for the Commissioner. Warren Jones Co. v. Commissioner, 524 F.2d 788 (9th Cir. 1975). The Ninth Circuit read the legislative history of section 1001(b) and the enactment of section 453 to mean Congress intended to establish a definite rule that if the fair market value of property received in an exchange can be ascertained, that fair market value must be reported as an amount realized. In so doing the court rejected our conclusion that cash equivalency was an element to be considered for a cash method taxpayer under section 1001(b). In the prior litigation the Ninth Circuit held only that petitioner's reporting of the 1968 sale was improper; it did not consider the installment method computations. The court concluded its opinion with these comments (524 F.2d at 794): The Tax Court found, as a fact, that the taxpayer's real estate contract with the Storeys [the purchasers] had a fair market value of $76,980 in the taxable year of sale. Consequently, the taxpayer must include $76,980 in determining the amount realized under section 1001(b). As previously noted, however, the Commissioner has conceded that the taxpayer is eligible to report on the installment basis and has calculated the taxpayer's deficiency accordingly. The decision of the Tax Court is reversed, and on remand, the Tax Court will enter judgment for the Commissioner. 10 Reversed and remanded, with directions. 10 The taxpayer has not here challenged, and we have not examined, the Commissioner's calculation of the taxpayer's gain under section 453. The Tax Court may examine those calculations on remand, if the taxpayer so requests. 2 Sec. 1001(b). AMOUNT REALIZED.-The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. On February 4, 1976, the Tax Court entered its decision pursuant to the opinion and mandate of the Ninth Circuit for the Commissioner that the deficiency in income tax for the taxable year ended October 31, 1968, was $1,373.04. This entry was based on a stipulated computation submitted by and agreed to by the parties. The pertinent details supporting the deficiency were as follows: Warren Jones Co. Taxable Year Ended Oct. 31, 1968 Computation of Taxable Income Taxable income as determined in accordance with the opinion of the Tax (a) The Court of Appeals determined that the fair market value of the deferred payment contract must be included in determining the amount realized on the sale. Surcharge-10% prorated for Jan. 1, 1968, through Oct. 31, 1968 (.083333). Corrected income tax liability. Income tax assessed and paid... Deficiency, underassessment, and underpayment... $76,980.00 20,000.00 96,980.00 (61,913.34) (607.15) 34,459.51 20,457.84 .3553259 7,269.20 0 7,269.20 $19,993.20 4,398.50 366.54 4,765.04 3,392.00 1,373.04 For reasons hereinafter stated we believe the computation submitted to the Court as the basis for decision was in error. |