Liberty National Bank and Trust Company, Trustee of Oharcoliquidating Trust, Plaintiff-appellee, v. Commissioner of Internal Revenue, Defendant-appellant, 650 F.2d 1174 (10th Cir. 1981)

The only issue on appeal is whether the Tax Court erred in holding that a corporation, after electing to liquidate under the provisions of Internal Revenue Code (I.R.C.) § 337 (1954), is entitled to recognize a loss because it accepts less than face value as the sale price for its trade accounts and notes receivable.¹  We conclude that the Tax Court did not err in so ruling.

The essential facts are not in dispute and were stipulated to in the Tax Court. They are fully set forth in the Tax Court's Memorandum Opinion and will not be repeated here. See Liberty National Bank and Trust Co. v. Commissioner, 38 T.C.M. (CCH) 314 (1979).

I.R.C. § 336 states the general rule that, except as provided in I.R.C. § 453(d) relating to the disposition of installment obligations, no gain or loss shall be recognized to a corporation on the distribution of property in partial or complete liquidation. I.R.C. § 337(a) provides that no gain or loss is recognized to a corporation from the sale or exchange of "property" within a twelve-month period beginning with the adoption of a plan of complete liquidation, if the corporation distributes all of its assets, not counting those retained to meet claims, during the twelve-month period.² 

The term "property" is not defined in section 337. However, section 337(b) (1) excludes certain items from the nonrecognition provision of 337(a). Section 337(b) (1) states that, for the purposes of 337(a), the term "property" does not include the following: (1) the stock in trade of the corporation held primarily for sale to customers; (2) installment obligations acquired in the sale of stock in trade, regardless of whether the sale was before or after the adoption of a plan of liquidation; and (3) installment obligations acquired in the sale of all classes of property other than stock in trade where such sale was made prior to the adoption of a plan of liquidation.

In the instant case, after adopting its liquidation plan, the taxpayer³  sold its accounts receivable for $50,000 less than their face or book value. These accounts were generated from the sale of the taxpayer's stock in trade to customers in the ordinary course of its business. The accounts originated prior to taxpayer's adoption of its plan of liquidation.

The Commissioner does not dispute the fact that the taxpayer realized a loss of $50,000 in the sale of its trade accounts and notes receivable. The Commissioner contends, however, that the loss is not recognizable under the provisions of section 337(a), which, as indicated, provides that no gain or loss shall be recognized from the sale or exchange of property by a corporation in the process of complete liquidation. The taxpayer contends that the loss realized must be recognized notwithstanding the provisions of section 337(a), since accounts receivable are a type of installment obligation, which, under section 337(b) (1) (B), are specifically excluded from the nonrecognition provision of section 337(a).

As earlier mentioned, the Tax Court held that the loss was recognizable since, under section 337(b) (1) (B), installment obligations acquired in the sale of stock in trade do not constitute "property" as that term is used in the nonrecognition provision of section 337(a). Specifically, the Tax Court found that the "sale of accounts receivable qualifies for recognition under the exception in section 337(b) (1) (B) as an installment obligation." 38 T.C.M. at 317.

We agree with the result reached by the Tax Court. Since we are in general accord with the Tax Court's rationale, such will not be repeated in any detail here.

In this Court the Commissioner's main argument is that the term "installment obligation" is a term of art, and is limited to obligations received in connection with sales made on the installment plan, i. e., periodic payments spread out over a period of time, and reported in the manner permitted by section 453. The taxpayer in the instant case did not report its non-cash sales in the manner permitted by section 453, and, from this fact, the Commissioner argues that taxpayer's trade accounts and notes receivable cannot therefore be deemed to be "installment obligations" under section 337(b) (1) (B). We do not agree.

The term "installment obligation" is not defined in the Code. Section 453 merely prescribes a method by which a taxpayer "who regularly sells or otherwise disposes of property on the installment plan" may report such income. The wording of section 453 suggests that there may be income from installment obligations which will not be reported in the manner permitted by that section. Hence, the fact that a taxpayer elects not to use the method of reporting permitted by section 453 does not necessarily mean that obligations in the form of trade accounts and notes receivable are not "installment obligations" as that term is used in section 337(b) (1) (B).

Our disposition of the present matter finds support in Coast Coil Co. v. Commissioner, 50 T.C. 528 (1968), aff'd, 422 F.2d 402 (9th Cir. 1970), and Family Record Plan, Inc. v. Commissioner, 36 T.C. 305 (1961), aff'd on other grounds, 309 F.2d 208 (9th Cir. 1962), cert. denied, 373 U.S. 910, 83 S. Ct. 1297, 10 L. Ed. 2d 411 (1963).

In Coast Coil, the Tax Court rejected the argument made here by the Commissioner that "installment obligations," as that term is used in section 337(b) (1) (B), means only those obligations resulting from the sale of property which the seller has elected to report under the installment method provided in section 453. In so holding, the Tax Court was of the view that the intent of section 337(b) (1) (B) "is much broader than the ground covered by section 453 and is designed to embrace accounts receivable arising under the sale of stock in trade by an accrual basis corporation as well."⁴  The Tax Court noted that, as is true in the instant case, the taxpayer had previously reported and paid income taxes on its sales and then suffered a loss when it sold those accounts. 50 T.C. at 533-34. As indicated, on appeal Coast Coil was affirmed by the Ninth Circuit in a 2-1 decision.⁵ 

In Family Record, there was a gain, not a loss, realized in the sale of accounts receivable, and in that situation the Commissioner's position was that the gain was taxable, and did not come within the nonrecognition provision of section 337(a). In other words, it was the taxpayer in Family Record who advanced the argument made here by the Commissioner that failure to report under section 453 precludes a finding that the obligations were "installment obligations" under section 337(b) (1) (B).⁶  In Family Record, the Tax Court rejected the taxpayer's argument and upheld the Commissioner's position that gain realized on the sale of the accounts receivable was taxable.⁷ 

On appeal in Family Record, the Ninth Circuit affirmed, using an anticipatory assignment of income theory. In thus holding, however, the Ninth Circuit did not disapprove of the reasoning of the Tax Court. And, of course, in Coast Coil, the Ninth Circuit approved of the Tax Court's holding that accounts receivable are included within the broader term "installment obligations."

Judgment affirmed.