Williams v. Commissioner
1957 U.S. Tax Ct. LEXIS 115, 28 T.C. 1000 (1957)
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Rule of Law:
For a cash-basis taxpayer, a promissory note received as evidence of indebtedness does not constitute taxable income in the year of receipt if it was not intended as payment and has no ascertainable fair market value.
Facts:
- Jay A. Williams, a cash-basis taxpayer, was in the business of locating marketable timberland for prospective purchasers.
- Williams provided information on timber stands to J. M. Housley.
- On May 5, 1951, Housley issued Williams an unsecured, non-interest-bearing promissory note for $7,166.60, payable in 240 days.
- At the time the note was issued, Housley was unable to pay it due to a lack of funds.
- It was understood that Housley would be unable to make any payments on the note until he sold timber from the property Williams had located.
- During 1951, Williams attempted to sell the note to various banks and finance companies on 10 to 15 occasions but was unable to do so.
- Williams ultimately received a partial payment of $6,666.66 in 1954 in discharge of the debt.
Procedural Posture:
- Jay A. Williams and his wife filed a joint income tax return for 1951 on a cash basis.
- The Commissioner of Internal Revenue determined a deficiency in their 1951 income tax, asserting the promissory note was taxable income in the year of receipt.
- The petitioners challenged the Commissioner's determination by filing a petition in the Tax Court of the United States.
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Issue:
Does a non-interest-bearing, unsecured promissory note constitute taxable income in the year of receipt to a cash-basis taxpayer when the maker is insolvent and the note has no fair market value?
Opinions:
Majority - Withey, Judge
No. A promissory note does not constitute taxable income in the year of receipt if it is not the equivalent of cash. The court provided two independent reasons for its holding. First, the note was not intended as payment for services, but merely as evidence of the indebtedness. The court accepted Williams's uncontradicted testimony on this point, stating that a simple change in the form of debt from an account payable to a note payable does not cause the realization of income. Second, even if the note had been intended as payment, it had no fair market value in 1951. The court found that the note was not the equivalent of cash because it was unsecured, non-interest-bearing, the maker was insolvent, and Williams's repeated, unsuccessful attempts to sell it demonstrated its lack of marketability.
Analysis:
This case clarifies the 'cash equivalent' doctrine for cash-basis taxpayers. It establishes that the receipt of a promise to pay, such as a promissory note, is not taxable income unless it is both intended as final payment and has a clearly ascertainable fair market value. The decision gives significant weight to the taxpayer's uncontradicted testimony regarding intent and provides a practical framework for assessing a note's market value based on factors like security, interest, maker solvency, and marketability. This precedent solidifies the principle that cash-basis taxpayers only recognize income upon the receipt of actual cash or property that is readily convertible into cash.
