Bernice Patton Testamentary Trust v. United States

Bernice Patton Testamentary Trust v. United States was a case before the United States Tax Court discussing the taxation of capital appreciation, particularly the taxation of deferred and contingent payment sales.

Background

Facts

A trust, in exchange for common STOCK, received cash and a promissory note.

Tax return

The trust was assessed a tax deficiency for the note. Plaintiff paid the tax deficiency and filed a timely claim for refund, which was denied.

Trustee plaintiff sued for a tax refund from a promissory note it for the sale of stock.

Issues

The trust filed a complaint seeking a refund plus interest, and both parties moved for summary judgment:

• the trust asserted that the note had no ascertainable value based on the open transaction doctrine, and therefore, the Internal Revenue Service (IRS) should not have considered it taxable income for the 1990 tax year, and instead invokes the open transaction method for reporting taxable income.
• the Tax Commissioner claimed that the fair market value of the note was reasonably ascertainable at the time of sale, and so the open transaction doctrine does not apply, and the IRS (Commissioner) was correct in determining the proper method for reporting this transaction was as an installment sale.

Opinion of the court

The court found that the fair market value of the note was reasonably ascertainable at the time of the sale. Plaintiff failed to offer proof to rebut the presumption that the IRS decision was correct because they offered no expert testimony of valuation and no evidence to support its claim that the value was unascertainable. Their assertion alone was insufficient to rebut the presumption of correctness.