dissenting: I think that the result reached by the majority herein clearly frustrates the intent of Congress in enacting section 453 of the Internal Revenue Code of 1954 and its predecessor, section 44(b) of the Internal Revenue Code of 1939.
The enactment of statutory provisions permitting the installment method of reporting income was generated by the fact that the usual cash or accrual bases of reporting created hardship in such situations. See Burnet v. S. & L. Bldg. Corp., 288 U.S. 406, 413 (1933). The underlying concept was that the tax should be paid “from the proceeds collected rather than be advanced by the taxpayer." See Thomas F. Prendergast, Executor, 22 B.T.A. 1259, 1262 (1931). (Emphasis supplied.) As the Supreme Court stated in Commissioner v. South Texas Co., 333 U.S. 496, 503 (1948):
Tiie installment basis of reporting was enacted, as shown by its history, to relieve taxpayers who adopted it from having to pay an income tax in the year of sale based on the full amount of anticipated profits when in fact they had received, in cash only a small portion of the sales price. [Emphasis supplied.]
Granted that an assumption of the seller’s liabilities should properly be taken into account in determining the extent to which a seller has realized gain, or indeed when such gain should be reported under the normal rules of cash or accrual accounting for tax purposes, it does not follow that the same framework should be employed to determine how the installment method of reporting should be applied. See Ivan Irwin, Jr., 45 T.C. 544, 549. Indeed, in both the Irwin opinion in this Court and the majority opinion herein, a different standard keyed to the fact of payment is adopted. And respondent’s regulations and rulings similarly apply a different standard in order to tax in the year of sale the amount by which the face amount of an assumed obligation exceeds the cost basis of liened property, irrespective of when or whether payment of the obligation is made — a position which has been sustained as an administratively convenient means of assuring that such portion of the seller’s profit will not escape tax. See Burnet v. S. & L. Bldg. Corp., supra. Thus, an asymmetrical rationale is in full flower with respect to the treatment of assumed obligations generally under the installment-reporting provisions.
Similar administrative reasons, which led to respondent’s regulations dealing with mortgaged property, are present where there is an assumption of unsecured indebtedness. Even though secured obligations may often be of longer duration than unsecured obligations, this is not always so. The logic of the position adopted by the majority herein and in Irwin would seem to me to require that the assumed liabilities be included in the “contract price” and that the seller report and pay tax on a prorata portion of each payment of such liabilities as made by the purchaser.1 Thus, the same administrative difficulties encountered in connection with secured obligations — perhaps different in degree of frequency and timing — will be encountered. Such a result would be avoided if the applicable rules were the same whether the obligations involved were secured or unsecured.
The premise of the majority’s position is that the payment by the purchaser of an assumed debt of the seller is the same as a payment of cash to the purchaser because it increases his net worth. See Ivan Irwin, Jr., supra at 551. The premise is at best questionable, since it would appear that, for all practical purposes, it is the assumption itself rather than the payment that increases the net worth and even then this occurs in connection with a sale of assets only if the assets used in the net worth computation are determined on the basis of cost rather than a higher fair market value. See Horan, “Assumption and Discharge of Seller’s Liabilities as Year of Sale Payments for Purposes of I.R.C. Section 453,” 16 Buffalo L. Rev. 758 (1967). And, in any event, net worth increases are not determinative of whether a payment has been received for the purpose of computing the 30-pei'cent test under section 453, especially when one recalls that the underlying purpose of the legislation was to key the time for reporting income to actual collections of the proceeds of sale.
While there is a theoretical comparability between the facts involved in cases such as Riss v. Commissioner, 368 F. 2d 965 (C.A. 10, 1966), affirming a Memorandum Opinion of this Court, James Hammond, 1 T.C. 198 (1942), and Wagegro Corporation, 38 B.T.A. 1225 (1938), and the factual situation involved herein, there is an important practical difference hi that in those cases the payment — either to the third party or to the seller by way of cancellation — occurs simultaneously with or as an integral part of the closing of the sale itself and is not at an indeterminate time after the closing. The compelling administrative reasons relative to the difficulty of policing the transaction do not exist.
What 'bothers me most about our position in situations such as is involved herein is that it puts a premium on the form of handling the sale transaction in the right fashion, e.g., by holding back the accounts payable and an equivalent amount of accounts receivable, by extracting a covenant against payment in the year of sale from the seller, or by attempting to separate the sale into several parts. See Koblenz, “Installment Sales — Purchaser’s Assumption of Liability to Third Party,” 18 Western Res. L. Rev. 906 (1967); Berger, “Installment Sales with Assumed Liabilities,” 122 J. Accountancy 41 (1966). Not only are many of these forms commercially unrealistic, but the probable sanctuary of their use turns section 453 into a tax trap for the unwary. I recognize that in other areas we have been left with little choice but to put taxpayers in the straitjacket of the formalities with which they have handled a particular transaction. Compare United States v. Cumberland Pub. Serv. Co., 338 U.S. 451 (1950), with Commissioner v. Court Holding Co., 324 U.S. 331 (1945). But we have not been inclined to penalize taxpayers in the past for their unwariness where section 453 is involved (cf. Jack Farber, 36 T.C. 1142 (1961), affd. 312 F. 2d 729 (1963)), and I see no compelling reason for us to do so under the circumstances of this case.
It cannot be gainsaid that neither the assumption of petitioner’s liabilities nor their postclosing payment by the purchaser put any cash in petitioner’s hands with which to pay the tax. Such being the case and given the avowed congressional purpose in enacting the installment reporting provisions, I agree with the Circuit Courts of Appeals decisions in Marshall and Imoim and would apply the approach of section 1.453-4. Income Tax Regs., to the instant situation, disregarding the fact of actual payment.
One final word. Our opinion in Irwim, and the majority opinion herein refle'cit the point of view that a novation would constitute a payment to be included in the 30-percent computation. I am not convinced that this result would necessarily obtain and the emphasis in the opinion in Irwim, on extinguishment or cancellation of the debt as well as payment indicates that it might not. See 45 T.C. at 551. In many purchases of a business, the purchaser takes over a line of bank credit in favor of the seller, or establishes its own line of credit, and the seller is relieved of liability. But, as a factual matter, the indebtedness of the business is not only not extinguished or canceled but continues indefinitely. I recognize that the language in our opinion in Stephen A. Cisler, Jr., 39 T.C. 458, 466 (1962), treats a novation as payment but it is dictum. The novation issue is not involved herein and I think it would be unfortunate if our opinion in Irwin or the majority opinion herein should' be read as disposing of the issue.
Fat, Simpson, and Featheeston, JJ., agree with this dissenting opinion.It would also seem to follow from such position that, even in the mortgage situation, a portion of each payment of the obligation would be taxed even though there was no excess of the obligation over the basis of the mortgaged property or, if there was an excess, it would be taxed when payment is made even though such excess had already been taxed in the year of sale.