A former PwC partner couldn't use the installment method to account for proceeds from unrealized receivables in the sale of her PwC partnership interest (Mingov. Commissioner, 5th Cir., 13-60801, 12/09/14).
The U.S. Court of Appeals for the Fifth Circuit affirmed late Dec. 9 a U.S. Tax Court ruling that Lori Mingo wasn't entitled to use the installment method for the portion of proceeds from the sale of her interest in PwC attributable to unrealized receivables.
When PwC sold the consulting business to IBM in 2002, Mingo received a promissory note from IBM for $832,090 in exchange for her partnership interest, with $126,240 of that amount attributable to unrealized receivables owed to the consulting business.
More specifically on October 1, 2002, IBM gave Mrs. Mingo a convertible promissory note (note) for $832,090 in exchange for her interest in PwCC. The $126,240 attributable to her interest in
partnership unrealized receivables was included in that face value. The note included the following terms:
(1) Mrs. Mingo had the right to convert all or any portion of the unpaid principal balance into IBM common stock at any time after the first anniversary of closing. However, any such conversion had to be in increments of $1,000 principal amounts or for the entire unpaid principal.
(2) unless the note is converted into IBM stock, IBM would pay interest on the unpaid principal balance semiannually.
(3) the outstanding principal amount of the note and any accrued and unpaid interest was due and payable on the fifth anniversary of the transaction’s closing (i.e.,October 1, 2007).
On their 2002 Federal income tax return and on an attached Form 6252, Installment Sale Income, petitioners reported the sale of Mrs. Mingo’s interest in PwCC as an installment sale.
The selling price, gross profit, and contract price were listed as $832,090. Petitioners did not recognize any income relating to the note other than interest income on their 2002 Federal
income tax return.
Petitioners did not convert any portion of the note during tax years 2002, 2003, 2004, 2005, and 2006. Petitioners also did not report any income other than interest income from the note
for any of those years.
During tax year 2007 petitioners converted the entirety of the note in a series of transactions. On February 26, 2007, petitioners converted a portion of the note into shares of IBM stock worth $929,765. Also on February 26, 2007, petitioners sold those shares of IBM stock for a total of $899,287. On October 1, 2007, petitioners converted the remainder of the note into shares of IBM stock worth $283,494.
On May 23, 2007, the Commissioner issued a notice of deficiency for 2003. The Commissioner
contended that the unpaid principal balance of the note could be converted to IBM stock at any time after the first anniversary of closing. IBM paid interest semiannually, and the outstanding balance and interest was due and payable on the fifth anniversary of closing.
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