Williams v. Commissioner

Brief Fact Summary. Petitioners are in the business of providing information on parcels of timberland to potential buyers. They provided information to one buyer in 1951 who was unable to pay for the information at the time. In return he issued a note in the amount of $7,166 to Petitioners payable at a later date.

Synopsis of Rule of Law. A note received only as security or as evidence of indebtedness and not as payment may not be regarded as income at the time of receipt.

Facts. Petitioners, Mr. and Mrs. Williams, are a husband and wife living in Portland, Oregon. Mr. Williams was in the business of locating marketable parcels of timberland for prospective buyers of timber. He provided information to Lester McConkey and J.M. Housley and received nothing at the time. In 1951 Housley issued to him an unsecured, non-interest bearing promissory note in the amount of $7,166 payable 240 days later. It was understood that Housley would not be able to pay until after he acquired and sold at least part of the timber. Petitioners attempted to sell the note to banks and finance companies and were unsuccessful. They collected $6,666 from Housley in 1954 on the note. Petitioners reported income from the note in 1954 and not in 1951. The Commissioner determined that Petitioners should have reported the note as income in 1951.

Issue. Did receiving the note in 1951 result in income in that year?

Held. The Tax Court reversed the Commissioner and held that the note did not constitute income to Petitioners in 1951.

Discussion. The Court noted that the note bore no interest and was not secured and was not payable until 1952. Further, Petitioners were able to demonstrate that the note had no fair market value because they were not able to sell it despite trying.