Norman A. & Gloria A. Vickery and Donald B. & Priscilla Vickery v. Commissioner of Revenue (April 6, 2001)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



NORMAN A. & GLORIA A. VICKERY   v.  COMMISSIONER OF REVENUE
And DONALD B. & PRISCILLA
VICKERY	   

Docket Nos. F188143			      Promulgated:
	       F188144				 April 6, 2001
		 

These are appeals under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the appellee to abate income taxes assessed for the tax year 1987 under G.L. c. 62, § 17. 
Chairman Burns heard the appeals and was joined in the decisions for the appellee by Commissioners Gorton, Egan and Rose.  
These findings of fact and report are made at the request of the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

Norman A. Vickery and Donald B. Vickery, pro se, for the appellants.
	
Kevin M. Daly, Esq. and Aaron Levangi, Esq. for the appellee.




FINDINGS OF FACT AND REPORT
	On the basis of a Stipulation of Agreed Facts and testimony and exhibits introduced in the hearing of these appeals, the Appellate Tax Board ("Board") made the following findings of fact.  During 1987, Norman and Gloria Vickery, husband and wife, and Donald and Priscilla Vickery, husband and wife (collectively, "the taxpayers" or "the appellants"), were Massachusetts residents subject to the Massachusetts individual income tax.  Norman Vickery and Donald Vickery are brothers who operated the Norman A. & Donald B. Vickery Partnership ("the partnership"), whose  primary business activity consisted of renting real estate.  At all relevant times, the partnership was required to file an informational return under G.L. c. 62C, § 7, disclosing the partnership's income or loss, any deductions or credits, the identity of the partners and each partner's distributive share of the partnership's income, loss, deductions or credits. 
	In 1987, the partnership sold a parcel of Massachusetts property which it had acquired in 1951.  The partnership had an adjusted basis in the property of $13,457.00, and it sold the property for $600,000.00.  The consideration was in the form of a promissory note for the full purchase price of $600,000.00, which was secured by a mortgage covering the property.  The terms of the note were: "59 payments of $5709.12 payable monthly for 59 months and a 60th payment of $544,604.75, according to a 20-year amortization schedule, on a direct reduction basis."  Interest was payable at ten percent per annum.  The first payment was due thirty days from August 7, 1987, the date of the note, and subsequent payments were due monthly thereafter.
The appellants hired a certified public accountant ("the CPA") to prepare and file the partnership's United States and Massachusetts tax returns for calendar year 1987.  As required under federal tax law, the CPA used the installment method on the United States partnership return to report the partnership's gain on the sale of the property, meaning that the return reported the gain over the term of the note as the partnership actually received each payment.  However, for the Massachusetts partnership return, the partnership reported $586,543.00 of capital gain from the sale of the property, which reflected the gain on the full purchase price before the total amount of payments were actually received by the partnership.  On Line 16 of Part II of the Massachusetts partnership return, where the partnership was required to specify any differences between the gains or losses reported on the United States partnership return and the Massachusetts partnership return, the CPA wrote the following phrase:  "INST. SALE NOT ALLOWED IN MASS."      
The CPA also prepared the taxpayers' Massachusetts individual income tax returns for calendar year 1987, in which the taxpayers reported their shares of the gain from the sale of the partnership's property.  On Line 4 of Schedule D of both returns, where the taxpayers were required to specify differences between the gains or losses reported on Schedule D of their United States return and Schedule D of the Massachusetts return, the CPA again wrote the following phrase:  "INST. SALE NOT ALLOWED IN MASS."  Norman Vickery's return reported $293,272.00 of capital gain from the partnership's sale of the property, and Donald Vickery's return reported $293,271.00 of capital gain from the partnership's sale of the property. 
 In 1989, the buyer of the property defaulted on the mortgage.  The partnership foreclosed on the property on April 5, 1990, and reaquired the property on August 17, 1990.  Thereafter, the partnership recalculated its income for calendar year 1987 to reflect only the payments actually received under the property sale agreement.  The taxpayers filed amended individual income tax returns for calendar year 1987, using the installment method to report their gain from the partnership's sale of the property.  The Commissioner of Revenue ("the Commissioner" or "the appellee") treated the amended returns as applications for abatement.  Norman and Gloria Vickery's amended return requested a refund of $14,260.00, while Donald and Priscilla Vickery's amended return requested a refund of $14,261.00.   These amended returns were timely filed, within three years from the due date of the taxpayers' original Massachusetts individual income tax returns.
In February of 1991, the Commmissioner denied the taxpayers' applications for abatement.  Norman and Donald each filed timely appeals with the Board, and the two appeals were consolidated in September of 1991.  The Board dismissed the appeals in September of 1999 for lack of prosecution, but later allowed the taxpayers' motions to expunge the dismissals on March 10, 2000.  On the basis of the foregoing, the Board found that it had jurisdiction over these appeals.

For the reasons stated in the Opinion which follows, the Board found that the taxpayers were not entitled to abatements because they did not properly elect the installment sale method for reporting the gain.  Accordingly, the Board issued decisions for the appellee in these appeals.

OPINION
Massachusetts residents are subject to a tax on their taxable income, which is defined as the federal gross income calculated under the Internal Revenue Code ("Code") with certain adjustments.  G.L. c. 62, § 2.  Under Massachusetts law, both during the tax year at issue and currently, the reporting of gain received from an installment sale differs from the Code.  Section 453 of the Code requires a taxpayer to report gain received from an installment sale under the installment method.  An installment sale is defined as "a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs."  Code § 453(b)(1).  The installment method is a method by which income from each payment under an installment sale is reported as a proportion of the total payments which are to be received under the total contract price.  Code § 453(c).  To report gain from an installment sale in a manner other than the installment method, the taxpayer must make a special election to this effect.  Code § 453(d).
Under Massachusetts law, however, the installment method is not automatic with an option to elect out.  Instead, the taxpayer must meet specific guidelines provided in the law and the Commissioner's regulations.  The Massachusetts requirements for reporting taxable gain under the installment method are set forth in G.L. c. 62, § 63(c), which requires a taxpayer to file an election to report income in this manner.  In addition to making this election, the taxpayer also "shall deposit with the commissioner security, in a form satisfactory to the commissioner, in an amount equal to such excess for the payment of future taxes under this chapter."  These requirements are clarified in the Commissioner's regulations at 830 CMR 62.63.1(d), which specifies that a taxpayer must receive prior approval from the Commissioner as a prerequisite to electing the installment sale method:
Before being entitled to use the installment method, a taxpayer, prior to the due date or any extension thereof for filing his tax return for the year in which the sale was made, must secure the written approval of the commissioner to the use of the installment method.  In order to secure such written approval he must notify the commissioner in writing disclosing all the details of the transaction to which he seeks to have the installment method applied. . . .  If the case is an appropriate one for the use of the installment method, the commissioner will grant the necessary permission conditioned upon the immediate posting of a bond or other security in such amount as the commissioner may determine necessary to secure payment of the total tax.

	Under the terms of the note received by the partnership, requiring sixty payments to be made on a monthly basis, the sale of property by the partnership qualified as an installment sale.  The issue raised in these appeals is whether the taxpayers may report gain from the sale of property using the installment method, when they did not elect the installment method prior to filing their original income tax returns, but instead reported the income under this method by filing timely amended income tax returns.
The facts of the taxpayers' appeals are similar to those of Rondeau v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 9 (1997).  The taxpayers in Rondeau sold real property and realized long-term capital gain in calendar year 1988.  Id. at 9.  The taxpayers did not elect the installment method for reporting the gain to the Commonwealth, but instead reported the full amount of gain on their 1988 tax return.  Id.  The buyer of the property later defaulted on its payments to both the first mortgage holders and to the taxpayers, who held a second mortgage on the property.  Id. 
 The first mortgage holder foreclosed on the property in 1990, rendering the taxpayers' second mortgage worthless.  Id.  The Board found that "the installment sale method is not automatic."  Id. at 10.  Because they did not properly elect the installment method by securing the Commissioner's prior approval and posting security, the Rondeaus were required to report the entire sale price as gain.  "By failing to elect installment treatment, the taxpayers in effect are treated as if they were reporting on the accrual method whereby 'the entire sales price of goods sold is reported as income as of the date of sale even though payments for the goods may be in installments extending over a period of years thereafter.'"  Id., quoting Commissioner v. Mackin, 164 F.2d 527, 529 (1st Cir. 1947).  Accordingly, the Board in the present appeals found that, because  the  taxpayers  did not secure prior written 
approval from the Commissioner or post bond, the taxpayers failed to elect the installment method, and therefore were required to report gain based on the entire sale price.  
	The taxpayers cite Smolak v. Commissioner of Revenue, 17 Mass. App. Tax Bd. Rep. 152 (1995), to contend that the sale of property by the partnership was a transaction in which the collection of future payments was so doubtful that "the transaction remains 'open' and the taxpayers are entitled to defer reporting income."  Id. at 157.  The transaction was doubtful, they argue, because the note required a balloon payment of ninety percent of the purchase price at the end of its five-year term.  See also Watson v. Commissioner of Revenue, 14 Mass. App. Tax Bd. Rep. 139 (1992)(The final payment in the acquisition of a subsidiary was not includable to the taxpayer until actually received, where this final payment, categorized by the acquisition agreement as the "Performance Payout Amount," was contingent upon the profits of the subsidiary and therefore had no ascertainable fair market value at the time of the agreement).
The Board, however, found that Smolak and Watson do not legitimize the taxpayers' late attempt to elect the installment method.  The conditions of payment in Smolak and Watson created actual contingencies beyond the mere possibility that a buyer would be unable to pay on a note.  In Smolak, the taxpayer sold property in exchange for a note that required the buyer to pay the taxpayer only upon the occurrence of a subsequent event, the sale of each of five lots.  17 Mass. App. Tax Bd. Rep. at 153.  Similarly, the final payment under the note in Watson was contingent upon the profitable performance of the purchased subsidiary.  14 Mass. App. Tax Bd. Rep. at 140.  These events were true contingencies, dependent upon actual subsequent events or conditions which were unknown at the time the parties entered into the sale.  
By contrast, the note in the present appeals was not contingent upon a subsequent event, but was a simple contract for payment.  The fact that the buyer defaulted on the payment indicated that the sale ultimately was a poor business transaction, not that it was dependent upon the occurrence of any contingency.  Accordingly, the Board found that the sale in these appeals was not "open" and, therefore, the deferral of income previously reported was not warranted.  Because the taxpayers here did not meet the necessary prerequisites for application of the installment method to their sale, the Commissioner acted properly in denying such treatment to the sale upon the taxpayers' requests pursuant to amended returns.   
The taxpayers also argued that the Board should apply principles of equity to allow them to elect the installment method, since the failure to elect such treatment on the original return was due to a mistake of law made by the CPA.  The taxpayers invoked G.L. c. 62C, § 36 for the proposition that the Commissioner has the authority to determine that the taxpayer has made an overpayment, and that the Commissioner "may, in his discretion" apply such overpayment to any unpaid amounts of tax due.  It is also true that the Commissioner's regulations allow exceptions to the requirements for electing the installment method:
"The commissioner may, for due cause determined by him to be sufficient, give late approval to a taxpayer's filing on the installment method, where owing to oversight or inadvertence the taxpayer failed or neglected to obtain a prior approval for such filing."

830 CMR 62.63.1(d).  
However, the Commissioner's authority in G.L. c. 62C, § 36, to apply overpayments of tax to unpaid balances and to give late approval for the installment method are both within the Commissioner's discretion.  In these appeals, the Commissioner exercised his discretion by refusing to allow an election made pursuant to an amended return, which although timely filed, did not meet the requirements presecribed by statute for the election of the installment method.  "Nothing in § 36 suggests that the Commissioner's failure to refund under that section is subject to review by the board."  Commissioner of Revenue v. Chesterton Co., 406 Mass. 466, 468 (1990).  Because the appellants failed to file a timely application to elect the installment method, the appellants were not entitled to an abatement from the Commissioner, and therefore, the Board does not have the authority to grant an abatement.  See Id.
Accordingly, the Board issued decisions for the appellee in these appeals.
				

	      APPELLATE TAX BOARD	
				
			
  By:____________________________
					     Abigail A. Burns, Chairman

A true copy:



Attest: _____________________
	        Clerk of the Board

   Norman and Donald Vickery filed their returns jointly with their wives.
    The Board in Rondeau, however, found that the bad debt deduction was available to the taxpayers when the debt became worthless; this occurred in 1990 when the first mortgagee foreclosed on its mortgage.  Id. at 11.  See Mackin, 164 F.2d at 529 (When a taxpayer uses the accrual method for reporting a gain on property, "uncollectible installments are deductible in full as bad debts since the total profit on the sale has been taken into income and taxes paid thereon").  Any bad debt deduction available to the present appellants would enable them to deduct the amount of the bad debt in the year in which it became worthless, in this case, either 1989 or 1990, and would not affect the appellants' taxable income for 1987, the year at issue. 

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ATB 2001 - 293