## Facts

- The Bernice Patton Testamentary Trust (the trust) owned 25% of the common stock of two closely held meat-packing companies, Western Packing Company and Braunfel Meats, Inc.
- In 1990, a group of investors acquired the companies and renamed the combined business W‑B Acquisition Corporation (W‑B).
- Around the time of the acquisition, W‑B was appraised to determine its fair market value.
- In 1990, the trust sold its stock to the investors in exchange for (1) cash and (2) a seller’s promissory note with a stated face amount and a maturity date not later than September 1995.
- The cash portion exceeded the trust’s basis in the stock.
- In 1993, Carlton Foods, Inc. assumed the investors’ obligations and later satisfied the note for less than its stated face amount.
- On its 1990 return, the trust reported the transaction as an open transaction, reporting long-term capital gain only to the extent cash received exceeded basis and treating the promissory note as having no ascertainable value when received.
- The IRS audited the 1990 return and issued a notice of deficiency, determining that the note had an ascertainable fair market value and that the sale had to be reported under the installment-sale rules because payments were due after the year of sale.
- The trust paid the asserted deficiency, sought a refund, and after denial brought suit for a refund; the parties filed cross-motions for summary judgment on the proper reporting method.

## Issues

1. Whether the trust could treat the 1990 stock sale as an open transaction on the theory that the seller’s promissory note had no reasonably ascertainable fair market value when received.
2. Whether, given the note’s terms and the information available at the time of the 1990 sale (including the appraisal and negotiated price), the note had an ascertainable fair market value.
3. If the note had an ascertainable value and at least one payment was due after the close of 1990, whether the installment-sale rules required installment reporting and defeated the trust’s refund claim.

## Decision

- The court denied the trust’s motion for summary judgment and granted the government’s cross-motion.
- The court held that the open-transaction doctrine did not apply because the seller’s note had an ascertainable fair market value at the time of the 1990 exchange.
- The court held that the transaction fell within the installment-sale provisions because the sale involved deferred payments due after the close of the year of sale.
- The court rejected the trust’s reliance on the later discounted satisfaction of the note as proof that the note lacked ascertainable value when issued.
- Judgment was entered for the United States; the trust was not entitled to a refund.

## Legal Principles

- The open-transaction doctrine is a narrow exception that applies only when the value of the property received cannot be reasonably determined at the time of the sale.
- A promissory note received as consideration can have an ascertainable fair market value even if the obligor’s business presents ordinary commercial risk.
- Whether value is ascertainable is determined as of the time of the transaction, using information available then; later events (including a later payoff at a discount) do not, by themselves, show that the note was incapable of valuation at issuance.
- When a disposition involves a payment obligation extending beyond the close of the taxable year of sale, the installment-sale rules generally govern the timing of gain recognition unless a recognized exception applies.

## Conclusion

Because the seller’s promissory note received in the trust’s 1990 stock sale had an ascertainable fair market value when received and the sale involved payments due after 1990, the court rejected open-transaction treatment and required reporting under the installment-sale rules, leaving the IRS’s deficiency in place and denying the trust’s refund claim.


Bernice Patton Testamentary Trust v. United States, 2001-1 U.S. Tax Cas. (CCH) 50,332 (2001)