## Facts

- Jay A. Williams (with spouse Ellen G. Williams) operated a business locating and supplying information about marketable timberland to prospective purchasers.
- Williams provided timberland information to Lester McConkey and J.M. Housley and initially received no payment for the services.
- On May 5, 1951, Housley gave Williams an unsecured, non-interest-bearing promissory note for $7,166.60, payable 240 days later (in 1952).
- The parties understood Housley lacked funds and could not pay until he acquired and sold at least part of the timber property connected to the transaction.
- In 1951, Williams attempted 10 to 15 times to sell or discount the note to banks or finance companies but could not obtain any cash.
- Williams ultimately collected $6,666.66 in 1954 in satisfaction of the note.
- The Williamses used the cash method of accounting and reported income from the note only when cash was collected in 1954.
- The Commissioner determined a 1951 deficiency by treating the note (at face amount or value) as taxable income upon receipt.

## Issues

1. Whether an unsecured, non-interest-bearing promissory note received by cash-basis taxpayers for services constituted taxable income in the year of receipt when the note lacked a readily realizable value.

## Decision

- The Tax Court found for the taxpayers.
- The court held the promissory note did not constitute taxable income in 1951.
- The court accepted recognition when cash was actually received in 1954, rather than when the note was delivered in 1951.

## Legal Principles

- Cash-basis taxpayers generally recognize income upon actual or constructive receipt of cash or its equivalent.
- A promissory note is included in income upon receipt only if it is the equivalent of cash, meaning it has a readily realizable fair market value.
- An instrument that is unsecured, bears no interest, depends on uncertain future events for repayment, and cannot be sold or discounted on ordinary commercial terms may lack fair market value and is not treated as cash-equivalent.
- A note given as evidence of indebtedness, rather than as payment, does not by itself trigger income recognition for a cash-basis taxpayer absent cash-equivalent value.

## Conclusion

The Tax Court held that receipt of a speculative, nonmarketable promissory note lacking fair market value was not income to cash-basis taxpayers in 1951; income was recognized only when cash was later collected.


Williams v. Commissioner, 28 T.C. 1000 (T.C. 1957)