Cowden v. Commissioner
289 F.2d 20 (5th Cir. 1961)

  • Cowden transferred some oil and gas leases to Stanolind. In return Staolind gave Cowden $10k immediately and a contract to give him $250k in January of the next year, and $250k the January after that.
  • Cowden then signed over the contracts to a bank for a little less than face value.
  • When he filed his taxes, Cowden claimed the money he got from the bank as a capital gain. The IRS disagreed.
    • Cowden argued that the contract was a capital asset, and that by selling it he had made a capital gain.
    • The IRS argued that the payments were ordinary income, since they really just represented the money that Cowden was due, he just got it a little faster by selling the contracts to the bank.
  • The Tax Court found that the payments were ordinary income.
    • The Tax Court found that the contracts were readily and immediately convertible to cash, were the equivalent of cash, and had a fair market value equal to their face value.
  • The Appellate Court vacated and remanded.
    • The Appellate Court found that if a contract or other negotiable instrument is a cash equivalent, then it is fully taxable as ordinary income in the year it was received.
    • The Court found that there are a number of factors that courts should look at to determine if something is a cash equivalent. These include:
      • Whether there is an unconditional promise to pay,
      • Whether the promisor is solvent,
      • Whether the contract is assignable to a third party,
      • Whether the contract is subject to a set-off
      • Whether the contract is readily marketable, and
      • The amount of risk involved.
    • The Court remanded to the Trial Court to determine whether Cowden's contract was a cash equivalent based on the factors.