Williams v. Commissioner
28 T.C. 1000 (Tax Ct. 1957)
In 1951, Williams provided
services to McConkey and Housley. In return they gave him a promissory
note for $7166, payable in 240 days.
A promissory note is pretty
much the same as an IOU, with a date payable included.
Williams tried to sell the
promissory note, but couldn't find a buyer. McConkey and Housley didn't
have the money to pay until three years later when they settled for $6666.
Williams reported the $6666 as
gross income as part of his 1954
taxes, but he didn't include it as income on his 1951 taxes. The IRS disagreed and
assessed a deficiency.
The IRS argued that the
receipt of the promissory note constituted taxable income in 1951.
Williams argued that he
didn't actually get the money until 1954, so it shouldn't be taxed until
Williams argued that the
promissory note wasn't a payment, it was just evidence that McConkey and
Housley owed him money.
The Tax Court found for
The Tax Court found that the
promissory note was not payment, but only evidence of indebtedness.
The Court noted that
Williams tried to sell the promissory note, but couldn't find a buyer.
That was evidence that the note had no fair market value.
The Court noted that even if
the promissory note counted as a payment, Williams couldn't have
collected his money for 240 days, which would have been in 1952, so the
income should not have been included in his 1951 income anyway.