The opinion of the court was delivered by: Austin, Judge.
MEMORANDUM OPINION AND JUDGMENT ORDER
This action was brought for the refund of an overpayment of
federal income tax and interest for the year 1966.*fn1 During
the course of preparation of the case for trial, counsel
agreed with this court that there were but three crucial
questions of fact; that they would be immediately tried to a
jury; and that, if the answers to the interrogatories
propounded to the jury were in plaintiffs' favor, any
remaining questions of law would be resolved by the court. It
so happened that the answers were in plaintiffs' favor;*fn2
and the subject of this opinion is resolution of the issues of
law presented by the parties' cross motions for summary
The undisputed facts are as follows. On January 1, 1966, Dr.
Coye C. Mason, a cash method taxpayer, sold all of his shares
in Illinois Transfusion Service, Inc. to Chicago Blood Donor
Service, Inc., a not for profit corporation qualified to
receive charitable contributions. The shares had a fair market
value of $117,000 and an adjusted basis of $29,750. In full
payment for his shares, Dr. Mason received from the Chicago
Blood Donor Service, Inc. $4,507.50 cash plus its $112,689.42
promissory note having a fair market value of $81,000. In
March, 1966, the fair market value of an identical note held
by Dr. Grimm, one of Dr. Mason's associates, had been set at
$80,776.03 for purposes of determining Grimm's gross estate.
On his 1966 federal income tax return, he claimed a
charitable deduction in the amount of the difference between
the fair market value of the shares sold and the fair market
value of the consideration received. Thus, according to the
findings of the jury in this case,*fn3 the amount properly
deducted was $31,492.50 [$117,000 - ($81,000 $4,507.50)].
The claimed deduction was disallowed, and a tax deficiency in
the amount of $18,456.11 plus $3,751.90 interest was assessed.
This was paid in September, 1970. Dr. Mason then filed for a
tax refund of $17,161.90 plus interest, but it was disallowed.
This action was filed to recover that amount.
Because the jury found Dr. Mason intended to make a gift
when he sold his shares to the charitable corporation, the
Government now concedes he is entitled to the charitable
deduction. However, it asserts that as a result of the
deduction, his recognized gain from the sale must be
recomputed so as to report additional ordinary income. In
reporting his gain, Dr. Mason elected the installment method
under section 453 of the Internal Revenue Code, the
computation of which was as follows (numbers are rounded to
the nearest dollar):
(a) Selling price (cash plus note) $117,197.
(b) Basis 29,750.
(c) Total gain (a - b) $87,447.
(d) Gross profit percentage (c ÷ a) 74.6154%
(e) Payments received in 1966 $10,142.
(f) Gain recognized in 1966 (d x e) 7,568.
The recognized gain in 1966 was reported as a capital gain,
rather than as ordinary income, on the ground that the shares
sold were capital assets.
In opposition to this, the Government now argues that that
portion of each payment received by Dr. Mason which represents
the ratable difference between the face amount ($112,689.42)
and the fair market value ($81,000) of the promissory note
must be reported as ordinary income.
Thus, the question for decision is whether the difference
between the face amount and fair market value of a promissory
note is to receive capital gains treatment as it is paid,
where: 1) such difference was deducted as part of a charitable
contribution; 2) the note was received as part of the purchase
price in the sale of a capital asset; and 3) the taxpayer
properly elected to report his recognized gain from the
transaction under the installment method of section 453. For
the following reasons, it is concluded that only part of the
amount in question is entitled to capital gains treatment.
Under section 453(b) of the Internal Revenue Code, income
from a casual sale of personal property for a price exceeding
$1,000 may be reported in the manner prescribed in section
453(a) — provided that payments in the taxable year of the
sale (other than promissory notes) do not exceed 30% of the
selling price. In the present case, Dr. Mason met all these
prerequisites to electing
the installment method. Section 453(a) provides in pertinent
Under regulations prescribed by the Secretary or
his delegate, a person who . . . sells . . .
personal property on the installment plan may
return as income therefrom in any taxable year
that portion of the installment payments actually
received in that year which the gross profit,
realized or to be realized when payment is
completed, bears to the total contract price.
The related Treasury Regulations define "gross profit" as "the
selling price less the adjusted basis." Treas. Reg. §
1.453-1(b)(1). (emphasis added).
From the words of the Statute and the Regulations
thereunder, it is clear that the "selling price" and "contract
price" are one and the same figure. See Gralapp v. United
States, 319 F. Supp. 265, 268 (D.Kan. 1970); 2 Mertens, Law of
Federal Income Taxation § 15.16 at 46. It is also clear from
the words used that that figure is the face amount of the
consideration received, rather than its fair market value.
Otherwise, the arithmetic of the statute simply would not work
properly.*fn4 Furthermore, where gain from the sale of a
capital asset is properly reported under the installment