Rev. Rul. 58-189

Advice has been requested whether the filing of an income tax bond, for the purpose of deferring gain from the disposition of installment obligations under section 44(d) of the Internal Revenue Code of 1939, is applicable to cases where the recipient is an exempt organization,

Section 44(d) of the Code provides that gain or loss shall result from the disposition, otherwise than by sale or exchange, of an installment obligations measured by the difference between the basis of the obligation and the fair market value of the obligation at the time of disposition. However, an exception is made in the case of a decedent who dies possessed of an installment obligation and it is transmitted at death. In such a case, the income ordinarily required to be reported by the decedents estate will be deferred if a proper income tax bond is filed with the Commissioner under the procedure prescribed in Section 39.44-5(c) of Regulations 118, which states in part as follows:

In the case of a decedent who dies possessed of installment obligations, no gain on account of the transmission at death of such obligation is required to be reported as income in the return of the decedent for the year of his death, if the executor or administrator of the estate of the decedent or any of the next of kin or legatees files with the Commissioner a bond on Form 1132 conditioned upon the return as income, by any person receiving any payment in satisfaction of such obligations, of the same proportion of such payment as would be returnable as income by the decedent if he had lived and received such payment. The bond shall be subject to the approval of the Commissioner, shall be in an amount sufficient in his judgment to insure collection of the tax resulting from the fulfillment of the conditions stated in the bond, and shall be filed at the time of filing the return for the decedent for the year of his death or at such later time as may be specified by the Commissioner. * * *.

The issue of whether section 44(d) of the Code is applicable where the recipient is an exempt organization appears to have been raised for the first time in the case of Archie R. Conner, Administrator of the Estate of Lucy Radulovich, Deceased v. Commissioner , 37 B.T.A. 890, Acq. C.B. 1938-2, 7. The Government in that case advanced the argument that the provisions of section 44(d) requiring the filing of a bond in order to exclude the unpaid installments from decedent's income was inapplicable where a charitable organization was the transferee. The court in an opinion adverse to the Government held that since a tax exempt organization is a `person' within the meaning of section 44(d) the Commissioner's failure to approve an income tax bond was an arbitrary abuse of discretion.

The court, after a general discussion of the history of section 44(d), pointed out that to hold that a charitable organization is not a person for purposes of section 44(d) because it is not required to file an income tax return, or pay a tax, would be to read into the last sentence of section 44(d) something that is not there and limit the word `person' to taxable person. `Such an interpretation,' said the court, `is not in harmony with the statutory definition of the word `person' found in section 801(a)(1). * * * In our opinion the term `person' as used in the last sentence of section 44(d) includes any corporation, * * *.'

In President and Directors of Manhattan Company, and Joseph F. Poeg, Executors, Estate of Jacob F. Haubeil, Deceased v. Commissioner , 41 B.T.A. 1244, the court, following its reasoning in the Connor case, rejected the contentions of the petitioner and held that an installment obligation passing at death of petitioner's decedent to a charitable organization was subject to inclusion in the decedent's income for the last year of his life as to installments not yet returned by him as income since no bond had been filed by the executors of the decedent's estate as required by section 44(d). See also Estate of Francis T. Ingraham, Deceased, Guaranty Trust Company of New York, Executor v. Commissioner , T.C. 701.

It is clear from the foregoing that the requirement imposed by section 44(d) of the Code, for filing a bond in order to defer the reporting of gain from installment obligations transmitted at death, is equally applicable to cases where the recipients are tax exempt organizations.

Sections 453(d)(3) and 691(a)(4)(A) of the 1954 Code, the counterpart of section 44(d) of the 1939 Code, with eliminated the requirement of filing a bond to defer gain on installment obligations transmitted at death, are applicable with respect to taxable years beginning after December 31, 1953, and ending after August 16, 1954, and do not affect or authorize the release of bonds executed under section 44(d) of the 1939 Code. See Rev. Rul. 55-627, C.B. 1955-2, 550.