Tax Court & Federal Cases
The judicial anchors — and the outer limit.
5.1 · Cunningham v. Commissioner — Obligor Substitution Upheld
A seller sold stock for cash and notes; the buyer corporation later sold the stock to a second corporation that assumed the notes, with the first corporation released and terms later modified. The Tax Court rejected the IRS's argument that the assumption triggered a disposition: the sellers "had no more or less than they had in the beginning. They were creditors of the same installment obligations. There was a different obligor … but in both instances the essential underlying security … was the stock and earning potentials."
The judicial anchor for the obligor-substitution pillar, and the case 75-457 built on. It establishes — with an IRS acquiescence, strengthening its weight — that substituting the obligor does not change the seller's economic position and therefore does not accelerate installment gain. This is the closest case-law analog to what an SIS does.
5.2 · Oden v. Commissioner — The Escrow / Constructive-Receipt Boundary
A leading authority — cited by the IRS itself (e.g., in PLR 200521007) — for the rule that depositing the buyer's funds into escrow results in constructive receipt by the seller "if the funds are not subject to substantial conditions or restrictions other than time of payment and the seller expects to collect." If constructively received, installment treatment is defeated.
Governs the constructive-receipt pillar, not the obligor pillar. Oden defines the failure mode an SIS must avoid: if sale proceeds sit in an escrow or account the seller can reach without a substantial restriction, the seller is taxed on the whole amount up front regardless of the installment paperwork. The SIS is built to stay on the safe side of Oden — the seller never owns or controls the funding annuity, and the proceeds are subject to genuine, substantial restrictions (nontransferable, non-accelerable payment rights). Oden thus validates a correctly built SIS while marking exactly where a sloppy one fails.
5.3 · Holmes v. Commissioner — The Third-Party-Note Rule
The seller of California real property took, as part of the consideration, a promissory note made by a third party (the "Smith note"); the buyer assigned the note to the seller and separately guaranteed it. The Tax Court held that a third-party note is not an "evidence of indebtedness of the purchaser" under §453(b)(2) of the 1954 Code, so its fair market value must be counted as a payment received in the year of sale. The buyer's guarantee did not convert the third-party note into the buyer's own obligation — it bore only on the note's valuation. The court left the seller's installment election intact; only the third-party note was accelerated into year-of-sale income.
This is the case-law anchor for the third-party-note question — whether the seller received the buyer's installment obligation or, instead, a third party's note as consideration. Because §453(b)(2) is the predecessor of current §453(f)(3), Holmes remains directly on point. It supplies two things the SIS analysis needs: first, confirmation that an obligation running from inception against a party other than the buyer (here, the assignment company) would be a payment in full in the year of sale; and second, that a buyer guarantee cannot fix that — the guarantee goes to value, not to character. This is the judicial foundation for the sequencing discipline: the obligation must originate as the buyer's and then be assumed, not originate against the assignment company.
5.4 · Williams v. United States — The Unifying Escrow Rule
A seller who could have taken cash but instead parks it in an escrow or fund they remain entitled to draw on is taxed on the full amount in the year of sale; a seller subject to a real economic restriction is not. IRS Publication 537's "Escrow Account" guidance codifies the same distinction.
The foundational, oldest articulation of the constructive-receipt/economic-benefit boundary that Oden later applied. It frames why an SIS must use a genuinely restricted, assignment-company-owned structure rather than a seller-accessible escrow.
5.5 · Burrell Groves, Inc. v. Commissioner — The Outer Limit
The taxpayer surrendered the original note, released the original buyer, and accepted new notes from a new buyer with a different interest rate, different payment amounts, and a different term. The court held this was a disposition.
Defines the boundary the SIS must not cross. Burrell Groves shows that if the substitution is accompanied by material changes to the seller's payment rights (amounts, term), it can become a §453B disposition. Most practitioners treat it as effectively limited by Rev. Rul. 82-122 (which permitted obligor substitution plus a rate change), and read the two together to mean: substitute the obligor and adjust the rate freely, but do not materially rewrite the seller's payment schedule. A well-built SIS keeps the seller's payment rights substantially intact precisely to stay clear of Burrell Groves.