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Williams v. Commissioner | 28 T.C. 1000 (1957)

Typically, individuals are taxed using the cash method of accounting, which treats income as taxable at the time it’s received. But is a promissory note considered received, taxable income when the note is issued or when it’s actually paid? The tax court explored this question in Williams versus Commissioner.

Jay Williams had a business locating timberland for potential buyers. Williams located a piece of land for Lester McConkey and J M Housley.

Williams charged a little over seven thousand one hundred dollars for his services, but McConkey and Housley couldn’t pay Williams at that time. Instead, Housley gave Williams a promissory note, promising to pay Williams in eight months, after Housley and McConkey had made money from the purchased land.

Over the next three years, Williams tried to sell the promissory note more than ten times, but no bank or financial institution would buy it. Eventually, Housley paid Williams approximately six thousand six hundred dollars, and Williams accepted this amount as satisfying the debt for his services.

Williams paid income tax on the six thousand six hundred dollars in the year Housley gave him the cash.

The commissioner of the Internal Revenue Service, or I R S, determined that Williams should’ve declared the promissory note’s amount as income in the year Housley gave him the note. Under this method, Williams owed additional income tax.

Williams petitioned the United States Tax Court for a determination that the promissory note itself wasn’t taxable income and that Williams hadn’t received any income from Housley until Housley paid him in cash.

The tax court received evidence and ruled on the matter.

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