What a difference a day makes.

• Author: Ochsenschlager, Thomas P.
• Position: Recognition of gain

A recent court case highlights the importance of timing. Both the Tax Court and the Ninth Circuit concluded that a corporation had to recognize the full amount of gain a year before it received any principal payments on the note (James F. Boccardo, 10/2/98, aff'g TC Memo 1997-171).

The facts were not particularly unusual. An S corporation sold two prune ranches to an individual. The sale price was approximately $2 million, all of which was paid by the buyer's unsecured note. The note's terms called for interest-only payments for 20 years, at which time the principal would be due in a lump sum. The 20-year balloon note came due Nov. 1, 1988. On that date, the company's board of directors met and, at the buyer's request, unanimously voted to extend the note an additional two years. They also increased the interest rate on the note.

The IRS argued that the board was a day late in extending the note's terms. Because the original note had matured on the day the board extended it, the company was technically in constructive receipt of the $2 million on that date. By implication, had the board met and extended the note on Oct. 31, 1988 (the day before the maturity date), the corporation could have continued to defer the gain until the extended...