67 T.C. 379">*380 OPINION

The Commissioner determined the following deficiencies in petitioners' Federal income taxes for the taxable year 1971:

The cases were consolidated for purposes of trial, briefing, and opinion. Concessions having been made, the sole issue for decision is whether shares received more than 3 years after the initial exchange in a nontaxable corporate reorganization pursuant to sections 354(a)(1)¹ and 368(a)(1)(B) constitute payments subject to the imputed interest provisions of section 483.

The consolidated cases were submitted under Rule 122, Tax Court Rules of Practice and Procedure. All of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated1976 U.S. Tax Ct. LEXIS 13">*17 by this reference. Only the facts necessary for an understanding of our opinion will be summarized below.

Petitioners Sidney R. and Beatrice Solomon, husband and wife, resided in New York City, N.Y., at the time they filed their petition in this proceeding. They filed a joint Federal income tax return for the taxable year 1971 with the Internal Revenue Service Center, Covington, Ky.

Petitioners Samuel and Doris Katkin, husband and wife, resided in Farmington, Mich., at the time they filed their petition. They also filed a joint Federal income tax return for the taxable year 1971 with the Internal Revenue Service Center, Covington, Ky.

Prior to August 19, 1968, Mr. and Mrs. Solomon and Mr. and Mrs. Katkin were owners of all the outstanding capital stock of Quinn Manufacturing Co. (hereinafter Quinn), a Michigan corporation, having its principal place of business in Allen Park, Mich. Each petitioner owned 25 shares of the capital stock of Quinn. Quinn owned 300 shares of the 67 T.C. 379">*381 outstanding capital stock of Detroit Bolt & Nut Co. (hereinafter Detroit), a Michigan corporation having its principal office in Allen Park, Mich. The remainder of the outstanding capital stock of1976 U.S. Tax Ct. LEXIS 13">*18 Detroit was owned by petitioners in the following amounts:

On August 19, 1968, Sidney and Beatrice Solomon entered into an acquisition agreement and plan of reorganization with Whittaker Corp. (hereinafter Whittaker), a California corporation having its principal office in Los Angeles, Calif. The agreement provided for the acquisition of all of the stock of Quinn and Detroit owned by Mr. and Mrs. Solomon in exchange for voting stock of Whittaker. In consideration for the transfer of his shares in Quinn and Detroit, Sidney Solomon was to receive 6,037 shares of Whittaker's $ 5 par value preferred stock and such number of its shares of common stock as had an aggregate fair market value of $ 1,373,387, but not in excess of 22,890 shares. In exchange for the transfer of her shares in the two corporations, Beatrice Solomon was to receive 3,963 shares of Whittaker's $ 5 par value preferred stock and such number of shares of its common stock as had a fair market value of $ 901,613, but not in excess of 15,027 shares. On August 19, 1968, Mr. and Mrs. Solomon1976 U.S. Tax Ct. LEXIS 13">*19 received the designated number of preferred shares and the maximum number of common shares that could initially be received under the agreement. The shares of stock received were subject to substantial restrictions on transferability. In addition, because of the difficulty in valuing the shares exchanged and as further consideration to petitioners, the agreement provided for the issuance of additional shares if the value of the common stock received and still retained by petitioners on August 19, 1971, was less than 120 percent of its value on August 19, 1968, or if the value of the preferred shares received was less than $ 100 per share. The agreement further provided that the maximum number of shares which might be issued be placed in a reserve account to be established by Whittaker for possible future delivery. The 67 T.C. 379">*382 agreement did not provide for the payment of interest on such additional shares. On September 27, 1971, pursuant to its obligations under the agreement, Whittaker issued 29,797 additional shares of its common stock to Sidney Solomon and 19,561 shares to Beatrice Solomon. The shares were registered under the Securities Act of 1933, as amended, and had 1976 U.S. Tax Ct. LEXIS 13">*20 a value of $ 10.125 per share.

On August 19, 1968, Samuel and Doris Katkin also entered into an acquisition agreement and plan of reorganization with Whittaker providing for the exchange of all of their stock in Quinn and Detroit for voting stock of Whittaker. Under the terms of the agreement, Samuel Katkin was to receive such number of shares of common stock of Whittaker as had a fair market value of $ 1,039,977, up to a maximum of 17,333 shares; Doris Katkin was to receive such number of shares of common stock as had a fair market value of $ 535,023, but not in excess of 8,917 shares. On August 19, 1968, both petitioners received the maximum number of shares which could be initially received under the agreement. The shares, like those issued to Mr. and Mrs. Solomon, were subject to substantial restrictions on transferability. The agreement also provided for the issuance of additional shares if the value of the shares retained by petitioners on August 19, 1971, was less than 120 percent of their value on August 19, 1968. The maximum number of shares which might be issued was to be placed in a special reserve account. No provision was made for the payment of interest on the additional1976 U.S. Tax Ct. LEXIS 13">*21 shares. On September 27, 1971, Whittaker issued 15,671 additional shares to Samuel Katkin and 8,066 additional shares to Doris Katkin. The shares were registered under the Securities Act of 1933, as amended, and had a value of $ 10.125 per share.

The exchanges of stock between petitioners and Whittaker qualified as a tax-free reorganization under sections 354(a)(1)² and 368(a)(1)(B). ³

1976 U.S. Tax Ct. LEXIS 13">*22 67 T.C. 379">*383 The Commissioner, in his statutory notices of deficiency, determined that petitioners received interest income pursuant to section 483 on the receipt of the additional Whittaker shares in 1971.

Section 483⁴ was added to the Internal Revenue Code in 1964 to correct a practice whereby a seller of property on the installment basis was able to convert what would otherwise 67 T.C. 379">*384 constitute interest income into capital gain by inflating the purchase price and not providing for the payment of interest on the deferred payments. H. Rept. No. 749, 88th Cong., 1st Sess. 72 (1963). In general, section 483 requires that in the case of a contract for the sale or exchange of property under which deferred payments are due more than 1 year from the date of such sale or exchange and which provides for either no interest or interest payments at a rate below that specified in the Treasury Regulations, a portion of each payment received more than 6 months after the date of sale or exchange be treated as interest.

1976 U.S. Tax Ct. LEXIS 13">*23 67 T.C. 379">*385 Petitioners do not contend that the shares transferred in 1971 are not payments for their stock, but they, instead, contend that the shares transferred to them are not "payments" within the meaning of section 483. Moreover, the regulations specifically include stock within the meaning of the term "payments," sec. 1.483-1(b)(1)(ii), Income Tax Regs., a term which may have different meanings when used in different Code sections. See Don E. Williams Co., 62 T.C. 166">62 T.C. 166, 62 T.C. 166">169 (1975), affd. 527 F.2d 649">527 F.2d 649 (7th Cir. 1975), cert. granted 426 U.S. 919">426 U.S. 919 (1976).

Petitioners first maintain that section 483 does not apply to deferred payments received in transactions qualifying for nonrecognition treatment under sections 354(a)(1) and 368(a)(1). Section 483(c)(1) provides in pertinent part as follows:

(c) Payments to Which Section Applies. --

(1) In general. -- Except as provided in subsection (f), this section shall apply to any payment on account of the sale or exchange of property which constitutes part or all of the sales price and which is due more than 6 months after the date of such1976 U.S. Tax Ct. LEXIS 13">*24 sale or exchange * * * [Emphasis added.]