98 T.C. 54">*54 Ruwe, Judge:

Respondent determined a deficiency in petitioners' Federal income taxes for 1982 in the amount of $ 98,196. The issue for decision is whether petitioners are entitled to use the installment method to report the gain on exchange of their shares of stock in a savings and loan association for savings accounts of another savings and loan association.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Mose Silverman and Rose Silverman were husband and wife. 98 T.C. 54">*55 Mose Silverman died in January 1983. Rose Silverman individually and as executrix of the Estate of Mose Silverman, timely filed a joint Federal income tax return for the 1982 tax year. Mrs. Silverman subsequently filed an amended 1982 return on behalf of herself and her husband on August 1, 1987. Mrs. Silverman resided in Oakland, California, at the time the petition was filed. Probate of the Estate of Mose Silverman, deceased, was conducted in California Superior1992 U.S. Tax Ct. LEXIS 7">*9 Court for San Mateo County.

In 1982, Mr. and Mrs. Silverman owned 29,162 shares of stock in Olympic Savings & Loan Association (Olympic). On October 21, 1982, Coast Federal Savings & Loan Association (Coast), a federally chartered mutual savings and loan association, offered to acquire all outstanding shares of stock of Olympic in exchange for Coast savings accounts in the principal amount of $ 28.5487 per share.

The exchange offer provided that:

In accepting the Exchange Offer, an Olympic Savings stockholder will receive savings accounts in Coast Federal as follows:

(1) 30% of the Exchange Price paid to each stockholder will be in a withdrawable statement savings account of Coast Federal, bearing interest, commencing on the effective date of the transaction, at a rate of 5 1/2% per annum, compounded daily, with an effective yield of 5.65%, (the "Statement Savings Account");

(2) 70% of the Exchange Price paid to each stockholder will be in a non-withdrawable fixed-rate six-year statement savings account of Coast Federal, bearing interest, commencing on the effective date of the transac-tion, at the rate of 6 1/2% per annum, compounded daily, with an effective yield of 6.72%, 1992 U.S. Tax Ct. LEXIS 7">*10 and payable semi-annually commencing six months from the effective date of the transaction (the "Term Account").

Mr. and Mrs. Silverman accepted the Coast offer and received $ 249,761 principal amount of statement savings accounts, and $ 582,776 principal amount of term accounts in exchange for their Olympic stock. The term accounts were certificates of deposit. Mr. and Mrs. Silverman's term accounts were issued and held as follows:

98 T.C. 54">*56 Mr. and Mrs. Silverman received a passbook for each account issued. These passbooks were basically identical to 1992 U.S. Tax Ct. LEXIS 7">*11 those evidencing any other account at Coast. If a passbook represented a certificate of deposit, the passbook stated that it was a "certificate of deposit". All Coast's passbooks stated on the first page that they were "Not transferable except on the books of the Association." The only situation in which title to one of Coast's certificates of deposit could be changed was if the owner or one of the joint owners died. In such a case, title would be vested in the executor or administrator of the decedent's estate.

The passbooks evidencing the term accounts received in the exchange, in addition to stating they were certificates of deposit, contained the following language: "Per Stock Exchange Offer." This language indicated that, in addition to the usual restrictions on certificates of deposit, the account was subject to the terms of the exchange offer. Pursuant to the exchange offer, no part of the principal amount of the term accounts could be withdrawn for 6 years from the effective date of the exchange. Interest, payable semiannually, could be withdrawn during the term of the account. Finally, holders of the term accounts were limited with respect to the amounts they could 1992 U.S. Tax Ct. LEXIS 7">*12 borrow against the accounts as follows:

B. Term Accounts. Term Accounts may not be pledged as security for a "share loan" until one year following the effective date of the transaction. Starting at the first anniversary of the effective date, however, the owner of the Term Account will be entitled to borrow, through the vehicle of a "share loan" secured by the Term Account, at an interest rate of 8 1/2%, with a minimum loan term of three months, up to a total of:

(1) 18% of the initial principal amount of the Term Account during the second year of the account's term.

(2) 36% of the initial principal amount of the Term Account during the third year of the account's term.

(3) 54% of the initial principal amount of the Term Account during the fourth year of the account's term.

(4) 72% of the initial principal amount of the Term Account during the 98 T.C. 54">*57 fifth year of the account's term.

(5) 90% of the initial principal amount of the Term Account during the sixth year of the account's term.

The exchange was effective and the term accounts were issued to Mr. and Mrs. Silverman on November 22, 1982.

The term accounts were not readily tradable in an established securities market.

1992 U.S. Tax Ct. LEXIS 7">*13 Mose Silverman's last will and testament (the will) provided that the residue of his estate, which included the Coast term accounts, was to go to Mrs. Silverman and Tommy F. Angell, an attorney, in trust for the benefit of Mrs. Silverman for her life and the balance to their daughter Ruth Elaine Silverman upon Mrs. Silverman's death. Probate of the Estate of Mose Silverman was concluded pursuant to an order of the California Superior Court on July 3, 1984.

On August 10, 1984, term account (1) was closed and the balance transferred into two new term accounts. The first account, in the amount of $ 95,615.53, was opened in the name of Rose Silverman and Tommy F. Angell, Trustees Under the Will of Mose Silverman (1-711315-0), and a second account, in the amount of $ 100,000, was established in the name of Rose Silverman as Executor of the Estate of Mose Silverman (1-711309-3). Pursuant to the order of the Probate Court, the two newly opened accounts and the two previously issued accounts under the name of Mose Silverman (term accounts (2) and (3) above) were revested in the name of Rose Silverman and Tommy F. Angell, Trustees Under the Will of Mose Silverman.

On their original 19821992 U.S. Tax Ct. LEXIS 7">*14 return, Mr. and Mrs. Silverman treated the exchange as a nontaxable exchange pursuant to a corporate reorganization. In 1985, the U.S. Supreme Court, in Paulsen v. Commissioner,469 U.S. 131">469 U.S. 131 (1985), held that an exchange, very similar to the Coast/Olympic exchange, was not a tax-free corporate reorganization. On August 1, 1987, an amended return for 1982 was filed reporting the exchange of the Olympic stock for Coast accounts as an installment sale, treating the statement savings accounts as payment received, and the term accounts as the deferred payment obligation. Federal income tax was paid on the gain attributable to the $ 249,761 principal amount of the statement savings accounts.

On June 23, 1988, respondent issued a statutory notice of deficiency to petitioners with respect to taxable year 1982 98 T.C. 54">*58 treating the stock exchange as a fully taxable exchange.

OPINION

Respondent contends that Mr. and Mrs. Silverman were required to include the entire gain on disposition of their Olympic stock in their 1982 income. Petitioners concede that the exchange is not entitled to treatment as a tax-free reorganization. They argue, however, that the1992 U.S. Tax Ct. LEXIS 7">*15 gain on the exchange may be reported on the installment method. We must decide whether the Silvermans were entitled to report the exchange under the installment method.

Section 1001(a)¹ provides that the gain from the sale of property shall be the excess of the amount realized therefrom over the adjusted basis. Amount realized is defined as the sum of any money received plus the fair market value of property (other than money) received. Sec. 1001(b). ² All gain realized under section 1001 must be recognized absent a statutory exception. Sec. 1001(c).

Section 453 provides such an exception. It allows income from an installment sale to be reported in the year "payment" is received. The amount1992 U.S. Tax Ct. LEXIS 7">*16 of income to be recognized for any taxable year is the "proportion of the payments received in that year which the gross profit (realized or to be realized when payment is completed) bears to the total contract price." Sec. 453(c).

An "installment sale" is defined as "a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs." Sec. 453(b)(1). Generally, and for purposes of this case, the term "'payment' does not include the receipt of evidences of indebtedness of the person acquiring the property". Sec. 453(f)(3). ³

Mr. and Mrs. Silverman disposed of property (Olympic stock) 1992 U.S. Tax Ct. LEXIS 7">*17 to Coast. Coast was thus "the person acquiring the property". 98 T.C. 54">*59 In return, the Silvermans received withdrawable statement savings accounts and term accounts that could not be withdrawn for 6 years. If the Coast term accounts which Mr. and Mrs. Silverman received in the exchange are "evidences of indebtedness of the person acquiring the property", then Mr. and Mrs. Silverman's receipt of the term accounts would not constitute "payment" for purposes of section 453, and they would therefore be entitled to report the disposition of their Olympic stock on the installment method. ⁴

Whether certificates of deposit are "evidences of indebtedness" of the issuing savings and loan association was answered by the Supreme Court in Paulsen v. Commissioner,469 U.S. 131">469 U.S. 131 (1985).1992 U.S. Tax Ct. LEXIS 7">*18 In that case, involving practically identical facts, the Court was called upon to determine whether a transaction wherein the taxpayer received savings accounts and certificates of deposit from a federally chartered mutual savings and loan association in exchange for stock in a State-chartered savings and loan association, qualified as a tax-free reorganization under sections 354(a)(1) and 368(a)(1)(A). One requirement for such a tax-free exchange was that the taxpayer's ownership in the prior organization must continue in a meaningful fashion in the reorganized enterprise, i.e., "the seller must acquire an interest in the affairs of the purchasing company more definite than that incident to ownership of its short-term purchase-money notes." Pinellas Ice & Cold Storage Co. v. Commissioner,287 U.S. 462">287 U.S. 462, 287 U.S. 462">470 (1933); Paulsen v. Commissioner,469 U.S. 131">469 U.S. at 136. In Paulsen, the Court recognized that the certificates of deposit had both "equity and debt characteristics", Paulsen,469 U.S. 131">469 U.S. at 138, but found that the debt characteristics predominated, and that the equity characteristics were1992 U.S. Tax Ct. LEXIS 7">*19 insubstantial.

there are substantial debt characteristics to the Citizens shares that predominate. Petitioners' passbook accounts and certificates of deposit are not subordinated to the claims of creditors, and their deposits are not considered permanent contributions to capital. Shareholders have a right on 30 days' notice to withdraw their deposits, which right Citizens is obligated to respect. While petitioners were unable to withdraw their funds for one year following the merger, this restriction can be viewed as akin to a delayed 98 T.C. 54">*60 payment rather than a material alteration in the nature of the instruments received as payment. * * *

In our view, the debt characteristics of Citizens' shares greatly outweigh the equity characteristics. The face value of petitioners' passbook accounts and certificates of deposit was $ 210,000. Petitioners have stipulated that they had a right to withdraw the face amount of the deposits in cash, on demand after one year or at stated intervals thereafter. Their investment was virtually risk free and the dividends received were equivalent to prevailing interest rates for savings accounts in other types of savings institutions. The1992 U.S. Tax Ct. LEXIS 7">*20 debt value of the shares was the same as the face value, $ 210,000; because no one would pay more than this for the shares, the incremental value attributable to the equity features was, practically, zero. * * *

[469 U.S. 131">Paulsen v. Commissioner, supra at 139, 140.]

We perceive no meaningful distinction between the certificates of deposit in Paulsen and those involved here. ⁵ The certificates of deposit received by Mr. and Mrs. Silverman represent "evidences of indebtedness" of the person acquiring their property. Petitioners meet all of the literal statutory requirements of section 453 so as to entitle them to report income from the disposition of Olympic stock using the installment method. ⁶

1992 U.S. Tax Ct. LEXIS 7">*21 Respondent argues that the term accounts are "cash equivalents" and therefore must be included in income in the year of sale. Respondent points out that the Court in Paulsen characterized the accounts as cash equivalents. 469 U.S. 131">Paulsen v. Commissioner, supra at 140.

We have previously held that a finding that a taxpayer is entitled to installment sale reporting makes it unnecessary for us to address issues involving the application of the cash equivalence doctrine. Applegate v. Commissioner,94 T.C. 696">94 T.C. 696, 94 T.C. 696">705 (1990). However, since respondent relies heavily upon the cash equivalence argument and application of that doctrine is far from clear, Applegate,94 T.C. 696">94 T.C. 705, we will examine respondent's position.

98 T.C. 54">*61 Gain from a sale or exchange is realized pursuant to section 1001. "There has been a host of cases involving the question of when an amount is realized for purposes of section 1001. In a number of cases, this Court has held that an amount is realized when a seller receives property which is the equivalent of cash." Griffith v. Commissioner,73 T.C. 933">73 T.C. 933, 73 T.C. 933">937 (1980)1992 U.S. Tax Ct. LEXIS 7">*22 (citing Watson v. Commissioner,69 T.C. 544">69 T.C. 544, 69 T.C. 544">549 (1978), affd. 613 F.2d 594">613 F.2d 594 (5th Cir. 1980); Western Oaks Building Corp. v. Commissioner,49 T.C. 365">49 T.C. 365, 49 T.C. 365">376 (1968); Ennis v. Commissioner,17 T.C. 465">17 T.C. 465, 17 T.C. 465">470 (1951); Estate of Atkins v. Commissioner,9 B.T.A. 140">9 B.T.A. 140, 9 B.T.A. 140">150 (1927), affd. 36 F.2d 611">36 F.2d 611 (D.C. Cir. 1929)). An obligation is a cash equivalent if it is of a solvent obligor, unconditional, assignable, not subject to setoffs, and is of a kind that is frequently transferred to lenders or investors at a discount not substantially greater than the generally prevailing premium for the use of money. Cowden v. Commissioner,289 F.2d 20">289 F.2d 20, 289 F.2d 20">24 (5th Cir. 1961), revg. 32 T.C. 853">32 T.C. 853 (1959); Watson v. Commissioner,69 T.C. 544">69 T.C. 544, 69 T.C. 544">551-552.

In Warren Jones Co. v. Commissioner,524 F.2d 788">524 F.2d 788 (9th Cir. 1975), revg. 60 T.C. 663">60 T.C. 663 (1973), the Circuit Court to which the instant case would be1992 U.S. Tax Ct. LEXIS 7">*23 appealable reversed this Court's holding that the fair market value of a contract was not includable in the amount realized from a sale. We had held that the contract was not a cash equivalent because it could not have been transferred to a lender or investor at a discount which was not substantially greater than the generally prevailing premium for the use of money. (The discount factor was found to be approximately 42 percent.) After an analysis of the evolution of the language of section 1001, the accompanying legislative history, and the case law of that circuit, the Ninth Circuit held that if the fair market value of a contract can be ascertained, the ascertainable fair market value must be included as an amount realized under section 1001(b). Consequently, under Warren Jones Co., whether gain is or is not realized under section 1001 upon receipt of purchaser's debt obligation depends on whether the obligation has an ascertainable fair market value, regardless of the size of the discount. ⁷

1992 U.S. Tax Ct. LEXIS 7">*24 98 T.C. 54">*62 The result of satisfying either the cash equivalence or the ascertainable fair market value tests is that gain is realized under section 1001(b). See 524 F.2d 788">Warren Jones Co. v. Commissioner, supra at 791 n.6. Petitioners do not dispute that gain was realized in 1982. Such realized gain under section 1001 must be recognized absent a statutory exception, but, as previously pointed out, section 453 provides such an exception. A finding that a transaction may be reported under section 453 assumes there has been a realization event and makes any further consideration of the cash equivalence doctrine redundant. See Warren Jones Co. v. Commissioner,68 T.C. 837">68 T.C. 837 (1977), affd. 617 F.2d 536">617 F.2d 536 (9th Cir. 1980). ⁸ Thus, despite the inclusion of the value of the buyer's obligation in the amount realized under section 1001(b), a taxpayer is entitled to report gain from the transaction under the installment method. Warren Jones Co. v. Commissioner,524 F.2d 788">524 F.2d 788 (9th Cir. 1975).

1992 U.S. Tax Ct. LEXIS 7">*25 The legislative history of section 453 indicates that Congress believed that the cash equivalence characteristics of certain types of debt instruments made it inappropriate to allow them to be reported under the installment method. As a result, it enacted specific provisions to preclude certain debt instruments from being reported under the installment method. See S. Rept. 91-552 (1969), 1969-3 C.B. 423, 515. These provisions, section 453(f)(4) and (5), first became part of the installment sale section in 1969 as paragraph 453(b)(3). These paragraphs provide:

(3) Payment. -- Except as provided in paragraph (4), the term "payment" does not include the receipt of evidences of indebtedness of the person acquiring the property (whether or not payment of such indebtedness is guaranteed by another person).

98 T.C. 54">*63 (4) Purchaser evidences of indebtedness payable on demand or readily tradable. -- Receipt of a bond or other evidence of indebtedness which

(A) is payable on demand, or

(B) is issued by a corporation or a government or political subdivision thereof and is readily tradable,