Opinion
Docket No. 1441-62.
1964-01-27
PETER MAMULA AND DOROTHY R. MAMULA, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Carl A. Stutsman, Jr., for the petitioners. Lawrence Kartiganer, for the respondent.
Carl A. Stutsman, Jr., for the petitioners. Lawrence Kartiganer, for the respondent.
Petitioners reported gain from sales of real estate in 1959 upon the deferred-payment method— a method inconsistent with the installment sales method. Held, they made an election not to use the installment sales method and were not thereafter entitled to have their tax computed upon the installment sales method when it later turned out that the deferred-payment method was unavailable to them. Sec. 453, I.R.C. 1954; sec. 1.453-8(b), Income Tax Regs.
Respondent determined deficiencies in petitioners' income tax for the taxable years ended December 31, 1959, and December 31, 1960, in the amounts of $30,000.63 and $2,215.80, respectively. The parties have agreed to certain adjustments with respect to the deficiencies.
The only issue remaining for determination is whether petitioners are entitled to have their gains from sales of real estate in 1959 computed upon the installment basis, notwithstanding that they reported such gains in their 1959 returns under the deferred-payment method, a method which, it turned out, they could not properly use.
FINDINGS OF FACT
Some of the facts have been stipulated, and, as stipulated, are incorporated herein by this reference.
Petitioners, husband and wife, residing in Long Beach, Calif., filed Federal income tax returns for the years 1959 and 1960 with the district director of internal revenue at Los Angeles, Calif.
Peter Mamula, hereinafter referred to as petitioner, was engaged in the practice of medicine in Los Angeles, Calif., for a number of years, and was so engaged during the years in question.
In 1959 petitioner sold two parcels of real estate which he had acquired on or about May 2, 1958. One parcel, which had a basis of $51,051.63, was sold for $150,000. Petitioner received $5,000 in cash, with the balance represented by a promissory note in the amount of $145,000; the note was secured by a deed of trust on the property. The other parcel, which had a basis of $27,601.70, was sold for $39,000; petitioner received $5,000 in cash and four promissory notes in the amounts of $18,000, $10,000, $4,000, and $2,000.
The promissory notes received in these 1959 sales had a fair market value substantially equal to their face value. Petitioners realized net gains from the sales in 1959 in the aggregate amount of $107,446.85.
Petitioners' income tax return for the year 1959 was prepared by George Vacher, a certified public accountant who was certified in California; Vacher, at the time of trail, had been practicing in that State for a period in excess of 20 years. Vacher had regularly prepared petitioners' income tax returns for approximately 5 years prior to 1959; he also maintained petitioner's business and other records in connection with the aforementioned property sales and in connection with similar transactions during the years in question.
Pursuant to a discussion between Vacher and petitioners relating to the manner in which the gain from the sales of real estate should be reported, Vacher advised petitioners that they could report the transactions under one of three different methods: (1) The closed transaction basis, which requires reporting the entire gain in that year of the sales; (2) the deferred basis, which is tantamount to a tax-free recovery of basis prior to the reporting of any gain; and (3) the installment method under section 453 of the Internal Revenue Code of 1954. Petitioner stated to Vacher that he wanted to adopt the method which would result in the least taxes payable in 1959. As a result of his discussions with petitioner, Vacher chose to adopt the deferred basis or cost recovery method of reporting the sales in 1959. This choice was acceptable to petitioner.
In addition to receiving the ‘down payments' on the properties sold in 1959, petitioners also received in 1959, partial payments relating to both of the sales. They did not report any taxable income in 1959 from the sales of real estate.
Petitioners' tax return for the year 1959 contained a schedule entitled ‘Peter and Dorothy R. Mamula Income Tax Return— Year 1959 Sale of Real Estate— Deferred Basis.’ The body of the schedule was as follows:
+----------------------------------------------------------------------+ ¦Two lots and duplex sold Apr. 29, 1959, for ¦ ¦$39,000.00¦ +------------------------------------------------+----------+----------¦ ¦Cost—May 2, 1958 ¦$27,601.70¦ ¦ +------------------------------------------------+----------+----------¦ ¦Expenses of sale and escrow charges ¦2,494.82 ¦30,096.52 ¦ +------------------------------------------------+----------+----------¦ ¦Unrealized profit ¦ ¦8,903.48 ¦ +------------------------------------------------+----------+----------¦ ¦Cost and expenses ¦30,096.52 ¦ ¦ +------------------------------------------------+----------+----------¦ ¦Received cash from escrow installment ¦2,976.37 ¦ ¦ +------------------------------------------------+----------+----------¦ ¦Balance to recover ¦27,120.15 ¦ ¦ +------------------------------------------------+----------+----------¦ ¦Acreage improved with some blacktop and fence on¦ ¦ ¦ +------------------------------------------------+----------+----------¦ ¦Aug. 10, 1959 for ¦ ¦150,000.00¦ +------------------------------------------------+----------+----------¦ ¦Cost—May 2, 1958 ¦51,051.63 ¦ ¦ +------------------------------------------------+----------+----------¦ ¦Expenses of sale and escrow charges ¦405.00 ¦51,456.63 ¦ +------------------------------------------------+----------+----------¦ ¦Unrealized profit ¦ ¦98,543.37 ¦ +------------------------------------------------+----------+----------¦ ¦Cost and expenses ¦51,456.63 ¦ ¦ +------------------------------------------------+----------+----------¦ ¦Received cash from escrow and installment ¦6,373.92 ¦ ¦ +------------------------------------------------+----------+----------¦ ¦Balance to recover ¦45,082.71 ¦ ¦ +----------------------------------------------------------------------+
In 1960 petitioners received partial payments in respect of the two sales of real estate in 1959. They reported no taxable income in 1960 from the sales. However, their tax return for the year 1960 showed that they had received these partial payments.
OPINION
RAUM, Judge:
Petitioners, relying upon their accountant's advice, reported the sales in issue on the deferred-payment method, a method which permits the tax-free recovery of basis prior to reporting taxable gain. This was not a choice blindly made. The accountant outlined the three possible methods of reporting the sales, and petitioner consciously accepted the alternative selected by the accountant. The deliberate attempt to use that method was in fact an election not to employ the installment method, even though, as a matter of hindsight, the deferred-payment method turned out to have been incorrectly chosen. It is not now open to petitioners to insist upon a recomputation of their liability upon the installment sales basis, as opposed to having their realized gains taxed in the year of realization.
Section 453, I.R.C. 1954, provides in part as follows:
SEC. 453. INSTALLMENT METHOD.
(a) DEALERS IN PERSONAL PROPERTY.— Under regulations prescribed by the Secretary or his delegate, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit, realized or to be realized when payment is completed, bears to the total contract price.
(b) SALES OF REALTY AND CASUAL SALES OF PERSONALTY.
(1) GENERAL RULE.— Income from
(A) a sale or other disposition of real property, or
(B) a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding $1,000,
may (under regulations prescribed by the Secretary or his delegate), be returned on the basis and in the manner prescribed in subsection (a).
Section 1.453-8(b) of the Income Tax Regulations, promulgated September 17, 1958, in accordance with the foregoing statute, provides in part as follows:
(b) Sales of real property and casual sales of personal property. (1) A taxpayer who sells or otherwise disposes of real property, or who makes a casual sale or other casual disposition of personal property, and who elects to report the income therefrom on the installment method must set forth in his income tax return (or in a statement attached thereto) for the year of the sale or other disposition the computation of the gross profit on the sale or other disposition under the installment method. In any taxable year in which the taxpayer receives payments attributable to such sale or other disposition, he must also show in his income tax return the computation of the amount of income which is being reported in that year on such sale or other disposition.
(2) The information required by subparagraph (1) of this paragraph must be submitted for each separate sale or other disposition but, in the case of multiple sales or other dispositions, separate computations may be shown in a single statement.
These regulations have been explicitly held valid. Ackerman v. United States, 318 F.2d 402 (C.A. 10).
Petitioners have not complied with the regulations. Apart from their attempting to elect a method of reporting that was inconsistent with the installment sales method, they did not set forth in their return, as they would have been required to do by the regulations, ‘the computation of the amount of income which is being reported (on the installment sales basis) in that year on such sale * * * .’
Petitioners have attempted to report on the deferred-payment method and have thus made an election not to use the installment sales method which is inconsistent therewith; they may not now have the benefit of the latter method. Cf. Pacific National Co. v. Welch, 304 U.S.191; Jacobs v. Commissioner, 224 F.2d 412 (C.A. 9); Albert Vischia, 26 T.C. 1026; W. A. Ireland, 32 T.C. 994; John W. Commons, 20 T.C. 900.
Apart from the fact that the present case is governed by the new regulations adopted in 1958 (cf. Nathan Spivey, 40 T.C. 1051, 1054), cases such as Hornberger v. Commissioner, 289 F.2d 602 (C.A. 5), relied upon by petitioners, are distinguishable for reasons explicitly set forth in the Hornberger opinion as follows (p. 604):
We are not dealing with a case where a taxpayer has made an election by reporting the sale on a deferred payment basis and subsequently seeks to change his position, as was the situation in Pacific National Company v. Welch, 304 U.S. 191, 58 S.Ct. 857, 82 L.Ed. 1282, and in Jacobs v. Commissioner, 9 Cir., 224 F.2d 412, * * * .
Petitioners have attempted to distinguish the cases cited above in Hornberger on the ground that they did not choose a method available to them, i.e., the deferred-payment method. But the point is that they did choose that method, which was at least arguably open to them. The reason that it turned out not to be available is that the notes which they received are now agreed to have an ascertainable fair market value substantially equal to their face amounts. But at the time the returns were prepared the accountant apparently thought that the facts could be interpreted otherwise, and upon his view of the facts the deferred-payment method was an available alternative.
That a different view of arguable facts is now accepted cannot, as a matter of hindsight, destroy the binding effect of an election not to adopt the installment method, particularly where all the facts were known at that time.
He testified:I explained the different methods of reporting this particular transaction, and having such a little down payment, and because of the taxpayer's shaky credit standing I suggested that he could take the deferred payment plan.(In mentioning the ‘taxpayer's' shaky credit standing he was obviously referring to the shaky credit standing of the makers of the notes. And, if such could be established, then the deferred payment method might well have been open to petitioners.)
Other cases relied upon by petitioners were concerned with tax years prior to the 1958 regulations before us, and, in general, did not involve the making of an election to report the gain on sale under a method inconsistent with the installment sales method. John F. Bayley, 35 T.C. 288; Jack Farber, 36 T.C. 1142, affirmed 312 F.2d 729 (C.A. 2); United States v. Eversman, 133 F.2d 261 (C.A. 6); Scales v. Commissioner, 211 F.2d 133 (C.A. 6),
reversing 18 T.C. 1263. Baca v. Commissioner, 326 F.2d 189 (C.A. 5), reversing 38 T.C. 609, is similarly distinguishable.
In Jacobs v. Commissioner, 224 F.2d 412 (C.A. 9), the Court of Appeals states (p. 414): ‘If the case of Scales v. Commissioner, 6 Cir., 211 F.2d 133, * * * is not distinguishable, we are not in agreement.’
We hold that the Commissioner's adjustment in respect of this issue must be approved.
Decision will be entered under Rule 50.