54 T.C. 1716 (1970), 5854-68, Pomeroy v. C.I.R.

Docket Nº:5854-68.
Citation:54 T.C. 1716
Opinion Judge:WITHEY, Judge:
Attorney:Ivan D. Pomeroy, pro se. Sheldon M. Sisson, for the respondent.
Case Date:September 02, 1970
Court:United States Tax Court

Page 1716

54 T.C. 1716 (1970)




No. 5854-68.

United States Tax Court

September 2, 1970

          Ivan D. Pomeroy, pro se.

         Sheldon M. Sisson, for the respondent.

         Petitioner sold a residence in 1965 previously held for income-producing purposes, and on a page attached to his untimely return for that year, stated that he elected to treat the disposition as an installment sale. He then computed the gross profit on the transaction using such method, but incorrectly included only $1,000 as the recognized gain to be reported in 1965. Upon audit of his return, the respondent, in effect, determined that the installment method was permissible, although the computation of the recognized gain was erroneous. Petitioner now contends that the computation of gain on his return did not reflect his true intent, and under the circumstances, the installment method should be set aside and a more appropriate method adopted. Held: (1) Petitioner, having elected the installment method of reporting income, which was an acceptable method although the computation was inaccurate, is bound by such election and he cannot, after audit by respondent, choose a different method. Pacific National Co. v. Welch, 304 U.S. /9/ (1938), followed: (2) that an addition to tax, pursuant to sec. 6651(a), I.R.C. 1954, for failure to timely file a return for 1965 is properly imposed in the absence of a showing of reasonable cause for such failure.

          WITHEY, Judge:

         Respondent determined a deficiency in petitioner's Federal income tax for 1965 in the amount of $666.85 and an addition

Page 1717

thereto under section 6651(a)[1] in the amount of $80.74. At the trial, respondent conceded that the addition to tax involved herein is $33.34 and not $80.74 as indicated by the statutory notice.

         The issues presented for our consideration are: (1) Whether the petitioner, having elected the installment method of reporting income, which was a proper method although the computation was incorrect, is bound by such election upon audit by respondent, or may petitioner choose another method of reporting the amount realized; and (2) whether petitioner's failure to file a timely income tax return for the year 1965 was due to willful neglect and was not due to reasonable cause.


         Some of the facts are stipulated and are incorporated herein by this reference.

         Ivan D. Pomeroy, hereinafter sometimes called petitioner, resided at Inglewood, Calif., at the time he filed his petition herein. He filed his Federal income tax return for the year 1965 with the district director of internal revenue at Los Angeles, Calif.

         In 1954, Pomeroy purchased a single-family residence at 4845 East Picadilly, Phoenix, Ariz., for $8,100. He paid $500 in cash and a mortgage in the amount of $7,600 was placed on the property. The mortgage was payable to A. B. Robbs Agencies as mortgagee and was recorded on December 23, 1954 (docket 1498, page 375), by the county recorder of Maricopa County, Ariz.

         A mortgage note in the amount of $7,600 secured the mortgage. The monthly payment on the note was $34.20 and was payable to the Continental National Bank at Phoenix, Ariz., as holder of the note.

         From 1956 to 1965, the residence was held for income-producing purposes and leased to various tenants. Petitioner claimed depreciation on this residence in the aggregate amount of $1,759.38 during the years 1959 through 1964, inclusive.

         In November 1964, the tenant vacated the residence and for 3 or 4 months the house was vacant.

         On January 15, 1965, the Federal Housing Administration (FHA) issued a commitment to refinance the house to the petitioner. The commitment, by its terms, was to expire on July 15, 1965.

         In 1965, Lawrence and Donna Johnson sought to purchase the residence from petitioner. However, the Johnsons were unable to meet the eligibility requirements of the FHA commitment obtained by the petitioner.

Page 1718

          On February 25, 1965, the Johnsons entered into an ‘ Agreement’ with Pomeroy to purchase the house. This agreement was recorded with the county recorder of Maricopa County, Ariz., on March 18, 1965, at docket 5470, page 132.

         The agreement provided, inter alia, that the Johnsons were to obtain a joint tenancy with respect to the property. It was agreed that the Johnsons were to enter into possession of the property and continue in such possession for and during the life of the agreement. The Johnsons agreed to keep the property insured against fire in the amount of the reasonable insurable value thereof, but in no case, less than $10,000 for the mutual benefit and protection of the parties to the sale. Further, the Johnsons were to pay all taxes and assessments to this property levied subsequent to December 31, 1964.

         The purchase price of the house was $11,500 and this amount was to be paid as follows:

1 $1,500.00
2 6,720.21
3 3,279.79
         As part of the agreement of sale, an escrow account (No. 231,337) was opened with the Arizona Title Insurance & Trust Co.          Pomeroy delivered a deed to the property involved to the Arizona Title & Trust Co. in accordance with the agreement and the Johnsons likewise delivered a deed to the property to the title company.          As of March 31, 1965, the Johnsons were shown on records of the county assessor as the persons responsible for the taxes on the property. As of the date of the instant trial, January 5, 1970, they resided therein and were making the monthly payments required by the agreement.          Pomeroy's Federal income tax return for the taxable year 1965 was dated April 21, 1966, and was received by the district director of internal revenue, Los Angeles, Calif., on April 25, 1966.          At the time he filed his 1965 return, Pomeroy included a letter to the district director which stated:          I am sorry for the delay in filing but I ran into much unexpected difficulty and complexity at the last moment and was unable to obtain adequate help. However, it is my feeling that the 1963 Amended Return enclosed and the refund due Page 1719 thereby, I should not be subject to penalty for either the slight tardiness or the slight miscalculation in estimated taxes due (I was about 2% below the 70% value).          In any event, the following represents my impression of our account:
1963 tax refund due $1,677
1965 tax due 948
Interest on 1963 refund 201
Total refund due 930
Less estimate 44
         On Schedule D (part II) of Pomeroy's return for 1965, the sale of the residence was reported substantially as follows:
(b) 1 Acquired-January 1955
(c) Sold-Mar. 11, 1965
(d) Gross sales price $11,500
(e) Original basis plus expense of sale $8,672
(f) Less accumulated depreciation -3,249
(g) Adjusted basis 5,423
(h) Total gain 6,077
(j) Other gain (before sec. 1202 deduction) 1,000
         An explanation of the sale prepared by Pomeroy was attached to the return which indicates in substance:
Sales price $11,500.00
Cash $1,500.00
Contract to Pomeroy 3,279.79
Mortgage assumed by buyer 6,720.21
Less selling expenses 571.60
Net sales price [sic] 10,928.00
Adjusted basis 4,851.00
Net gross profit 6,077.00
         Pomeroy included the amount of $1,000 as the recognized gain on the sale of the residence on Schedule D of his return for 1965 (before the deduction provided by section 1202 of the Code). Page 1720           The following statement was included in the explanation of the sale:
Electing to treat as an installment sale 1,500 plus 71.10 principle payments=
1,571.10=13.6% of $11,500
Installment received 1965
Cash $1,500.00
Principal payment 71.10
Less selling cost 571.60
         The respondent in the statutory notice recomputed the gain as follows:
Loss determined (from two other realty transactions) ($1,150)
Sales price of Phoenix property $11,500
Less: expense of sale 572
Amount realized $10,928
Less: cost (original) 8,100
accumulated depreciation 3,249
Adjusted basis 4,851
Gain determined 6,077
Gain to be reported in 1965 (installment) $3,123.09
Net gain 1,973.09
Less: section 1202 deduction 986.55
Corrected gain 986.54
Terms of sale:
Cash-downpayment $1,500.00
Contract to Pomeroy 3,279.79
Mortgage at date of sale (paid by buyer) 6,720.21
Total sales price 11,500
Payments received in year of sale:
Cash-downpayment 1,500.00
Principal (on contract to Pomeroy) 47.74
Excess of mortgage over adjusted basis 1,869.21
Total 3,416.95
30% of sales price of $11,500 is 3,450.00
Total received in year of sale 3,416.95
Adjusted basis or mortgage, whichever is lesser 4,851
Contract price 6,649
Gross profit percentage
Profit to be realized $6,077
__________- __-- is 91.40%
Total contract price 6,649
Gain to be reported in 1965-91.40% of $3,416.95 is $3,123.09
          Page 1721           Respondent in his statutory notice imposed an addition to the tax of 5 percent ($80.74) pursuant to section 6651(a), supra.          OPINION          ISSUE 1. ELECTION TO REPORT SALE ON INSTALLMENTS METHOD          The respondent contends that the petitioner, having elected the installment method of reporting income from the sale of real estate in the taxable year 1965, which was an acceptable method although the computation was inaccurate,...

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