Highland Farms, Inc. and Subsidiary - Page 24

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          petitioner is not required to include the entire amount of the              
          entry fees in income in the year of receipt.  Only the                      
          nonrefundable or nonforfeitable amounts each year constitute                
          income.  Petitioner included in income for a specific taxable               
          year those portions of the entry fees for the apartments and the            
          lodge that became nonrefundable or nonforfeitable within that tax           
          year.  This method of accounting for the entry fees clearly                 
          reflects income.  It was an abuse of discretion for respondent to           
          conclude that the fees must be included in petitioner's income              
          for the year of receipt.  We hold for petitioner on this issue.             
          Cluster Home Transactions                                                   
               Respondent has treated the cluster home and condominium                
          transactions as sales, requiring the gain from these transactions           
          to be included in income in the year of receipt and disallowing             
          the depreciation deductions petitioner took with respect to these           
          units.  Petitioner argues that its obligation to repurchase a               
          cluster home or condominium unit created a security transaction             
          in the nature of a mortgage, not a sale.  We agree with                     
          respondent.                                                                 
               "Under North Carolina law, the test for determining whether            
          a conveyance with an option to repurchase represents a true sale            


          (...continued)                                                              
          nor helpful to the Court, and on brief the parties seem unable to           
          agree as to what their experts supposedly agreed to.  The Court             
          has disregarded both parties' expert reports and the experts'               
          joint exhibit.  After notice petitioner could increase the                  
          monthly rental payments for the apartment or lodge units, without           
          regard to the entry fees.  The Court rejects respondent's                   
          suggestion that the entry fees represent prepaid rent that                  
          somehow makes up for supposed below market rental rates.                    



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