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In addition, respondent argues that petitioners’ incorrect method
of accounting resulted in inflated losses in prior years such
that the net operating loss carryovers to the years at issue
should be reduced accordingly.
II. Method of Accounting and Recognition of Gain
A. Existence of Gain--Completed Sale
As a general rule, the Internal Revenue Code imposes a
Federal tax on the taxable income of every individual. See sec.
1. Section 61(a) specifies that gross income for purposes of
calculating such taxable income means “all income from whatever
source derived”. Expressly encompassed within this broad
pronouncement are “Gains derived from dealings in property”.
Sec. 61(a)(3). Section 1001(a) then defines such gains as the
amount realized “from the sale or other disposition of property”,
less the adjusted basis. Accordingly, section 1001(a) indicates
that gross income within the meaning of section 61(a) does not
arise until property is considered sold or otherwise disposed of
for Federal tax purposes.
Case law then sets forth the standard for determining when a
sale is complete for tax purposes. With respect to real
property, a sale and transfer of ownership is complete upon the
earlier of the passage of legal title or the practical assumption
of the benefits and burdens of ownership. See Major Realty Corp.
& Subs. v. Commissioner, 749 F.2d 1483, 1486 (11th Cir. 1985),
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