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amounts from $5,300 to $12,000, and the aggregate face value of
the 41 notes amounts to $423,770. The typical note to petitioner
has an interest rate of 10 percent and is subject to amortization
over 30 years; after 7 years, however, a balloon payment is due
for the outstanding principal balance. As of the time of trial,
one note was no longer secured by a second deed of trust as a
result of a foreclosure on the first deed of trust, one note had
been fully repaid, and the remaining 39 notes were outstanding.
On his 1995 tax return, petitioner, a cash basis taxpayer,
did not use the installment method when recognizing income from
his construction business. On his Schedule C, Profit or Loss
From Business, petitioner did not include the face value of the
promissory notes in his gross receipts because he believed that
as a cash basis taxpayer he did not have to report that income
until he actually received payment. Additionally, on his 1996
through 1999 tax returns, petitioner did not employ the
installment method. On his 1995 through 1999 tax returns,
petitioner, however, did report the interest income associated
with the promissory notes. Respondent determined that the face
value of the promissory notes had to be returned as Schedule C
3(...continued)
amortizable over a 30-year period, and secured by a first deed of
trust, (2) petitioner financing the next 15 percent of the
purchase price, and (3) the purchaser paying the remaining 5
percent out of his own funds. The principal benefit of this
arrangement was that the purchaser avoided the cost of private
mortgage insurance.
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