Bud Raymond - Page 4

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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              

          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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