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Petitioner reported the sale under the installment method.3
Under that method, a taxpayer reports the taxable portion of each
installment in the year received. Petitioner received $28,376 in
installments for 1995, of which only $20,303 was included in
income by petitioner on its 1995 Federal income tax return.
Petitioner “deferred” the inclusion in income of the remainder of
the $1,569,211 installment sale gross profit until future
installments were paid/received.4
In arguing that the tax on future installment income had
“accrued”, petitioner relies on section 1.535-2(a)(1), Income Tax
Regs. That regulation contains the following elaboration on the
deduction as being “for taxes accrued during the taxable year,
regardless of whether the corporation uses an accrual method of
accounting, the cash receipts and disbursements method, or any
other allowable method of accounting.”
3 Petitioner’s 1995 Federal return contains the notation
that it uses the accrual method of accounting for tax purposes.
With respect to the real estate sale, however, petitioner elected
the installment method.
4 Petitioner reflected an amount in excess of $500,000 in
connection with the installment sale as “deferred income taxes”
(a current liability) on the balance sheet which was part of its
1995 return. In addition, for financial reporting purposes,
petitioner included the “deferred” installment sale income in its
1995 income. However, no part of the income that may be realized
from subsequent years’ installments was included in petitioner’s
1995 Federal income tax base.
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