Scales v. Commissioner

Joe W. Scales and Corinne Scales, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent

Scales v. Commissioner

Docket Nos. 23672, 34297

United States Tax Court

18 T.C. 1263; 1952 U.S. Tax Ct. LEXIS 86;

September 30, 1952, Promulgated

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Decisions will be entered under Rule 50.

1. Petitioner transferred a dairy farm, real and personal property, in 1943 executing a bill of sale, deed and lease. Held, that the 1943 transfer constituted a sale, not a lease.

2. Held, further, petitioner did not make an election in a timely filed income tax return to report the capital gain on the installment method under section 44(b), I. R. C., and the entire capital gain is taxable in 1943.

3. Held, further, that petitioner realized a capital gain on the sale of 98.72 acres of land, which property was inherited from a relative who died on June 20, 1913.

4. Petitioner omitted from gross income for 1943 an amount in excess of 25 per cent of the amount of gross income stated on the return. Held, therefore, that the deficiencies are not barred since section 275(c), I. R. C., providing for a 5-year statute of limitations is applicable.

5. Held, further, in 1947 petitioner, a cash basis taxpayer, realized no taxable income when he received a note in connection with a refinancing including sums owed for feed bills and interest of prior years.

6. Held, further, that the deficiencies were not due to negligence and respondent erred in determining negligence penalties.

Cecil Sims, Esq., W. W. Berry, Esq., and James W. Allen, C. P. A., for the petitioners.

Homer F. Benson, Esq., for the respondent.

Black, Judge.

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BLACK

Respondent determined deficiencies and penalties in the income taxes of petitioners as follows:

Docket No.	Year ended	Deficiency	Penalty
23672	Dec. 31, 1943	$ 35,710.10	$ 1,966.00
34297	Dec. 31, 1947	33,145.53	1,860.41

In the pleadings the parties have raised the following issues for the calendar year 1943:

1. The respondent determined that petitioners realized gains in connection with the sale of a dairy farm of $ 37,394 for the land to be taxed as a long term capital gain and $ 41,558.46 for the cattle and personal property to be taxed as ordinary income. Petitioners contend that the gain should be computed in its entirety as a capital gain on the installment basis in accordance with section 44, I. R. C., as follows: $ 1,025.32 for the land and $ 1,229.76 for the cattle. In the alternative, petitioners contend there was no sale in 1943 but the sums in question were received pursuant to a 5-year lease.

2. The respondent determined that $ 2,000 paid to petitioner under the 1943 sale contract was for the sale of dairy equipment and taxable as ordinary income in the year 1943. Petitioner contended that the sale of cattle was for $ 43,558.46 and taxable as a capital gain, and the dairy equipment was transferred for no value. In his brief, respondent specifically concedes this issue. Petitioner contends that of this $ 43,558.46 capital gain, $ 3,318.46 is short term and $ 40,240 long term, and respondent concedes this issue specifically. The cost basis for the personal property is conceded to be zero, as the costs were written off as expenses.

3. The respondent determined that petitioners realized a long term capital gain of $ 1,622 upon the exchange of 98.72 acres of land for 67 acres of land. Petitioners contend there was no taxable gain of the transaction.

4. The respondent determined that a 5 per cent negligence penalty applies to the total tax liability, including the deficiency, under section 293(a), I. R. C. Petitioners assign error to the penalty.

5. Petitioners contend that the respondent was barred by the period of limitation from asserting deficiencies and penalties under section 275(c), I. R. C., since petitioners did not omit 25 per cent of their gross income from their 1943 return.

The following issues were raised in the pleadings for the year 1947:

1. In the event the Court determines that the sale of the dairy farm did not take place in 1943, respondent determines in the alternative that the sale took place in 1947, and petitioners realized long term capital gains in 1947 of $ 30,651.22 for the land and ordinary income of $ 36,161.26 for the cattle and personal property. Petitioners contend that the dairy farm, real and personal property, was sold in 1943 and refinanced in 1947. Petitioners contend that the sale of cattle and personal property resulted principally in a long term capital gain, not ordinary income, and respondent concedes this contention specifically in his brief. Petitioners in the alternative contend that the sale in 1947 was an installment sale of capital assets in accordance with section 44, I. R. C., the payment to petitioners being $ 84.30 in 1947.

2. In determining that the basis for the long term capital gain in 1947 was $ 30,651.22 for the sale of land, respondent determined that the cost basis was $ 21,781.24. Petitioners contend the basis was $ 22,605.

3. Respondent determined that petitioners realized a long term capital gain of $ 1,740.26 from the sale of farm equipment. Petitioners contend that the sale took place in 1943 and was merely refinanced in 1947. In his brief respondent specifically agreed to petitioners' contention that the farm equipment was transferred for no value and the amount applied by respondent to the farm equipment should be added to the sale of cattle. Therefore, this issue is no longer before the Court and the Issue 1 above should be adjusted accordingly.

4. The respondent determined that petitioners received interest income in the amount of $ 4,825.63, to which petitioner assigned error.

5. The respondent determined that petitioners realized income of $ 3,500 for a feed bill. Petitioners contend that a preexisting indebtedness existed for this feed bill and said indebtedness was merely refinanced without resulting in taxable income.

6. Respondent determined that a negligence penalty of 5 per cent is applicable pursuant to section 293(a), I. R. C., to which petitioners assigned error.

FINDINGS OF FACT.

The petitioners Joe W. Scales and Corinne Scales, husband and wife, are residents of Wales, Giles County, Tennessee. In 1943 and 1947 they filed joint Federal income tax returns on the cash basis with the collector of internal revenue for the district of Tennessee.

In the year 1943, petitioners resided at Eagleville, Rutherford County, Tennessee, on a farm owned by Corinne Scales. In 1943, Joe W. Scales, sometimes herein referred to as petitioner, operated a dairy on his wife's farm at Eagleville, Tennessee. In addition, Joe W. Scales owned and operated another dairy farm in Giles County, Tennessee.

Joe W. Scales had been selling his entire output of milk from the Giles County farm to the White Way Pure Milk Company at Decatur, Alabama. This milk company was operated by Emmette L. Barran, sometimes herein referred to as Barran, and C. E. Winton, sometimes herein referred to as Winton. On July 6, 1943, petitioner agreed to sell the Giles County farm and improvements thereon, together with certain personal property located on the farm, to Barran and Winton. Barran and Winton agreed to execute a note for $ 60,000 in payment of the real estate and to execute a note in an amount to be determined by inventory of the personal property included in the bill of sale. The petitioner, Barran, and Winton further agreed to execute a lease to the real and personal property and an escrow agreement and to deposit the warranty deed, bill of sale, and the two notes with the escrow agent. An escrow agreement dated July 6, 1943, was executed between the parties and the Third National Bank in Nashville as escrow agent. Upon the execution of the deed, bill of sale, two notes, and lease agreement, these documents were delivered to the escrow agent. In accordance with the agreement of July 6, 1943, a warranty deed conveyed the Giles County farm to Barran and Winton for the consideration of a $ 60,000 note. The deed included the following language:

* * * in the principal amount of $ 60,000.00, bearing interest at the rate of 5% per annum on the unpaid balance of said note, payable monthly, the principal of which is payable in equal monthly installments of $ 333.33, which note is payable to Joe W. Scales and is secured by a vendor's lien herein and hereby retained on the property hereinafter described and conveyed. * * *

Also, in accordance with the provisions of the July 6, 1943, agreement, Joe W. Scales executed a bill of sale on July 31, 1943, conveying to Barran and Winton the following described personal property located on the Giles County farm:

6	Heifers
2	Big Horse Mules,
2	Young mules 1 horse and 1 mare
1	Horse 2 Age mules
2	Gray mules
	Meal (feed)
428	Cows,
12	Calves

Inventory with no charges

1 McCormick Milker Unit with 4 milkers

1 Surge Milker Unit with 14 milkers

1 Cooling Board

1 5-H. P. Hammer Mill with Motor

1 5-H. P. Boiler,

1 Feed Mixing Mill,

3 Refrigerator Boxes (2 Wilson -- 1 Westinghouse) (for cans of milk)

1 Norge Compressor

(The consideration includes $ 5,000.00 loaned to said Barran and Winton)

Barran and Winton at the same time executed their second promisory note payable to the order of Joe W. Scales in the amount of $ 48,558.46, with interest on the unpaid balance at the rate of 5 per cent per annum, payable monthly at the rate of $ 269.88 a month.

Also, in accordance with the original agreement of July 6, 1943, Joe W. Scales and Barran and Winton executed an "agreement" in the form of a lease dated July 6, 1943, which recited that it was effective or entered into as of the first day of July 1943, and which provided that Joe W. Scales leased the Giles County farm to Barran and Winton for the term of 5 years, beginning July 1, 1943, and ending June 30, 1948. This agreement included, among others, the following provisions:

The Lessees guarantee that the receipts from said farm to be payable to Lessor will not be any less than $ 7,238.52 each year, and agree and bind themselves to pay to Lessor the sum of $ 603.21 on the first day of each and every month during the life of this lease (the payment for July, 1943, as adjusted, having been paid and receipt of same is acknowledged at the time of delivery of this instrument). It is agreed that at least the said sum of $ 603.21 must be paid the first day of each month, so that, including the payment made or due June 1, 1944, the Lessor will receive the sum of $ 7,238.52, as rent for the first year and it is agreed that any amounts due each month may be paid in advance as receipts come in from said farm, and all such amounts paid in advance shall be credited on the minimum which is due in succeeding months. * * *

(4) Upon the end or termination of this lease, if the same be terminated prior to June 30, 1948, or terminated on that date without delivery of deed and bill of sale mentioned in Section 7 of this lease, as hereinafter provided, it is agreed that the farm and improvements shall be returned to Lessor in substantially the condition they now are, reasonable wear and tear excepted, and that an inventory of the personal property will be taken at the time, which shall show the kind, quantity and value of the personal property, and if such personal property plus the amount that would be credited on the note for the personal property if this contract were performed exceeds in value the personal property now delivered to Lessees, it is agreed that Lessees may remove such part of the personal property as they may select, which equals in value the excess of the inventory then taken plus such payments over the inventory now taken of the personal property turned over and delivered. In the event the inventory plus such payments shows the value of the personal property to be less than the personal property now turned over, Lessees agree to pay Lessors the difference in cash. In the event Lessees are at the time of settlement indebted to Lessor, the Lessor shall credit on such indebtedness the amount of the excess of the then inventory of personal property plus such payments over the present inventory of personal property, if there be such, and Lessor shall be entitled to retain all personal property.

* * * *

It is agreed and understood, subject to the terms of an escrow agreement, that in the event Lessees carry out and perform this trade, that at the end or termination thereof the amount paid and received by Lessor as rent (excluding all other amounts paid as taxes, insurance, maintenance, etc.,) shall be credited on said two notes by the escrow agent, credited six-elevenths (6/11) on the note given for the real property and five-elevenths (5/11) on the note given for personal property, and thereupon the escrow agent is to deliver the deed and bill of sale to Lessees herein named, and deliver the two notes so credited to Lessor herein named. It is further agreed that said two notes are payable on or before, and that any amounts may be paid thereon on the first day of any month, and if at any time Lessees elect to pay one-third of the amount due on said notes in advance of the termination of this lease to said Lessor, they have the privilege of so doing, and thereupon the said notes shall be credited as aforesaid and delivered to Lessor, and the deed and bill of sale delivered to Lessees, and this lease agreement shall end and terminate without further responsibility of one party to the other hereunder, it being understood and agreed that Lessees will become the owner of the real and personal property and will accept same in the condition it is at the time of such delivery.

In the event of the forfeiture of this lease for any reason, as hereinabove provided, the said notes are to be returned to Lessees and the said deed and bill of sale to Lessor, and Lessor shall retain all rents paid under this agreement to the date of termination.

The total consideration recited in the deed and bill of sale, including the loan of $ 5,000, amounted to $ 108,558.46. The aforesaid two notes executed by Barran and Winton for this amount provided for the payment of same in equal monthly installments over a 15-year period, the monthly installments amounting to $ 603.21, or $ 7,238.52 per annum. The rental provided for in the lease agreement that was to be credited on said notes was the sum of $ 7,238.52 per annum and was payable in monthly installments of $ 603.21 each. Thus, the monthly payments due under the lease agreement were equal in amount to the payments due on said notes.

When Joe W. Scales made the transaction with Barran and Winton in July 1943, there was no discussion regarding the fixing of a reasonable annual rental for the leasing of the property, and it was not the intent or purpose of the parties to lease the property. A sale was really contemplated. But the lease agreement was executed because the lawyers who prepared the papers explained to Joe W. Scales that the lease gave him authority to remove the purchasers with less difficulty in the case of a default than if he had delivered only a deed direct to the purchasers.

Upon the execution of the various documents in July 1943, the Giles County farm and dairy herd and other property described in the bill of sale were delivered to Barran and Winton, who took possession of same and began making the monthly payments called for in the documents. They made the monthly payments throughout the remainder of 1943 and continued so doing until about 1945, when they began defaulting on the payments. At that time petitioner became concerned and visited the Giles County farm. He learned that Barran and Winton had sold the herd of cattle but had not replaced same. Petitioner made no attempt to reposses the farm but entered into negotiations with Barran and Winton for the purpose of collecting the balance of the purchase price for the farm and the personal property.

These negotiations culminated in a new agreement between Joe W. Scales and Barran and Winton dated April 23, 1946, which, in substance, authorized Barran and Winton to sell the Giles County farm, either at private sale for an amount to be approved by Joe W. Scales or at public auction, and that the proceeds of the sale would first be used to pay Joe W. Scales for the balance owing him on the two promissory notes executed by Barran and Winton in 1943. In the event of a sale of the farm, petitioner had no right to receive from the proceeds of the sale any sums in excess of the unpaid balance due him under the original documents executed in 1943. This agreement dated April 23, 1946, further provided that on July 30, 1946, whether or not the Giles County farm or any part thereof had been sold, Barran and Winton would execute new notes to Joe W. Scales for the "full balance due to" Joe W. Scales under the documents executed in 1943. These notes were to be secured by a mortgage on the Giles County farm and, in addition, on the milk plant of Barran and Winton located in Decatur, Alabama. Upon the execution of the new notes and mortgages, Joe W. Scales would have the Third National Bank in Nashville deliver to Barran and Winton the deed, bill of sale, and two notes placed in escrow at that bank in 1943.

In accordance with the agreement dated April 23, 1946, Barran and Winton attempted to sell the Giles County farm at auction but were unsuccessful. On August 1, 1946, Joe W. Scales and Barran and Winton executed an agreement terminating the escrow arrangement with the Third National Bank in Nashville. All the documents were delivered to an attorney in Pulaski, Tennessee, to be held by him until final papers were executed giving Joe W. Scales a mortgage on the Giles County farm and property of Barran and Winton in Decatur, Alabama, as provided in the second agreement dated April 23, 1946. Before the final papers were executed, additional negotiations resulted in Joe W. Scales' making a new loan in the amount of $ 85,000 to Barran and Winton for financing improvements to their milk plant which was to increase the efficiency of their operation and enable them to repay the balance thereby owed to Joe W. Scales for the Giles County farm, livestock and equipment, and loans.

The unpaid principal and accrued interest due for the Giles County farm and livestock and equipment as of July 30, 1946, amounted to $ 98,832.47. To this amount was added additional sums owing to Joe W. Scales by Barran and Winton, making their total indebtedness to Joe W. Scales $ 103,084.30. In May 1947, Barran and Winton paid Joe W. Scales $ 84.30 and gave him their promissory note for the balance of $ 103,000. Another note was executed by Barran and Winton to Scales in the principal amount of $ 85,000 representing the loan for the improvements to the milk plant in Decatur, Alabama. At the same time a deed was executed dated May 27, 1947, to convey the Giles County farm to Barran and Winton as tenants in common and to reconvey the farm to Scales as trustee for the purpose of securing the payment of the two promissory notes. At the same time Barran and Winton also executed a mortgage on their milk plant at Decatur, Alabama.

From July 1, 1943, to the present time, Barran and Winton have been in complete possession of the Giles County farm.

Petitioner received from Barran and Winton the sum of $ 5,250.03 in 1943 as payments of principal and interest due on the deferred purchase price for the Giles County farm and livestock and equipment. Of this sum, $ 3,016.05 represented principal and $ 2,233.98 represented interest. The entire sum of $ 5,250.03 was reported by petitioner and his wife in their joint income tax return for 1943, together with $ 600 of rent from other property which is not in issue, as "Rent of Farm Lands $ 5,850.03." Petitioners did not report on their 1943 return any part of the purchase price of the Giles County farm and livestock and equipment that was not actually received by them in 1943, nor the fact of sale. In their joint income tax returns filed for the years 1943 and 1947, petitioner and his wife did not elect to report gain from the sale to Barran and Winton of either the real estate or the personal property of the dairy farm on the installment basis nor indicate in any way that there was this sale to Barran and Winton. Since the sale took place in 1943, the entire capital gain realized is taxable in 1943. A check for $ 84.30 dated May 21, 1947, drawn by the White Way Pure Milk Company and payable to Joe W. Scales was reported as interest by petitioners in their joint income tax return for that year. This $ 84.30 was properly reported as interest and was not payment on principal.

The adjusted cost basis of the farm and improvements as of July 6, 1943, was $ 22,605, and as of May 27, 1947, the adjusted cost basis was $ 21,781.24. The real property had been owned by the petitioners for a period of more than 12 months prior to the date of sale. The cost basis for the personal property was agreed to be zero, and of the total sales price of $ 43,558.46, $ 3,318.46 was for property held less than six months and $ 40,240 was long term gain.

In 1947, Scales received a note from Barran and Winton for $ 103,000, which note included interest computed to July 30, 1946, on certain obligations to Scales, the principal one of which was their indebtedness to him for the unpaid balance of the purchase price of the Giles County farm, livestock and equipment. Petitioners reported their income for the year 1947 on the cash receipts and disbursements basis, and did not receive any payment of principal or interest on the $ 103,000 note in the year 1947. Included in the promissory note for $ 103,000 received by Scales from Barran and Winton in 1947 was the amount of $ 3,500 representing feed sales in prior years and a 1944 note for that purpose. The $ 103,000 note also included accrued interest from prior years of $ 4,815.37. The major portion of the note was the indebtedness due for the sale of the dairy farm and the additional security of the mortgage on the milk plant was substitute collateral for the livestock improperly disposed of. Petitioners reported their income for the year 1947 on the cash basis and received no income on account of the interest or feed sales aforesaid by the receipt of the $ 103,000 note in the year 1947.

Corinne Scales inherited from her grandfather, who died on June 20, 1913, a tract of land in Rutherford County, Tennessee, consisting of 98.72 acres. On November 6, 1943, Corinne Scales conveyed this tract of land to Marvin Scales for another tract of land cosisting of about 67 acres and in addition the sum of $ 1,622 in cash. A short while thereafter, Corinne Scales sold the 67-acre tract for $ 8,250, making the total amount received by her for her original tract of 98.72 acres amount to $ 9,872, or $ 100 per acre. As of June 20, 1913, the date Corinne Scales acquired the land, there were white oak timber and valuable red cedar rails on the property but as of November 6, 1943, the date on which petitioner sold the property, the timber and cedar rails had been sold. The fair market value of the 98.72 acres of land as of June 20, 1913, the date of the death of John C. Haley, was $ 8,250, and the sale of the land in 1943 resulted in a long term capital gain of $ 1,622.

Petitioner has omitted the following amounts from his gross income for 1943:

One-half of long-term gain from sale of land			$ 18,697.00
One-half of long-term gain from sale of personal property:
Total sale price personal property		$ 43,558.46
Less: Amount reported	$ 3,016.05
Short-term gain	3,318.46	6,334.51
Long-term gain of sale of land omitted from gross
income		37,223.95
One-half of long-term gain omitted			18,611.97
Short-term gain from sale of personal property			3,318.46
One-half of long-term gain from sale of 98.72 acre tract			811.00
Other items omitted and conceded by petitioner			1,753.94
Total omissions from gross income			$ 43,192.37

Petitioners contend the gross income reported on their 1943 return is $ 170,231.74, while respondent determined it to be $ 83,260.94. Petitioner reports feed sales of $ 79,229.07, of feed which was purchased and not raised. Petitioner did not deduct from his computation to ascertain gross income any amounts representing cost of feed sold. Cost of feed sold must have amounted to at least $ 50,000.

The major deficiencies for 1943 resulted from a confusing series of transactions and complicated documents. Having considered all the facts, we conclude that the deficiency for 1943 was not due to negligence. For the same reason, we find no negligence in the taxable year 1947.

OPINION.

The pleadings have raised several issues with regard to the sale of a dairy farm and dairy cattle for the taxable years 1943 and 1947. Some of these issues are alternative issues depending upon whether the sale took place in 1943 or 1947. We shall first determine that question in order to dispose of the issues that are moot and to present the actual issues before us.

On July 6, 1943, petitioners executed a deed and bill of sale to Barran and Winton to sell a farm, dairy herd, and other personal property and received two promissory notes in the amounts of $ 60,000 for the land and $ 48,558.46 for the personal property plus a $ 5,000 loan. There is no contention by petitioner that these notes were not worth their face value. Petitioner was to be paid in installments, and a lease for 5 years was also executed for the farm, admittedly to facilitate foreclosure in the event Barran and Winton did not maintain their installment payments. All the documents were placed in escrow. The so called lease provided that Barran and Winton would receive credits on their two notes for all amounts paid as rent and if terminated earlier the lessees were to receive personal property equivalent in value for rents paid. In the event of forfeiture by Barran and Winton, the rents would also be forfeited.

Barran and Winton took immediate possession of the property in 1943. The payments were not made in accordance with the agreement and Barran and Winton had sold the herd of cattle. A new agreement dated April 23, 1946, provided that Barran and Winton would sell the dairy farm, and would pay the proceeds to petitioner, but petitioner was not to receive any sums in excess of the balances due under the two 1943 notes. That agreement further provided that Barran and Winton execute new notes for the full balance due petitioner, together with a mortgage on the dairy farm and also a milk plant owned by Barran and Winton. The attempted sale was unsuccessful and the new notes and mortgages were executed in May, 1947.

The parties intended that the sale of the dairy farm took place in July 1943, and the so called lease was in reality a security device. Alexander W. Smith, Jr., Executor, 20 B. T. A. 27; Truman Bowen, 12 T.C. 446">12 T. C. 446. Apparently both petitioner's and respondent's briefs prefer the position that the sale took place in 1943. We agree that it did take place in that year and consequently the incidence of the tax falls within that year.

The following issues now remain to be decided: (1) Can the capital gain from this sale now be reported on the installment method, or was the entire gain taxable in 1943? (2) Was there any capital gain on the exchange of 98.72 acres of land in 1943? (3) Did petitioner omit 25 per cent of the amount reported as gross income bringing into effect the 5-year statute of limitations? (4) Should a 5 per cent negligence penalty be applied to 1943? (5) When the new notes were issued in 1947, did petitioner realize any taxable income from interest or feed sales, and is a negligence penalty applicable? By holding the dairy farm sale took place in 1943, the issues raised on the supposition that the sale took place in 1947 become moot.

Issue 1.

The major issue in this proceeding relates to the method of reporting the capital gain from the sale of the dairy farm and cattle thereon for a total consideration of $ 103,558.46. In 1943 Barran and Winton paid $ 5,250.03 in cash and promissory notes were executed covering the balance. Respondent contends that the capital gain should be reported in full in 1943, while petitioner contends that it may be reported on the installment basis under section 44(b), I. R. C. The applicable statute is quoted in the margin. ¹

On their 1943 income tax returns the petitioner and his wife did not report in any way the sale of the dairy farm, either the real or personal property, nor make any election of reporting this sale on the installment basis. But the 1943 return reported the cash payments of $ 5,250.03 made by Barran and Winton as well as another item of $ 600 for rent as follows: "Rent of Farm Lands $ 5,850.03." The respondent contends that a taxpayer, desiring to report income from a sale of real property and a casual sale of personal property, must make an affirmative election in the return filed for the year of the sale.

Judicial decisions have generally required taxpayers to make an affirmative election in a timely filed income tax return in order to elect to report a sale of property on the installment method under section 44(b), I. R. C. Once an election has been made to report a sale as a completed transaction, in a subsequent year the taxpayer could not recompute his tax liability by changing to the installment method. Pacific Nat'l. Co. v. Welch, 304 U.S. 191">304 U.S. 191. Where a taxpayer fails to file timely tax returns, he cannot use the installment method. Cedar Valley Distillery, Inc., 16 T.C. 870">16 T. C. 870, 882; Sarah Briarly, 29 B. T. A. 256, 258-259.

Where a taxpayer sells property and receives a promissory note for the full purchase price of the property and no election is made on his return to report the gain resulting from the sale on the installment basis as provided in section 44 of the Code, the taxpayer may not later claim the benefit of the installment basis of reporting income. W. T. Thrift, Sr., 15 T. C. 366. In the Thrift case, we said:

* * * Having accepted a demand promissory note from the son for the full purchase price of all 24 lots at the time of the conveyance, the fair market value of the note was includible in the petitioners' gross income for 1946 unless they made an election and qualified under the installment provisions of section 44. As no election to report the gain on the installment basis was made, and the petitioners have not shown that the fair market value of the note was less than its face value, we are of the opinion that the respondent correctly determined that the gain realized from the sale of all 24 lots was properly includible in petitioners' income for 1946.

Nor may the petitioners now claim that they are entitled to the benefits of section 44. The opinion of this Court in Sarah Briarly, 29 B. T. A. 256, is expressive of the established rule, wherein it states that when benefits are sought by taxpayers, meticulous compliance with all the named conditions of the statute is required, and that in the case of section 44, timely and affirmative action is required on the part of those seeking the advantages of reporting upon the installment basis. We feel that it is now too late for the petitioners to claim the benefits of section 44. [Citing authorities].

It seems to us that our decision in W. T. Thrift, Sr., supra, is in point here.

In the instant case the sale in question was reported in the timely filed income tax return for 1943 as follows: "Rent of Farm Lands $ 5,850,03," with no further explanation or information. From this return, the Commissioner was not apprised of any sale whatsoever nor of an election to use the installment method. As indicated in the return, petitioner apparently received professional assistance in its preparation.

Petitioner relies principally on United States v. Eversman, 133 F. 2d 261. The Court there held that though no special ritual had to be followed to report on the installment basis, the circuit court emphasized the fact that a complete disclosure of all relevant facts was made on that return. In the instant case we have no such complete disclosure. We hold that the petitioner cannot now claim the right to report the capital gain from the sale of the dairy farm and cattle on the installment basis.

Issue 2.

In 1943, petitioner's wife Corinne Scales exchanged 98.72 acres of real estate for 67 acres of real estate and the sum of $ 1,622 in cash. Corinne Scales sold the 67 acres of real estate within a short time after she acquired it for $ 8,250. Thus, the total consideration she received for the 98.72 acres of real estate in 1943 was $ 9,872, or $ 100 per acre. The issue here depends upon Corinne Scales' basis for determining gain with respect to the 98.72 acre tract. Respondent determined the basis was $ 8,250, while petitioner contends the basis was $ 9,872.

Corinne Scales inherited the 98.72 acre tract under the will of her grandfather, John C. Haley, who died on June 20, 1913. He left the property to Corinne Scales' mother for life and the remainder to her heirs -- only Corinne Scales. The basis for determining gain depends on the value of this property on June 20, 1913. Petitioner testified that in his opinion the fair market value of the land was $ 80 per acre and the timber and rails $ 40 per acre on June 20, 1913. At the time of the exchange in 1943, there was no longer any timber or cedar rails on the land. They had been sold and removed from the land. The fair market value of the land on June 20, 1913, was not more than $ 8,250. The basis of $ 8,250 determined by respondent is sustained and petitioner realized a long term capital gain of $ 1,622 in 1943.

Issue 3.

The third issue is whether respondent is barred by limitations from asserting deficiencies and penalties for the year 1943 or whether section 275(c), I. R. C., is applicable. Section 275(c) of the Internal Revenue Code provides as follows:

* * * If the taxpayer omits from gross income an amount properly includable therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment at any time within 5 years after the return was filed.

The respondent has the burden of proving that the 5-year limitations period applies, C. A. Reis, 1 T. C. 9.

We have determined from the evidence that the following amounts have been omitted from petitioner's gross income for 1943:

One-half of long-term gain from sale of land	$ 18,697.00
One-half of long-term gain from sale of personal property	2 18,611.97
Short-term gain from sale of personal property	3,318.46
One-half of long-term gain from exchange of 98.72 acre tract	811.00
Other items omitted and conceded by petitioner	1,753.94
Total omissions from gross income	$ 43,192.37

Petitioner contends that the gross income reported on their 1943 return is $ 170,231.74, while respondent determined $ 83,260.94. Even under petitioner's computation, more than 25 per cent of $ 170,231.74 ($ 42,557.94) has been omitted and section 275(c) is applicable.

Moreover, even if it would be determined that our findings on any of the smaller issues were not correct, the omission only of the capital gain from the sale of the dairy farm constitutes at least 25 per cent of the gross income reported on the 1943 return. The most important difference between the methods of computation by petitioner and respondent concerns the sale of feed. Petitioner reported gross income of feed sales of $ 79,229.07, which is the total price without deducting any amount for cost of feed sold. Petitioner listed as an expense deduction on his return "Feed $ 107,600.05." Respondent determined that cost of feed sold is $ 79,229.07, having shown that the feed was purchased and not raised.

In figuring business income involving the sale of goods, it is axiomatic that gross income is gross sales less cost of goods sold. Lela Sullenger, 1076">11 T. C. 1076, Regulations 111, section 29.22 (a)-5. The feed sold must have cost something. We have found that the feed sold must have cost at least $ 50,000. The following computation shows petitioner's gross income for 1943 after an adjustment is made for cost of feed sold:

Petitioner's computation	$ 170,231.74
Less allowance for cost of feed sold	50,000.00
Total income allegedly reported	120,231.74
25 per cent of total	30,057.94

We have determined heretofore that petitioner omitted $ 43,192.37 gross income from his return for 1943 and have given figures to substantiate this total. Therefore, the 5-year statute of limitations of section 275(c) is applicable and we hold that respondent is not barred by limitations for the year 1943.

Issue 4.

Respondent asserted a 5 per cent negligence penalty for the year 1943 under section 293(a), I. R. C. The major issue in this case deals with the legal interpretation of a series of transactions and several documents pertaining to the sale of a dairy farm. Petitioner reported all the cash received from the sale in 1943 on his return, albeit in a confusing manner and a mistaken conception of his legal rights. Confusion and legal mistake under the circumstances here shown do not constitute negligence. No citation of authorities seems necessary for that proposition. The other adjustments are relatively small and minor. Having considered all the facts, we hold that the deficiency for 1943 was not due to negligence and respondent erred in asserting a negligence penalty.

Issue 5.

There are several issues still remaining for the year 1947: Did petitioner receive income of $ 4,815.37 from interest and $ 3,500 from a feed bill by the receipt of a note for $ 103,000, and was the 1947 deficiency due to negligence giving rise to a 5 per cent penalty under section 293(a), I. R. C. Though these issues have not been rendered moot by our holdings so far and have not been conceded by respondent, respondent has not argued these questions in his brief.

In 1947, Barran and Winton gave a note of $ 103,000 to petitioner to consolidate all their obligations into one evidence of indebtedness and to extend the maturity date. The new note included accrued interest from prior years and a 1944 note for feed sales. The security of the note was the security originally given for the sale price of the dairy farm. The additional security of a mortgage on a milk plant was substitution collateral for the livestock which had been sold. Petitioner was on the cash basis. There was no determination that the consolidated note given petitioner for the original debts for interest and feed sales was the equivalent of cash or was given or accepted as payment. Mellinger v. United States (Ct. Cl.), 21 F. Supp. 964">21 F. Supp. 964. We hold, therefore, that petitioner did not receive income in 1947 in the amounts of $ 3,500 for the feed bill and $ 4,815.37 for interest. The facts show that they remain yet to be paid .

For the year 1947 there has been no showing of any additional income other than that already agreed to by petitioner. Having considered all the facts we hold there is no basis for the assertion of a negligence penalty for 1947 under section 293(a), I. R. C.

Decisions will be entered under Rule 50.

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Footnotes

• 1. SEC. 44. INSTALLMENT BASIS.

  (b) Sales of Realty and Casual Sales of Personalty. -- In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding $ 1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 30 per centum of the selling price (or, in case the sale or other disposition was in a taxable year beginning prior to January 1, 1934, the percentage of the selling price prescribed in the law applicable to such year), the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this section. As used in this section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.↩

• 2. ↩

  Total sale price personal property		$ 43,558.46
  Less: Amount reported	$ 3,016.05
  Short term gain	3,318.46	6,334.51
  Long term gain of sale of land omitted from gross income		37,223.95
  One-half of long term gain omitted		18,611.97