                         T.C. Memo. 1998-277



                       UNITED STATES TAX COURT



              JOHANNES M. SCHALEKAMP, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17980-96.                  Filed July 29, 1998.



          P filed his 1989 Form 1040NR on May 29, 1990.
     The notice of deficiency was issued on May 22, 1996.
     Held: the deficiencies determined are barred by the
     expiration of the period of limitations. Sec. 6501(a),
     I.R.C.



     William M. Sharp, Sr., William T. Harrison III, and Vernon

Jean Owens, for petitioner.

     Howard P. Levine for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:    By notice of deficiency dated May 22, 1996,

respondent determined a $4,834,273 deficiency in petitioner's
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1989 Federal income tax, a $178,587 accuracy-related penalty, and

a $2,956,005 fraud penalty.

     Respondent has conceded the fraud penalty.   The issues

remaining for decision are:   (1) Whether the period of

limitations on assessment and collection of petitioner’s income

tax liability for 1989 expired before respondent mailed the

statutory notice of deficiency; (2) whether, under sections

871(b)(1) and 897(a), petitioner was required to report amounts

received in 1989 from his disposition of installment notes that

he received in 1987 and 1988, and if so, in what amount;

(3) whether respondent's determination of a deficiency is in part

arbitrary within the meaning of Helvering v. Taylor, 293 U.S. 507

(1935); and (4) whether petitioner is liable for a penalty under

section 6662(a) on account of negligence or disregard of rules or

regulations.   Unless indicated otherwise, all section references

are to the Internal Revenue Code in effect for the year in issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

     Because we find for petitioner with respect to the period of

limitations, petitioner has successfully established an

affirmative defense to respondent’s determinations of a

deficiency and penalties, and we need not further address the

adjustments giving rise to respondent’s determination of a

deficiency or the accuracy-related penalty.
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                         FINDINGS OF FACT

     Some facts have been stipulated and are so found.    The

stipulation of facts and attached exhibits are incorporated

herein by this reference.

Background

     Petitioner resided in Belgium at the time the petition was

filed.

     Petitioner was born in The Netherlands in 1932.    He is not a

U.S. citizen.   Petitioner came to the United States in 1987 and

resided here during 1987 and 1988.     In 1989, petitioner did not

reside in the United States.

Petitioner’s Returns

     For both 1987 and 1988, petitioner made returns of Federal

income tax on Form 1040, “U.S. Individual Income Tax Return” (the

1987 and 1988 returns, respectively).    For 1989, petitioner made

a return of Federal income tax on Form 1040NR, “U.S. Nonresident

Alien Income Tax Return” (the 1989 return).    Petitioner filed the

1989 return on May 29, 1990.

Notice of Deficiency

     Respondent’s notice of deficiency (the notice) is dated

May 22, 1996.

Ampel Notes; Floridama Note

     Petitioner began investing in real property in the United

States in 1968.   Between 1976 and 1984, he acquired at least
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12 parcels of unimproved real property located in Hernando,

Citrus, Volusia, and Marion Counties, Florida (the 12 parcels).

Ampel Corporation, Ltd. (Ampel), is a British Virgin Islands

corporation.   In December 1987, Ampel purchased the 12 parcels

from petitioner.    Ampel agreed to pay a total of $21 million for

the 12 parcels.    Petitioner received no cash from Ampel at the

time of sale, but he received 12 notes from Ampel, in various

amounts, one for each property, evidencing Ampel’s obligation to

pay the $21 million purchase price in installments, with interest

(the 1987 Ampel notes).    The 1987 Ampel notes are similar (at

least 11 are; one, inexplicably, is not in evidence), all calling

for both interest and principal payments beginning in January

1989.   A mortgage secures each note.   Petitioner reported the

sale of the 12 parcels on the 1987 return.    He reported that sale

under the installment method of accounting.    He reported a

selling price of $21 million, an adjusted basis of $6,751,500,

commissions and other expenses of sale of $189,365, and no

payment in 1987.

     Ampel did not make the 1989 payments to petitioner called

for in the 1987 Ampel notes.

     Floridama Finance, Ltd. (Floridama), is a British Virgin

Islands corporation formed on February 24, 1989.    On March 2,

1989, Floridama purchased the 1987 Ampel notes from petitioner.

Floridama agreed to pay a total of $19,501,158.56 for the 1987
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Ampel notes, with $201,158.56 to be paid immediately, in cash,

and the balance ($19.3 million) due on March 2, 1999.

Floridama’s obligation to pay $19.3 million on March 2, 1999, was

evidenced by its interest-bearing note (the Floridama note).

Interest was to be paid on the Floridama note at an annual rate

of 10.88 percent.   Pursuant to a stock pledge agreement,

petitioner held Floridama stock as security for the Floridama

note.   On March 2, 1989, the accrued interest on the 1987 Ampel

notes was $2,449,974.   Petitioner’s adjusted basis in the 1987

Ampel notes at their sale to Floridama was $6,940,865

     Sometime in 1991, petitioner exchanged the Floridama note

for two notes from Ampel in the total amount of $25.5 million

(the 1991 Ampel notes).   Petitioner exchanged the Floridama note

for the 1991 Ampel notes in order to facilitate Ampel’s

redemption of the 1987 Ampel notes.      He did so because Ampel had

failed to pay interest to Floridama on the 1987 Ampel notes, and

Floridama had threatened to foreclose on the related mortgages,

which, petitioner believed, would have limited the amount that,

eventually, he would have been able to obtain from Floridama with

respect to the Floridama note.    As of the time of trial,

petitioner still held the 1991 Ampel notes, on which he had, as

of then, received no payment.

Holland Spring Notes

     Holland Spring, Inc. (Holland Spring) is a Florida

corporation.   In December 1987, Holland Spring purchased from
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petitioner (1) 1,000 shares of stock in The Masa Land Corp. (Masa

Land), a Florida corporation, and (2) a parcel of real property

located in Collier County, Florida (the Marco Beach lot).

Holland Spring agreed to pay a total of $4 million for the Masa

Land shares, with $200,000 to be paid immediately, in cash, and

the balance ($3.8 million) evidenced by a note and due in two

annual installments, in December 1989 and 1990, respectively.

Holland Spring agreed to pay $2,350,000 for the Marco Beach lot,

that amount evidenced by a note due in June 1990.   Petitioner

reported both sales on the 1987 return using the installment

method of accounting.

     In 1988, Holland Spring purchased from petitioner

(1) 100 shares of Samajo Investment Corp. (Samajo), a Florida

corporation, (2) 1,000 shares of Daytonapa Corp. (Daytonapa), a

Florida corporation, and (3) a parcel of real property located in

Spring Hill, Florida (the Spring Hill lot).   Holland Spring

agreed to pay a total of $840,000 for the Samajo shares, with

$84,000 evidenced by a note due in 90 days and the balance

($756,000) evidenced by a second note due in 18 months.   Holland

Spring agreed to pay a total of $1.7 million for the Daytonapa

shares, with $170,000 to be paid immediately, in cash, and the

balance ($1,530,000) evidenced by a note and due in 6 years.

Holland Spring agreed to pay a total of $195,000 for the Spring

Hill lot, with $50,000 to be paid immediately, in cash, and the

balance ($145,000) evidenced by a note due in the future.
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Petitioner reported all three sales on the 1988 return using the

installment method of accounting.

      In 1989, petitioner sold the notes referred to in the

preceding two paragraphs (the Holland Spring notes) to Herland

Finance, Ltd. (Herland), receiving “approximately” $2.5 million

in cash.   At the time of that sale, petitioner’s total basis in

the Holland Spring notes was $2,724,451.

                              OPINION

I.   Introduction

      Section 1 of the Code imposes an income tax on the income of

every individual who is a citizen or resident of the United

States and, to the extent provided in sections 871(b) or 877(b),

on the income of a nonresident alien.   In pertinent part, section

897(a) provides that gain or loss of a nonresident alien

individual from the disposition of a U.S. real property interest

shall be taken into account under section 871(b)(1).   The parties

agree that, for 1987 and 1988, petitioner was a resident of the

United States and that, for 1989, he was a nonresident-alien

individual.   Respondent determined a deficiency in petitioner’s

1989 Federal income tax on the basis that petitioner had failed

to report total capital gain income of $17,248,184 arising from

the disposition in 1989 of the 1987 Ampel notes to Floridama and

Holland Spring notes to Herland.    Respondent determined, at least

with respect to the disposition of the 1987 Ampel notes, that

petitioner’s gain arose “from the sale of United States real
                               - 8 -


property”.   Petitioner assigned error to that determination and

argues on brief that, for various reasons, it is incorrect.     We

need not address the questions raised by petitioner with respect

to section 897, however, because we find that petitioner did not

omit from gross income a sufficient amount to trigger the 6-year

limitations period found in section 6501(e)(1).

II.   Limitations on Assessment and Collection

      Section 6501(a) provides a general rule limiting to 3 years

after a return is filed the time in which a tax may be assessed

or a proceeding in court without assessment for collection begun.

If a taxpayer omits from gross income an amount properly

includable in gross income that is in excess of 25 percent of the

amount of gross income stated in the return, the period for

assessment or a proceeding in court without assessment for

collection is extended to 6 years.     Sec. 6501(e)(1).

      A claim that the period for assessing the tax has expired is

an affirmative defense, and the party raising it must plead it

and carry the burden of proving its applicability.     Rules 39,

142(a).   Petitioner has satisfied the pleading requirement.

Moreover, the parties have stipulated that the 1989 return was

filed with respondent’s Philadelphia Service Center on May 29,

1990, and that the notice of deficiency in this case is dated

May 22, 1996.   Petitioner has, thus, made a prima facie case that

the 3-year period of section 6501(a) has expired, and the burden

of going forward with the evidence to show some applicable
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extension shifts to respondent.      See Mecom v. Commissioner,

101 T.C. 374, 382-383 (1993), affd. without published opinion,

40 F.3d 385 (5th Cir. 1994); Amesbury Apartments, Ltd. v.

Commissioner, 95 T.C. 227, 240-241 (1990).     Respondent avers that

petitioner omitted from gross income an amount properly

includable therein in excess of 25 percent of the amount of gross

income stated on the return and, thus, respondent relies on the

provisions of section 6501(e)(1).     Because we find that

petitioner omitted no gross income from the 1989 return, section

6501(e)(1) is of no avail to respondent.

III.    Omission From Gross Income

       A.   Introduction

       Petitioner reported gross income of $385,150 on the 1989

return.     Twenty-five percent of $385,150 equals $96,288.    Thus,

respondent must show that petitioner omitted gross income in

excess of $96,288.     Respondent claims that petitioner was

required to report, but failed to report, two items of gross

income, viz, petitioner’s gains from the dispositions of (1) the

1987 Ampel notes and (2) the Holland Spring notes.     In the

notice, respondent set forth adjustments increasing gross income

by a total of $17,248,184 on account of those two claimed

omissions, viz, $14,059,135 on account of the 1987 Ampel notes

and $3,189,049 on account of the Holland Spring notes.       On brief,

respondent lowers his claim of unreported gross income with

respect to the 1987 Ampel notes to $10,522,422, for total
                              - 10 -


unreported gross income (we calculate) of $13,711,471.

Petitioner acknowledges that he did not report gain from the

disposition of either the 1987 Ampel notes or the Holland Spring

notes on the 1989 return, but petitioner argues that, even if he

were required to report those gains (which petitioner says he was

not), the omitted gains do not exceed $96,288.

     Section 61(a)(3) includes in gross income:   “Gains derived

from dealings in property”.   Section 1001(a) specifies that gain

from the sale or other disposition of property is the excess of

the amount realized therefrom over the taxpayer’s adjusted basis

in the property.   Section 1001(b) provides, as a general rule,

that the amount realized from the sale or other disposition of

property is the sum of any money received plus the fair market

value of the property (other than money) received.   Section 1011

specifies the taxpayer’s adjusted basis in property.    Section

453B deals specifically with gain or loss on the sale or other

disposition of an installment obligation.   The parties are in

agreement that petitioner’s adjusted bases in the 1987 Ampel

notes and the Holland Spring notes were $6,940,865 and

$2,724,451, respectively.   Their disagreement is with respect

to the amount realized on each sale.

     The parties are in further agreement that, in determining

the amount realized on each sale, some portion of the

consideration received by petitioner is allocable to accrued

interest and is not part of the amount realized on each sale.
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Respondent does not claim that any amounts allocable to accrued

interest are items of omitted gross income.

     B.   Amount Realized on Disposition of 1987 Ampel Notes

     Respondent argues that petitioner received both cash and

property on the disposition of the 1987 Ampel notes.    The parties

agree that petitioner received cash of $201,158.86.    Respondent

argues that the fair market value of the Floridama note on

March 2, 1989, was not less than its face amount, viz,

$19.3 million.   Petitioner argues that it was $7 million.    We

find that the fair market value of the Floridama note on March 2,

1989, was $7 million.

     Fair market value is "the price at which the property would

change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or sell and both having

reasonable knowledge of relevant facts."   Sec. 1.170A-1(c)(2),

Income Tax Regs; see McShain v. Commissioner, 71 T.C. 998, 1004

(1979).   Determining the fair market value of a long-term

installment obligation is a question of fact.    Riss v.

Commissioner, 368 F.2d 965, 970-971 (10th Cir. 1966), affg.

T.C. Memo. 1965-198.

     Neither party offered expert testimony as to the value of

the Floridama note.    Petitioner testified that the “cash value”

of the Floridama note--the value a willing buyer would pay a

willing seller--of the Floridama note was $7 million.      Petitioner

was a credible witness, knowledgeable about real estate in
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Florida.   He testified that, if he could have sold the 12 parcels

in 1987 for $10 million in cash, he would have done so.    He

testified that he viewed the $21 million, no downpayment price

agreed to by Ampel as a “speculative price”.    On March 2, 1989,

when petitioner sold the 1987 Ampel notes to Floridama, Ampel was

in default on those notes.    Adding the unpaid, accrued interest

to the $21 million principal amount of the 1987 Ampel notes

results in an unpaid, total obligation of almost $23.5 million.

The Floridama note was in the principal amount of $19.3 million

and Floridama paid petitioner cash of $201,159.    We do not

believe that the 1987 Ampel notes were worth their face amount,

nor do we believe that the Floridama note was worth its face

amount.    The 1987 Ampel notes were eventually exchanged by

Floridama to Ampel for the Floridama note (received by Ampel from

petitioner), and petitioner ended up with the 1991 Ampel notes,

which, as of 1997, had not been paid.    Relying principally on

petitioner’s testimony, we find, as stated, that the fair market

value of the Floridama note, as of March 2, 1989, was $7 million.

     Making the necessary allocations to interest, petitioner

calculates that the amount realized on disposition of the 1987

Ampel notes was $6,448,806, which, given petitioner’s adjusted

basis in those notes of $6,940,895, means that petitioner

realized a loss of $492,089, on the disposition of the 1987 Ampel

notes, and we so find.
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C.    Disposition of the Holland Spring Notes

       In 1989, petitioner sold the Holland Spring notes to

Herland.     At the time of that sale, petitioner’s adjusted basis

in the notes was $2,724,451.      Petitioner’s unreported installment

gain on the notes was $3,189,049, which leads us to believe that,

as of the time of sale, the total unpaid principal amount of the

Holland Spring notes was $5,913,500.       Petitioner testified that

he sold the Holland Spring notes to Herland for approximately

$2.5 million.       He further testified that he did so because he had

never been paid any of the interest or principal due on any of

the Holland Spring notes and he needed cash.      Petitioner was

credible, and respondent has introduced no evidence to impeach

petitioner’s testimony.      We find that petitioner received

approximately $2.5 million on the sale of the Holland Spring

notes to Herland.      Given petitioner’s adjusted basis in the notes

of $2,724,451, we find that petitioner did not realize a gain on

the disposition of the Holland Spring notes.

       D.   Conclusion

       Petitioner realized no gain on the disposition of either the

1987 Ampel notes or the Holland Spring notes.      Accordingly,

petitioner omitted no gross income from the 1989 return.

IV.    Conclusion

       Petitioner has not omitted gross income in excess of

25 percent of the gross income stated on the 1989 return.
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Therefore, assessment or collection of the tax here in issue is

barred by the section 6501(a) limitation on assessment and

collection.


                                        Decision will be entered

                                   for petitioner.
