Volume 100 — Tax Court Reports

Petitioner established trusts which provided that the net income less 15 percent be paid to the income beneficiaries for 10 years and 1… Held: in view of the evidence that the gas reserves would be exhausted or reduced to a de minimis level at or prior to the expiration of the term of the trusts, the use of the percentage factor set forth in Table B, sec. 25.2512-5(f), Gift Tax Regs., would be unrealistic and unreasonable with the result that the value of the gift to the…

P received a distribution from a foreign subsidiary which constituted an ordinary income dividend under sec. 1248, I.R.C., to the extent of the… Held: that, even though all the foreign subsidiary's accumulated profits were distributed as a dividend, all foreign taxes paid by the subsidiary in prior years cannot be aggregated and credited under sec. 902(a)(1), I.R.C.Held, further, the same principles for year-by-year sourcing of a dividend to accumulated profits under sec.…

These consolidated cases involve, among other things, petitioner Albert J. Huddleston's personal liability as a fiduciary under sec. 6901, I.R.C. 1954, as… Held: Petitioner Albert J. Huddleston is estopped by the doctrine of judicial estoppel from asserting that he was not a fiduciary of his deceased wife's estate and from asserting that the Federal estate tax deficiency of his deceased wife's estate and the fraud addition to tax were not established in docket No. 165-88.

Decedent's estate paid $ 425,000 to decedent's stepsons in settlement of a lawsuit brought by the stepsons to enforce the terms of an alleged agreement… Held: decedent's estate may not deduct as a claim against the estate under sec. 2053(a)(3) the $ 425,000 paid to decedent's stepsons because the stepsons' underlying claim was not supported by consideration and because the amount paid with regard to this claim constituted a payment in the nature of the stepsons' inheritance.

During 1986, petitioners donated two blimps to an organization described in sec. 170(c)(2) and for income tax purposes claimed a charitable contribution deduction of $ 60,000, the value… Held: the requirement in the regulations of a separate qualified appraisal report is directory and not procedural or mandatory. Held, further, petitioners have substantially complied with sec. 1.170A-13 and are entitled to the claimed deduction. Taylor v. Commissioner, 67 T.C. 1071 (1977).

Under the terms of the decedent's (D's) will, the residue of his estate goes to an existing inter vivos trust upon his death, which trust at that time is to be divided into two trusts, the Family Trust and the Memorial Trust. Neither the will nor the trust agreement provides for the Memorial Trust to qualify for a marital deduction. Under the terms of the trust agreement and the will, as written, the Memorial Trust admittedly does not qualify for a marital deduction. After D's death, the trustees of the Memorial Trust, in an effort to qualify a specific portion of the Memorial Trust for a marital deduction as Qualified Terminable Interest Property (QTIP), attempted to disclaim certain powers granted to them by the trust instrument. Also to try to qualify a specific portion of the Memorial Trust for a marital deduction as QTIP property, the medical beneficiaries and the guardians of the educational beneficiaries of that trust attempted to disclaim certain benefits granted to them under the trust. Respondent (R) determined that the disclaimers were not valid and denied the marital deduction. Held: There is no ambiguity in the language of the will or the trust instrument, and the trustees of the Memorial Trust cannot disclaim part of the powers given to them by D in the trust instrument and thereby change the terms of the trust in order to try to qualify a portion of the trust corpus for a marital deduction. Held further: The medical disclaimers were invalid under State law and hence invalid for Federal estate tax purposes. Held further: Sec. 2518(c)(3), I.R.C., is inapplicable to the invalid medical disclaimers. Held further: Since the trustees could not disclaim their powers under the trust instrument and since the medical disclaimers were invalid, D's surviving spouse did not have a qualifying income interest for life in any specific portion of the Memorial Trust, and D's estate is not entitled to a marital deduction under sec. 2056(b)(7), I.R.C.

In May 1985, after agreeing to merge with S, W paid its president, P (in settlement of a contractual dispute), an employment severance… Held: P's employment agreement with W was not entered into, renewed, or amended in any significant relevant aspect after June 14, 1984, the effective date with respect to the imposition of tax under sec. 4999, I.R.C. Accordingly, the $ 3,475,000 employment severance payment does not constitute an excess parachute payment within the scope…

Ps, H and W, are entitled to an award of legal costs if they meet the $ 2 million net worth limitation on such awards incorporated in sec. 7430(c)(4)(A)(iii), I.R.C. Each individual P has a net worth under $ 2 million; their combined net worth is in excess of $ 2 million. Ps filed a joint return, received a joint deficiency notice, and filed a joint petition to this Court. Held, 28 U.S.C. sec. 2412(d)(2)(B), incorporated by reference into sec. 7430, defines a prevailing party to be "an individual whose net worth did not exceed $ 2,000,000". Since neither individual P has net worth exceeding $ 2 million, each is a "prevailing party" entitled to legal costs, all other conditions of sec. 7430 concededly having been met.

Ps sustained personal injury when their home was destroyed by a gas explosion and fire caused by U's negligence. Held: the punitive damages received by Ps are excludable from gross income under sec. 104(a)(2), I.R.C., as damages received * * * on account of personal injuries.

Petitioner, a charitable trust owning farmland, entered into three sharecrop leases. The sharecrop leases provided for rent to be determined on a fixed percentage of the crops harvested. Held: the amount of rent is not determined, in whole or in part, on the income or profits of the sharecroppers; thus the rents are excluded from UBIT under sec. 512(b) (3) (B) (ii), I.R.C.

Ps were awarded damages of $ 995,000 in a Michigan wrongful death action and D appealed. Held: Sec. 104(a)(2), I.R.C., excludes from gross income damages received * * * on account of personal injuries. Statutorily imposed interest on damages is not included within the exclusionary terms of sec. 104(a)(2). Ps may not exclude the portion of the payment representing interest.

In a ruling letter dated March 31, 1969, respondent ruled that petitioner was exempt from Federal income tax under sec. 501(c)(3), I.R.C. 1954. Held: The Fifth Amendment's due process clause does not require respondent to initiate judicial review before revoking petitioner's favorable ruling letter.

Taxpayer-transferor transferred to petitioner-transferee property valued, at the times of the respective transfers, at $ 263,000. Held: Respondent need not demonstrate that transferor was insolvent at the time of, or immediately after, the transfers at issue, unless such showing is required by applicable State law. Held, further, respondent has demonstrated that, under applicable State law, petitioner would be liable as a transferee.

Held: On the facts of this case, petitioners' remittance accompanying a Form 4868 for 1981 is deemed to be a deposit, not a payment of tax. Held: On the facts of this case, petitioners' remittance accompanying a Form 4868 for 1981 is deemed to be a deposit, not a payment of tax.

Decedent (D) executed a power of attorney appointing his son (S) attorney-in-fact and granting S the authority to make gifts on D's behalf. Held: D maintained dominion and control over the checks until they were paid by the drawee bank on Jan. 2, 1986, notwithstanding D's express ratification of the lawful acts of his attorney-in-fact.

In the instant declaratory judgment action under sec. 7476, I.R.C., H seeks review of R's proposed determination that a profit sharing plan sponsored by H experienced a partial termination during… Held: Such discharges did not cause a partial termination of the plan under sec. 411(d)(3), I.R.C., when the discharges are considered in light of all facts and circumstances.

In previous opinions it was determined that each petitioner was personally liable for unpaid estate tax to the extent of the value, at the time of decedent's death, of each… Held: Each petitioner is liable for interest under Federal law on the amount of his personal liability for unpaid estate tax from the due date of the transferor's estate tax return; and (2) the limitation imposed by sec. 6324(a)(2) does not apply to petitioners' respective liabilities for such interest.

In Smith v. Commissioner, 91 T.C. 733 (1988), the synthetic fuel activities of petitioners were held to lack economic substance, and deductions for license fees, interest… Held: the deductions claimed by petitioners in subsequent years are denied. Held, further: Smith v. Commissioner, 937 F.2d 1089 (6th Cir. 1991), revg. 91 T.C. 733 (1988), is not followed. Karr v. Commissioner, 924 F.2d 1018 (11th Cir. 1991), affg. Smith v. Commissioner, 91 T.C. 733 (1988), is followed.

R determined that P did not qualify as a DISC and was required to pay income tax on its commission income. Held: Sec. 1.993-6(e)(1), Income Tax Regs., to the extent that it requires a DISC to use its related supplier's method of accounting in computing qualified export receipts and gross receipts, is invalid.

P, an experienced attorney, and R executed a closing agreement. They now dispute its interpretation. Held: The closing agreement is clear and unambiguous and supports R's position. Held: The closing agreement is clear and unambiguous and supports R's position. Held further: Even if the disputed terms of the closing agreement are deemed ambiguous, ordinary principles of contract law require that we adopt R's interpretation.

On June 15, 1984, after agreeing to merge with A, J executed severance payment agreements with several of its senior executives,… Held: The additional compensation and/or bonuses received by each H-P were contingent on a change in control under sec. 280G(b)(2)(A)(i), I.R.C., and constituted excess parachute payments within the purview of secs. 280G and 4999, I.R.C. Held, further, Except as determined by R, none of the additional compensation and/or bonuses received…

A participating partner in a TEFRA partnership proceeding filed a motion to dismiss for lack of jurisdiction because the petition that was filed during the 90-day period of sec. 6226(a), I.R.C., was… Held: The principle of implied ratification may be applied in a TEFRA proceeding. Held, further, the partners in this proceeding, including the TMP, ratified the petition filed by the partner who was other than the TMP.

Respondent moved to dismiss for lack of jurisdiction as to partnership items which had previously been disposed of in an administrative proceeding. Held: respondent's motion is granted. Petitioner's objections are without merit. In particular, a notice of computational adjustment is not a precondition to the issuance of a notice of deficiency.

At the time the notice of deficiency was mailed, neither P nor her spouse had filed any Federal income tax returns for 1988. Held: Because the year 1987 is not before the Court, we have no jurisdiction to determine whether P and her spouse overpaid their 1987 taxes. 2. P is not entitled to a refund for the overpayment in 1988. See secs. 6512(b)(3)(B), 6511(b)(2)(B), I.R.C. 3.

P, an integrated producer of front-end oil, sold crude oil after Executive Order, No. 12,287, 3 C.F.R. 124 (1982), fully decontrolled crude oil and refined petroleum products. Held: The Executive Order did not directly affect front-end oil as to integrated producers. Held, further, the front-end oil credit was similarly not terminated. Held, further, after decontrol (absent recertification) there is no tertiary incentive revenue.

In Geisinger Health Plan v. Commissioner, 985 F.2d 1210 (3d Cir. 1993), the Court of Appeals remanded this case for a determination of whether P qualifies for exempt status under sec. 501(c)(3),… Held: P has not proven that its activities would not be an unrelated trade or business if conducted by the exempt organization to which it is related. Therefore P is not entitled to exempt status.

H and W were married and resided in Texas, a community property State. In 1980, H and W purchased a renewable term life insurance policy on H's life. In 1983, W died testate. In her will, W left H certain property interests for which H, as executor of W's estate, elected QTIP treatment. Four months after W's death, H remarried and executed a purported last will and testament, leaving his entire estate to his second wife and naming her executrix of his estate. In 1986, H died. Pursuant to agreement settling the will contest that followed H's death, the Midland County Court denied probate of H's will and declared that H died intestate. P, as named beneficiary of the policy purchased by H and W, received the entire death benefit. P excluded from the gross estate of H one-half of the term life insurance death benefit paid to P and the property interests that had passed from W, on her death, to H for which H, as executor of her estate, had elected QTIP treatment. P filed H's estate tax return about 4 months after the due date, including the maximum allowable extension of time for filing. R determined deficiencies in tax based on P's exclusion of one-half of the term life insurance death benefit paid to P and the property interests that had passed from W, on her death, to H. R also determined an addition to tax for late filing. Held, H received a qualified income interest for life in the property interests that passed from W to H for which H had elected QTIP treatment and for which a marital deduction had been allowed in determining W's taxable estate. Therefore, P was not entitled to exclude these interests from H's gross estate. Held, further, UnderTexas community property law, the estate of W had no legal interest in the term life insurance death benefit paid to P. P therefore was not entitled to exclude any part of the term life insurance death benefit from H's gross estate. Held, further, P's failure to file a timely estate tax return was not due to reasonable cause.

Decedent owned 511,160 shares of Realtron stock. Held: The marital deduction must be reduced by the deduction allowed under sec. 2057, I.R.C. in order to prevent a double deduction of the value of the shares.

Sec. 1253, I.R.C., allows a transferee of a trademark to amortize its cost if the transferor retains any significant power, right, or continuing interest in the subject matter of… Held: The 5-year right retained by F to disapprove assignment of the trademarks is not a right contained within the nonexclusive list of significant rights in sec. 1253(b)(2), I.R.C., nor has it been proven to be an otherwise significant right in the context of the particular facts in this case.

This case is before the Court on P's motion for litigation costs under sec. 7430, I.R.C. P owned five office building complexes during the years at issue. He claimed $ 1,452,854 in deductions in 1978 and $ 4,874,239 in 1979. At R's request, P timely signed Forms 872-A to extend the time to assess tax for his 1978 and 1979 returns. Other than asking P to sign the Forms 872-A, R did not contact P or audit his 1978 or 1979 returns during the almost 3 years after they were filed, or during the 3 years after P signed the Forms 872-A. Before asking P to sign the Forms 872-A, R had decided not to contact or audit P, and had decided (but not disclosed to P) to let the statute of limitations bar assessment of tax for 1978 and 1979 if P did not sign the Forms 872-A. P terminated the Forms 872-A 3 years after signing them. R then issued a notice of deficiency denying all of P's deductions in excess of $ 9,000 because the time to assess tax was about to expire. Before R issued the notice of deficiency, it was reviewed by an attorney in R's District Counsel office. R concedes that the position of the United States includes R's position in the notice of deficiency. The attorney was R's counsel in a case involving P's tax years immediately preceding the years at issue here. R's counsel's work on that case caused him to become familiar with P's business and returns for the years at issue here. This case was settled without trial. R conceded that P had no deficiency. P moved for an award of litigation costs under sec. 7430. R concedes that P substantially prevailed. P had substantial negative net worth when the petition was filed due primarily to the slump in the Houston real estate market in 1986 and his indebtedness attributable to his buildings. Held, R's denial of all of P's deductions in excess of $ 9,000 was not substantially justified because it did not have a basis in both fact and law. Pierce v. Underwood, 487 U.S. 552 (1988). The fact that R's position is presumed correct is not a basis in both fact and law for R's position where respondent had no information and made no attempt to obtain information about the case before adopting the position. Held, further, P's motion for litigation costs is granted in the amount stated below.

At the time set for trial, there was no appearance by or on behalf of P. R moved that this case be dismissed on the basis that P is a fugitive from justice, and argues that we should decline to exercise jurisdiction to redetermine the deficiency and additions to tax determined by R. Held: P's fugitive status is not a basis for dismissal on jurisdictional grounds since P's petition was timely filed in accordance with the applicable statutes and Rules. Held further: P's deemed admissions pursuant to Rule 90(c) support a decision in R's favor on all issues.

1. A public utility gas company was authorized by the Public Service Commission to use a cost of gas adjustment (CGA) to compute the tariff rates charged… Held: the utility may not treat a future reduction in rates due to the net overrecoveries of 1986 as refunds deductible that year as ordinary and necessary expenses. Such adjustment in tariff rates merely reduced the amount of its taxable income for the following year. It cannot serve as the basis for a deduction at all.

Ps seek summary judgment that R is barred by the doctrine of res judicata from asserting transferee liability against Ps by virtue of a State court quiet title judgment. Held: Because Ps failed to comply with the service and pleading requirements of 28 U.S.C. sec. 2410(b) in a quiet title action brought in a State court against the United States, the United States did not waive its sovereign immunity, and the State court had no jurisdiction over the United States.

P-H received a lump-sum distribution from a qualified pension plan in 1987. Pursuant to a Louisiana judgment partitioning community property of P-H and his former wife rendered the following year, one-half of the lump sum was paid to the former wife. Ps, electing 10-year averaging treatment with respect to the lump-sum distribution, reported one-half of the taxable portion of the distribution on Form 4972, Tax on Lump-Sum Distributions. R determined that Ps are taxable on 100 percent of the taxable portion of the distribution. Ps contend that they are not liable for tax on the portion of the distribution paid to the former wife because (1) she is an alternate payee under a qualified domestic relations order under secs. 414(p) and 402(a)(9), I.R.C., or (2) under Louisiana community property law she was the owner of one-half of the pension plan account, and is therefore the distributee for tax purposes of one-half of the lump-sum distribution. Held: 1. The State court judgment rendered more than 1 year after the lump-sum distribution does not meet the requirements of sec. 414(p)(2), I.R.C., and is not a qualified domestic relations order (QDRO). Therefore, P-H's former wife is not an alternate payee under a QDRO with respect to any portion of the lump-sum distribution. 2. Ps are liable for 100 percent of the tax imposed on lump-sum distributions under sec. 402(e)(1)(A), I.R.C., notwithstanding Louisiana community property law. Sec. 402(e)(4)(G), I.R.C., specifically provides that such tax be determined without regard to community property laws. 3. Ps are not liable for the additions to tax for negligence under sec. 6653(a)(1)(A) and (B), I.R.C.

P is a personal service corporation wholly owned by R, a professional entertainer, and her spouse (now deceased). P took out a disability income insurance policy on R payable to itself. Held, since any proceeds of the disability income policy would have been excludable from P's gross income under I.R.C. sec. 104(a)(3), the premiums which P paid were not allowable as a deduction, being allocable to a class of income exempt from income tax, as provided in I.R.C. sec. 265(a)(1). Held, further, P is not liable for the addition to tax for negligence under I.R.C. sec. 6653.

P entered into certain transactions in 1984 and 1985 to hedge interest rate risk related to the issuance of some of its debentures and acquisition of certain mortgages. Held: The transactions engaged in by P to reduce interest rate risk with respect to the issuance of debentures and mortgage commitments in 1984 and 1985 were hedges; the disposition of the hedges resulted in ordinary gain or loss; Arkansas Best Corp. v. Commissioner, 485 U.S. 212 (1988), interpreted. 2.

Held: Under the doctrine of collateral estoppel, where a trial court's judgment in an earlier proceeding is affirmed by an appellate court on grounds… Held: Under the doctrine of collateral estoppel, where a trial court's judgment in an earlier proceeding is affirmed by an appellate court on grounds different from those relied upon by the trial court, the findings of fact of the trial court are not binding in a subsequent proceeding in this Court between the same parties.

With regard to the domestic international sales corporation (DISC) provisions of the Internal Revenue Code, held: (1) Industrial cranes used on… Held: Industrial cranes used on oil drilling platforms attached to the Outer Continental Shelf of the United States in the Gulf of Mexico were not used outside the United States; (2) In calculating deemed distributions under sec. 995, I.R.C., FMC Corp. (petitioner) is required to aggregate base period export receipts of a DISC that…

P is a corporation engaged in the design, manufacture, and sale of semiconductor components and computer systems. Held: the research and experimental expense allocation and apportionment moratorium established by of the Economic Recovery Tax Act of 1981, Pub. L. 93-34, sec. 223, 95 Stat. 172, 249, is inapplicable to the computation of combined taxable income under sec. 994(a), I.R.C.St. Jude Medical, Inc. v. Commissioner, 97 T.C. 457 (1991), followed.

P, an airline pilot, sued his former employer under the Age Discrimination in Employment Act of 1967 (ADEA), Pub. Held: Upon reconsideration, we adhere to our original holding that all damages which petitioner received on account of his ADEA claim are excludable.

P earned a substantial amount of income as a child actress in 1985, 1986, and 1987 when she was 11, 12, 13, and 14 years old. Held: sec. 6012(b)(2), I.R.C., required P's parents to file P's returns for her. Held, further, P is liable for the additions to tax for failure to file returns under sec. 6651(a), I.R.C., for the years in issue. Held, further, P is liable for the addition to tax for negligence under sec. 6653(a), I.R.C., for the years in issue.