Volume 102 — Tax Court Reports

In 1982, tax preference items were generally subject to a minimum tax under sec. 56, I.R.C., which was an add-on to the regular income tax. Ps had such preferences, which reduced their taxable income. Because of an abundance of tax credits, however, Ps' liability for regular tax would have been the same even if the preferences had not been used to reduce taxable income. Thus, the preferences did not provide a current tax benefit, and sec. 58(h), I.R.C., relating to the tax benefit rule and the minimum tax, relieved Ps of minimum tax liability for 1982. First Chicago Corp. v. Commissioner, 88 T.C. 663 (1987), affd. 842 F.2d 180 (7th Cir. 1988). The preferences, however, had the effect of increasing the credits available for carryback or carryover to other years, and Ps realized the tax benefits of the preferences by applying the "freed-up" credits in carryback years. Ps did not follow the allegedly invalid sec. 1.58-9, Income Tax Regs., which required them to reduce the freed-up credits prior to use in other years. Held, sec. 1.58-9, Income Tax Regs., is a valid regulation as applied to Ps.

P is an affiliated group of corporations engaged primarily in exploration for, and development, production, refining, and sale of, oil and natural gas and exploration for,… Held: The costs in issue were incident to and necessary for the drilling and development of oil and gas wells and are deductible as IDC under sec. 263(c), I.R.C., and sec. 1.612-4, Income Tax Regs. P extracted hydrocarbon and nonhydrocarbon liquids and gases from oil and gas wells in Alabama and Florida.

H and W entered into a marital settlement agreement providing that W would receive cash of $ 1 million from H's share of a pension plan. Held: collateral estoppel does not apply to determine whether the marital settlement agreement satisfies the requirements of sec. 414(p), I.R.C. 2. Held, further, the marital settlement agreement was not a QDRO. 3. Held, further, the $ 1 million pension plan distribution is taxable to H.

X corporation, owned by H and W, redeemed all W's stock in exchange for cash. Held: W's transfer of her stock by way of redemption was not a transfer to a third party on behalf of H under sec. 1.1041-1T, Q&A 9, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984). Accordingly, X's payment to W in redemption of her stock was taxable to her in the year of redemption.

P settled various tort claims by entering into structured settlements with the tort claimants. Held: P's method of accounting for its obligations under settlement agreements for tax purposes does not clearly reflect income, and R's determination limiting P's deduction for P's obligations under settlement agreements to the amounts P paid for the single premium annuity contracts was not an abuse of discretion.

Ps filed a lawsuit against bank (B) alleging that B failed improperly to release its lien on Ps' property. Following a jury verdict for Ps totaling approximately $ 60 million, which included $ 6 million for lost profits, $ 1.5 million for mental anguish, and $ 50 million for punitive damages, Ps and B agreed to settle the lawsuit for $ 10,691,972.43. In connection with their settlement, Ps prepared unilaterally a final judgment allocating 95 percent of the settlement proceeds to tortlike personal injuries; the final judgment was entered by the trial court in accordance with the settlement. Held, the Court is not bound by the allocation of damages in the final judgment, and must determine the portion of the settlement proceeds that was attributable to Ps' tortlike personal injuries. Held, further, the portion of the settlement proceeds attributable to Ps' tortlike personal injuries (and excludable from Ps' gross income under sec. 104(a)(2), I.R.C.) equals 37.331 percent.

P failed to file returns for 1981, 1982, and 1983 and was convicted of tax evasion for those years. Thereafter, he filed a petition in this Court with respect to the same years. Held: An income tax return is required to be verified by a jurat consisting of a signed written declaration that the return is made under penalties of perjury. The jurat is required to be made according to the forms prescribed by the Secretary.

P, a corporation whose stock is publicly traded, is a leading manufacturer of hard disk drives for personal computers. Held: respondent's reallocation of income to P is arbitrary, capricious, and unreasonable. Held, further, R does not bear the burden of proof for issues in the case, except as specifically noted in the opinion.

Ps deducted straddle losses in years for which deficiencies are now barred by the statute of limitations. Held: the phrase to accurately reflect the taxpayer's net gain or loss from all positions in such straddle modifies the phrase not allowable as a deduction and does not permit Ps to offset the straddle losses from closed years, which are otherwise not allowable losses, against reported gains in an open year under sec. 108(c) of the Deficit…

Under the Tax Reform Act of 1986, Congress changed the manner in which property and casualty insurance companies account for income. Held: the regulatory use of the term reserve strengthening does not comport with the statutory use and purpose of the term and, accordingly, to that extent the regulation is not valid.

R determined a deficiency in Ps' Federal income tax for 1984 relying on sec. 6501(e)(1)(A), I.R.C., which provides for a 6-year period of limitations where the taxpayer omits… Held: Ps' motion for partial summary judgment is denied on the ground that the item giving rise to the increased deficiency may be assessed pursuant to the 6-year limitations period prescribed in sec. 6501(e)(1)(A), I.R.C. (assuming R can establish a substantial omission of gross income on Ps' return).

P filed a motion pursuant to Rule 231, Tax Court Rules of Practice and Procedure and sec. 7430, I.R.C., seeking reasonable administrative and litigation costs, claiming that R's position was not… Held: R's position was substantially justified for purposes of sec. 7430, I.R.C.

P applied for, and was awarded, a post-doctoral fellowship grant from Columbia University, which allowed him to pursue independent research. The terms of the fellowship did not require P to perform any services, and they did not otherwise contain a quid pro quo. Held, the fellowship grant is not income derived by P from a trade or business, and he is not subject to self-employment income tax on that amount.

P purchased all of the assets of a consumer magazine business. As part of the purchase, P became the employer of E and acquired subscriber relationships and subscription lists. Held: P has failed to establish the remaining useful life and value of the employment relationship with E. 2. Held, further, P has failed to adduce the strong proof necessary to support its allocation of additional consideration to the noncompetition agreements. 3.

P was an officer of A. A terminated P's employment. Held: the settlement agreement is the result of bona fide, arm's-length negotiations and accurately reflects the substance of the claims settled by P and A. Held, further: The $ 12,250,215 payment allocated to the wrongful discharge tort claim represents a payment for tort type personal injury which is excludable from income under sec.…

Ps were held liable for sec. 4975(a), I.R.C., excise taxes on prohibited transactions in an earlier opinion, Janpol v. Commissioner, 101 T.C. 518 (1993). Held, Ps are liable for sec. 6651(a)(1) additions to tax for failure to file excise tax returns.

Petitioners have timely moved for reconsideration of our opinion and findings of fact. Held: Ps' motion for reconsideration will be granted in that we revise in part our findings of fact.

P rented equipment to X which did not pay rent. Held: since sec. 881, I.R.C., does not require an actual payment, such fair rental value is income under that section.

H and W were married and jointly owned 100 percent of M, which owned and operated a McDonald's restaurant. H and W separated. Held: No constructive dividend resulted to H from M's redemption of W's stock, because H did not have a primary and unconditional obligation to purchase W's stock. See Edler v. Commissioner, 727 F.2d 857 (9th Cir. 1984), affg. T.C. Memo. 1982-67. 2.

Partnership (MBP) paid P $ 75,000. P's relationship with MBP was being terminated because P had become disabled. MBP paid P the $ 75,000 for the release of her disability waiver of premiums on an insurance policy. The partnership reported the item as a guaranteed payment ( sec. 707(c), I.R.C.). On her return, P claimed that the $ 75,000 was a lump-sum payment exempt from tax under sec. 104(a). P notified R that the $ 75,000 was reported inconsistently from the partnership within the meaning of sec. 6222. R issued a notice of deficiency disallowing the claimed tax-exempt treatment of the $ 75,000 payment without conducting a partnership level proceeding or notifying P of the conversion of partnership items to nonpartnership items. P contends that the notice is invalid and that we have no jurisdiction to consider a partnership item in a partner level proceeding because of R's failure to comply with sec. 6222 and the underlying regulations. R contends that P's sec. 104(a) position is not inconsistent, and constitutes an affected item that is not subject to sec. 6222 and the underlying regulations, and may be the subject of a notice of deficiency to a partner. Held: P's treatment of the payment is not inconsistent and is an affected item which is within the subject matter jurisdiction of this Court in a partner's deficiency proceeding. Accordingly, R is not subject to the limitations of sec. 301.6222(b)-2T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6782 (Mar. 5, 1987).

P, an organization seeking tax-exempt status under sec. 501(c)(3), I.R.C., advocates social, economic, and political change in the United States. Held: P does not serve a private interest rather than a public interest. Sec. 1.501(c)(3)-1(d)(1)(ii), Income Tax Regs. 2. Held, further, P has not established that its telephone counseling service is in furtherance of a charitable or educational purpose. 3.

After filing petitions, T failed to respond to R's informal communications. Held: T failed to file returns for 1985, 1986, and 1987. Held, further, T's deficiencies will be determined using the tax tables for married individuals filing separate returns. Sec. 1(d), I.R.C. 2.

P1 is a member of an affiliated group of corporations that filed a consolidated Federal corporate income tax return for the year in issue. P is the parent of the affiliated group. Held: the character of P1's distributive share of FP's income is determined at the partnership level. Held, further, P1's distributive share of FP's income is not subpart F income. Held, further, the holding in Rev. Rul. 89-72, 1989-1 C.B. 257, is incorrect; hence, the Court will not follow it.

1. Police raided Ps' residence and that of a confederate in a bookmaking operation, and seized various wagering paraphernalia and records of bets handled by P on two National Football League Conference championship games played on a single day in January, 1990. R's agent applied a 4.5 percent profit factor to the total bets, and extrapolated P's wagering income for two years from these figures. P's actual profit from the bets he took on the two games was approximately 10 percent of the amount arrived at by the profit-factor method. R's agent made an alternative computation of Ps' unreported income for the 2 years by using the bank deposit analysis method. Held: On the facts of this case, R's application of the profit-factor method was not reasonable. DiMauro v. United States, 706 F.2d 882 (8th Cir. 1983), applied. Held, further, R's alternative computation of Ps' unreported income by the bank deposit analysis method was reasonable. Held, further, R's determination of the addition to tax for fraud sustained for 1989. 2. R made a termination assessment against Ps for 1990 on the authority of sec. 6851(a), I.R.C., immediately following the raid on their premises in January, 1991. Ps filed successive applications on Forms 4868 and 2688 for extensions of time within which to file their 1990 return. On the first application Ps estimated their 1990 income tax liability to be zero. After the original due date of Ps' 1990 return, R made substituted returns for Ps as married individuals filing separately under the authority of sec. 6020(b), I.R.C. Shortly thereafter R mailed deficiency notices to Ps based upon the substituted returns, to which Ps responded by filing Tax Court petitions. Ps thereafter filed a 1990 joint return within the time putatively extended by the Forms 4868 and 2688. Held: Ps automatic extension of time application on Form 4868 was invalid because Ps did not make a bona fide and reasonable estimate of their tax liability. Crocker v. Commissioner, 92 T.C. 899 (1989). Held, further, R's determination under sec. 6651(f), I.R.C., that Ps' failure to file their 1990 return was fraudulent on the part of P husband, sustained. In applying sec. 6651(f), I.R.C., to determine whether there has been a fraudulent failure to file, the same elements are considered as when imposition of the fraud penalty under former sec. 6653(b) and sec. 6663(a), I.R.C., is considered. 3. Held: P husband received unreported interest income in 1990 in the amount of $ 3,016. 4. R's determination of additions to tax under sec. 6654(a), I.R.C., for failure to pay sufficient estimated tax for 1990 sustained.

D failed to pay the Federal gift tax arising from transfers of property to her son (P) in 1983. Held: P's Motion to Restrain Assessment and Collection will be denied on the ground that R's collection efforts under sec. 6324(b), I.R.C., are not otherwise subject to the normal deficiency procedures set forth in secs. 6211- 6216, I.R.C.

Ps moved for litigation costs under sec. 7430, I.R.C. The parties reached a settlement of the case, in which the significant substantive issue was conceded by R at a time when that issue had been… Held: under the circumstances, Ps' motions are denied since R's position was substantially justified at the time of the concession.

On Nov. 3, 1987, Gs gave their grandchildren, Ps, stock in A. Gs around Apr. 15, 1988, filed separate United States Gift (and… Held: R's motion for partial summary judgment is granted, and Ps' cross-motion for summary judgment, on the ground that under sec. 6324(b), I.R.C., Ps have no liability for gift taxes of Gs since no such tax was determined against Gs prior to the expiration of the 3-year period of limitations from the date their returns were filed, is…

Ps were partners in a partnership, Wind 2, that is subject to the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648. On Sept. 13, 1991, R mailed a notice of final partnership administrative adjustment (FPAA) for the 1983 and 1984 taxable years to the tax matters partner. On Oct. 13, 1991, R mailed a copy of the FPAA for the 1983 taxable year to Ps. No petition for readjustment was filed with respect to the FPAA for either 1983 or 1984. After the time for filing such a petition expired, R assessed deficiencies in Ps' Federal income taxes for taxable years 1983 and 1984, "computational adjustments", based on the partnership adjustments. See sec. 6231(a)(6), I.R.C. Thereafter, on Oct. 8, 1992, R mailed Ps a notice of deficiency for "affected items", determining additions to tax pursuant to secs. 6653(a)(1)(A) and (B) and 6659(a), I.R.C., with respect to the 1983 deficiency. On Jan. 6, 1993, Ps filed a petition for redetermination with respect to the affected items deficiency notice in addition to the 1983 and 1984 deficiencies (and interest) attributable to their share of Wind 2 partnership items for 1983 and 1984. On Mar. 1, 1993, and Mar. 8, 1993, R filed two motions each seeking to dismiss for lack of jurisdiction and to strike a portion of the petition insofar as it attempts to put the 1983 and 1984 deficiencies into issue. R argues that the deficiencies fall outside of the Court's jurisdiction because they arise from computational adjustments. On Mar. 15, 1993, and Mar. 22, 1993, Ps filed objections to R's motion to dismiss and to strike. Ps argue that they were denied due process throughout the Wind 2 partnership proceedings because they did not receive the FPAA for 1983 until October 1992. In addition, they are contesting the deficiency (and interest) attributable to their share of Wind 2 partnership adjustments for 1984. Pursuant to the Court's order, R filed a response and supplemental response to Ps' objections. Ps then filed a supplement to their prior objection, asserting that the FPAA's for 1983 and 1984 were mailed beyond the applicable limitations period. Held. I. R's Motion to dismiss for Lack of Jurisdiction and To Strike (With Respect to the 1983 Taxable Year) 1. Ps in this proceeding may challenge the validity of the affected items notice of deficiency on the ground that R failed to properly notify the partner of the underlying partnership proceeding. However, under these facts, R properly notified Ps of the partnership adjustments as required by sec. 6223(a), I.R.C. Actual receipt of an FPAA is not required so long as R mails the FPAA to the correct address. Therefore, the affected items notice is valid, and we will grant R's motion to dismiss for lack of jurisdiction and to strike filed Mar. 1, 1993. 2. Ps are not entitled to a redetermination of the deficiency resulting from adjustments to the Wind 2 partnership return for the 1983 taxable year to the extent those adjustments are attributable to partnership items. Our jurisdiction is limited to a redetermination of Ps' liability for affected items; i.e., the additions to tax set forth in the affected items deficiency notice. II. R's Motion to dismiss for Lack of Jurisdiction and to Strike (with respect to the 1984 taxable year) Because the parties agree that R did not issue Ps an affected items deficiency notice for the 1984 taxable year relating to their investment in Wind 2, a prerequisite to our jurisdiction over the 1984 taxable year is lacking. Thus, we will grant R's motion to dismiss for lack of jurisdiction and to strike filed Mar. 8, 1993.

P, a dentist, incorporated C and established three employee plans. P was the sole shareholder, director, and officer of C. Prior to 1984, the plans were modified from time to time to comply with internal revenue law changes. With the 1982 and 1984 enactment of numerous changes to the pension provisions of the Internal Revenue Code, C's plan became "top-heavy", and changes were made to cause it to be operationally in compliance with revenue laws. G, an insurance company, devised a modified prototype plan which was generally approved by the Internal Revenue Service. Although C's plan was operationally in compliance, the modified plan was not formally adopted, nor was a joinder agreement executed. In 1986 P dissolved C, and in 1987 the assets in the plan trust were distributed to employees, including P. P timely attempted to roll over his distribution to an individual retirement account. R determined that C's plan was not qualified in 1985, 1986, and 1987 for failure to have a written plan that complied with the 1982 and 1984 changes. R also determined the entire distribution was taxable to P because it was received from an unqualified plan and trust. P argues that the formal adoption of a written plan is unnecessary and that the plan was in compliance, both in form and in operation. In the alternative, P argues that even if the trust was unqualified at the time of the distribution, the Tax Court's holding in Baetens v. Commissioner, 82 T.C. 152 (1984), revd. 777 F.2d 1160 (6th Cir. 1985), would subject to taxation only those portions of the distribution which were accumulated when the trust was disqualified. R, requesting that we reconsider our prior holdings, argues that only one Court of Appeals opinion (Second Circuit, 1965) holds that view and that the Tax Court's view has been reversed by three more recent Courts of Appeals opinions (Fifth, Sixth, and Seventh Circuits, one of them in 1981 and the other two in 1985). This case would be appealable to the Court of Appeals for the Fourth Circuit, which has not addressed this issue. Held, C's plan and trust were not qualified during 1985, 1986, and 1987. Held further, upon reconsideration, we decline to adhere to our prior holding as set forth in Baetens v. Commissioner, supra, and will follow the holdings of the Courts of Appeals for the Fifth, Sixth, and Seventh Circuits, except in those cases appealable to the Court of Appeals for the Second Circuit, where we will continue to follow the holding in Greenwald v. Commissioner, 366 F.2d 538 (2d Cir. 1966), affg. in part and revg. in part 44 T.C. 137 (1965).

Ps filed a motion for an award of reasonable litigation costs in connection with the underlying case, Bragg v. Commissioner, T.C. Memo. 1993-479. Held: Ps' motion for an award of reasonable litigation costs is denied. 2.

Held: In computing allowance for percentage depletion, it is unreasonable to determine petitioners' 1979 gross income from the property for… Held: In computing allowance for percentage depletion, it is unreasonable to determine petitioners' 1979 gross income from the property for sales of natural gas after it was transported away from the wellhead by the method provided for in the last sentence of sec. 1.613-3(a), Income Tax Regs., the representative market or field prices,…

P is a California nonprofit mutual benefit insurance corporation. It provides automobile liability insurance to its members, all of which are tax-exempt social service organizations that furnish transportation to the elderly, the handicapped, the needy, etc. The premiums paid by a member for such insurance are determined actuarially to take into account a number of factors, such as the deductibles selected by the member, the number of vehicles used by the member, the number of passengers carried by each vehicle, and the radius of the member's operations. 1. Held, P is not exempt under sec. 501(a), I.R.C., as an organization described in sec. 501(c)(3), I.R.C., because a substantial part of its activities consists of providing "commercial-type insurance" within the meaning of sec. 501(m)(1), I.R.C. 2. Held, further, such insurance in this case is not excluded from classification as "commercial-type insurance" under sec. 501(m)(3)(A), I.R.C., as insurance "provided at substantially below cost".

L, a Louisiana corporation, was incorporated during 1974 because P wanted to help his son, S, become involved in business. Held: Louisiana law is not controlling as to the issue of whether the transfer of the 51 shares is subject to Federal gift tax. Held, further, for Federal gift tax purposes, P did not relinquish dominion and control over the 51 shares until June 1988. Held, further, P made a taxable gift of the 51 shares of L stock to S during June 1988.

The decedent, Mrs. Clara K. Hoover, through a revocable trust, held a 26-percent interest in a limited partnership that owned and operated a large ranch. Held: the 30-percent minority interest discount from fair market value may not be taken in conjunction with the use of a sec. 2032A, I.R.C., reduction in value. Estate of Maddox v. Commissioner, 93 T.C. 228 (1989), followed and clarified.

Ps transferred property to a creditor in satisfaction of a recourse indebtedness. Ps were insolvent both before and after the transfer. R conceded that the excess of the amount of the indebtedness over the fair market value of the property constituted income from discharge of indebtedness excludable under sec. 108, I.R.C.Held, the excess of the fair market value of the property over basis constituted an amount realized under sec. 1001, I.R.C., and therefore taxable gain under sec. 61(a)(3), I.R.C., rather than income from discharge of indebtedness under sec. 61(a)(12), I.R.C., excludable under sec. 108, I.R.C.Danenberg v. Commissioner, 73 T.C. 370 (1979), and Estate of Delman v. Commissioner, 73 T.C. 15 (1979), followed.

Upon his death in 1974, Mr. P established a testamentary marital trust for the benefit of his wife. Mrs. P was given a lifetime interest in the income of the marital trust, and a testamentary general power of appointment over the marital trust assets. To the extent Mrs. P did not exercise her power of appointment, Mr. P's will provided that the assets of the marital trust would pass to Mr. P's grandchildren. These grandchildren were the grandchildren of Mr. P by a prior marriage, and were not the grandchildren of Mrs. P. Upon her death in 1987, Mrs. P did not exercise her testamentary general power of appointment over the marital trust assets (other than with respect to the payment of certain Federal estate taxes). As a result, the marital trust assets passed to Mr. P's grandchildren pursuant to the terms of Mr. P's will. Petitioner concedes that these transfers constituted "direct skips" as that term is defined in sec. 2612(c)(1), I.R.C. 1. Held, the effective date rules of the Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514, sec. 1433(b), 100 Stat. 2731, do not prevent the application of the generation-skipping transfer (GST) tax to the transfers. Held, further, sec. 26.2601-1(b)(1)(v)(A), Temporary GST Tax Regs., 53 Fed. Reg. 8445 (Mar. 15, 1988), corrected by 53 Fed. Reg. 18839 (May 25, 1988), is valid. 2. Held, further, the GST tax exception provided by TRA 1986 sec. 1433(b)(3), relating to certain transfers to grandchildren, does not apply to the transfers. 3. Held, further, the application of the GST tax to the transfers does not violate the Due Process Clause or equal protection principles of the Fifth Amendment to the Constitution. 4. Held, further, in calculating petitioner's GST tax liability, the amount of interest payable on the GST tax deficiency must be excluded from the GST tax base.