Volume 103 — Tax Court Reports

Ps bought property at a U.S. Customs Service auction. Held: in deciding whether the limitation of sec. 170(e)(1)(A) applies to the property donated by Ps, we apply the factors used to decide whether the property is a capital asset under sec. 1221(1), I.R.C. Held, further, the property at issue, if sold, would not be considered to be held by Ps primarily for sale to customers under sec.…

A surviving spouse, S, received an income interest in a trust. The income was payable to S in quarterly installments. Held: the trust is not qualified terminable interest property under sec. 2056(b)(7), I.R.C.Estate of Howard v. Commissioner, 91 T.C. 329 (1988), revd. 910 F.2d 633 (9th Cir. 1990), followed.

P, a commodities dealer, deducted losses in 1978 from straddle transactions purportedly executed on London commodities exchanges. Held: P's purported losses from straddle transactions are not deductible pursuant to the Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 108(b), 98 Stat. 494, as amended by sec. 1808(d), Tax Reform Act of 1986, Pub.

Petitioner participated in a Mexican debt-equity-swap transaction. Held: Petitioner is to be treated as having realized a taxable gain on the exchange of U.S. dollar-denominated Mexican Government debt for Mexican pesos. The value of the pesos received and the amount of gain determined.

P sold her residence during 1979, and her return preparer reflected, under sec. 121, I.R.C., the exclusion of about $ 7,000 of gain on the… Held: sec. 1034, I.R.C., although mandatory, does not preclude P's valid 1979 sec. 121, I.R.C., election, and the period within which P could have changed the 1979 election has passed. Held, further, sec. 6214(b), I.R.C., would not empower this Court to permit P to change or revoke her 1979 election in the circumstances of this case.

Held, a loss sustained as a result of the abnormal retirement of a building from the taxpayer's business (caused by a casualty to or an… Held: a loss sustained as a result of the abnormal retirement of a building from the taxpayer's business (caused by a casualty to or an extraordinary obsolescence of the building) and sustained prior to the demolition of the building is not treated as having been sustained on account of the demolition of the building, and such loss will…

Held, for Federal income tax purposes, purported promissory notes associated with petitioner's investment in educational master audio tapes do not constitute genuine indebtedness.

T and his wife realized a gain on the sale of their jointly owned residence in December 1988. In their joint return they did not report the gain as gross income but deferred recognition of the gain, pursuant to sec. 1034, I.R.C., by indicating their intention on Form 2119 to purchase another residence within the 2-year period permitted by sec. 1034, I.R.C. Thereafter, T and his wife were separated in December 1989, and were later divorced in May 1991. However, subsequent to the separation, but within the 2-year period, T purchased a personal residence for himself. He then filed an amended 1988 joint return, which his wife refused to sign. The amended joint return, without his wife's signature, was filed in accordance with Rev. Rul. 80-5, 1980-1 C.B. 284. In that amended return petitioner reported additional income from the sale of the couple's residence to the extent that his one-half allocable share of the proceeds was not reinvested in his new residence. His wife did not purchase any residence for herself during the 2-year period. The Commissioner's deficiency notice was based upon a computation that took into account the entire proceeds of sale, not upon petitioner's one-half allocable share, and it was addressed to both the husband and wife. T's wife did not join in T's petition to this Court, nor did she file any petition on her own behalf. Held, in applying sec. 1034, I.R.C., T was entitled to compute his gain on sale of the jointly owned residence by taking into account only his one-half allocable share of the basis and net proceeds from the sale of the residence. Rev. Rul. 74-250, 1974-1 C.B. 202. Held, further, T was nonetheless jointly and severally liable under sec. 6013(d)(3), I.R.C., for the tax attributable to his wife's allocable one-half share of realized gain, all of which was immediately taxable, because she had failed to purchase a replacement residence within the time permitted under sec. 1034, I.R.C.Held, further, T was also subject to additions to tax under secs. 6653 and 6661, I.R.C., for negligence and substantial understatement of income tax, respectively.

P purchased computer equipment from a middle entity and leased the equipment back to third parties that had originally conveyed the… Held: The ultimate test for determining whether a taxpayer is at risk pursuant to sec. 465(b)(4) is whether there is a realistic possibility of economic loss. Based on the facts presented, P has not established that there was any realistic possibility that he would be subject to economic loss as a result of his long-term purchaser note. 2.

P1 and P2 are organizations established under Fla. Stat. Held: Ps do not qualify for tax-exempt status as cooperative hospital service organizations because Ps are not engaged in purchasing insurance on a group basis as contemplated under sec. 501(e)(1)(A), I.R.C.Held, further, a substantial part of Ps' activities consists of providing commercial type insurance within the meaning of sec. 501(m),…

P, a corporation that had a number of subsidiary corporations, acquired an S corporation on Aug. 31, 1982. The newly acquired corporation's status as an S corporation was automatically terminated when it was acquired by P. The consolidated return for P's fiscal year ending Feb. 28, 1983, disclosed a net operating loss, a portion of which was attributable to the former S corporation for the short period Sept. 1, 1982, through Feb. 28, 1983. Held, the portion of the consolidated net operating loss attributable to the former S corporation cannot be carried back to P's consolidated fiscal year ending Feb. 29, 1980.

P, E, and B were partners in a partnership. The partnership agreement allocated operating income 47.5 percent to P, 49 percent to E, and 3.5 percent to B. The partnership agreement allocated a disproportionately large share of losses and depreciation to E from 1974 through 1978, so that at the beginning of 1980, E had a negative capital account balance of $ 1,251,898. P and B had positive capital account balances. As a result of a dispute between E and P, E filed suit in State court. On May 8, 1980, the State court ordered P to purchase E's interest in the partnership on or before Sept. 30, 1981, or to transfer one-half of his interest (23.5 percent) to E. The partnership sold its real property on Dec. 10, 1980, pursuant to an installment sale agreement under which the partnership realized gain of $ 4,659,832, of which $ 1,986,913 was taxable in 1980. The partnership agreement provided that, upon the sale of the partnership's real property or the liquidation of the partnership, E was entitled to a return of its capital investment of $ 766,100 before distributions were made to other partners. The partnership allocated the gain recognizable in the year of the sale first to E in an amount necessary to bring its capital account to 0. The balance was allocated to P and B. P reported on his 1980 return $ 563,656 in gain from the sale of the property. In the notice of deficiency, respondent determined that P was required to report $ 943,784 or 47.5 percent of the gain recognizable in 1980 from the sale of the partnership's real property and $ 723,566 from P's "sale" of E's partnership interest. In an amended answer respondent asserted that P purchased E's interest on May 8, 1980, and, therefore, was required to include 96.5 percent of the gain as income in 1980. 1. Held, the partnership's allocation of the gain recognized in the year of the installment sale did not have substantial economic effect and, therefore, gain from the sale of the property must be allocated in accordance with the partners' interests in the partnership under sec. 704(b), I.R.C. 2. Held, further: Because E had a negative capital account, gain must be allocated first to E's interest in an amount necessary to bring its capital account to 0, and because E had a right to the first $ 766,100 of proceeds, gain must be allocated next to E's interest in an amount necessary to bring its capital account to that amount. Therefore, the entire gain in the year of the sale must be allocated to E's interest. 3. Held, further, P acquired E's interest in the partnership after the sale of the real property on Dec. 10, 1980. 4. Held, further, because E had received the benefit of the prior deductions for depreciation and loss and P had the right to the proceeds from the sale of the property as a result of his purchase of E's interest, allocating gain to E in an amount necessary to bring the capital account to 0, and allocating the remaining gain to P is in accordance with the partners' interests in the partnership under sec. 704(c), I.R.C., and is reasonable under sec. 706(c), I.R.C., and sec. 1.706-1(c)(2)(ii), Income Tax Regs.

Ps own all stock of RS, an S corporation. Held: RS's reliance on the uncertified, preliminary information supplied to it by its actuaries was not reasonable and does not satisfy the statutory requirements of secs. 412(c)(3) and 6059, I.R.C., and the regulatory requirements thereunder. 2.

In December 1985, P established a voluntary employees' beneficiary association (VEBA) trust which qualified for exemption under sec. 501(c)(9), I.R.C. During the years in issue, P contributed amounts to the VEBA trust to provide medical and certain other benefits to its employees. Such amounts were primarily used to satisfy benefits claims in the year following the year of contribution. Although the VEBA trust was authorized to provide postretirement medical and life insurance benefits, in addition to current medical benefits, no reserves were established or funded for the purpose of paying postretirement benefits. 1. Held, petitioner may not use the safe harbor limitation of sec. 419A(c)(5)(B)(ii), I.R.C., in computing an addition to its account limit for incurred but unpaid medical claims with respect to its 1986 or 1987 taxable years. 2. Held, further, petitioner may not use estimates of incurred but unpaid claims made by insurance administrators as of midyear 1987 in computing an addition to its account limit for incurred but unpaid medical claims with respect to its 1986 or 1987 taxable years. 3. Held, further, petitioner's incurred but unpaid claims for medical benefits for its 1986 and 1987 taxable years determined based upon stipulated percentages of direct qualified costs. See sec. 419A(c)(1), (5), I.R.C. 4. Held, further, because P's contributions to the VEBA trust did not result in the creation of a reserve funded as necessary to provide postretirement medical and life insurance benefits to its employees, P is not entitled to include any amount in its account limit pursuant to sec. 419A(c)(2), I.R.C., with respect to its 1986 and 1987 taxable years.

Ps claimed depreciation deductions under the accelerated cost recovery system (ACRS), sec. 168, I.R.C., on two 19th-century violin bows… Held: Ps are entitled to depreciation deductions for their violin bows under ACRS because the bows are recovery property under sec. 168(c)(1), I.R.C.; that is, the bows: (1) Are tangible personal property, (2) were placed in service after 1980, (3) are used in Ps' trade or business, and (4) suffer substantial wear and tear as a result of…

P claimed a depreciation deduction under the accelerated cost recovery system (ACRS), sec. 168, I.R.C., on a 17th-century Ruggeri bass… Held: P is entitled to a depreciation deduction under ACRS because the viol meets the four-prong test enunciated in Simon v. Commissioner, 103 T.C. 247 (1994); the viol: (1) Is tangible personal property, (2) was placed in service after 1980, (3) was used in P's trade or business, and (4) suffered wear and tear from P's use in his trade or…

This opinion (SC II) involves cross-motions for partial summary judgment made by the parties with respect to income generated through P's participation in an affinity credit card program. Held: Consideration received by P on account of its participation in the affinity credit card program was for the use of intangible property (P's name, logo, and mailing list). No genuine issue of material fact exists on that score.

In 1988, P was the subject of a leveraged buyout (LBO) that was treated as a redemption for Federal tax purposes. P incurred numerous costs in obtaining the debt financing used to complete the LBO. Held: further, amortization deductions constitute an amount paid or incurred for purposes of sec. 162(k), I.R.C.Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), applied. Held, further, no portion of the organizer fee constituted additional interest.

P worked as an ordained minister of the United Methodist Church. P claimed that he was self-employed for 1988. Held: P was an employee of the United Methodist Church for Federal income tax purposes. P's expenses constitute miscellaneous itemized deductions allowed on Schedule A of his 1988 Federal income tax return, subject to the 2-percent limitation under sec. 67, I.R.C.

R mailed a 30-day letter to P proposing an increase in estate tax. P protested the proposed adjustment with R's Appeals Office (Appeals). Held: a 30-day letter is not a notice of deficiency for purposes of sec. 7430, I.R.C.; thus, P is not entitled to an award of administrative costs.

Ps are members of an affiliated group of corporations that filed consolidated Federal income tax returns. Held: S's COD income is to be included in S's earnings and profits for purposes of computing C's excess loss account under sec. 1.1502-19, Income Tax Regs.Held, further, R's alternative position is without support in either the Internal Revenue Code or the consolidated return regulations, and therefore, is without merit.

R imposed a jeopardy assessment and levy on P under authority of sec. 6861, I.R.C. P requested an administrative review of the jeopardy assessment on the grounds that such assessment was unreasonable. R upheld the jeopardy assessment. P filed a motion for review of the jeopardy assessment and levy with this Court pursuant to sec. 7429(b)(2), I.R.C., and Rule 56, Tax Court Rules of Practice and Procedure. We are required to make a de novo determination within 20 days from the filing of a motion to review as to two issues: (1) Whether the making of the jeopardy assessment is reasonable under the circumstances, and (2) whether the amount assessed is appropriate under the circumstances. R has the burden of proof on the first issue, and P has the burden of proof on the second issue. Held, because R has not proved that the jeopardy assessment and levy were reasonable as required, the jeopardy assessment must be abated and levy thus released.

P and her husband operated a beef farm in Wisconsin until the husband's death in 1986. Held: P does not satisfy the aggregate gross receipts test of sec. 108(g)(2)(B), I.R.C.; therefore, P's debt does not constitute qualified farm indebtedness, and P's discharge of indebtedness income is includable in gross income. 2. Held, further, P is liable for the accuracy-related penalty imposed by sec. 6662, I.R.C.

R's agent (A) examined P's 1987 income tax return and after review of P's records allowed a loss from a related pass-through entity. Held: review of the same records for another taxable year that results in a proposed deficiency for an already examined year is not a second inspection within the meaning of sec. 7605(b), I.R.C.

D's surviving spouse (S) chose to take an elective share rather than to take under D's will. S submitted a proposed allocation of estate assets to fund the elective share which was summarily approved by Probate Court order. The allocated assets were unencumbered securities and cash. Respondent argues that, under Tenn.

R allocated P's research and development expenses in accordance with the sales method set forth in sec. 1.861-8(e)(3)(ii), Income Tax Regs. P asserts that the regulation is invalid because the sales method fails to take into account the research and development expenses of P's foreign subsidiaries and results in an overallocation of such expenses to such subsidiaries, thereby reducing P's foreign tax credit under secs. 901 and 904, I.R.C., exposing P to double taxation, and failing to achieve the objective of the foreign tax credit. P submits that its "worldwide" method of allocation of research and development expenses properly takes such expenses of its foreign subsidiaries into account and, by comparison, produces a larger foreign tax credit, reduces its exposure to double taxation, and carries out the objective of the foreign tax credit under secs. 901 and 904, I.R.C.Held, the sales method incorporated in sec. 1.861-8(e)(3)(ii), Income Tax Regs., is not unreasonable, and therefore the regulation is valid.

Petitioner, a municipal corporation of the State of New York, seeks a declaratory judgment that the bonds it proposes to issue will be exempt from taxation under sec. 103(a), I.R.C. Petitioner proposes to use $ 15 million of the $ 100 million bond issuance to finance advances to nongovernmental borrowers for purposes of rehabilitating low-income housing units. The advances will be structured as loans that must be repaid in full by the borrowers, and will bear interest rates below the market rate reflected in the yield on the bonds. Held, petitioner may not use time value of money principles to bifurcate the advances into a loan portion and a grant portion for purposes of applying the private loan financing test of sec. 141(c), I.R.C.Held, further, the $ 15 million principal amount of the advances exceeds the $ 5 million private loan financing test threshold of sec. 141(c), I.R.C.Held, further, the proposed bonds constitute private activity bonds under sec. 141(a), I.R.C., and the interest thereon will not be exempt from taxation under sec. 103(a), I.R.C.

P is the sole general partner of RCC. P's brother, R, in an attempt to defraud creditors, caused the transfer of both personal and corporate assets to RCC. Held: a State court adjudication may, in appropriate circumstances, bind the parties in a Federal action. In re Bertoli, 58 Bankr. 992, 995 (D.N.J. 1986), affd. 812 F.2d 136 (3d Cir. 1987). 2. Held, further, P is collaterally estopped from denying that he was a party in the State court action. 3.

Decedent died on Apr. 21, 1989. Decedent's estate obtained an extension to file an estate tax return until Saturday, July 21, 1990. Held: Pursuant to sec. 7503, I.R.C., the return is considered timely filed on Monday, July 23, 1990. Sec. 7502, I.R.C., does not apply unless the return is untimely filed.

Ps as heirs of D received parcels of farmland from D's estate. For estate tax purposes, D's estate elected to specially value the farmland under sec. 2032A(a), I.R.C. As a condition precedent to the election, sec. 2032A(a), I.R.C., requires all persons having an interest in the property subject to the election to enter into an agreement described in sec. 2032A(d), I.R.C. Ps executed the written agreements described in sec. 2032A(d), I.R.C. In the agreements, Ps (1) asserted that the land was qualified real property and that they were qualified heirs of D, (2) consented to the election to value the property under sec. 2032A, I.R.C., (3) agreed and consented to the application of sec. 2032A(c), I.R.C., (4) agreed and consented to be personally liable for the additional estate tax imposed by sec. 2032A(c), I.R.C., in the event of early disposition or cessation of the qualified use of the farmland, and (5) acknowledged that the agreements were a condition precedent to the election to specially value the farmland under sec. 2032A, I.R.C. R approved the notice of special use valuation election, the estate tax return was accepted as filed, and the special use valuation election was allowed without audit. The period of limitations has now run on D's estate. Ps leased portions of the farmland on a cash-rental basis, a nonqualified use of the property. Ps now contend that the farmland was not qualified real property at the time of D's death and that the election to specially value the farmland was invalid. Held, Ps are bound by the duty of consistency and are estopped to deny that the farmland was qualified real property or to assert that the election to specially value the property under sec. 2032A(a), I.R.C., was invalid.

P, a nonexempt cooperative subject to subch. T, I.R.C., realized a loss in 1980 from transactions with its shareholders and treated the loss as a net operating loss carryback to 1977 pursuant to sec. 172(b)(1)(A), I.R.C. R determined that P is a "membership organization" under sec. 277, I.R.C., and further determined that the subject loss cannot be carried back as a net operating loss but can only be carried over and deducted in subsequent years. Held, inasmuch as P is a nonexempt cooperative subject to subch. T, it cannot be a "membership organization" within the meaning of sec. 277(a), I.R.C., and thus it is eligible to treat the loss realized from transactions with its shareholders as a net operating loss carryback under section 172(b)(1)(A), I.R.C.

During P's taxable years 1980 through 1984, P made substantial improvements to leased premises for the purpose of operating its pharmacies and Wags restaurants. Held: in sec. 5 of Act of Jan. 3, 1975, Pub. L. 93-625, 88 Stat. 2108, 2112, Congress removed all sec. 1250 property from the ADR system until such time as the Treasury Department prescribed class lives explicitly containing sec. 1250 property; held, further, ADR class 57.0 did not contain any sec. 1250 property.

Held, the estate tax marital deduction does not include the amount received by the surviving spouse in the settlement of her claim to her elective share under New Jersey law to the extent that the amount received includes a portion of the postdeath enhancement in value of the estate assets. Secs. 2031, 2056, I.R.C.Estate of Hubert v. Commissioner, 101 T.C. 314 (1993), distinguished. The fact that New Jersey law may provide for valuation of the widow's elective share as of the date of distribution is irrelevant in the application of the Federal statute. Cf. Morgan v. Commissioner, 309 U.S. 78, 80-81 (1940).

P, a mutual life insurance company, issued participating whole life insurance policies that provided for the possibility of payments of dividends to policyholders. Each year, P set aside a reserve for policyholder dividends in order to reflect its estimated liability to pay policyholder dividends in the following year. Under former sec. 811(b), I.R.C., before limitation by former sec. 809(f), I.R.C., P computed its policyholder dividends deduction as the amount of policyholder dividends paid during the year, plus the yearend policyholder dividends reserve, less the policyholder dividends reserve at the end of the preceding year. In 1984, Congress enacted sec. 808(c)(1), I.R.C., which provides that the policyholder dividends deduction is limited to the policyholder dividends paid or accrued during the taxable year, as limited in the case of mutual life insurance companies by sec. 809, I.R.C. Under a transitional rule in the Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 216(b), 98 Stat. 758, the change to the paid or accrued method was to be treated as not being a change in the method of accounting. Unlike most insurance companies, P guaranteed a pro rata portion of the policyholder dividends that were determined at each yearend but not payable until the anniversary of the policy issue date in the following year. The amount of guaranteed policyholder dividends satisfied the requirements for an accrual under the accrual method of accounting. For 1984, P computed its policyholder dividends deduction as the amount of policyholder dividends paid in 1984 plus the guaranteed portion of its Dec. 31, 1984, reserve (Dec. 31, 1984, accrual). 1. Held, the transitional rule does not relieve P from applying accrual principles as of Jan. 1, 1984. 2. Held, further, P's 1984 policyholder dividends deduction must be reduced by the portion of the 1983 yearend policyholder dividends reserve that satisfied accrual standards in 1983.

Ps are attorneys who received a structured settlement in payment of attorney's fees with respect to two related cases. Held: the fair market values of Ps' rights to receive payments under the settlement agreements were not includable in income under sec. 83, I.R.C., in the year in which the settlement agreements were effected, since the promises to pay under the structured settlements were neither funded nor secured and thus did not meet the definition of…

P is an affiliated group of corporations that filed consolidated U.S. Corporation Income Tax Returns. Held: further: Even if the provisions of sec. 1.267(a)-3, Income Tax Regs., were found to be within the broad regulatory authority granted by sec. 267(a)(3), I.R.C., the retroactive application of the regulations from their issue date on Dec. 31, 1992, to P's taxable years ended Sept. 29, 1985, Sept. 28, 1986, and Sept. 26, 1987, violates…

R sent a statutory notice to decedent and decedent's spouse determining a deficiency in income tax. No State proceeding for administration of decedent's will had been commenced or was necessary. A, one of decedent's three children by a former spouse and a 25-percent beneficiary of decedent's estate, filed a petition contesting R's determination. Held: 1. The Court appoints A as special administrator of decedent's estate to conduct this litigation, pursuant to Cal. Civ. Proc. Code sec. 377.33 (West Supp. 1994). 2. A is a proper party to conduct this litigation under Rule 60(c), Tax Court Rules of Practice and Procedure. 3. R's motion to dismiss for lack of jurisdiction is denied.

Subsequent to filing petitions in this Court, P was convicted of tax fraud. Prior to a hearing in this Court on the merits of his case, P escaped from prison. Held: Inasmuch as there is a connection between the proceedings in this Court and P's criminal conviction for tax fraud, a rational basis exists for disentitling P from utilizing this Court's resources to redetermine his deficiencies and additions to tax while he remains a fugitive from justice.

P-husband loaned money to CCC, a subchapter C corporation, and received a note of CCC evidencing the loan. Held: the amount loaned by P-husband to CCC could not be included in his basis in the stock and indebtedness of CMB for the purposes of determining the amount of CMB losses Ps could deduct under sec. 1366(d)(1), I.R.C.Held further, Ps are liable for the additions to tax for negligence, except the addition to tax under sec. 6653(a)(1)(B),…