Volume 104 — Tax Court Reports

Ps received $ 362,326 from their mother's estate (M's estate). M's estate received this amount from her former husband's estate (H's estate) in satisfaction of alimony arrearages. Held: the $ 362,326 received by M's estate constitutes income in respect of a decedent under sec. 691, I.R.C., which is alimony in character. Held, further, each P should include in his 1989 gross income the portion of the $ 362,326 that M's estate distributed to him.

Ps claimed investment tax credit (ITC) on their 1981 consolidated Federal income tax return and accelerated depreciation deductions on their 1981 through 1985 consolidated Federal income tax returns. Held: under sec. 48(a)(2)(B)(v), I.R.C., the containers must actually be used to transport property to or from the United States at least once each year during their recapture period.

P borrowed in foreign currencies which it converted into U.S. dollars and later repaid the borrowings in the same foreign currency which it had purchased… Held: P's gain does not constitute income by reason of the discharge of indebtedness eligible for exclusion from gross income under sec. 108, I.R.C.Kentucky & Ind. Terminal R.R. v. United States, 330 F.2d 520 (6th Cir. 1964), has been sapped of its vitality by United States v. Centennial Sav. Bank FSB, 499 U.S. 573 (1991).

P commenced a cash tender offer for a large part of the publicly traded stock of Conoco. Held: DuPont's two-step acquisition of Conoco by means of a tender offer of cash and DuPont stock in exchange for Conoco stock, followed by a statutory merger of Conoco into DT, embodied a plan of reorganization within secs. 368(a)(1)(A) and 354(a), I.R.C. 2.

Petitioner is the common parent corporation of an affiliated group of corporations making a consolidated return of income (the affiliated group). Held: such income is subpt. F income includable in the gross income of the member under sec. 951(a), I.R.C.

P, a professional basketball player, formed a personal service corporation. Held: The Rockets had the right to control the manner and means by which P's personal services were performed; accordingly, with respect to P's services as a player for the Rockets, P was an employee of the Rockets.

P is an Alaska native village corporation organized under the Alaska Native Claims Settlement Act (ANCSA), Pub. Held: the payments of $ 5,050,000 and $ 270,000 are not option payments, and are includable in P's 1987 and 1988 gross income, respectively. Held, further, the expenses of $ 123,986 are ordinary and necessary business expenses that are deductible from P's gross income under 43 U.S.C. sec. 1620(h)(2).

P is a partnership organized for the purpose of managing, holding, and developing property for investment. P acquired certain raw land (the property) which it planned to subdivide. Held: The Commissioner is sustained in disallowing deductions and requiring capitalization of the foregoing costs as well as property taxes paid by P in respect of the property, notwithstanding that P did not make any physical change to the property during the taxable years.

Ps filed a refund suit in District Court for an overpayment of their 1984 tax, asserting that they were entitled to deductions which had not been claimed on their original income tax return and which related to commodity trading performed through C, a brokerage firm. The court entered summary judgment against Ps. R subsequently issued a notice of deficiency for the taxable years 1983 and 1984, determining that Ps were not entitled to deductions which had been claimed on their original income tax returns relating to trading activity with C. Ps moved for partial summary judgment, contending that the doctrine of res judicata prevented further litigation of the 1984 taxable year. Held: The prior refund suit does not bar subsequent determination and litigation of a deficiency for the same taxable year. Ps' motion for partial summary judgment will be denied.

P is a charitable remainder unitrust within the meaning of sec. 664(d)(2), I.R.C. P was a shareholder in N, a publicly traded company. Held: P was a member of the three limited partnerships at issue, and the income of the partnerships caused P to receive UBTI. Held, further: The receipt of UBTI caused P to become taxable to the full extent of its income and not merely to the extent of UBTI.

By motion, P seeks certification of an interlocutory order pursuant to sec. 7482(a)(2), I.R.C., for purposes of appealing the decision set forth in General Signal Corp. v. Commissioner, 103 T.C. 216… Held: P, under the facts of this case, cannot establish that an interlocutory appeal will materially advance the ultimate termination of the litigation, as is required by sec. 7482(a)(2), I.R.C. Consequently, P's motion must be denied.

Ps, through their consolidated domestic subsidiary, extracted oil and gas from the Norwegian Continental Shelf in the North Sea, under a royalty license which they held from the Kingdom of Norway. Held: these three Norwegian charges were taxes, and were income or excess profits taxes within the meaning of sec. 901, I.R.C.

R imposed a jeopardy assessment and levy on P under authority of sec. 6861, I.R.C. Pursuant to P's motion made in accordance with sec. 7429(b)(2), I.R.C., and Rule 56, Tax Court Rules of Practice and Procedure, this Court held for petitioner and ordered abatement of the jeopardy assessment and release of the levy. McWilliams v. Commissioner, 103 T.C. 416 (1994). P filed a motion for attorney's fees and administrative costs pursuant to sec. 7430, I.R.C., and Rule 231, Tax Court Rules of Practice and Procedure. The underlying deficiency proceeding has not yet been decided. Held, disposition of the motion for attorney's fees and administrative costs relating to the jeopardy assessment proceeding is not premature notwithstanding that the issues concerning P's tax liability have not yet been decided in the deficiency proceeding. Held, further, Rule 232(f), Tax Court Rules of Practice and Procedure, was not intended to, and does not, apply to litigation costs related to a jeopardy proceeding. Held, further, our disposition of the motion for litigation costs as to the jeopardy assessment review shall be by entry of a supplemental order to our order that the jeopardy assessment be abated and the levy released. Rule 232(f); Explanatory Note to Rule 232(f), 93 T.C. 1021.

Ps sustained a net operating loss (NOL) and an alternative minimum tax (AMT) NOL in 1985. Held: In accordance with Plumb v. Commissioner, 97 T.C. 632 (1991), NOL's and AMT NOL's from a single year cannot be carried into separate taxable years. The NOL deductions are governed by a single carryback period, for which only a single election may be made under sec. 172(b)(3)(C), I.R.C. 2.

P is a social club as described in sec. 501(c)(7), I.R.C. P published a magazine and distributed it free of charge to members and nonmembers. The magazine accepted paid advertisements, and the advertising portion of the magazine generated net income, while the editorial portion generated a net loss. P deducted expenses from the editorial portion of the magazine against income from the advertising portion. Held:Sec. 1.512(a)-1(f), Income Tax Regs., applies to social clubs.

Decedent made various bequests in her will, including generation-skipping transfers in trust. Held: Renunciations of legacies followed by payments from decedent's spouse were not disclaimers under sec. 2518(b), I.R.C., and renounced amounts were not part of the marital deduction.

P, a subchapter C corporation, operates as a general contractor engaged in the construction business. Held: In light of the fact that sec. 448, I.R.C., does not require P to abandon the cash method and sec. 460, I.R.C., does not require P to report its income on the percentage of completion method, we hold that R's determination requiring that P change its method of accounting constitutes an abuse of discretion.

In 1983, Ps invested in Encore Leasing Corp. (Encore), through Alamo East Enterprises (Alamo East), an investment conduit. Held: sec. 6229(d), I.R.C., suspended the period of limitations for assessing tax attributable to a partnership item for the period during which the action with respect to the FPAA was pending in the District Court, until the decision of the court became final, and for 1 year thereafter.

During the taxable years at issue, P deducted additions to its bad debt reserve utilizing the percentage of taxable income method set forth in sec. 593(b)(2)(A), I.R.C. In its calculations of taxable… Held: Upon reconsideration, we no longer adhere to our prior holdings that such regulation is invalid; P must take NOL's into account in computing its taxable income under sec. 593(b)(2)(A), I.R.C., as required by such regulation.

Ps each filed a motion for protective order seeking to preclude R from engaging in ex parte communications with Ps' former employees regarding the matters in dispute in these cases. Held: Model Rules of Professional Conduct rule 4.2 (1992), which prohibits an attorney from engaging in ex parte communications with a party that he knows to be represented by counsel, does not apply to preclude R from engaging in ex parte communications with Ps' former employees.

Ps claimed investment tax credit (ITC) on their 1981 consolidated Federal income tax return and accelerated depreciation deductions on their 1981 through 1985 consolidated Federal income tax returns. Held: Ps are not entitled to claim depreciation under sec. 168(f)(2) for any containers which do not meet the definition of qualified leased property under sec. 168(f)(8)(D). Norfolk S. Corp. v. Commissioner, 104 T.C. 13 (1995), modified.

Petitioner, ADC, manufactured combat boots. Its Puerto Rican subsidiary, ADPR, manufactured the uppers for such boots and transferred them to petitioner at a price determined by petitioner. Held: ADPR's return for its fiscal year 1986 was timely filed; therefore it properly elected cost sharing for that year and, accepting respondent's concession, cost sharing is applicable to the prior fiscal year 1985.

Ps claimed fuel tax credit pursuant to secs. 34, 6427, and 4041, I.R.C., for the taxable year ending June 30, 1988, for fuel tax incurred with respect to Ps' registered, diesel-powered, highway… Held: sec. 48.4041-7, Manufacturers & Retailers Excise Tax Regs., is valid, and R's determination is sustained.

Ps were officers and 100-percent owners of ABC corporation. Held: Ps' liability for interest for the period prior to the issuance of the notices of transferee liability is to be determined under State law. Held, further, Ps are liable for interest at the statutory rate provided in Colorado from the date of the transfers to the date the notices of transferee liability were sent.

Decedent died on Oct. 2, 1986. Decedent made gifts in 1984 and before death in 1986. Petitioner paid Kansas State inheritance tax on account of substantially all of these gifts. After decedent's death, there were found in his car checks that had been written by him during the 2 weeks before his death. Petitioner underreported the value of two bank accounts on its Federal estate tax return by the amount of these checks. 1. Held, the underreporting of the value of a bank account can be a valuation understatement within the meaning of sec. 6660, I.R.C. 1954. 2. Held, further, petitioner is not entitled to a waiver of the addition to tax as to a $ 30,000 undervaluation of one bank account, but is entitled to a waiver of the addition to tax as to a $ 61,000 undervaluation of another bank account. Sec. 6660(e), I.R.C. 1954. 3. Held, further, decedent's 1984 and 1986 gifts are not includable in the gross estate. Sec. 2035(a), (d)(1), I.R.C. 1954. 4. Held, further, petitioner is not entitled to a credit for State death taxes in respect of decedent's gifts. Sec. 2011(a), I.R.C. 1954. 5. Held, further, decedent's gifts are not to be taken into account in determining the maximum permissible credit for State death taxes. Sec. 2011(b), I.R.C. 1954.

P is an attorney who operates his law practice as a sole proprietorship. During the years under consideration, he had six employees. Held: the adequate protection payments do not constitute business interest. 2. Held, further, the IRS had the authority to allocate the payments as it did. 3. Held, further: No portion of the payments is deductible. The portion applied to interest on Ps' tax deficiencies for prior years is a nondeductible personal interest expense.

Ps, Japanese insurance companies, wrote reinsurance through F, a North Carolina corporation, which conducted its operations in the United… Held: on the facts, F was an agent of an independent status within the meaning of Art. 9(5) of the Convention for the Avoidance of Double Taxation, Mar. 8, 1971, U.S.-Japan, 23 U.S.T. (Part 1) 969, and was therefore not a permanent establishment, during the years at issue, of any of petitioners within the meaning of Art. 8(1) of such…

P is an accrual method taxpayer. P established a Voluntary Employees' Beneficiary Association (VEBA) exempt from tax under sec. 501(c)(9), I.R.C., for purposes of providing health and welfare… Held: the account receivable reflected on the books of the VEBA as of the close of the 1984 taxable year does not constitute assets set aside within the meaning of sec. 419A(f)(7), I.R.C., for purposes of increasing the VEBA's account limit for the 1987 taxable year.

P, a publicly held corporation, owned business properties in the State of Washington. Pursuant to a "Plan of Distribution", P transferred its Washington properties to a newly formed limited partnership. Upon the transfer of the Washington properties, P's shareholders received a pro rata distribution of partnership units. P determined its gain from the distribution of the Washington properties under sec. 311(d)(1), I.R.C., by reference to the value of the partnership units received by its shareholders. R determined P's gain as if P had sold its entire interest in the Washington properties for fair market value on the date of distribution. Held, under sec. 311(d)(1), I.R.C., P's gain is determined as if P had sold its entire interest in the Washington properties for fair market value on the date of distribution.

A1 owned both A2, a wholly owned subsidiary in the oil and gas business, and 80 percent of the stock of N, another corporation in the oil and gas business. P1, also in the oil and gas business, wished to acquire N. As a first step in the acquisition, P1 offered to buy A1's N stock for $ 5 million. At A1's request, so that A1 would not be required, under the Securities Exchange Act of 1934, ch. 404, sec. 16(b), 48 Stat. 881, 896 (current version at 15 U.S.C. sec. 78p(b) (1988)), to disgorge its short-swing profits from sale of its N stock, P1 paid $ 3.8 million for A1's N stock and an excessive price of $ 1.2 million for a 1-year option on gas leases held by A2. Upon expiration of the option, P1 deducted $ 1.2 million as a loss. Approximately 6 months after buying A1's N stock, P1 acquired the minority shareholder interests in N in a stock-for-stock reverse merger. A former minority shareholder of N brought a class action against P1 on behalf of the former minority shareholders of N, alleging breach of fiduciary duty by P1 in misrepresenting and failing to disclose the true values of P and N for the purpose of setting the exchange ratio in the merger. P1 incurred costs to defend that suit and deducted those costs as ordinary and necessary trade or business expenses. C, a wholly owned subsidiary of S, owned oil leases L1, L2, L3, and L4. S wished to sell C. P1 agreed with T to cause C to sell L1 to T if P1 were to acquire C. T agreed to pay P1 $ 1,250,000 more for L1 than the amount that P1 would pay for C. P1, through N, purchased the stock of C for $ 6.5 million, and immediately thereafter caused C to sell L1 to T for $ 7,750,000. During the next 2 years, N continued to hold L2, purchased its coowner's interest in L4, and developed, operated, and then sold L3 and L4 to third parties. C advanced N $ 1 million 7 months after the ownership change and $ 2,625,946 10 months after the ownership change, taking back interest-bearing demand notes. The advances were canceled less than 13 months after the ownership change, immediately prior to N's distribution of the stock of C to P1. Held: The $ 1.2 million ostensibly paid A2 for the option was part of P1's cost of N stock, so that P1 is not entitled to a loss deduction upon the expiration of the option. Held , further, the suit by N's minority shareholders had its origins in P1's acquisition of N stock, and the costs to defend that suit are not deductible as ordinary and necessary business expenses. Held, further, for purposes of sec. 382(c)(1), I.R.C., C continued its historic business at all times during the 2 years after the ownership change. See sec. 1.368-1(d), Income Tax Regs.Held, further, for the purposes of sec. 382(e)(1), I.R.C., the value of the stock of C was $ 6.5 million immediately before the ownership change. Held, further, the advances and their cancellation were an "other corporate contraction" occurring in connection with the ownership change; for the purposes of sec. 382(a), I.R.C., the value of the stock of C must be reduced by the amount of the canceled advances. Sec. 382(e)(2), I.R.C.Held, further, immediately after the ownership change, C held L1 and a note receivable as nonbusiness assets, but immediately before the ownership change, C held only the note receivable as a nonbusiness asset; for the purposes of sec. 382(a), I.R.C., the value of C must also be reduced by the amount that the value of the note receivable exceeded its proportionate share of C's known liabilities. Sec. 382(1)(4), I.R.C.

D left his residual estate to his wife provided that she survives distribution and survives distribution of her share of the remainder of my estate, but otherwise left this property in a trust for… Held: When the provisions of D's will are considered in light of the law of Washington, the value of the personal property left to D's wife is a terminable interest under sec. 2056(b), I.R.C., and not a part of the marital deduction. The real property which, under Wash.

P has made a motion in limine to exclude from evidence the report and testimony of certain witnesses R to qualify as experts. Held: motion in limine is denied; REALCA inapplicable.

R filed a motion to compel production of documents. Ps objected to the production of certain documents on the grounds of attorney-client privilege, work product, or both. Held: the attorney-client privilege protects communications or reports by third parties, made at the request of P, to Ps' attorneys. Held, further: The accountant was not engaged by Ps to assist their attorneys in providing them with legal advice.

P, a taxable farmers cooperative, distributed patronage dividends to its patrons annually in accordance with its bylaws. Held: the tax benefit rule requires that the difference between the stated amounts and the discounted values of redeemed qualified written notices of allocation should be included in P's income because the deduction of the qualified written notices of allocation at their stated amounts upon issuance is fundamentally inconsistent with the…

This case concerns the allocation and apportionment of certain State taxes between domestic and foreign source gross income. Held: Ps' alternative methods of allocating and apportioning State income taxes (the gross income method and the factor operations method) are contrary to sec. 1.861-8(e)(6)(i), Income Tax Regs. 2. Held, further, sec. 1.861-8(e)(6)(i), Income Tax Regs., is not being applied in an impermissible retroactive fashion. 3.