Volume 105 — Tax Court Reports

Ps entered into agreements with insurance agents under which Ps agreed to apply for whole life insurance. Upon approval by the insurance companies, Ps paid the premiums. Held: The plea agreement and consent order are admissible. 2. Held, further: Ps have realized income in the amount of the premium kickbacks. 3. Held, further: Ps are not liable for additions to tax and the penalty for negligence or for the penalty for substantial understatement of income tax.

During taxable year 1990, P made contributions to its ESOP in the amount of $ 240,732 and claimed a deduction for the entire amount under sec. 404(a), I.R.C. P also paid to the ESOP a cash dividend with respect to its common stock in the amount of $ 1,440,000. The ESOP transferred the entire amount of the dividend to the Bank as payment of interest and principal under a note, executed for purposes of purchasing securities of P. On its 1990 Federal income tax return, P claimed a deduction with respect to the cash dividend paid to the ESOP in the amount of $ 1,440,000 under sec. 404(k), I.R.C. P did not include the sec. 404(k), I.R.C., deduction in the computation of its adjusted current earnings (ACE adjustment) for purposes of determining its alternative minimum tax (AMT), and, as a result, concluded that it was not liable for AMT. R determined that by failing to include the section 404(k), I.R.C., dividends in its ACE adjustment, P did not comply with section 1.56(g)- 1(d)(3)(iii)(E), Income Tax Regs., and thus failed to properly compute its AMT. Held: Sec. 1.56(g)- 1(d)(3)(iii)(E), Income Tax Regs., is valid. Held, further: R did not abuse her discretion by providing retroactive application of the regulation. Thus, sec. 404(k), I.R.C., dividends are not deductible in computing ACE for purposes of determining AMT.

P husband, a participant in a qualified profit sharing plan, received a lump-sum distribution of the balance of his account in the plan on Feb. 5, 1988. Held: The series of transfers does not qualify as a tax-free rollover pursuant to sec. 402(a)(5), I.R.C. To constitute a tax-free rollover to an individual retirement account under sec. 402(a)(5), I.R.C., the rollover must be to an IRA established for the benefit of the employee who received the lump-sum distribution.

Both petitioners and respondent have moved for summary adjudication with regard to a question of res judicata. Held: The rule of res judicata is not a bar to respondent's raising the issue of fraud. Zackim v. Commissioner, 91 T.C. 1001 (1988), revd. 887 F.2d 455 (3d Cir. 1989), is distinguishable.

R, believing collection of any tax that may be due from Ps to be in jeopardy, made a jeopardy assessment and seized Ps' realty. Held: This Court is without jurisdiction or authority to stay the sale of the property.

WII, a subsidiary of HEI, borrowed funds a part of which was used for specific business purposes of HEI and the balance transferred to HEI in cash. Held: There is a factual issue with respect to whether the purchase of the portfolio stock by HEI was directly attributable to the funds borrowed by WII and whether WII's indebtedness was incurred or continued to purchase or carry tax-exempt securities by HEI.

T, a corporation, made an application to change its method of accounting in 1985. Held: the sec. 481(a) adjustments are items of income attributable to periods before the 1st year for which the corporation was an S corporation, within the meaning of sec. 1374(d)(5). They are properly treated as recognized built-in gain.

P received a tax-exempt scholarship from the Indian Health Services Scholarship Program (IHSSP) to attend medical school. IHSSP required P to sign a National Health Services Corp. (NHSC) scholarship program contract mandated by 42 U.S.C. secs. 241l and 254o (1988). Under the contract, P agreed to serve in the Indian Health Service for 4 years. P did not fulfill his service obligation. Instead, he began the practice of medicine at a private clinic. As a result, P was required by 42 U.S.C. sec. 254o(b)(1)(A) to pay treble damages to the Department of Health and Human Services (HHS). P deducted most of his payment to HHS as a business expense associated with accepting his new position. Held: Ps may not deduct the treble damages payment because it is a statutorily prescribed penalty for purposes of sec. 162(f) I.R.C.

P, a savings and loan association, acquired by repossession properties securing mortgage loans made by P to the owner-debtors of the properties. Held: amounts representing the recovery of unpaid interest on the sale of the foreclosure properties are currently taxable as ordinary income, and are not treated as credits to a bad debt reserve.

On June 22, 1981, P's wholly owned corporation (J) sold stock of another corporation (E) to a third corporation (W) in exchange for a 20-year promissory note (Note). Held: The liquidation of E was a disposition within the meaning of sec. 453(e)(1), I.R.C.Held, further, the 2-year period under sec. 453(e)(2), I.R.C., was tolled as a result of the sale of E's assets and the adoption of the plan of liquidation.

P was an officer of an S & L. The S & L was placed into conservatorship on May 12, 1987. Held: P was an officer of the S & L until Apr. 28, 1988, so Ps are not entitled to deduct estimated losses on deposits in the S & L as casualty losses under sec. 165(1), I.R.C., in 1987 or 1988.

Pursuant to a purported qualified domestic relations order (QDRO) entered in the Court of Common Pleas for Montgomery County, Pennsylvania, P received a cash payment from a profit-sharing plan, in… Held: whether a domestic relations order is a QDRO as described in sec. 414(p), I.R.C., is a different question from the tax consequences attaching to a QDRO which depend upon whether the profit-sharing plan is a qualified plan.

Petitioner, P, was issued notices of deficiency for the calendar years 1975, 1976, 1977, and 1980. Held: the period of limitations on assessment had not expired when the notices of deficiency were issued.

This case concerns the proper tax treatment of investment bankers' fees and printing costs incurred by petitioner in response to a series of unsolicited (but eventually successful) offers to acquire… Held: The expenditures in question are capital expenditures; no deduction is allowable under either sec. 162(a) or sec. 165, I.R.C.

Ps filed a bankruptcy petition on Sept. 3, 1991. On May 20, 1992, R issued a notice of deficiency to Ps determining deficiencies for the taxable years 1984 and 1985. Held: Sec. 6213(f), I.R.C., provides that the running of the time for filing a petition shall be suspended for the period during which the debtor/taxpayer is prohibited by reason of a bankruptcy case from filing a petition and for 60 days thereafter.

Sec. 1.469-2T(c)(7)(iv), Temporary Income Tax Regs., provides that passive activity gross income does not include Gross income of an individual from a covenant by such individual not to compete. Held: the regulation is valid.

Ps filed their consolidated Federal income tax returns electing under sec. 458, I.R.C., to exclude from gross income the sales revenue attributable to magazines that were returned by the purchasers… Held: Because Congress did not intend to prescribe or preclude rules for the treatment of costs under the sec. 458, I.R.C., election, the regulation does not conflict with this section and is valid.

D transferred her remainder interest in stock for consideration equal to the value of that interest, and retained an income interest in the stock for life. Held: D's gross estate includes the value of the stock at D's death, less the amount that D received for the remainder interest. The bona fide sale exception of sec. 2036(a), I.R.C., is inapplicable to the facts at hand.

The Housing Authority of Riverside County, California, issued revenue bonds to finance the construction of multifamily housing for families of low and moderate incomes. Ps purchased some of these bonds and, believing that the bonds were tax exempt, did not include the interest received thereon in income. Sec. 103(a), I.R.C., generally provides a tax exemption for interest earned on bonds issued by State and local governments. This exemption does not apply to "arbitrage bonds". Sec. 103(c), I.R.C. Under sec. 148(f), I.R.C., a bond is treated as an "arbitrage bond" if (1) the bond proceeds are used to purchase investments that are not acquired to carry out the governmental purpose of the bond issue; (2) the investment of the bond proceeds produces an excess amount of earnings described in sec. 148(f)(2), I.R.C.; and (3) the bond issuer fails to pay such excess amount to the United States. The Commissioner determined that the bonds should be treated as arbitrage bonds pursuant to sec. 148(f), I.R.C., and that, as a result, the interest on the bonds was not excludable from Ps' income. Held: The Commissioner's determination is upheld. The bonds are to be treated as arbitrage bonds pursuant to sec. 148(f), I.R.C. The interest on the bonds is not excludable from Ps' taxable income under sec. 103(a), I.R.C.

In 1969, S, P's wholly owned subsidiary, issued debentures, convertible into shares of common stock of P. In 1987, S called the debentures for redemption, thereby prompting most debenture holders to… Held: P is not entitled to a capital loss deduction. International Telephone & Telegraph v. Commissioner, 77 T.C. 60 (1981), supplemented by 77 T.C. 1367, affd.

P is married to E. E is not a petitioner in this case. E's mother, M, died in 1983, leaving E and his brothers a tract of land (G). G was sold in 1984. Held: P and E are in a sufficiently close legal and economic relationship so that P is estopped by E's representation, under the duty of consistency.

P, a domestic utility company, formed F as a subsidiary corporation in the Netherlands Antilles. Held: F engaged in the business activity of borrowing and lending money. F was not a mere conduit or agent. The treaty exemption applies. P is not liable for the withholding tax.

In 1983 the donor made gifts of parcels of real estate valued at $ 93,300 to Ps, husband and wife, as tenants in common. Held: since, pursuant to sec. 6503(a)(1), I.R.C., the limitations period for assessment (as extended) against the donor was suspended upon the issuance of the notice of deficiency until the decision of this Court became final and for 60 days thereafter, and (b) since, pursuant to secs. 7481(a)(1) and 7483, I.R.C., the decision became final…

Kathleen M. Pert signed closing agreements (Forms 866) pursuant to sec. 7121 I.R.C., for tax years 1986, 1988, and 1989 for both… Held: If it is established that petitioner Harvey Pert is a transferee, then: (1) He may not contest the deficiencies and additions to tax for fraud as established by the closing agreements except on the grounds available to the parties to the closing agreements under sec. 7121 I.R.C. (fraud, malfeasance, or misrepresentation of a material…

Ps were shareholders of X, which computed its earnings and profits under the percentage of completion method of accounting. Held: for purposes of measuring the amount of the dividend, X's earnings and profits for its last taxable year as a C corporation must be computed on the basis of year-end estimates of the total costs of its long-term contracts.

On Oct. 21, 1993, Ps filed a bankruptcy petition under chapter 7 of the Bankruptcy Code. On March 14, 1994, R issued a notice of deficiency to Ps for the taxable year 1989. On Nov. 1, 1994, the bankruptcy court entered an order granting summary judgment against Ps and determining that Ps' debts are nondischargeable under 11 U.S.C. sec. 727 (1988). On Dec. 12, 1994, Ps filed a petition for redetermination with this Court. On Jan. 23, 1995, the bankruptcy court entered an order granting Ps' motion for relief from judgment and vacating its order entered Nov. 1, 1994. On July 21, 1995, this Court issued an order directing the parties to show cause why this case should not be dismissed for lack of jurisdiction. Held: The bankruptcy court's order entered Nov. 1, 1994, denied Ps a discharge of their debts under 11 U.S.C. sec. 727 (1988), and, thus, served to terminate the automatic stay imposed under 11 U.S.C. sec. 362(a)(8) (1988). See 11 U.S.C. sec. 362(c)(2)(C) (1988). Held, further, The bankruptcy court's order entered Jan. 23, 1995, while vacating the bankruptcy court's order entered Nov. 1, 1994, does not reinstate the automatic stay. See Allison v. Commissioner, 97 T.C. 544 (1991). Held, further, the petition filed herein was not filed in violation of the automatic stay and Ps properly invoked this Court's jurisdiction. Sec. 6213(f), I.R.C.

In 1987, P received $ 150,000 in compensatory damages and $ 500,000 in punitive damages pursuant to judgment on a claim for tortious interference with future employment, with statutory interest… Held: $ 500,000 of the settlement proceeds are properly characterized as punitive damages.

P made donations of its surplus bread inventory to food banks which qualified as permissible charitable donees under sec. 170(e)(3)(A), I.R.C., and claimed charitable contribution deductions based… Held: fair market value of P's bread contributions redetermined.

P, a dentist, incorporated C and established three pension plans. P was an employee of C. Plan 2 was frozen in 1982. Plan 2 was merged into plan 1 in 1986. P dissolved C in 1986 and distributed all of the assets in the plan 1 trust to employees, including P, in 1987. We held in Fazi v. Commissioner, 102 T.C. 695 (1994) (Fazi I), that plan 1 was not qualified and its related trust was not exempt during 1985, 1986, and 1987. We also held that, except for amounts conceded by R, P was taxable in 1987 on the assets distributed to P from plan 1. In Fazi I, R conceded on brief that the taxable distribution to P from plan 1 for 1987 had to be reduced by contributions made on P's behalf for 1985 and 1986, including P's share of the amount merged from plan 2 to plan 1 during 1986. This concession was accepted without review or analysis of the underlying substantive issues related to the concession. R determined that P is taxable in 1986 on the amounts contributed to plans 1 and 3 on his behalf for that year, including the amount merged from plan 2 into plan 1. R's notice of deficiency was mailed more than 3 years, but less than 6 years, after the filing of P's 1986 tax return. R now admits that, but for judicial estoppel, P should not be taxed in 1986 on his share of the merged amount, but rather when it was distributed to him in 1987. P argues that judicial estoppel does not apply and that R is barred by the statute of limitations from asserting a deficiency for 1986. Held, P's share of the merged amount is not taxable to P in the year of merger; Fazi I clarified. Held, further, judicial estoppel does not prevent P from denying liability. Held, further, the 1986 tax year is not open for redetermination.