Volume 106 — Tax Court Reports

P filed a motion for partial summary judgment relating to the computation of combined taxable income under sec. 936(h)(5)(C)(ii), I.R.C., with respect to syrup and soft-drink… Held: further,sec. 1.936-6(b)(1), Q&A-12, Income Tax Regs., requires U.S. affiliate expenses to be allocated and apportioned to the component concentrate by applying the production cost ratio to all expenses allocable and apportionable to the integrated product; i.e., bottle and can soft drink. 3.

Ps deducted the amount of interest on the portion of a deficiency in Federal income tax arising out of adjustments caused by accounting errors of… Held: sec. 1.163-9T(b)(2)(I)(A), Temporary Income Tax Regs., is invalid insofar as it applies under the circumstances involved herein. Held, further, the amount of the interest so allocated by Ps is deductible as interest on an indebtedness properly allocable to a trade or business within the meaning of sec. 163(h)(2)(A), I.R.C.

Ps filed a motion for reasonable litigation costs pursuant to Rule 231, Tax Court Rules of Practice and Procedure, and sec. 7430, I.R.C., claiming that R was not substantially justified in… Held: R was not substantially justified with respect to the first issue, but was substantially justified with respect to the second issue. 2.

P, an accrual basis taxpayer, is in the banking business and issues credit cards. Held: the annual membership fees constitute payments for services rendered or made available to cardholders rather than payments in the nature of additional interest or loan commitment fees. 2.

P is in the banking business. P issued credit cards. P charged its credit card holders an annual membership fee. Held: it was not an abuse of discretion for R to conclude that P must report annual membership fees in income in the year of receipt. Held, further, Rev. Proc. 71-21, 1971-2 C.B. 549, does not permit P to report income from annual membership fees later than the year of receipt.

Decedent's will gave his surviving spouse an income interest in certain marital trust property but provided that if decedent's… Held: The marital trust property is QTIP within the meaning of sec. 2056(b)(7), I.R.C. This Court's opinions in Estate of Robertson v. Commissioner, 98 T.C. 678 (1992), revd. 15 F.3d 779 (8th Cir. 1994); Estate of Clayton v. Commissioner, 97 T.C. 327 (1991), revd. 976 F.2d 1486 (5th Cir. 1992); and Estate of Spencer v. Commissioner, T.C.…

Ps contend that they avoided recapture of an investment credit claimed with respect to property of a partnership subject to secs. 6221… Held: The amended return was ineffective because it did not conform to the requirements of an administrative adjustment request under sec. 6227, I.R.C.Held, further, Ps were required to take into account their distributive share of the partnership investment credit, and conversion of their partnership items to nonpartnership items pursuant…

P's were partners of the Raiders, a professional football team that received municipal funds repayable only from specific sources of revenue. Held: Amounts received from the Los Angeles Memorial Coliseum Commission as loans, to be repaid from revenue received from luxury suites, are taxable when received, because the obligation to repay was not unconditional. 2.

Decedent owned shares of stock that before his death were subject to certain securities law restrictions adversely affecting the value of the shares. Held: the per share value for Federal estate tax purposes is $ 15.56, since that was the value at the moment of decedent's death.

Decedent, a nonresident alien, died in 1990. She bequeathed U.S. situs property outright to her grandchildren. In 1986, bequests of this type, i.e., "direct skips", were first subjected to the generation-skipping transfer (GST) tax provisions of secs. 2601 through 2663, I.R.C. At the time of decedent's death, regulations dealing with "direct skips" had not been issued. Held, the bequests are subject to the GST tax. The issuance of regulations in respect of "direct skips" by nonresident aliens provided for in sec. 2663(2), I.R.C., is not a condition precedent to the imposition of the GST tax on such "direct skips" but merely authorizes the Secretary of the Treasury to prescribe the allocations and calculations involved in determining how such tax should be imposed.

P, a tax-exempt agricultural organization, engaged in activities to promote the use of agricultural cooperatives among farmers. In 1934, P formed L, a statewide cooperative. Held: The fees received by P pursuant to its service contract with L were substantially related to its tax-exempt purpose and, therefore, did not constitute unrelated business taxable income.

P, an accrual basis taxpayer, operates a continuing-care residential retirement community that has five types of accommodations: cluster homes or condominiums; apartments; a lodge; a rest home; and a skilled nursing health-care center. The rest home and health-care center are not involved in this case. The residents purchase the cluster homes or condominiums for the full purchase price and pay the taxes, insurance, and utilities for their unit. The cluster home or condominium owner can transfer the unit only to P which must repurchase the unit at certain percentages of the original purchase price during the first 7 years after purchase and thereafter at not less than 76 percent of the original purchase price. The residents of the apartments and the lodge must pay a lump-sum entry fee before taking occupancy and must thereafter pay a monthly rent. Except for the first 10 percent, the entry fees for the apartments are refundable on a prescribed percentage basis over a 5-year period. Except for the first 5 percent, the entry fees for the lodge are refundable on a prescribed percentage basis over a 20-year period. Held: The cluster home or condominium transactions constitute sales rather than financing arrangements so that P must include in income the net gains on the sales and is not entitled to depreciation deductions on the units. Held further: The entry fees do not constitute prepaid rent or advance payments for services that must be reported in the year of receipt. P's reporting of the nonrefundable or nonforfeitable portions of the entry fees each year clearly reflects income. Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203 (1990); Oak Industries, Inc. v. Commissioner, 96 T.C. 559 (1991) applied.

On reconsideration, we decline to alter any of the findings of fact or conclusions of law set forth in our prior opinion at 103 T.C. 59 (1994). Held: we adhere to our prior holding that 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. We also adhere to our prior findings and conclusions regarding the value of the pesos received and the amount of gain realized.

P, an Indiana county sheriff, was required by State statute to provide meals to the prisoners incarcerated in the county jail. The costs of providing the meals were borne by P. P received a meal allowance from the county on a per meal basis at a specified rate established by the State. P claims that he provided the meals to the county prisoners as an independent contractor, and reported the meal allowances received and costs incurred on a Schedule C. R contends that P provided the meals to the county prisoners as an employee of the county and must deduct such costs on a Schedule A as employee business expenses. Held: The costs of the meals constitute costs of goods sold and are taken into account in the determination of P's gross income. Consequently, under the circumstances of this case, it makes no difference for Federal income tax purposes, whether P provided the meals to the prisoners as an independent contractor or county employee.

P is an insurance company authorized to sell disability and life insurance within the State of Arizona. Held: R may rely on sec. 845(b), I.R.C., prior to the issuance of regulations.

Held: Among other things, petitioner, in the year of payment, is not entitled to a claimed sec. 166, I.R.C., bad debt deduction with respect to its payment as guarantor of a Japanese-yen-denominated loan made to a Japanese subsidiary corporation. Where a guarantor has a right of subrogation against, or a right of reimbursement from, the primary obligor (regardless of whether that right is expressly stated in the guaranty agreement), the provisions of sec. 1.166-9(e)(2), Income Tax Regs., apply, and the guarantor is not entitled to a bad debt deduction until the right of subrogation, or the right of reimbursement, is shown to be worthless.

P, a home rule municipal corporation and political subdivision of the State of Ohio, seeks a declaratory judgment that interest on bonds it proposes to issue will be exempt from taxation under sec. 103(a), I.R.C. In 1967, in exchange for the assumption of P's accrued unfunded pension obligation by a fund established for that purpose by the State of Ohio, P incurred a long-term obligation to the State Fund. In 1994, P made a lump-sum payment equal to 65 percent of the remaining principal in satisfaction of the long-term obligation. Taking into account the 35-percent discount, the yield to P in making the prepayment, as compared to the payments it otherwise would have made, is 7.57484 percent. P proposes to issue long-term obligations, with an interest rate of 6 percent, to fund the prepayment to the State Fund. Pending our decision herein, P has issued short-term obligations to fund the prepayment. Held, P entered into the prepayment transaction with a principal purpose being to profit from the discount offered by the State Fund. Held, further, to reflect the economic substance of the transaction, R may characterize the prepayment as the acquisition of property. Sec. 1.148-10(e), Income Tax Regs.Held, further, the prepayment constitutes investment-type property, sec. 148(b)(2), I.R.C., with a materially higher yield than the proposed bonds. Thus, interest on the proposed bonds will not be excludable from gross income under sec. 103(a), I.R.C.

P husband, age 53 at the time, made a premature withdrawal from his individual retirement account (IRA) in 1989. Held: Ps are liable for the 10-percent additional tax on the premature IRA withdrawal.

Ps provided free meals to their employees in private cafeterias located on their business premises. Held: Ps may deduct 100 percent of the meals' cost if they are within the de minimis fringe benefit exception of sec. 274(n)(2)(B), I.R.C., and whether they are within this exception is an unanswered question of fact. Held, further: Ps' provision of the meals is not within sec. 274(e)(8), I.R.C.

C, P's wholly owned corporation, operated a pension plan in which P participated. Held: P received a taxable distribution. 2. Held, further, the distribution was received by P in 1986. 3. Held, further, R abused her discretion by failing to waive the penalty for substantial understatement of income tax.

Petitioner (P) is a taxable membership corporation that operates a futures exchange. When a membership on the exchange is transferred, the transferee must pay P a transfer fee, which, under P's bylaws, is to be used to "purchase, retire or redeem the indebtedness encumbering the Board of Trade Building", which houses P's trading floor and substantial office space leased to third-party tenants. Held, the transfer fees are nontaxable contributions to capital, rather than taxable payments for services, because the transferees pay the fees with an investment motive, as evidenced by (1) the earmarking of the fees for reduction of P's mortgage indebtedness, (2) the resulting increase in the members' equity in P, and (3) the members' opportunity to profit from their investment in P because of the lack of restrictions on the transferability of their membership interests.

M, a subch. S corporation, purchased working interests in various gas wells that were subject to a gas purchase contract with A. To avoid litigation over a so-called take or pay provision in… Held: A's payment is an advance payment for the purchase of gas under the gas purchase contract and is includable in M's income in the year received. Held, further, sec. 1.636-(a)(1), Income Tax Regs., is valid and, A's right of recoupment is not a production payment under sec. 636(a).

Held, for purposes of determining the limitation under sec. 415(b), I.R.C., on benefits of a plan, the term service with the employer… Held: for purposes of determining the limitation under sec. 415(b), I.R.C., on benefits of a plan, the term service with the employer shall include service with businesses that antedate the plan sponsor where the transition results in a mere technical change in the employment relationship and continuity otherwise exists in the substance…

Both parties moved for summary judgment based solely on the issue whether this Court has jurisdiction to allow, by way of equitable recoupment, an offset of a barred estate tax overpayment resulting… Held: this Court has such jurisdiction. Estate of Mueller v. Commissioner, 101 T.C. 551 (1993), reaffirmed and applied.

Petitioner moved for award of reasonable litigation costs in a so-called actuarial case. Held, respondent's position was substantially justified. Held, further, petitioner's motion for award of reasonable litigation costs is denied.

P, a corporation, filed a lawsuit against various defendants alleging breach of contract, malicious prosecution, intentional interference with business relationship, fraud, and violation of fiduciary… Held: None of the proceeds are excludable from P's gross income under sec. 104(a)(2), I.R.C., because the settlement proceeds were not received on account of a personal injury.

P created a voluntary employees' beneficiary association (VEBA) trust designed to fund P's future holiday pay obligations to its employees. Held: P's $ 20 million contribution to the VEBA in 1985 provided P with substantial future benefits. P is therefore not entitled to deduct its $ 20 million contribution in 1985. INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), applied.