Volume 107 — Tax Court Reports

P made contractually required monthly contributions to 29 collectively bargained defined benefit pension plans. Held: the contributions based on hours worked after the close of the fiscal year and before October 15, 1986, were not on account of P's February 2, 1986 fiscal year, as required by sec. 404(a)(6), I.R.C., and are therefore not deductible in that year.

P was ordered to file responses to R's requests for admission. P's subsequent responses to the requests for admission were evasive and incomplete and contained time-worn tax protester statements. Held: Sanctions imposed; the matters contained in R's requested admissions are established for purposes of this case. 2. Held, further: P had unreported taxable income as determined by R for each of the years in issue.

Ps' principal residence was destroyed by fire. They recovered insurance proceeds based on replacement cost, resulting in a gain. Held: under the origin of claim doctrine, Ps' residence was the source of their gain and the legal fees represented capital expenditures constituting a reduction in their gain and not currently deductible under sec. 212(1), I.R.C.

W, a cash basis partnership, entered into an agreement in 1980 to borrow up to $ 29 million from J. J made an initial disbursement of $ 19,645,000. Held: W is not entitled to interest deductions under sec. 163(a), I.R.C. A cash basis borrower is not entitled to an interest deduction where the funds used to satisfy the interest obligation were borrowed for that purpose from the same lender to whom the interest obligation was owed.

Under the Ontario Mining Tax (OMT), mine operators are generally liable for a tax on gross receipts less deductions for several expenses and a processing allowance. P paid the OMT and claimed a foreign tax credit under sec. 901, I.R.C. P and R agree that sec. 1.901-2, Income Tax Regs., applies to the years at issue. R concedes that the OMT is a tax and that it meets realization and gross income requirements imposed by those regulations but contends that the OMT does not meet the net income requirement. Sec. 1.901-2(b)(4), Income Tax Regs. A foreign tax meets the net income requirement if it meets any one of three tests. Under one of those tests, a foreign tax meets the net income requirement if, judged on the basis of its predominant character, the base of the tax is computed by reducing gross receipts to permit recovery of significant expenses under a method that is likely to approximate or exceed those expenses. Sec. 1.901-2(b)(4)(i)(B), Income Tax Regs. Held: Whether, judged by the predominant character of the OMT, the processing allowance is likely to approximate or exceed expenses related to gross receipts which are nonrecoverable under the OMT is a question of fact. Accord Texasgulf, Inc. v. United States, 17 Cl. Ct. 275 (1989), modified per order (Apr. 16, 1992). Held, further, P has proven that, judged on the basis of the predominant character of the OMT, the processing allowance is likely to approximate or exceed expenses related to gross receipts which are nonrecoverable under the OMT. Inland Steel Co. v. United States, 233 Ct. Cl. 314, 677 F.2d 72 (1982), distinguished ( sec. 1.901-2, Income Tax Regs., did not apply).

Ps own, operate, and manage hospitals and related businesses. For taxable year ended 1987, pursuant to sec. 448, I.R.C., Ps not already using an overall accrual method changed their method of accounting to that method. Also during 1987, HCAII, a wholly owned subsidiary of HCA, sold all of the stock of some subsidiaries that owned and operated hospitals and other facilities. On audit, R determined that for certain of those subsidiaries (Category B Corporations) Ps had to include in income for taxable year ended 1987 the entire sec. 481, I.R.C., adjustment relating to the change in method of accounting required by sec. 448, I.R.C. Ps contend that, even though the Category B Corporations were sold during 1987, pursuant to sec. 448(d)(7)(C)(ii), I.R.C., HCA is entitled to include ratably in income over a 10-year period the portion of the sec. 481(a), I.R.C., adjustment attributable to the Category B Corporations. Held: The cessation of trade or business provision of sec. 1.448-1(g)(3)(iii), Income Tax Regs., is a permissible construction of sec. 448(d)(7)(C)(ii), I.R.C. Held further: the entire balance of the sec. 481(a), I.R.C., adjustment attributable to the Category B Corporations must be included in Ps' income for taxable year ended 1987.

Company A (A) sold Company B (B) a 35-percent interest, and retained a 65-percent interest, in a commercial office building (building) that was subject to an existing loan (loan) made by Company C… Held: The 11.5-month period of zero rent qualifies as a reasonable rent holiday described in sec. 467(b)(5)(C). Accordingly, pursuant to respondent's concession, P shall accrue rent for 1988 in accordance with the lease as provided in sec. 467(b)(1)(A).

Ps own, operate, and manage hospitals and related businesses. Held: Amended sec. 1.448-2T(e), Temporary Income Tax Regs., 53 Fed. Reg. 12513 (Apr. 15, 1988), is a permissible construction of sec. 448(d) 95), I.R.C., and, therefore, the amount to be excluded from income for 1987 and 1988 pursuant to sec. 448(d)(5), I.R.C., must be calculated as required by the amended temporary regulations.

P, a nonresident alien individual, failed to file Federal income tax returns for the years 1987 through 1991. R repeatedly notified P of his failure to file. Held: P is not entitled to the benefit of deductions pursuant to sec. 874(a), I.R.C.Held, further, P is liable for additions to tax pursuant to secs. 6651(a)(1) and 6654, I.R.C.

P was the licensee of a Bermuda corporation (SDI Bermuda) of worldwide rights to use computer software. P in turn licensed those rights for use in the United States to a U.S. corporation (SDI USA). Held: the two licenses were separate and distinct from each other with the result that the royalties paid to P by SDI USA did not retain their U.S. source character as part of the royalties paid by P to SDI Bermuda.

Ps had net operating losses for tax years 1989 to 1992 from deductible expenses they incurred to comply with various requirements of Federal law; i.e., the Internal Revenue Code, the 1934 Securities… Held: Ps' regulatory compliance costs are not specified liability losses.

In Fort Howard Corp. v. Commissioner, 103 T.C. 345 (1994), we held that sec. 162(k), I.R.C., precluded petitioner from deducting or… Held: In light of this statutory modification, we now hold that the expense disallowance rule of sec. 162(k), as amended on Aug. 20, 1996, does not preclude petitioner from taking deductions for the amount of costs and fees it paid or incurred that are properly allocable to indebtedness and amortized over the term of such indebtedness.

R determined a deficiency in P's estate tax liability. P claims that it is entitled to equitable recoupment of previously paid income tax, the refund of which is barred by the statute of limitations. Held: Equitable recoupment is restricted to use as a defense against an otherwise valid claim. For purposes of equitable recoupment, the notice of deficiency is considered to be R's claim for additional estate tax. See Bull v. United States, 295 U.S. 247 (1935).

Ps filed petitions for redetermination contesting, inter alia, R's determination that Ps are liable for interest computed at the increased rate prescribed in sec. 6621(c), I.R.C., applicable to large… Held: Sec. 6214(a) does not provide statutory authority for this Court to redetermine Ps' liability for interest computed at the increased rate prescribed in sec. 6621(c). Held, further, R's motions to dismiss for lack of jurisdiction and to strike will be granted.

P, a funeral director, is a full-time employee of Russon Brothers Mortuary, a C corporation, all the stock of which was owned by his father and two uncles. Held: Since stock is the type of property that normally pays dividends, it is covered by sec. 163(d)(5), I.R.C., as property which produces income of a type described in sec. 469(e)(1), I.R.C., notwithstanding that in this case no dividends have in fact been paid in the past on Russon Brothers stock.

P funded its vacation and severance pay obligations to its employees for 1991 by purchasing an irrevocable letter of credit on March 13, 1992. Held: the letter of credit constituted payment on March 13, 1992, so that sec. 404(a) (5), I.R.C., does not apply, and the deduction for vacation and severance pay is an allowable deduction for P's 1991 taxable year under sec. 83(h), I.R.C., and sec. 1.83-6(a) (3), Income Tax Regs.

P, an accrual basis taxpayer, provides discount securities brokerage services for which it earns a commission fee. Held: Under the all events test, P must accrue commission income for the purchase or sale of securities on the trade date as opposed to the settlement date. Held, further: Under California law, P's liability for franchise taxes based on its income during its second year ended Dec. 31, 1988, was fixed on that date.

P regularly made and participated in loans to borrowers located in foreign countries, including Brazil. Held: The withholding tax paid by non-tax-immune Brazilian borrowers is potentially creditable to P but must be reduced, undersec. 4.901-2(f) (3) (ii), Temporary Income Tax Regs., 45 Fed. Reg. 75653 (Nov. 17, 1980), and sec. 1.901-2(e) (3) (ii), Income Tax Regs., by the pecuniary benefit the borrowers received from the Brazilian Government.

P, a Canadian insurance company, operated through a permanent establishment in the United States for purposes of the income tax convention between the United States and Canada. Held: art. VII(2) of the Canadian Convention requires that profits attributed to a permanent establishment be measured based on the permanent establishment's facts and by reference to the establishment's separate accounts insofar as those accounts represent the real facts of the situation.