Volume 109 — Tax Court Reports

P had deficiencies in its Federal income tax for years 1 and 2. Held: P has made overpayments of interest for years 1 and 2 because R should have taken the investment tax credit amounts into account in calculating interest accruing from the end of year 3 until the due date of the return for year 6 on deficiency amounts reduced by the investment tax credit carried back.

Ps own, operate, and manage hospitals and related businesses. For taxable years ended 1985 through 1987 Ps claimed depreciation deductions based on 5-year recovery periods for certain properties they placed in service during those years, which properties Ps claim constitute tangible personal property. R determined that the properties constitute structural components of the buildings to which they relate and that the properties therefore must be depreciated over the same recovery periods as those buildings. Held: For purposes of assigning appropriate recovery classes or recovery periods to the properties to determine allowable depreciation deductions pursuant to sec. 168, I.R.C., tests developed under prior law for purposes of the investment tax credit are applicable to decide whether the property constitutes tangible personal property. Held further: The prohibition contained in sec. 168, I.R.C., against the use of the component method of depreciation does not preclude the use of an analysis based on Scott Paper Co. v. Commissioner, 74 T.C. 137 (1980), and its progeny, and sec. 1.48-1(1), Income Tax Regs., and accordingly such authorities are applied to assign appropriate recovery classes or recovery periods to the properties in issue.

H submitted requests for abatement of interest to the Internal Revenue Service prior to July 30, 1996, the date of enactment of sec. 6404(g), I.R.C. After July 30, 1996, R sent to H a notice of final disallowance of abatement of interest pursuant to sec. 6404(g). H and W filed a petition for review of the failure to abate interest. R filed a motion to dismiss for lack of jurisdiction as to H on the ground that the request for abatement of interest was submitted prior to the effective date of sec. 6404(g) and as to W on the ground that no notice of final disallowance of abatement of interest was mailed to her. Held: We have jurisdiction to review the denial of H's request for abatement of interest, but we lack jurisdiction as to W.

Ps submitted requests for abatement of interest to the IRS, which were denied prior to July 30, 1996, the date of enactment of sec. 6404(g), I.R.C. Ps now seek review of the failure to abate interest pursuant to sec. 6404(g). Held: We lack jurisdiction to review the denial of Ps' requests for abatement of interest.

Held: In consolidating nonlife insurance companies with life insurance companies and for purposes of calculating the amount of net operating… Held: In consolidating nonlife insurance companies with life insurance companies and for purposes of calculating the amount of net operating losses of nonlife insurance companies that, under sec. 1503(c)(1) and ( 2), I.R.C., may reduce income of the life insurance companies, companies that constituted members of a recently acquired…

P owned an interest in two wells in the same tight formation gas field. The field had been established under statutory procedures as a tight formation field. One well had been certified as producing tight formation gas under the established Federal statutory procedures, and the other had not. Congress provided a tax credit incentive to develop, among other fuels, tight formation gas. Sec. 29(c) (2) (A), I.R.C., requires that, as a prerequisite to the credit, "the determination of whether any gas is produced from * * * a tight formation shall be made in accordance with section 503 of the Natural Gas Policy Act of 1978 [NGPA]", Pub. L. 95-621, 92 Stat. 3350, 3397, 15 U.S.C. sec. 3413 (1988). NGPA sec. 503 was also the procedural route to qualifying individual tight formation gas wells for incentive (higher than ceiling) price treatment administered by the Federal Energy Regulatory Commission (FERC). Under NGPA sec. 503, related statutes, and FERC regulations, determinations concerning tight formation gas were required for both the field in which a well was situated and the individual well. R determined thatsec. 29, through reference to NGPA sec. 503, required individual well-category determinations to qualify for the tax credit. P contends and R does not deny that but for the lack of a certification under NGPA sec. 503, the well in question would meet the qualifications for tight formation gas. P contends that meeting the qualification by definition (in substance) should suffice and that actual certification is unnecessary. Held: Sec. 29, I.R.C., when read in conjunction with the provisions of NGPA sec. 503 and related materials, requires an individual well tight formation gas determination under the procedures of NGPA sec. 503 as prerequisite to tax credit eligibility.

P's employer withheld tax from his wages for 1984. P filed a timely 1984 return reporting no tax liability and claiming a refund for the withheld tax. No tax has ever been assessed or refunded for 1984. R issued a notice of deficiency after the expiration of the period of limitations. Assessment of any tax against P for 1984 is now barred. P claims that the entire amount of withheld tax is an overpayment within the meaning of sec. 6512(b), I.R.C. R maintains that any overpayment is limited to the amount by which the withheld tax exceeds the amount of tax which might have been properly assessed but for the statute of limitations. HELD: Pursuant to Lewis v. Reynolds, 284 U.S. 281 (1932), the amount of an overpayment for a taxable year is limited to the excess of the tax paid over the amount which might have been properly assessed and demanded even though assessment is now barred by the statute of limitations.

For certain years prior to the period at issue, petitioners, company A (A) and its subsidiaries (A group), were members of an affiliated… Held: For each year during the period at issue, petitioners were not members of the affiliated group within the meaning of sec. 1504(a) that had B as its common parent, and, consequently, they are not entitled to join in the consolidated return that B filed for each of those years in which it claimed to be the common parent of a group of…

During December 1982, P established a voluntary employees' beneficiary association (VEBA) which qualified for exemption under sec. 501(c)(9), I.R.C., and as a welfare benefit fund (WBF) under… Held: P is not automatically entitled to the safe harbor percentages of sec. 419A(c)(5)(B)(i) and (ii), I.R.C., in computing additions to its account limit for CIBU's for the taxable years 1986 and 1987. General Signal Corp. & Subs. v. Commissioner, 103 T.C. 216 (1994), followed. 2.

Prior to trial, R conceded the deficiencies determined for the years 1990 through 1992. P filed a timely claim for an award of litigation costs, including, among other things, attorney's fees billed at $<>250 per hour and one accountant's fees billed at $<>170 and $<>175 per hour and another's fees billed at $<>90 and $<>92 per hour. R concedes that P has satisfied all the requirements for entitlement to litigation costs and disputes only the amounts of the fees claimed by the attorney and the principal accountant. Specifically, R asserts that the limitation of sec. 7430(c)(1)(B)(iii), I.R.C., of $<>75 per hour (adjusted for inflation) for the years in issue, applies to all fees claimed. HELD: P failed to establish that a special factor existed which justifies an award of attorney's fees in excess of the $<>75 limitation (adjusted for inflation). HELD, FURTHER: The fees claimed for services of the accountants, who are authorized to practice before the Internal Revenue Service, are to be treated as services of an attorney pursuant to sec. 7430(c)(3), I.R.C., and, accordingly, the limitation of sec. 7430(c)(1)(B)(iii), I.R.C., applies to such fees.

1. HELD: This Court may raise sua sponte the doctrine of issue preclusion, or collateral estoppel. 2. Held: This Court may raise sua sponte the doctrine of issue preclusion, or collateral estoppel. 2. HELD, FURTHER, interest payments that were credited to a partnership's bank account are taxable to Ps because P controlled partnership matters and benefited from and controlled the funds in that account. 3.

During 1990 and 1991, Ps donated nonpublicly traded stock for which they claimed charitable contribution deductions in amounts which the parties agree represent the fair market values of such stock. Held: Ps have not substantially complied with sec. 1.170A-13, Income Tax Regs., and are not entitled to charitable contribution deductions in excess of that allowed by R.

HELD: Notwithstanding the recourse nature of a third-party bank loan, due to various loss-limiting features associated with a computer equipment leasing transaction, petitioner is not to be regarded as at risk under sec. 465, I.R.C., with regard to related partnership debt obligations.

P deducted the amount of interest paid to his former spouse on an indebtedness which he incurred incident to their divorce. Held: Sec. 1041, I.R.C., has no relevance to the proper characterization of interest on indebtedness incurred incident to divorce.

Decedent's (D) husband (H) died in 1985, and D died in 1991. They were survived by two children, James P. Letts III and JoAnne Magbee. Held: D's gross estate includes the value of the life interest under the duty of consistency.

H county has a program to preserve farmland by purchasing development rights from landowners. Held: Because Ps have shown that the market created by the county under the program was populated by sellers intending to make gifts to the county and was not determinative of fair market value, Ps are entitled to present evidence of the fair market value of their land before and after the conveyance of the easement.

Petitioner was organized in 1963. In a ruling letter dated Mar. 31, 1969, respondent ruled that petitioner was exempt from Federal income tax and was an eligible charitable donee. Secs. 501(a), 501(c)(3), 170(c), I.R.C. 1954. On June 11, 1984, petitioner entered into a 5-year fundraising contract (the Contract) with a professional fundraiser (W&H). During 1984 through 1989, W&H helped petitioner conduct a nationwide direct mail fundraising campaign. Petitioner received a total of about $<>2-1/4 million in net fundraising revenue under the Contract. W&H received more than $<>4 million in fees from petitioner, and in addition derived substantial income from exploiting the co-ownership rights in petitioner's mailing list, which rights had been granted to W&H under the Contract. On Nov. 2, 1990, respondent revoked the favorable ruling letter retroactively to June 11, 1984. Petitioner initiated the instant action under sec. 7428, I.R.C. 1986, for a declaratory judgment that it qualifies as an exempt organization and as an eligible charitable donee. 1. HELD: W&H was an "insider" for purposes of the inurement provisions of secs. 501(c)(3), 170(c)(2)(C), I.R.C. 1954 and 1986. 2. HELD, FURTHER, there was an inurement of net earnings to W&H; petitioner fails to qualify as an exempt organization or as an eligible charitable donee. 3. HELD, FURTHER, respondent's retroactive revocation of the favorable ruling letter back to June 11, 1984, was not an abuse of discretion.

On July 5, 1991, banking regulators seized the assets of the Bank of Commerce and Credit International, S.A. (BCCI, S.A.), including funds that petitioner (a United Kingdom citizen and U.S. resident) deposited at BCCI, S.A.'s Isle of Man branch (IOMB). Petitioner's account was insured for loss up to 15,000 pounds sterling by the Isle of Man Depositor's Compensation Scheme. Petitioner filed a claim against BCCI, S.A. for her funds. At all relevant times BCCI, S.A. maintained an agency office in Los Angeles. Petitioner deducted $ 185,493.79 as a loss from an insolvent financial institution pursuant to sec. 165(l)(1), I.R.C., on her 1991 U.S. Federal income tax return. The $ 185,493.79 represented the final balance of her IOMB account, less the 15,000 pounds sterling insurance. 1. HELD: Neither BCCI, S.A., its IOMB, nor its Los Angeles agency office meets the statutory requirements for "qualified financial institution" pursuant to sec. 165(l)(3), I.R.C. Accordingly, petitioner is not entitled to a casualty loss in 1991. 2. HELD, FURTHER: In light of the pendency of petitioner's claim in the liquidation of BCCI, S.A., petitioner is not entitled to a bad debt deduction pursuant to sec. 166, I.R.C., for 1991, the year the funds were seized, because she failed to prove that the deposit became worthless during that year.

P owns and operates various systems of interconnected subterranean natural gas gathering pipelines and related compression facilities (the gathering systems). Held: P transports, and does not produce, gas; thus, P must depreciate the gathering systems over 15 years.

An individual purchased more than a 50-percent interest in a partnership, that owned and operated a professional sports franchise. Held: Sec. 1056, I.R.C., does not apply to this partnership transaction involving a sports franchise. HELD, FURTHER: Partnership correctly computed the basis in the player contracts under the subch. K basis adjustment sections and regulations thereunder.

L, a partnership, purchased land on which it intended to build single-family residences. At the time of purchase, the land was zoned for agricultural use and one-third of the land was wetlands under Federal wetland regulations. In 1988, L applied for rezoning of the land to residential, and in 1989, L's rezoning application was denied. Also in 1989, new Federal wetland regulations were issued that resulted in about 75 percent of the land's being classified as wetlands. L is required to obtain a permit under the Clean Water Act of 1977, Pub. L. 95-217, sec. 67(a) (commonly called a section 404 permit), 91 Stat. 1566, 1600, 33 U.S.C. sec. 1344 (1994), before beginning the residential project on the wetland portion of the land. L did not apply for a permit in 1989, and L did not sell or abandon the property. The land remains zoned for agricultural use. L claimed a loss deduction under sec. 165, I.R.C., in 1989 for the decrease in property value of the land based on its inability to use the land for residential development because of the Federal wetland regulations. HELD: There has not been a realization event that fixes the decrease in property value in a closed and completed transaction, and L is not entitled to a loss deduction under sec. 165(a), I.R.C.

Ps realized income on account of the discharge of indebtedness. Ps excluded that income pursuant to the insolvency exclusion of sec. 108(a)(1)(B), I.R.C., by including certain "contingent" liabilities in the insolvency calculation of sec. 108(d)(3), I.R.C. HELD: The term "liabilities" in sec. 108(d)(3), I.R.C., requires Ps to prove with respect to any obligation claimed to be a liability that Ps will be called upon to pay that obligation in the amount claimed. HELD, FURTHER, Ps failed to prove that they would be called upon to pay any amount with respect to either of the obligations claimed to be liabilities. HELD, FURTHER, Ps failed to prove that, on the measurement date, their liabilities exceeded the fair market value of their assets and, therefore, may not exclude any income under sec. 108(a)(1)(B), I.R.C.