Volume 110 — Tax Court Reports

T, an individual, sought approval from the Internal Revenue Service to become a trustee of an individual retirement account (IRA) trust. Held: T is not qualified to serve as a trustee of an IRA trust under sec. 408(a)(2), I.R.C., and sec. 1.408-2(b)(2), Income Tax Regs. 2. HELD, FURTHER, the distributions to Ps were taxable in the year of distribution and were subject to the 10-percent additional tax pursuant to sec. 72(t), I.R.C. 3.

R determined a deficiency for the taxable year 1981. The notice of deficiency did not include any additions to tax or penalties; however, the notice did include a statement that interest would accrue on the deficiency. In a timely petition, Ps attempt to place in dispute penalties and interest. Ps did not make a written request with the IRS to abate interest; however, they assert that they made an informal request and that the notice of deficiency should be considered a "final determination" not to abate interest under sec. 6404(g). R filed a motion to dismiss for lack of jurisdiction and to strike with respect to penalties and interest. HELD: We lack jurisdiction to consider additions to tax or penalties which were not determined in the notice of deficiency. HELD FURTHER: We lack jurisdiction under sec. 6404(g) since, under these circumstances, the notice of deficiency issued to Ps does not constitute a notice of the Secretary's final determination not to abate interest.

P, a shareholder in an S corporation (S), received a 3X distribution from S during 1990. S's Accumulated Adjustment Account (AAA), under sec. 1368, I.R.C., had a 3X balance as of the beginning of 1990. S had a 2X loss for 1990. When subch. S status was elected for S, its predecessor subch. C corporation had in excess of 2X accumulated earnings and profits. To the extent that the 3X distribution for 1990 exceeds the balance of the AAA, P would be taxable for such excess as a dividend to the extent it did not exceed the accumulated earnings and profits from the predecessor subch. C corporation. R determined that the 2X loss should be first subtracted from the 3X balance of the AAA before considering the 1990 distribution. R's determination would result in taxable ordinary income to P. P counters that distributions should be first subtracted from the AAA prior to any adjustments for losses or deductions of the subch. S corporation for the year. HELD: Losses and deductions for the year are to be first subtracted from the AAA prior to considering shareholder distributions for the year. Secs. 1367 and 1368 interpreted.

R issued a notice of deficiency to Ps for the taxable years 1978, 1981, and 1982. Ps filed a petition with this Court and subsequently filed a petition in bankruptcy with the bankruptcy court. Held: This Court has jurisdiction. Comas, Inc. v. Commissioner, 23 T.C. 8 (1954), and Valley Die Cast Corp. v. Commissioner, T.C. Memo 1983-103, distinguished. HELD, FURTHER, the period of limitations for making an assessment has not expired.

Prior to Jan. 1, 1991, X was a closely held C corporation, which incurred passive activity losses (PAL's) giving rise to suspended PAL's pursuant to sec. 469, I.R.C. A portion of the suspended PAL's… Held: sec. 1371(b)(1), I.R.C., precludes X from using its suspended PAL's in 1991, an S corporation year. HELD, FURTHER, X may not recompute the bases of the sold properties to include amounts representing the portions of the suspended PAL's attributable to depreciation.

HELD, inter alia, upon redetermination of the original amortizable bases of property owned by P's S corporations, amortization must be calculated using the bases of the property as reduced by… Held: inter alia, upon redetermination of the original amortizable bases of property owned by P's S corporations, amortization must be calculated using the bases of the property as reduced by previously allowed amortization deductions.

P is the tax matters partner of a partnership comprised of four other partners. Two of the partnership's partners are partnerships. Held: R's position, relating to whether P was entitled to use PCM, was not substantially justified. 2. HELD, FURTHER, first-tier partners that meet the net worth requirements of sec. 7430, I.R.C., are eligible to receive an award. 3.

P accepted an offer for an early separation which had been made to him by the U.S. Navy pursuant to a downsizing program. Held: P's severance payment is not excludable from gross income under sec. 112.

P received distributions from individual retirements accounts (IRA's) and Keogh accounts consisting solely of money. P purchased stock with a portion of the distributions. Held: secs. 408(d)(3) and 402(c), I.R.C., both require that a rollover contribution, from a distribution of money, consist only of money. Thus, P's reinvestments of his IRA and Keogh distributions do not constitute rollover contributions and such distributions are includable in income.

Petitioner was the sole shareholder of M, an S corporation. In the 1991 taxable year, M was insolvent. Held: In deciding whether petitioner may increase his basis in the corporate stock, sec. 108(d)(7)(A), I.R.C., applies. 2. HELD, FURTHER, sec. 108(d)(7)(A), I.R.C., precludes the application of the conduit rules of subchapter S. 3.

P contends that, pursuant to the Religious Freedom Restoration Act of 1993, she is exempt from Federal income taxes. Held: RFRA does not exempt petitioner from Federal income taxes.

P and her husband (H) purchased property in 1972 as joint tenants with right of survivorship. P became the sole owner of the property upon H's death in 1991. Held: Amendment to definition of qualified joint interest in sec. 2040(b)(2), I.R.C., did not expressly or impliedly repeal effective date of 50-percent inclusion rule of sec. 2040(b)(1), I.R.C., which therefore does not apply to spousal joint interests created before Jan. 1, 1977.

Movants were investors in the so-called Elektra Hemisphere tax shelters. Held: Movants' motions are denied.

Petitioners (investors in the so-called Elektra Hemisphere tax shelters) move for leave to file motions under Rule 162 to vacate final decisions that have been entered herein and to require… Held: Petitioners' motions are denied.

P was a limited partner in a partnership subject to the unified audit and litigation provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 324, 648. R issued notices of computational adjustment to Ps, pursuant to which deficiencies for taxable years 1987 through 1990 were assessed. In the computational adjustment notices for 1989 and 1990, R recharacterized Ps' distributive share of partnership losses for those years as passive for purposes of sec. 469, I.R.C. R thereafter issued affected items notices of deficiency to Ps for 1987 through 1990 in which additions to tax and accuracy-related penalties were determined, based on the computational adjustments. Secs. 6653(a)(1)(A) and (B), 6659, 6661, 6662(a), I.R.C. Ps moved for summary judgment, claiming that the period of limitations for assessment for 1989 and 1990 has expired such that Ps' share of partnership losses cannot be recharacterized as passive, and that Ps are entitled to, among other things, refunds for overpayments as well as net operating losses for those years based on favorable adjustments at the partnership level for 1989 and 1990. R objects to Ps' motion. Both Ps and R moved to amend their respective pleadings pursuant to Rule 41, Tax Court Rules of Practice and Procedure. 1. HELD: Ps' motion for leave to file amendment to petition and R's motion for leave to file amendment to answer are granted. Rule 41(a), Tax Court Rules of Practice and Procedure. 2. HELD, FURTHER, Ps' motion for summary judgment denied; the statutory period of limitations does not preclude R's recharacterization of Ps' distributive share of partnership losses for 1989 and 1990 as passive losses subject to the limitations set forth in sec. 469, I.R.C.Secs. 6229(a) and (d), 6230(a)(2)(A)(i), I.R.C.

A and his son M were shareholders of MIC, an S corporation that distributed ice cream products to supermarket chains, independent grocery stores, and food service accounts. Held: The benefits of the personal relationships developed by A with the supermarket chains and A's oral agreement with the founder of HD were not assets of MIC that were transferred by MIC to SIC and thereafter sold by SIC to HD; A was the owner and seller of those assets. 2.

P transferred stock to its employees as compensation for services, and it claimed a deduction in the year of transfer for the value of the stock. Held: Sec. 83(h), I.R.C., does not allow P to deduct the reported amount in the year of transfer.

On June 25, 1992, P filed a bankruptcy petition under chapter 13 of the Bankruptcy Code. On Dec. 16, 1996, R issued a notice of deficiency to P for the taxable year 1993. Held: The bankruptcy court's order dated Jan. 21, 1997, dismissing P's bankruptcy case pursuant to 11 U.S.C. sec. 1307 (1994), served to terminate the automatic stay imposed under 11 U.S.C. sec. 362(a)(8) (1994). See 11 U.S.C. sec. 362(c)(2)(C) (1994).

P, a member of a federally recognized tribe of American Indians, purchased a boat that he used in treaty fishing- rights-related activity as defined in sec. 7873, I.R.C. In 1984, P obtained a… Held: Discharge of indebtedness income received by P from the BIA is not excludable from income under sec. 7873 because it was not derived by P directly or through a qualified Indian entity from a fishing-rights-related activity.

R moves to dismiss this case for lack of jurisdiction, alleging that P's petition for declaratory judgment with respect to the status of its profit sharing plan was untimely. Held: Sec. 7476(b)(5), I.R.C., requires that a petition for declaratory judgment be filed before the 91st day after the day after the issuance of a final revocation letter. Hence, we must dismiss this case for lack of jurisdiction.

Docket Nos. 27027-96, 5382-97 R determined deficiencies in P's taxable years 1988 through 1993. Held: Sec. 6512(b)(4), I.R.C., does not operate to restrain our jurisdiction to entertain P's overpayment claim. HELD, FURTHER: Our overpayment jurisdiction under sec. 6512(b), I.R.C., includes authority to determine an overpayment that is attributable to interest.

Decedent and his wife Yang owned real property in California, a community property State. Held: The State trial court's decree does not bind this Court for Federal estate tax purposes. Further, P has failed to overcome the presumption of joint tenancy with right of survivorship created by the deeds under California law.

R and P's predecessor, NP, executed a series of three Forms 872 for 1985. Held: P, Energy, is estopped to deny the validity of the Forms 872. Knowledge of the merger is not attributed to R's WPT agents; computerized information of the merger was not accessible to them. 2. HELD: Ps are independent producers, because they did not sell their propane to T. 3.

P is liable for the accuracy-related penalty on that portion of the underpayment attributable to the negligent omission of $ 102,519 of the total unreported income. In determining the amount to which the penalty is applied, R first calculated the total underpayment. R then calculated the underpayment excluding the "negligent" income. R then imposed the penalty on the difference. P calculated the underpayment of tax attributable to negligence by adding the $ 102,519 to the reported income and applying the penalty to that amount. HELD, R's method of computing the penalty is sustained.

As a result of mergers, P succeeded to the interests of two banks. Held: The loan origination expenditures were incurred in the creation of loans. These loans were separate and distinct assets that generated revenue over a period beyond the current taxable year. The expenditures are not currently deductible under sec. 162(a), I.R.C., and must be capitalized under sec. 263(a), I.R.C.

P, the related supplier of UCFSC, a wholly owned foreign sales corporation (FSC) within the meaning of sec. 922, I.R.C., filed a motion… Held: Respondent's cross-motion for partial summary judgment granted and petitioner's motion for partial summary judgment denied; sec. 1.925(a)-1T(e)(4), Temporary Income Tax Regs., supra, requires that the period of limitations for claiming refunds under sec. 6511, I.R.C., be open for both petitioner and UCFSC in order for petitioner to…

H and W formed a trust to hold their property during their lives. Held: The incompetency provisions in the trust agreement take the property passing to A outside the requirements for the marital deduction; the surviving spouse's power of appointment is not exercisable by the surviving spouse alone and in all events, as is required by sec. 2056(b)(5), I.R.C., and the regulations thereunder.

P provides investment management services to regulated investment companies (RIC's), which are commonly referred to as mutual funds. Held: The expenditures are not currently deductible under sec. 162(a), I.R.C., and must be capitalized under sec. 263(a), I.R.C. HELD, FURTHER: P failed to establish a limited life for the future benefits obtained from the costs of launching RIC's. P may not amortize such costs under sec. 167, I.R.C.

P executed a contract enrolling his farmland for 10 years in the Conservation Reserve Program. Food Security Act of 1985, Pub. L. 99-198, 99 Stat. 1509-1514, 16 U.S.C. secs. 3831-3836 (1994). Held: Annual payments received by P under the contract were rentals from real estate and therefore not subject to self- employment tax under secs. 1401 and 1402, I.R.C.

Ps filed a Motion for Reconsideration of our Opinion reported as Estate of Quick v. Commissioner, 110 T.C. 172 (1998). Held: Ps' Motion for Reconsideration is denied; this Court has jurisdiction to determine overpayments of tax, if any, attributable to affected items as part of a decision of this case ( sec. 6512(b)(1), I.R.C.; Woody v. Commissioner, 95 T.C. 193, 206, 209 (1990), followed); this Court lacks jurisdiction to order credits or refunds of…

Partnerships subject to U.S. income reporting made soil and water conservation expenditures in connection with their farming operations in New… Held: Sec. 175(c)(3)(A)(i) and (ii), I.R.C., limits the deduction of soil and water conservation expenditures to those that are consistent with a soil conservation plan approved by the Soil Conservation Service (SCS) of the Department of Agriculture or a soil conservation plan of a State agency, which agency is comparable to the SCS.

Between 1986 and 1991, N, a bank holding company whose affiliates provide banking and other financial services, developed or modified previously developed software for the internal… Held: The three additional tests for qualified research in the development of internal use software enunciated in the conference report accompanying the TRA 1986 require a higher threshold of technological advancement and functional improvement than is necessary in other fields of research. 2.

HELD: In determining the fair market value on a valuation date after the repeal of the doctrine established in General Utils. & Operating Co. v.… Held: In determining the fair market value on a valuation date after the repeal of the doctrine established in General Utils. & Operating Co. v. Helvering, 296 U.S. 200, 80 L. Ed. 154, 56 S. Ct. 185 (1935), of each of two minority blocks of common stock of company A, the Court is not precluded on the record presented from giving…