Volume 112 — Tax Court Reports

R determined, in a notice mailed to P, that some of P's workers were employees and that P was not eligible for relief under sec. 530 of the Revenue Act of 1978, Pub. Held: We lack jurisdiction to decide the amount of P's employment tax and income tax withholding liability for the taxable periods in issue.

P, a real estate developer, purchases properties intending to develop them. He undertook no development activities on the properties due to adverse economic conditions. Held: P must capitalize the tax payments under sec. 263A, I.R.C.

Ps submitted to the IRS a request for abatement of interest relating to employment taxes. R issued to Ps a notice of final determination not to abate interest. Ps filed a petitioner for review of R's failure to abate interest. HELD: R's failure to abate the assessments of interest under sec. 6404(a), I.R.C., was not an abuse of discretion. HELD, FURTHER: Sec. 6404(e)(1), I.R.C., does not authorize R to abate assessments of interest on employment taxes; therefore, R's failure to abate the assessments of interest under sec. 6404(e), I.R.C., was not an abuse of discretion.

P died owning 2,460,580 shares of stock that were held in her revocable trust. Held: The shares of stock should not merge or be aggregated for Federal estate tax valuation purposes.

P claimed a $ 10,131 overpayment on his return for 1993. R applied all of the overpayment to P's assessed tax liabilities for 1990 and 1991. Held: This Court does not have jurisdiction to decide whether R properly determined the assessed liabilities for years not before the Court.

H and W, who were both disqualified persons within the    meaning of sec. 4975, I.R.C., borrowed $ 340,000 from the    qualified pension plan of H's wholly owned corporation. H and W    did not make any payments of interest or principal relating to    the loan and did not file excise tax returns.      1. HELD: Sec. 4975, I.R.C., applies to a loan, even though    such loan, pursuant to sec. 72(p), I.R.C., was treated as a    distribution.      2. HELD, FURTHER, H and W did not correct, within the    meaning of sec. 4975, I.R.C., the prohibited transaction and,    pursuant to sec. 4975(a) and (b), I.R.C., are liable for both    tiers of excise taxes.      3. HELD, FURTHER, the "amount involved", on which the sec.    4975 excise taxes are based, is equal to the greater of interest    paid or fair market interest relating to the loan. Because H and    W did not make any payments of interest, the amount involved is    the fair market interest.      4. HELD, FURTHER, in determining the amount involved, the    fair market interest rate is 10.5 percent.      5. HELD, FURTHER, H and W, pursuant to sec. 6651(a)(1),    I.R.C., are liable for additions to tax for failing to file    excise tax returns.

Company M (M), a heavy truck dealer, purchased heavy truck parts and accessories (parts) from the manufacturers of those parts and sold them to its customers. Held: Respondent did not abuse respondent's discretion in determining that M's method of using replacement cost in valuing its parts inventory under the LIFO method does not clearly reflect income.

During 1991 and 1992, F, a non-U.S. pension fund, received dividends from U.S. corporations, net of U.S. income tax that was withheld thereon. Held: The deficiency notices are timely because F failed to file 1991 and 1992 income tax returns. The provision in sec. 1.6012-1(b)(2), Income Tax Regs., upon which F relies is inapplicable because: (1) F's tax liability for the years was not fully satisfied and (2) F claimed overpayments of tax.

D and N entered into a transaction that resulted in N's    owning all the stock of an entity of which D was a part. P    concedes that sec. 263(a), I.R.C., requires that D capitalize    the costs that were directly related to the transaction. P    disputes R's determination that sec. 162(a), I.R.C., does not    let D deduct investigatory and due diligence costs and all of    its officers' salaries. The investigatory costs relate primarily    to services rendered by L, a law firm, before D agreed to    participate in the transaction. D retained L to investigate    whether a reorganization-like transaction with N would be good    for D and its local community, so that D's management and board    could decide whether D should agree to such a transaction. The    remaining investigatory costs relate to services performed by L    in investigating whether, after the transaction, N's director    and officer liability coverage would protect D's directors and    officers for acts and omissions occurring before the    transaction. The due diligence costs relate to services    performed by L in connection with N's due diligence review. The    disallowed officers' salaries were attributable to the    transaction.      HELD: Sec. 162(a), I.R.C., does not let D deduct any of the    disputed costs.

P, as the result of a restructuring transaction, became the successor common parent of a consolidated group of corporations (the group). Held: The tentative refunds constitute nonrebate refunds with respect to P and the group because A's authority to act for the group, at least with respect to the issuance and receipt of the tentative refunds, terminated when A's affiliation with the group terminated.

Ps are the sole partners in L. During 1994, L expended    $ 26,650 on sec. 179 property and elected to expense $ 17,500    of that amount. Without regard to this deduction, L had no    taxable income for the 1994 taxable income. The deduction    under sec. 179 flowed through to Ps' 1994 return. Sec.    1.179-2(c)(2), Income Tax Regs., provides that a "partnership    may not allocate to its partners as a sec. 179 expense deduction    for any taxable year more than the partnership's taxable income    limitation for that taxable year". Ps contend that the    regulation is invalid. HELD: Sec. 1.179-2(c)(2), Income Tax    Regs., is valid and respondent's disallowance of the deduction    is sustained.

I. Decedent owned 18 of the outstanding 76.445 shares of the voting stock and 3,942.048 of the outstanding 141,288.584 shares of the nonvoting stock of J.R. Simplot Co. (the Company), a private,… Held: On the basis of the facts and circumstances presented, a premium for voting privileges is appropriate and is determined in relation to the equity value of the Company (enterprise value plus cash minus liabilities).

P and his wife filed joint returns for 1990 and 1991. P submitted a delinquent return for 1992 that was filed as a joint return. R determined that P underreported business receipts for 1990, 1991, and 1992 based on deposits to P's bank accounts and also disallowed business deductions claimed on P's returns. In the notice of deficiency for 1992, R determined that P's proper filing status for 1992 was married filing separately. Even though P and his wife remained married throughout 1992, R did not allocate one-half of P's income for 1992 to P's wife pursuant to California community property law. Sec. 66(b), I.R.C., authorizes R to disallow the benefits of any community property law to P if P acted as if he were solely entitled to the income in question and failed to notify his wife of the nature and amount of such income. On brief, R relies exclusively on sec. 66(b), I.R C., as justification for denying the benefit of community property law to P. However, R's notice of deficiency contained no reference to sec. 66(b), I.R.C., nor did it refer to any facts that would support a sec. 66(b), I.R.C., determination. A determination of whether or not sec. 66(b), I.R.C., applies requires the presentation of different evidence than that necessary to decide the matters described in the notice of deficiency. HELD: R's determinations of additional gross receipts and disallowance of deductions are, with certain modifications, upheld. HELD, FURTHER: Sec. 7522, I.R.C., requires that a notice of deficiency contain a description of the basis for the Commissioner's tax determination. Where R relies on a basis that was not described in the notice of deficiency that requires the presentation of different evidence, it is "new matter" within the meaning of Rule 142(a), Tax Court Rules of Practice and Procedure. If the new matter is allowed to be raised, Rule 142(a), Tax Court Rules of Practice and Procedure, requires that R bear the burden of proof. The burden of proof regarding application of sec. 66(b), I.R.C., is on R. R failed to meet this burden; therefore, P is entitled to the benefits of California's community property law for the taxable year 1992.

On cross-motions for partial summary judgment, HELD, partnership water rights constitute capital assets. Held: partnership water rights constitute capital assets. HELD, FURTHER, no portion of partnership's tax basis in land the partnership acquired in 1976 is to be allocated to the water rights the partnership acquired in 1983 and relinquished in 1992.

P filed his 1985 Federal income tax return on Oct. 27, 1992. In July 1993, P signed an installment agreement for 1985. Held: we lack jurisdiction under sec. 6404(g), I.R.C. to decide whether P is liable for penalties or additions to tax relating to his 1985 tax year, whether R's levy was improper, and whether P may offset his 1985 income tax liability with a claimed refund from 1995.

P is a shareholder of A, an S corporation. A is engaged in the business of selling residential timeshare units to individuals on an installment basis. Held: Ps may not deduct the sec. 453(l)(3)(A), I.R.C., interest on the tax incurred by P on installment sales of timeshares by A, because the interest is not properly allocable to a trade or business of P. See sec. 163(h)(2)(A), I.R.C.

Ps engaged in horse boarding and training activities beginning in 1989. Ps claimed deductions related to these activities on Schedule C for their 1990, 1991, 1992, 1993, and 1994 taxable years. Held: Overpayments of Ps' 1991 and 1992 Federal income tax are not barred by the period of limitations on credits or refunds.

GM and GMAC are members of a consolidated group. GM manufactured motor vehicles. GMAC financed motor vehicles. Held: The consolidated return regulations in issue constituted a method of reporting and not a method of accounting. Henry C. Beck Co. v. Commissioner, 52 T.C. 1 (1969), affd.

In 1985, P, an employee of the Central Intelligence Agency,    began selling classified information to the Soviet Union. During    1985, P received a communication from a Soviet agent that $ 2    million had been set aside for P to draw upon. On Apr. 28, 1994,    P pled guilty to conspiracy to commit espionage and tax    conspiracy to defraud the U.S. Government. P was sentenced to    life imprisonment on the espionage charge and to 27 months'    imprisonment on the tax charge.      R determined that P failed to report as income amounts    received and deposited in his bank accounts during 1989 through    1992. P contends that he constructively received the majority of    the illicit espionage income in 1985, the year he was informed    that $ 2 million had been set aside for him. P also contends that    he is protected by the Double Jeopardy Clause of the Fifth    Amendment to the U.S. Constitution from the assessment of any    tax or civil penalties based upon his illegal espionage income.      P sought to discover R's criminal reference letter.    Generally, criminal reference letters contain detailed    recommendations by R's attorneys that a taxpayer be prosecuted    for criminal tax violations. R refused to turn over the letter,    claiming the work product privilege applied. P contends that the    privilege does not apply to this civil proceeding. If we decide    it does apply, P argues that we should apply a balancing test    and decide that his substantial need overcomes the need for    assertion of the privilege.      HELD: The work product privilege applies to the criminal    reference letter, and P has not shown substantial need that    would vitiate R's claim of work product privilege. Held,    further, P did not constructively receive income before specific    amounts were made available to him. Held, further, the    imposition of a tax liability on P's espionage income and/or the    imposition of an accuracy-related penalty does not constitute    punishment within the meaning of the Double Jeopardy Clause.

On Nov. 12, 1985, H and W executed a Property Settlement Agreement (the agreement) in connection with their divorce; the agreement was approved by the divorce court. Held: In ascertaining the applicability of subpar. (B) of sec. 71(b)(1), I.R.C., the divorce or separation instrument need not mimic the statutory language of the subparagraph. The agreement reflects the substance of a nonalimony designation.

P, an independent contractor, commenced a lawsuit against D, alleging that D was liable to P for breach of contract and conversion arising out of P's work for D. As to the conversion claim, the jury… Held: All of the legal costs are attributable to P's trade or business; hence, the legal costs are all deductible on Schedule C as a business expense.

P, an organization exempt from Federal income tax, receives payments from the rental of its mailing list. Held: Excepting the portion of the list rental payment that compensates the list broker, or the list manager in its capacity as list broker, the mailer's list rental payment in each list rental transaction is a royalty that is excluded from unrelated business taxable income pursuant to sec. 512(b)(2), I.R.C. HELD, FURTHER, the list…