Volume 114 — Tax Court Reports

P, a corporation the stock of which is owned 84 percent by S and 16 percent by two individuals unrelated to S, sells greeting cards and… Held: P produces, rather than resells, its paper products; thus, P does not qualify for the small reseller exception to the uniform capitalization (UNICAP) rules of sec. 263A, I.R.C. HELD, further, P is not excepted from the UNICAP rules by virtue of the artist exemption of sec. 263A(h), I.R.C.; none of P's shareholders owns substantially…

W and H, who were married, owned all of the voting, and virtually all of the nonvoting, stock of X corporation (X). Held: The primary-and-unconditional-obligation standard is not an appropriate standard to apply in order to determine whether W's transfer of her X stock to X was a transfer of property by W to a third party on behalf of H within the meaning of Q&A-9.

P equipped and furnished 5 of 11 floors of a building it leased for its corporate headquarters. Held: In order for a taxpayer to have a world headquarters within the meaning of TRA sec. 204(a)(7), a taxpayer must have substantial international operations which are directed from the headquarters.

Sec. 29, I.R.C., provides a credit for fuel produced from nonconventional sources, including gas produced from geopressurized brine, Devonian shale, coal seams, or a tight formation. Held: S/V is allowed a credit for 32,410 BOE's of natural gas. The credit rate is (1) 15,483 times $ 3, and (2) 16,927 times $ 3 indexed as provided in the first sentence of sec. 29(b)(2), I.R.C.

D transferred a substantial portion of his assets to Ps within 3 years of his death. Held: Ps are transferees of property the value of which is treated as if included in D's gross estate pursuant to sec. 2035(d)(3)(C), I.R.C., and are, to the extent of the value of such property at the time of D's death, personally liable for unpaid estate taxes pursuant to sec. 6324(a)(2), I.R.C. HELD, FURTHER, Ps' motions for partial…

P's S corporation (S) performed management services for real estate partnerships in which P had direct and indirect interests. Held: R's decision not to or failure to issue regulations in this case is not a prohibition, per se, to P's ability to treat self-charged items as intended by Congress. HELD, FURTHER, P is entitled to offset the passive management deductions against the nonpassive management income.

Ps were limited partners in several partnerships with the same designated tax matters partner (TMP). Held: Sec. 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, is a valid regulation. HELD, FURTHER: The criminal tax investigation did not create a disabling conflict of interest and therefore did not terminate the TMP's designation.

P mailed two Forms 1040, U.S. Individual Income Tax Return, for 1991 to the IRS. Held: P is liable for the deficiency. HELD, FURTHER, P's second Form 1040 is not a valid return; therefore, P is not liable for the accuracy-related penalty pursuant to sec. 6662(a), I.R.C. HELD, FURTHER, P is liable for the addition to tax pursuant to sec. 6651(a)(1), I.R.C. HELD, FURTHER, P is liable for a penalty under sec. 6673, I.R.C.

Decedent (D) had two children, C and W. On June 17, 1993, D formed a revocable family trust (the trust) and a family limited partnership (the partnership). Held: The fair market value at D's date of death of assets D transferred to the partnership is included in D's gross estate. See sec. 2036(a), I.R.C.

P's residential property was condemned by the State of    South Dakota for purposes of a federally aided highway    construction project. In settlement of the ensuing condemnation    proceedings, P received $ 65,000. Subsequently, P and the State    became involved in negotiations and litigation regarding P's    entitlement under the Uniform Relocation Assistance and Real    Property Acquisition Policies Act of 1970, Pub. L. 91-646, 84    Stat. 1894 (Relocation Act), to additional sums enabling her to    purchase a comparable replacement dwelling. This suit was    settled for $ 100,000. P, relying on a provision of the    Relocation Act exempting payments thereunder from income,    reported no capital gain on the disposition of her home. R    determined a deficiency for taxes attributable to the amount by    which the $ 65,000 payment to petitioner exceeded her basis in    the property taken.      HELD: The $ 65,000 received by P in condemnation of her    residence is not exempted from taxation by the Relocation Act.

The Tax Court has held that it lacks jurisdiction to review a responsible person's administrative appeal under section 6320 because it lacks jurisdiction over the underlying taxes and penalties… Held: The Court's jurisdiction to review an administrative determination respecting a collection matter is limited to cases where the underlying taxes are of a type over which the Court normally has deficiency jurisdiction.

The Tax Court has held that a tax protester was not entitled to contest his tax liability before the IRS appeals office under section 6330(d) because he had already received a deficiency notice and had disregarded his opportunity to challenge the liability. In 1997 the IRS issued a deficiency notice to Howard Goza for years 1994-96; Goza returned the notice to the IRS with an attached statement indicating that he was not liable for taxes. The IRS later issued a notice of intent to levy, which Goza again returned with the same frivolous statement. The IRS then issued a determination letter, informing Goza that he cannot challenge the underlying liability because he received a deficiency notice. Goza petitioned the court, requesting a redetermination of the tax deficiencies. As a preliminary matter, Chief Judge Mary Ann Cohen, adopting the opinion of Chief Special Trial Judge Peter J. Panuthos, concluded that the court has jurisdiction under section 6330(d) to review the IRS's determination to proceed with the levy, even though Goza failed to file a petition for redetermination with respect to the deficiency notice. The court then held that Goza could not challenge the underlying tax liability before the IRS appeals office under section 6330(c)(2)(B). "Section 6330(c)(2)(B)," Judge Panuthos explained, "provides that the Appeals Office due process hearing is not a forum for the taxpayer to contest the existence or amount of the underlying taxes unless the taxpayer did not receive a [deficiency notice] . . . or did not otherwise have an earlier opportunity to dispute [the] tax liability." Judge Panuthos noted that although Goza received a deficiency notice for the years at issue, he did not avail himself of the opportunity to file a petition for redetermination with the court. R issued a notice of deficiency to P for the taxable years 1994, 1995, and 1996. P returned the notice of deficiency to R marked "I hereby refute and invalidate this unsigned Presentment without dishonor. I do not owe this or any amount of money. All rights reserved, without prejudice, UCCI-207." P did not file a petition for redetermination with the Court. R subsequently issued a notice of intent to levy to P indicating that R intended to collect the taxes due for the taxable years 1994, 1995, and 1996. P requested and received an administrative review of the proposed collection action. R issued a notice of determination to P stating that all applicable laws and administrative procedures had been met and that collection would proceed. R further advised P that challenges to the underlying liability would not be considered since P received a notice of deficiency. P filed a timely petition for review with the Court contesting the notice of determination on the ground that he is not liable for the underlying tax deficiencies, and, therefore, there is no basis for assessment and collection of the tax. R moved to dismiss for failure to state a claim upon which relief can be granted. HELD: The Tax Court has jurisdiction to review a determination pursuant to sec. 6330(c) and (d), I.R.C. Held, FURTHER, where P timely received a statutory notice of deficiency, yet he failed to file a petition for redetermination with the Court, P was precluded from contesting the issue of the underlying tax liability during Appeals Office consideration pursuant to sec. 6330(c)(2)(B), I.R.C. HELD, FURTHER, P's petition for review of R's administrative determination to proceed with collection fails to state a claim upon which relief can be granted. See sec. 6330(d), I.R.C.; Rule 331(b)(4) and (5), Tax Court Rules of Practice and Procedure.

Ps, husband (H) and wife (W), separated in 1992 and divorced in 1993. Held: The Permanent Orders do not qualify as a written declaration signed by the custodial parent confirming that the custodial parent will not claim the children as dependents for 1993 and 1994.

P provided its employees with the use of the company-owned aircraft for nonbusiness flights. P notified its employees to report the value of the flights as imputed income. Held: Sec. 274(e)(2), I.R.C., excepts from the effect of sec. 274, I.R.C., deductions of an employer's expenses in connection with an entertainment facility and does not limit or peg the amount deductible to the amount reportable by employees; i.e., the value of the benefit received.

Ps paid State nonresident income tax to nine States on net royalty income derived from their interests in oil and gas wells located within those States. Held: the addition of sec. 164(a)(3), I.R.C., by the Revenue Act of 1964, Pub. L. 88-272, sec. 207(a), 78 Stat. 19, 40, did not change the existing law with respect to the deduction of State income taxes.

P is a construction contractor that enters into contracts to construct, place, and finish concrete foundations, driveways, and walkways for real property developers. Held: P's contract to provide labor and material to a real property developer is a contract to provide service, and the material is an indispensable and inseparable part of the provision of that service. See Osteopathic Med. Oncology & Hematology, P.C. v. Commissioner, 113 T.C. 376, 384 (1999).

Petitioner (H) and his former wife (W) were divorced in 1992. H and W were residents of California, a community property State. Held: sec. 408(g), I.R.C., precludes characterization of W as a 50-percent distributee of H's IRA's under sec. 408(d)(1), I.R.C.; accordingly, H, not W, is taxable on the distributions.

R moves the Court to dismiss this case for lack of jurisdiction, alleging that P, a corporation organized under California law, lacked the capacity to file the petition instituting this action. Held: We shall grant R's motion; under applicable State law: (1) P lacked the power to initiate a lawsuit during the time it was suspended, and (2) that power was not returned to P until after the applicable 90-day period in which it was required to file a petition with this Court.

P and H filed a joint 1992 Federal income tax return on which H failed to report income from an S corporation in which he was a shareholder. Held: P had reason to know of the understatement on P's and H's joint return, and, therefore, P is not entitled to innocent spouse relief, pursuant to sec. 6015(b)(1), I.R.C. HELD, FURTHER, P's motion to reopen the record to introduce evidence as to P's ability to qualify for proportionate innocent spouse relief pursuant to sec.…

HELD: For the years before the Court, $ 204 million    (reflecting petitioners' 22-percent share of a total $ 928    million) in estimated dismantlement, removal, and restoration    (DRR) costs relating to fieldwide oil production equipment and    facilities located in the Prudhoe Bay oil field on the North    Slope of Alaska is not sufficiently fixed and definite to be    accruable under the all-events test of sec. 1.461-1(a)(2),    Income Tax Regs.      HELD, FURTHER, for the years before the Court, $ 24 million    (reflecting petitioners' 22-percent share of a total $ 111    million) in estimated DRR costs relating specifically to oil    wells and to well drilling sites located in the Prudhoe Bay oil    field: (1) Is sufficiently fixed, definite, and reasonably    determinable to satisfy the all-events accrual test of the    accrual method of accounting; (2) is not accruable as a capital    cost because such accrual would constitute a change in    petitioners' method of accounting for such costs for which    change respondent has not granted permission; and (3) is not    accruable as a current ordinary and necessary business expense    because such accrual would cause a distortion in petitioners'    reporting of income.

P submitted a request to R for innocent spouse relief pursuant to sec. 6015(b), (c), and (f), I.R.C. R mailed to P a determination which denied the requested… Held: We have jurisdiction to review a request for innocent spouse relief under sec. 6015(f), I.R.C., when P makes a requisite election under sec. 6015(b) and/or (c), I.R.C., and files a timely petition with the Tax Court pursuant to sec. 6015(e), I.R.C. See Butler v. Commissioner, 114 T.C. 276, 114 T.C. No. 19 (2000).

Ps were married in 1989, separated in 1995, and divorced in 1996. In 1994, W operated Medi-Task, a physician's transcription business. Held: All transcription-related self-employment income is allocated to W under secs. 6017 and 1402(a)(5)(A), I.R.C. HELD, FURTHER, Ps' rental cabin expenses are not deductible because they are preoperational startup expenses.

P is a minister of the gospel within the meaning of sec. 107, I.R.C. The church which employed him designated most or all of his compensation as a housing allowance during each of the taxable years… Held: The exclusion under sec. 107(2), I.R.C., is limited to the amount used to provide a home, not the fair market rental value of the home.

Ps T and J filed a joint Federal income tax return for the taxable year 1981, and R issued a notice of deficiency for taxes, additions to tax, and interest related thereto. Held: T, the nonelecting spouse, should be afforded an opportunity to litigate the decision by R to grant relief from joint and several liability to J, the electing spouse. HELD, FURTHER, respondent's motion for entry of decision will be denied.

P was the sole shareholder of two C corporations. Held: The recharacterization rule is valid. HELD, FURTHER, the written binding contract exception of sec. 1.469-11(c)(1)(ii), Income Tax Regs., is inapplicable to the facts herein. HELD, FURTHER, the transitional rule of sec. 1.469-11(b)(1), Income Tax Regs., does not operate to avoid application of the recharacterization rule.

In 1993, P recovered a $ 229,501 settlement under the Federal Age Discrimination in Employment Act of 1967, Pub. L. 90-202, sec. 2, 81 Stat. 602, current version at 29 U.S.C. secs. 621-633a (1994). Held: the amount retained by X for attorney's fees is includable in P's gross income for 1993 under the assignment of income doctrine.

P purchased the stock of LS. Prior to purchasing LS, P had negotiated with the Federal Trade Commission to satisfy the antitrust concerns about the purchase. Held: P's legal fees incurred in defending against the State's antitrust suit arose out of, and were incurred in connection with, P's acquisition of LS. The origin of the State's antitrust claim was P's acquisition of LS. P's legal fees must be capitalized.

Sec. 263A, I.R.C., enacted in 1986, requires the    capitalization of developmental costs. For plants with    preproduction periods that are 2 years or less, farmers may be    excepted from the capitalization requirements. For certain    plants, including citrus plants grown in commercial quantities    in the United States, the statute requires that the standard for    the 2-year test is to be based on a national weighted average    preproductive period for that type of plant. If the    preproductive period, so determined, is 2 years or less, citrus    farmers could be excepted from the capitalization requirement of    sec. 263A, I.R.C. No guidance had been issued as to the national    weighted average preproductive period for citrus trees as of    1989, when P began growing citrus trees. Due to the lack of    guidance, P did not deduct its developmental costs for the first    2 years and then determined, based on its growing experience,    that some of its citrus trees were productive within 2 years.    Based on that experience, P, in 1991, claimed to be excepted    from the capitalization requirement of sec. 263A, I.R.C., and    deducted the preproductive costs for 1989, 1991, and 1992. R    determined that P was not entitled to deduct the costs.      HELD: P is not entitled to use its own growing experience    to measure whether it meets the 2 years or less standard. Held,    further, P must capitalize its preproductive development costs    for its citrus trees.

R sent to Ps a notice of deficiency but failed to stamp a date in the section entitled Last Day to File a Petition With the United States… Held: Where R failed to put the petition date on the notice, as required by sec. 3463(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685, 767, and Ps nevertheless received the notice and filed a petition in a timely manner, such notice was sufficient to toll the period of limitations.

On Feb. 1, 1999, R mailed to P a Final Notice-Notice of Intent to Levy and Notice of Your Right to a Hearing, as required by sec. 6330, I.R.C. The notice pertained to P's unpaid income tax… Held: Pursuant to sec. 6330(d), I.R.C., our jurisdiction is dependent upon the issuance of a determination and the filing of a petition within 30 days of the issuance of such determination. Because R did not issue a determination to P, we must dismiss this case for lack of jurisdiction.

P is a nonprofit corporation organized to audit structural steel fabricators pursuant to a quality certification program administered by the American Institute of Steel Construction, Inc. (AISC). Held: P furthers private interests and therefore is not operated exclusively for exempt charitable purposes. Consequently, P is not entitled to exemption from income taxation under sec. 501(a), I.R.C., as an organization described in sec. 501(c)(3), I.R.C.

Ps claimed dependency exemptions on their 1996 joint    Federal income tax return without furnishing SSN's for their    children, as required under sec. 151(e), I.R.C. Ps seek relief    from the SSN requirement because of their religious beliefs in    opposition to using SSN's. HELD: the SSN requirement is the    least restrictive means of achieving the Government's compelling    interests in implementing the Federal tax system in a uniform,    mandatory way and in detecting fraud in regard to dependency    exemptions. Accordingly, neither the Free Exercise Clause of the    First Amendment to the Constitution nor the Religious Freedom    Restoration Act of 1993, Pub. L. 103-141, sec. 2, 107 Stat.    1488, provides a basis for excepting Ps from the SSN    requirement.

R determined deficiencies in income tax based on affected items that are dependent upon the resolution of partnership items. Held: A valid notice of deficiency based on affected items may not be issued prior to completion of the related partnership-level proceedings. Our jurisdiction is dependent upon a valid notice of deficiency. R's notice of deficiency is invalid. This case is dismissed for lack of jurisdiction.

R's notice of final partnership administrative adjustment (FPAA) treated 1990 transfers of business assets to P's partnership as taxable… Held: Sec. 6229(a), I.R.C., includes an alternative, minimum period of limitations, applicable to all partners; (2) sec. 6229(a), I.R.C., does not preclude the applicability to specific partners of a longer period of limitations such as the 6-year period in sec. 6501(e)(1)(A), I.R.C.; (3) assuming there was inadequate disclosure of P's…

P is a public utility engaged in the retail distribution of natural gas, electricity, and related services. Held: P's method of accounting for utility services from the unbilled period violates sec. 451(f) and must be disallowed. HELD, FURTHER, P must adjust the sec. 481 adjustment it made in 1986 to include revenue attributable to gas costs from the unbilled period as of Dec. 31, 1986.

U, a public utility filing consolidated Federal income tax    returns with P, engaged in the retail and wholesale distribution    of electricity and related services. Federal income tax rates    were reduced in 1986 pursuant to the Tax Reform Act of 1986,    Pub. L. 99-514, sec. 821, 100 Stat. 2372, creating an excess in    deferred Federal income tax collected from customers of U. U was    required to adjust utility rates in 1987 and 1988 to compensate    for this overcollection.      U was allowed to collect funds equal to its projected fuel    and energy conservation costs. Pursuant to regulatory law,    monthly collections remained fixed over a 6-month recovery    period in order to decrease the volatility of customers' bills.      1. HELD, U's rate reductions from 1987 through 1990 to    compensate for excess deferred Federal income tax are not    deductible business expenses within the meaning of sec. 1341,    I.R.C., and, therefore, P is not entitled to the beneficial    treatment of sec. 1341.       2. HELD, FURTHER, overcollections for fuel and energy    conservation costs are not income to P under sec. 61 because U    acquired funds subject to an unconditional obligation to repay.

Ps commenced a proceeding in response to two Notices of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330. Held: there was no abuse of discretion by respondent in allowing collection to proceed.