Volume 115 — Tax Court Reports

Under the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, Congress changed the reporting method for long-term contracts from the completed contract method to the percentage of completion… Held: Sec. 1.460-6(c)(2)(vi), Income Tax Regs., is a reasonable interpretation of the statute, comports with the legislative history, and, accordingly, is valid.

H and W, husband and wife, each created two trusts intended to qualify as grantor retained annuity trusts (GRAT's) under sec. 2702, I.R.C.… Held: Because the spousal interests in each GRAT are not fixed and ascertainable at the inception of the GRAT and are therefore contingent, and because the retained interests in each GRAT may extend beyond the shorter of a term of years or the period ending upon the death of the grantor, the retained interests in the GRAT's are to be…

R determined that the estate was not entitled to deduct the charitable remainder interest in a trust that was intended to be a… Held: No charitable deduction is allowable because: (1) Sec. 664(d), I.R.C., requires that minimum payments be distributed annually from the inception of the CRAT to certain designated persons, and these payments were not made, and (2) no portion of a purported CRAT may be paid to anyone other than designated noncharitable beneficiaries or…

Pursuant to sec. 6330(a), I.R.C., R issued a notice of    intent to levy to P indicating that R intended to collect income    taxes due for the taxable years 1991, 1992, and 1993. Pursuant    to sec. 6330(b), I.R.C., P requested a hearing before IRS    Appeals regarding the proposed collection action. Ultimately,    Appeals issued a notice of determination to P stating that all    applicable laws and administrative procedures had been met and    that collection would proceed.      Pursuant to sec. 6330(d), I.R.C., P filed a timely petition    for review with this Court. P contests the Appeals determination    on the grounds that: (1) The Appeals officer who conducted the    hearing failed to properly verify that the requirements of any    applicable law or administrative procedure had been met as    required by sec. 6330(c)(1), I.R.C., because the Appeals officer    relied on Form 4340, Certificate of Assessments and Payments, to    verify the assessments of taxes in issue; (2) P was not afforded    the type of Appeals hearing that sec. 6330, I.R.C., envisions    because P was not given the opportunity to subpoena witnesses or    to examine and cross-examine witnesses; and (3) the notice of    determination was not signed under penalties of perjury in    accordance with the requirements of sec. 6065, I.R.C.      HELD: In the absence of any showing of irregularity in the    assessments, the Appeals officer's reliance on Form 4340 to    verify the proper assessment of tax is sufficient for the    purposes of complying with sec. 6330(c)(1), I.R.C.      HELD, FURTHER, the right to a hearing before the IRS Office    of Appeals provided by sec. 6330(b), I.R.C., does not include    the right to subpoena and examine witnesses.      HELD, FURTHER, sec. 6065, I.R.C., which generally requires    that returns and other documents required by the I.R.C. be    verified under penalties of perjury, does not apply to a    determination letter issued by Appeals pursuant to sec. 6330,    I.R.C.

Certain insurance salesmen formed two purported voluntary employees' beneficiary associations (VEBA's) to generate commissions on their sales of life and other insurance products… Held: The corporate employer/participants (N and L) may not deduct contributions to their plans in excess of the cost of term life insurance. HELD, FURTHER, L may deduct payments made outside its plan for life insurance on two of its employees to the extent the payments funded term life insurance.

A filed a consolidated return with its wholly-owned subsidiary (PR) in 1977. Held: Under sec. 1.1502-14(d)(4), Income Tax Regs., P may not take a deduction in 1987 for the capital loss PR realized on the redemption of A's note.

More than 30 days after receiving an adverse Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, P sought judicial review in a Federal District Court. Held: Because P failed to file his initial petition with the District Court within 30 days of the notice of adverse determination, his Tax Court petition is dismissed for lack of jurisdiction.

P and H filed a joint income tax return for 1993. P and H later divorced. Held: In any case where an individual petitioner seeks relief from joint liability pursuant to sec. 6015, I.R.C., the other individual who filed the joint return is entitled to notice and, if not already a party in the case, an opportunity to intervene for purposes of challenging the propriety of relieving the petitioner of liability.

P is an individual underwriter for Lloyd's of London (Lloyd's). Held: The gain from the sale of stock is portfolio income pursuant to sec. 469(e)(1)(A), I.R.C., and sec. 1.469-2T(c)(3), Temporary Income Tax Regs., 53 Fed. Reg. 5686, 5713 (Feb. 25, 1988), and cannot be offset by P's passive losses.

The executor filed the Federal estate tax return in this case more than 18 months after the time prescribed by law (including extensions) for filing the return. Held: the estate must value all property included in the gross estate as of the date of decedent's death because the executor made the alternate valuation election more than 1 year after the time prescribed by law (including extensions) for filing the Federal estate tax return.

An estate tax return was delinquently filed on behalf of decedent's estate (E). R assessed the tax reported on the return and an addition to tax for late filing. Held: This Court lacks jurisdiction over the late filing addition to tax assessed by R prior to the issuance of the notice of deficiency, because such addition is not attributable to a deficiency as defined in sec. 6211, I.R.C.

HELD: Savings relating to coordination of benefits between health insurance companies do not qualify under the transition rule of the Omnibus Budget Reconciliation Act of 1990, Pub. Held: Savings relating to coordination of benefits between health insurance companies do not qualify under the transition rule of the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec. 11305(c)(3), 104 Stat. 1388-452. Claimed special deductions relating thereto are not allowed.

H and W boarded their private aircraft in July of 1993 but never arrived at their destination. Held: The reciprocal life estates at issue are not appropriately valued utilizing actuarial tables, must be deemed without value for estate tax purposes, and, therefore, will not support allowance of credits for tax on prior transfers under sec. 2013, I.R.C.

H operated a sole proprietorship, and later incorporated HIF, which assumed the business of the sole proprietorship. H was sole shareholder and president, and indispensable to the success, of HIF. Held: the facts of the instant cases are not materially distinguishable from the facts of Jack's Maintenance Contractors, Inc. v. Commissioner, T.C. Memo 1981-349, revd.

P and H filed a joint 1992 Federal income tax return on which a portion of retirement distribution proceeds H received and interest received from a joint bank… Held: P is not entitled to innocent spouse relief with respect to the omitted items of income. 2. HELD, FURTHER, knowledge of the item giving rise to a deficiency for purposes of sec. 6015(c)(3)(C), I.R.C., does not mean knowledge of the tax consequences of the item or that the entry on the return is incorrect. 3.

P is a merchant seaman who captains a vessel that sails worldwide carrying equipment of the U.S. military. Held: P's tax home is the situs of his residence. HELD, FURTHER, P's testimony, by itself, supports a finding that P paid incidental travel expenses while employed away from his tax home. HELD, FURTHER, P's use of the M&IE rates is limited to the portions thereof that are attributable to incidental expense.

During 1990 and 1991, petitioner engaged its wholly owned subsidiary, a foreign sales corporation, to act as its agent for the international sales of standardized mass-marketed computer software… Held: The temporary regulation is a reasonable and valid interpretation of sec. 927(a)(2)(B), I.R.C. HELD, FURTHER, computer software masters do not constitute sec. 927(a), I.R.C., export property.

Ps' S corporation, A, owned 50 percent of the stock of corporation B, a C corporation. Held: Because A's distribution of the stock of B occurred less than 5 years after A acquired control of B in a transaction in which gain or loss was recognized, the distribution failed to satisfy the active business requirement of sec. 355(a)(1)(C) and (b)( 2)(D)(ii), I.R.C. The distribution resulted in gain to A under sec. 311(b), I.R.C.,…

F owns more than 50 percent of the stock of P. F is a beneficiary of two retirement plans held by T. Under the terms of the plans F is authorized to direct the investments of the assets in his… Held: ERISA sec. 404(c) does not modify the definition of a fiduciary under sec. 4975, I.R.C., and P is liable for the tax imposed by that section.

P conducts horse races, including the Kentucky Derby, at its facilities. Held: P's claimed deductions are limited by sec. 274(n)(1), I.R.C., as determined by R. HELD, FURTHER: In incurring the expenses at issue P neither provided goods and services to the general public nor received adequate and full consideration for the goods and services provided.

By notice of determination issued in 1998, R determined that three individuals who performed services for P's sole proprietorship in 1992 were employees of the proprietorship during such… Held: Where the jurisdiction of the Court has been properly invoked under sec. 7436, I.R.C., the Court possesses jurisdiction to decide whether R's determination concerning worker classification is barred by the expiration of the period of limitations on assessment under sec. 6501, I.R.C.

Ps are liable for deficiencies in and additions to their    Federal income tax liabilities for the taxable years 1978    through 1982, including interest at the increased rate    prescribed under sec. 6621(c), I.R.C., and the "interest    sensitive" addition to tax under sec. 6653(a)(2), I.R.C., for    1981 and 1982. The parties agree that Ps are entitled to    refunds for overpayments for the taxable years 1984 and 1985    that would partially offset the deficiencies for the earlier    years. Ps contend that the Court's decision for the taxable    years 1978 through 1982 should state that "The penalties due    under section 6621(c) and section 6653(a)(2) are to be    determined after the application of the interest-netting rules    of section 6621(d)."      HELD: The Court lacks jurisdiction in this deficiency    proceeding to determine the impact, if any, of the so-called    interest-netting rule under sec. 6621(d), I.R.C., on the    computation of the sec. 6621(c), I.R.C., interest. HELD,    FURTHER, Because R has not computed the amount of statutory    interest payable under sec. 6601, I.R.C., the question of the    impact of sec. 6621(d), I.R.C., if any, on the computation of    the addition to tax under sec. 6653(a)(2), I.R.C., is not ripe    for consideration.

H was the sole shareholder of P. P was engaged in the business of hauling packaged freight in trucks. Its trucking operations were terminated in 1988. By 1990, P had sold its operating assets. Held: In order for a merger to be a tax-free reorganization within the meaning of sec. 368(a)(1)(A), I.R.C., there must be continuity of the business enterprise of the acquired corporation. See sec. 1.368-1(b), Income Tax Regs.

Petitioner (P) failed to file timely a Federal income tax (tax) return (return) for 1996. Held: Neither the amendment of sec. 6512(b)(3), I.R.C., nor its legislative history, effective for tax years that ended after Aug. 5, 1997, see Taxpayer Relief Act of 1997, Pub.

With regard to P's 1994 tax year, R assessed a tax deficiency (along with penalties and interest) and three sec. 6702, I.R.C., frivolous return penalties (along with related interest), of which R… Held: P is not entitled to the protections of sec. 6330, I.R.C., for amounts collected before the effective date of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3401, 112 Stat. 685, 746-750.

P received a notice of deficiency for his 1990 tax year.    After P petitioned this Court to redetermine that deficiency    determination, the Court entered a stipulated decision providing    for a tax deficiency, additions to tax, and statutory interest.    R subsequently filed a lien, and P, in turn, requested an    Appeals hearing from R's Appeals Office pursuant to sec.    6320(b), I.R.C. P refused to appear at the Appeals hearing on    the grounds that the location of the Appeals hearing was    inconvenient to P and his witnesses. After an Appeals officer    discussed the collection matter with P via telephone, the    Appeals officer issued to P a notice of determination under sec.    6330, I.R.C. P subsequently petitioned this Court to review the    Appeals officer's determination under sec. 6330, I.R.C. R now    moves for partial summary judgment with regard to the tax    deficiency, additions to tax, and interest that are the subject    of R's collection activities.      HELD: P received an adequate opportunity for an Appeals    hearing pursuant to sec. 6320(b), I.R.C. In any event, the    communications between the Appeals officer and P constituted an    Appeals hearing under sec. 6320(b), I.R.C.      HELD, FURTHER, P's challenge to the merits of R's    assessment of the tax deficiency and additions to tax fails to    state a claim on which relief can be granted.      HELD, FURTHER, because the Court has jurisdiction under    sec. 6404(i), I.R.C., over interest abatement cases, the Court    has jurisdiction to review the Appeals officer's determination    with regard to the interest that is the subject of R's    collection activities. However, the Appeals officer did not    abuse his discretion in making the determination.

In a prior opinion, we determined that there was a deficiency in estate tax. Held: Sec. 7486, I.R.C., provides that if the amount of the deficiency determined by the Tax Court is disallowed in whole or in part by the court of review, the amount so disallowed shall be credited or refunded to the taxpayer.

P was a holding company that held over 80 percent of the stock of five corporations (collectively, the subsidiaries) that were engaged in the retail sales of automobiles and light trucks conducted… Held: The restructuring was a genuine multiple-party transaction with economic substance, compelled by business realities and imbued with tax-independent considerations. The restructuring was not shaped solely by tax avoidance features.

R received from the Social Security Administration (SSA)    inaccurate information showing that, during 1987, P received    certain compensation in the amount of $ 35,100 for teaching a    scuba diving course. In fact, P received only $ 351 for such    compensation. P did not file a tax return for 1987 or 1988. On    the basis of the information from the SSA, R issued a notice of    deficiency to P, to which notice P did not respond. R assessed    the tax determined to be due and attached a lien to P's bank    account. During 1996, P was unable to obtain a home loan because    of the tax lien and outstanding balances due to R. P hired an    accountant to prepare P's tax returns for 1987 and 1988. R    received P's 1987 and 1988 tax returns on Jan. 9, 1997. P filed    his 1987 return as married filing jointly, but P's ex-wife did    not sign the return and refused to sign a declaration that P's    1987 return was true and accurate. R would not process the    return without P's ex-wife's signature on the return or the    declaration. In addition to the problems with P's 1987 return,    P's 1988 tax return contained significant errors. P eventually    hired an attorney to assist him. On Apr. 14, 1997, P provided R    with all of the information needed to process P's return. On May    30, 1997, R issued refund checks to P for the 1987 and 1988    taxable years. On June 2, 1997, R abated for reasonable cause    additions to tax for late filing and negligence that had been    assessed for 1987 and 1988. Pursuant to sec. 7430, I.R.C., P    made an administrative claim for costs associated with the    preparation and filing of P's 1987 and 1988 tax returns.      HELD: Costs associated with filing and correcting P's tax    returns were incurred in providing R with all the information    necessary to process P's returns. P is not entitled to recover    such costs because, until P provided to R all information    relevant (including a properly signed tax return) to processing    P's tax return, R's position was substantially justified. See    sec. 301.7430-5(h) Example (3), Proced. & Admin. Regs.      HELD: P is not entitled to recover administrative costs    incurred after P provided all relevant information to R because    R processed P's return within a reasonable period of time after    receiving such information.

P transferred to a newly formed family partnership, of which P is 50-percent owner and his two sons are each 25-percent owners, (1) P's fee interest in timberland subject to a long- term timber lease… Held: P's transfers represent separate indirect gifts to his sons of 25 percent undivided interests in the leased timberland and stocks. Held, further, the fair market value of petitioner's gifts determined.

R issued final notices of intent to levy to Ps. The notices requested payment of frivolous return penalties imposed under sec. 6702, I.R.C., for the taxable years 1996 and 1997. Held: R's motions to dismiss will be denied. HELD, FURTHER, these cases will be dismissed on the ground that the determination letters are invalid.

P leased an asset, and the terms of the lease became onerous or burdensome. Held: Sec. 167(c)(2), I.R.C. , interpreted to prohibit allocation of any portion of the asset acquisition cost to a deduction for P's termination of a burdensome lease.

Trust (T), a tax-exempt voluntary employees' beneficiary association described in sec. 501(c)(9), I.R.C., set aside for each year at issue a certain… Held: In determining for each year at issue the unrelated business taxable income (UBTI) of T under sec. 512(a)(3)(A), I.R.C., the amount of investment income at issue is subject to the limitation prescribed by sec. 512(a)(3)(E)(i), I.R.C. Held, further, in calculating for each year at issue the limitation prescribed by sec.…

P had operated his business on the M Street property since 1977. Held: The subject transactions were a sale of M Street to WLC for $ 142,400, as determined by R, rather than a sale of unimproved L Street, followed by a reverse like-kind exchange of M Street for improved L Street under sec. 1031(a), I.R.C., as reported by P. Because P never divested himself of beneficial ownership of L Street, P could…

D formed a family limited partnership (SFLP) and transferred assets, including securities, real estate, insurance policies, annuities, and partnership interests, to SFLP in return for a… Held: The partnership was valid under State law and will be recognized for estate tax purposes. (2) Sec. 2703(a), I.R.C., does not apply to the partnership agreement. (3) The transfer of assets to SFLP was not a taxable gift. (4) R's expert's opinion as to valuation discounts is accepted.

On Dec. 28, 1994, Ps established a trust of which P-H was    trustee (the management trust), a family limited partnership    (the partnership) of which the management trust was the general    partner, and trusts for the benefit of each of Ps' two adult    children (the children's trusts). Ps transferred three parcels    of real property used by Ps and their children and some    financial assets to the partnership. Each P transferred a 22.3-     percent interest in the partnership to each of their children's    trusts.      The parties stipulated that the steps to create the    partnership satisfied all requirements under Texas law, and that    the partnership has been a limited partnership under Texas law    since it was created.      HELD: We recognize the partnership for Federal gift tax    purposes.      HELD, FURTHER, the value of each of Ps' gifts to their    children's trusts in 1994 was $ 394,515; i.e., 22.3 percent of    the value of the real property and financial assets Ps    transferred to the partnership, reduced by minority and lack of    marketability discounts totaling 15 percent.      HELD, FURTHER, sec. 2704(b), I.R.C., does not apply to this    transaction. See Kerr v. Commissioner, 113 T.C. 449 (1999).

The cases are before the Court on R's motions for judgment on the pleadings and partial summary judgment and on the Court's orders to show cause why it should not… Held: With respect to the deficiencies in tax determined by respondent, judgment will be entered on the pleadings. Rule 120(a), Tax Court Rules of Practice and Procedure. 2. HELD, FURTHER, sec. 7491, I.R.C., does not add to movant's burden for judgment on the pleadings with respect to such deficiencies in tax. 3.

F, a regulated electric utility, is a wholly owned subsidiary of P. F is required to follow prescribed regulatory rules for regulatory accounting… Held: P's method of accounting for tax reporting purposes was to characterize the expenditures in issue consistently with the method that F used for regulatory accounting and financial reporting purposes. By seeking to alter the method which it used to characterize expenditures, P is attempting to change its method of accounting.

R issued a notice of deficiency to P for the taxable year 1988, but P did not file a petition for redetermination with the Court. R subsequently issued a notice of intent to levy. Held: 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 Goza v. Commissioner, 114 T.C. 176 (2000).

HELD: Sec. 6015, I.R.C., has no application to, and does    not govern, (1) the request of P's former spouse for relief from    joint and several liability under sec. 6013(e), I.R.C. (former    sec. 6013(e)), which was repealed effective July 22, 1998, and    (2) the administrative proceedings conducted by R that    ultimately resulted in R's granting that relief to her prior to    July 22, 1998. HELD, FURTHER, P did not have the right to be    notified of or to participate in the administrative proceedings    relating to the request of P's former spouse for relief from    joint and several liability under former sec. 6013(e). HELD,    FURTHER, P lacks standing to challenge respondent's    determination to grant P's former spouse relief from joint and    several liability under former sec. 6013(e). HELD, FURTHER,    respondent did not abuse respondent's discretion with respect to    any of the determinations in the notice of determination    concerning collection action under sec. 6320 and/or 6330, I.R.C.

P established and funded with corporate stock two substantially identical grantor retained annuity trusts (GRAT's). Held: For purposes of determining the value under sec. 2702, I.R.C., of the gift effected upon creation of each GRAT, P's retained qualified interest is to be valued as an annuity for a specified term of years, rather than as an annuity for the shorter of a term certain or the period ending upon P's death.

Prior to and during the years in issue, GIA, a proprietorship owned by P wife, sold residential real property by means of contracts for deed. Held: Each contract for deed effected a completed sale for tax purposes in the year of execution, and income attributable to such disposition must be recognized and reported for that taxable year.