Volume 116 — Tax Court Reports

P became an S corp. in 1988, a C corp. in 1989, and an S corp. in 1994. In 1994, 1995, and 1996, petitioner sold assets which had accrued gain prior to the 1994 conversion from C to S corp. status. Held: The transition rule of sec. 633(d) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2278, relating to a corp. which, pursuant to its most recent election, became an S corp. before 1989, is not applicable to P's 1994, 1995, and 1996 taxable years.

P-H, a calendar year taxpayer, owned interests in several    calendar year partnerships. P-H filed a bankruptcy petition on    July 5, 1990. P-H included the portions of his distributive    shares attributable to the period prior to his bankruptcy filing    on his separately filed 1990 income tax return. The remainder of    those distributive shares were reported by P-H's bankruptcy    estate.      HELD: The manner in which the distributive share of a    partner in bankruptcy is allocated between the partner and the    bankruptcy estate is not a "partnership item" under sec.    6231(a)(3), I.R.C. Accordingly, such allocation need not be    resolved in a partnership-level proceeding pursuant to the    uniform audit and litigation procedures of secs. 6221- 6234,    I.R.C.      HELD, FURTHER, where a partner's bankruptcy estate retains    beneficial ownership of a partnership interest as of the close    of the partnership taxable year, the partner's distributive    share for the entire partnership taxable year is reportable by    the bankruptcy estate. See secs. 706(a), 1398(e), I.R.C.

P is the parent of a consolidated group that includes L. P's ultimate parent is L'Air, a French corporation. Held: The royalty income is passive income for the purpose of calculating P's foreign tax credit.

Ps are partners in partnerships (the 1st-tier partnerships); some of the 1st-tier partnerships are partners in other partnerships (the… Held: In determining the amount of gross income stated in the return (the denominator in the 25-percent test of sec. 6501(e)(1)(A), I.R.C. 1986) for petitioners, the 2d-tier partnerships' information returns are treated as adjuncts to, and parts of, the 1st-tier partnerships' information returns, which in turn are treated as adjuncts to,…

P's Federal income tax returns for 1989 through 1997 were    filed consistently late. Each return reflected an overpayment,    which P elected to apply to a subsequent year's liability. HELD:    The Court has jurisdiction because the underlying tax liability    relates to Federal income tax, regardless of whether a    deficiency was determined. HELD, FURTHER, overpayments first    claimed on returns filed more than 3 years late are barred, and    R may proceed with collection of balances due as determined in a    Notice of Determination Concerning Collection Action(s).

Ps are the owners of agricultural property which, prior to the transactions at issue, was subject to outstanding mortgages held by the Farmers Home Administration (FmHA). Held: Ps are required to recognize income in 1996 under sec. 61(a)(12), I.R.C., on account of a $ 177,772 discharge of indebtedness in that year.

On its consolidated Federal income tax returns for the years in issue, F claimed a credit for Federal taxes on fuels. Held: F is not barred by the so-called one claim rule of sec. 6427(i)(1), I.R.C., from obtaining additional credits under sec. 34, I.R.C.

P contends that R is barred from assessing additional employment taxes because the notice of determination concerning worker classification… Held: The elements of fraud in the employment tax context are the same as those in the income, estate, and gift tax contexts. HELD, FURTHER, P did not commit fraud for purposes of sec. 6501(c)(1), I.R.C. Accordingly, R is barred by the statute of limitations from assessing additional employment taxes for the taxable periods in issue.

Ps, husband and wife, purchased a fishing vessel (vessel).    They financed that purchase by borrowing money from a bank. As    security for the loan, Ps granted the bank a mortgage interest    in the vessel. Ps became delinquent in making payments to the    bank on the loan, and the bank foreclosed on the vessel, sold it    as part of that foreclosure, used the proceeds from that sale to    reduce the outstanding principal balance of the loan, and    discharged the remaining balance of the loan. As a result, Ps    realized capital gain of $ 28,621 and discharge of indebtedness    (DOI) income of $ 42,142.      Ps excluded the DOI income from their gross income pursuant    to the insolvency exception of sec. 108(a)(1)(B), I.R.C.,    because they determined that they were insolvent within the    meaning of sec. 108(d)(3), I.R.C. In making the insolvency    calculation prescribed by sec. 108(d)(3), I.R.C., Ps excluded    certain assets that they claim are exempt from the claims of    creditors under applicable State law. The parties agree that if    such assets may not be excluded in making that calculation, Ps    were not insolvent within the meaning of sec. 108(d)(3), I.R.C.,    and may not exclude the DOI income from gross income pursuant to    sec. 108(a)(1)(B), I.R.C.      HELD: The word "assets" as used in sec. 108(d)(3), I.R.C.,    includes assets exempt from the claims of creditors under    applicable State law.      HELD, FURTHER: Ps are liable for the accuracy-related    penalty under sec. 6662(a), I.R.C., to the extent stated herein.

HELD: Petitions by J, individually and as trustee, are    dismissed for lack of prosecution. Attorney's fees are awarded    under I.R.C. sec. 6673(a)(2) against petitioners' counsel, who    multiplied the proceedings unreasonably and vexatiously.

D formed a family limited partnership (JBLP) with his son and transferred assets including real property, to JBLP in exchange for a 95.5389-percent limited partnership interest. Held: The transfers of property to the partnerships were not taxable gifts. See Estate of Strangi v. Commissioner, 115 T.C. 478 (2000). HELD, FURTHER, sec. 2704(b), I.R.C., does not apply to this transaction. SeeKerr v. Commissioner, 113 T.C. 449 (1999).

In late 1992, D and his former spouse won a Connecticut LOTTO prize payable in 20 annual installments. Held: The lottery payments must be included in D's gross estate and valued for estate tax purposes through application of the actuarial tables prescribed under sec. 7520, I.R.C.

P adjusted the basis in his retirement annuity by an inflation factor, to take account of inflation between the date of his contributions to the retirement plan and the annuity starting date, for… Held: P may not adjust the basis in his retirement annuity to account for inflation for purposes of calculating the amount of his pension annuity subject to Federal income tax.

HELD: Under the alternative cost method of Rev. Proc. 92-29, 1992-1 C.B. 748, a real estate developer may allocate to its bases in lots sold $ 3,707,662 in estimated construction costs relating to… Held: Under the alternative cost method of Rev. Proc. 92-29, 1992-1 C.B. 748, a real estate developer may allocate to its bases in lots sold $ 3,707,662 in estimated construction costs relating to common improvements.

HELD: Under the separate liability election provision of sec. 6015(c)(3)(C), I.R.C., the burden of proof is on respondent with regard to whether the electing spouse had… Held: Under the separate liability election provision of sec. 6015(c)(3)(C), I.R.C., the burden of proof is on respondent with regard to whether the electing spouse had actual knowledge of the item giving rise to the deficiency. Respondent must satisfy that burden of proof by a preponderance of the evidence.

P claimed relief from joint liability under sec. 6013(e), I.R.C., which was repealed and replaced by sec. 6015, I.R.C. Intervenor (I) is P's former spouse, who intervened pursuant to sec. 6015(e)(4),… Held: P meets all the requirements for relief under sec. 6015(c), I.R.C., unless R demonstrates that P had actual knowledge of the item giving rise to the deficiency at the time she signed the return.

For 1995, P elected, under sec. 179, I.R.C., to expense a depreciable asset. Held: R's refusal to consent, considering the facts in this case, was not an abuse of discretion.

M, a State bank, acquired a portion of the assets and assumed a portion of the deposit liabilities of C, a failed Federal savings association. Held: M's payment of the fees produced no significant future benefit to M that would require capitalization of either fee. James R. Walker and Charles L. Mastin II for petitioner.

On Sept. 10, 1999, R mailed to P a notice required by sec. 6320(a), I.R.C., concerning P's unpaid tax liabilities for the years 1984… Held: insofar as the petition filed herein purports to be a petition for review of a notice of the filing of a notice of lien pursuant to sec. 6320, I.R.C., the Court lacks jurisdiction on the ground that R did not make a determination pursuant to that section because R failed to send the written notice prescribed by sec. 6320(a), I.R.C.,…

On Mar. 16, 1999, R mailed to P-H a final notice of intent to levy concerning P-H's unpaid tax liabilities for the years 1987 through 1992 and 1997. Held: R's decision to conduct a so-called equivalent hearing did not result in a waiver by R of the time restrictions imposed upon P-H for requesting an Appeals Office hearing pursuant to sec. 6330, I.R.C. Kennedy v. Commissioner, 116 T.C. 255, 2001 U.S. Tax Ct. LEXIS 20, 116 T.C. No. 19 (2001), followed.

In the petition, petitioners alleged that wife, W, was entitled to relief from joint and several liability under former sec. 6013(e), I.R.C., with respect to their joint return for 1993. Held: W's request to withdraw, without prejudice, the issue of her qualification for relief under subsections (b) and (c) of sec. 6015, I.R.C., is denied. W placed those matters in issue in this case.

Ps petitioned the Court for a review of R's determination not to abate interest under sec. 6404. Held: C's sec. 6015 claim is an affirmative defense in a matter properly before the Court. In such circumstances, we require no additional statutory jurisdiction to address and determine C's claim for sec. 6015 relief.

P entered into a stock sale agreement in which P redeemed 75 percent of its outstanding stock from C in exchange for monetary consideration. Held: Sec. 197, I.R.C., requires that a covenant not to compete entered into in connection with a direct or indirect acquisition of an interest in a trade or business be amortized over 15 years.

P-USA is a corporation that is headquartered and has its manufacturing facility in the United States. Held: P-PR did not actively conduct a trade or business in Puerto Rico as required by sec. 936(a)(2)(B), I.R.C.; i.e., P-PR did not participate regularly, continually, extensively, and actively in the management and operation of a profit-motivated activity in that possession.

R mailed to P a notice of deficiency which failed to provide a date in the section entitled Last Day to File a Petition With the United States Tax Court (i.e., the petition date). Held: R's failure to provide the petition date in accordance with sec. 3463(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685, 767, does not render the notice of deficiency invalid.

A acquires and services multiyear installment contracts as its sole business operations. Held: The salaries and benefits are capital expenditures; A's payment of these items was directly related to its anticipated acquisitions of assets with expected useful lives exceeding 1 year.

Ps filed a petition seeking redeterminations of R's disallowance of several deductions and imposition of an addition to tax and accuracy-related penalty. The parties settled most of the issues regarding the disallowed deductions except one regarding certain Schedule C deductions. At trial, Ps claimed additional deductions on account of a casualty loss, charitable contributions, unreimbursed employee expenses, and Schedule C and E expenses that were neither claimed by Ps on their tax returns nor raised in the notice of deficiency. The examination in the instant case took place after the effective date of sec. 7491, I.R.C., as amended by the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 685, 726. HELD: Because Ps failed to introduce credible evidence, Ps failed to meet the requirements of sec. 7491(a), I.R.C., as amended, so as to place the burden of proof on R for the factual issues relating to the deductions in issue. HELD, FURTHER, to meet his burden of production pursuant to sec. 7491(c), I.R.C., as amended, R must come forward with sufficient evidence indicating that it is appropriate to impose a penalty, addition to tax, or additional amount. HELD, FURTHER, R met his burden of production with regard to the addition to tax and accuracy-related penalty.

In 1994, H entered into a deferred exchange whereby he relinquished 2-year timber cutting rights on his land and in return received in 1995 fee simple interests in three parcels of real estate. Held: At the beginning of the exchange period, H had a bona fide intent to enter into a deferred exchange of like-kind property within the meaning of sec. 1.1031(k)-1(j)(2)(iv), Income Tax Regs.

P's 1980, 1981, and 1982 Federal income tax returns claimed deductions for foreign tax liabilities which had accrued during those years. Held: P's election to credit the foreign taxes was untimely under sec. 901(a), I.R.C. The period specified therein commenced on the due dates of the returns for 1980, 1981, and 1982, the years for which P elected the foreign tax credit.