Volume 117 — Tax Court Reports

G and R (the applicants) filed a Joint Application to Perpetuate Testimony Before Commencement of a Case (joint application) pursuant to Rule 82, Tax Court Rules of Practice and Procedure. Held: Because there is a reasonable expectation that the applicants will be adversaries in an action cognizable in this Court, and there is a significant risk that critical testimony will be unavailable when a trial, if any, is commenced, the applicants' joint application will be granted.

U, an international airline, paid its pilots and flight attendants (collectively, employees) per diem allowances. Held: U may deduct the per diem allowances as personal service compensation under sec. 162(a)(1), I.R.C.

In 1995, P purchased an intraoral camera system (the system) for use in his dental practice. The system has general applicability and usefulness to all dental patients. Held: Because the system was not acquired by petitioner in order for him to comply with the applicable requirements of the ADA, the system is not an eligible access expenditure for purposes of sec. 44(c), I.R.C.

P acquired the assets of D and assumed certain liabilities,    including the contingent liability for a patent infringement    claim. P was subsequently held liable for damages, interest, and    court costs.      HELD: P's payment in satisfaction of the patent    infringement liability is a cost of acquiring the assets of D    and must be capitalized in the year incurred.

HELD: Evidence excluded at trial may be considered by the Court in ruling under sec. 7430, I.R.C., on a motion for litigation costs. Held: Evidence excluded at trial may be considered by the Court in ruling under sec. 7430, I.R.C., on a motion for litigation costs.

Before the effective date of secs. 6320 and 6330, I.R.C. (the effective date), R filed Federal income tax liens against certain property owned by P. After the effective date, R notified P under sec.… Held: Sec. 6330(d), I.R.C., grants this Court jurisdiction to review R's determination.

P, a domestic corporation, acquired substantially all of    the stock of A, a foreign corporation. The Federal Trade    Commission (FTC) contemporaneously filed a complaint in U.S.    District Court seeking to enjoin P's acquisition and control of    A pending resolution of potential restraint of trade issues.    Pursuant to the court's order, P transferred its A stock to a    voting trust pending the FTC's consideration of the issues. The    trust had an independent trustee who held and voted the stock    without influence by P. The trustee was directed to, and did,    operate A independently of P and as an active competitor of P. P    was the trust's only beneficiary.       HELD: Sec. 951(a), I.R.C., does not include A's subpt. F    income in P's income because P did not own the A shares after    the transfer.      HELD, FURTHER, sec. 951(a), I.R.C., includes A's subpt. F    income in the trust's income which, under secs. 671 and 677(a),    I.R.C., must be recognized by P.

P owned 100 percent of the stock in two corporations, C and L. During 1995 and 1996, C made a series of remittances totaling $ 89,728.73 which were treated as loans from C to P, followed by… Held: To the extent of $ 12,247.70, the transfer of L stock to C in exchange for debt release is excepted from redemption characterization pursuant to sec. 304(b)(3)(B), I.R.C., and, under secs. 351 and 357, I.R.C., generates no gain or loss.

During the years in issue, Ps lived and worked on Johnston Island, a U.S. insular possession. Held: Ps may not exclude from their gross income under sec. 931, I.R.C., the compensation they earned on Johnston Island because that island is not a specified possession as defined in sec. 931(c), I.R.C. Alternatively, Ps claim that, under sec. 911, I.R.C., and sec. 1.931-1(b)(2), Income Tax Regs., they can exclude from gross income up to…

HELD: Sec. 301.6203-1, Proced. & Admin. Regs., does not require that one of respondent's assessment officers sign and date Form 4340, Certificate of Assessments and Payments, in order to have a valid… Held: Sec. 301.6203-1, Proced. & Admin. Regs., does not require that one of respondent's assessment officers sign and date Form 4340, Certificate of Assessments and Payments, in order to have a valid assessment of a taxpayer's liability.

On Mar. 30, 2001, R mailed to P a Notice Of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 regarding P's tax liability for 1995. Held: The Court lacks jurisdiction over the petition because it was not timely filed. P cannot rely on the so-called timely mailing/timely filing rule of section 7502(a), I.R.C., because that rule does not apply to foreign postmarks.

HELD: Petitioner's request for a sec. 6330 hearing suspended the applicable 10-year limitations period for collecting petitioner's Federal income taxes for taxable years 1989 and 1990, and respondent… Held: Petitioner's request for a sec. 6330 hearing suspended the applicable 10-year limitations period for collecting petitioner's Federal income taxes for taxable years 1989 and 1990, and respondent is not time barred from collecting those taxes.

In Intermet Corp. & Subs. v. Commissioner, 209 F.3d 901    (6th Cir. 2000), revg. and remanding 111 T.C. 294 (1998), the    Court of Appeals remanded this case to the Court to determine    whether amounts that P paid to satisfy its State tax liabilities    and interest on Federal and State tax liabilities, qualify as    "specified liability losses" within the meaning of sec.    172(f)(1)(B), I.R.C.      HELD: P's State tax liabilities and interest on Federal and    State tax liabilities qualify as "specified liability losses"    within the meaning of sec. 172(f)(1)(B), I.R.C.

P, an S corporation, distributed all of its net income to A, its sole shareholder and president. Held: A is an employee of P for purposes of Federal employment tax pursuant to sec. 31.3121(d)-(1)(b), Employment Tax Regs., because A is an officer who performs substantial services for P and receives remuneration for those services. HELD, FURTHER, P is not entitled to relief pursuant to sec. 530 of the Rev. Act of 1978, Pub.

Respondent (R) sent petitioner (P), an S corporation, a notice of deficiency in which R determined that P was subject to the built-in gains tax under sec. 1374, I.R.C., for payments P received in… Held: Sec. 301.6245-1T, Temporary Proced. & Admin. Regs., is valid. HELD, FURTHER, the built-in gains tax imposed under sec. 1374, I.R.C., is a subchapter S item that must be determined in a unified audit and litigation procedure for an S corporation.

R issued a notice of intent to levy, and Ps requested a hearing before an IRS Appeals officer (A) pursuant to sec. 6330, I.R.C. In their request Ps… Held: The Tax Court has jurisdiction under sec. 6330(d)(1)(A), I.R.C., based on a valid notice of determination and a timely filed petition. In determining the validity of the notice of determination for jurisdictional purposes, we do not look behind the notice to see whether Ps were afforded an appropriate IRS Appeals hearing.

R issued a notice of intent to levy, and Ps requested a hearing before an IRS Appeals officer (A) pursuant to sec. 6330, I.R.C. The only issue that Ps raised in their request was whether there was a valid summary record of the assessments of the taxes in question. A sent a letter to Ps that enclosed a Form 4340, Certificate of Assessments and Payments, showing that the assessments were made and invited Ps to raise additional issues, but Ps did not do so.

Ps filed returns for 1994, 1995, and 1996, in which they reported their wages as income. Held: We lack jurisdiction to review R's lien and levy determination to proceed with collection of the frivolous return penalty. Van Es v. Commissioner, 115 T.C. 324, 328-329 (2000).

PP is a multiemployer pension plan established in 1966 to    benefit employees in the sheet metal industry. A second,    separate fund (C) was established in 1985 to provide 3-percent    cost of living adjustments (COLAs) to most of PP's participants.    For 1985 through 1990, C's assets were insufficient to pay the    3-percent benefit, and PP made "ad hoc" payments to each    of its participants who was eligible that year to receive a    benefit from C. The ad hoc payment equaled the amount that, in    combination with the benefit payable from C, equaled the 3-    percent COLA. PP's plan was amended in March 1992 to add a COLA    as of Jan. 1, 1991, equal to the difference between the 3-    percent COLA and the portion of that amount paid by C. In    October 1992, PP's plan was restated as of Jan. 1, 1991, to    provide for a flat 2-percent COLA that was not dependent on the    amount paid by C and that was payable to all eligible employees    without regard to whether the provision was in effect when the    employees retired or separated from service. PP paid a COLA for    1992 through 1994. In October 1995, PP's plan was amended to    eliminate the COLAs paid under the plan to pre-1991 retirees.      Held: The 1995 amendment, although it removed COLAs    that had been provided to pre-1991 retirees, did not violate the    anticutback provision of sec. 411(d)(6), I.R.C.

P planned to acquire control of C, a corporation. C    required P to sign a lockup agreement, which restricted P's sale    of any C stock. The agreement provided that, if P sold the stock    within 2 years of its acquisition, he would be subject to sec.    16(b) of the Securities Exchange Act of 1934.      On July 9, 1993, P received a nonstatutory employee stock    option from C. On Sept. 7, 1994, P exercised this stock option.    P pledged some of this stock as collateral for a loan, and the    stock was sold by the lender.      C issued P a Form 1099 for 1994 reporting income from P's    exercise of the stock option. On the basis of the Form 1099, R    issued a notice of deficiency for 1994 determining that P    received "other income" of $ 728,000 -- the difference    between the option price and the price the stock was selling for    on the date the option was exercised.      Held: Sec. 83(c)(3), I.R.C., is inapplicable because    the 6-month restricted period under sec. 16(b) of the Securities    Exchange Act of 1934 commenced on the date of grant of the    option and expired by the date of exercise.      Held, further, for purposes of sec. 83(c)(3),    I.R.C., the 6-month period provided by sec. 16(b) of the    Securities Exchange Act of 1934 cannot be extended.      Held, further, upon the exercise of his    option, P realized income in the amount of the difference    between the fair market value of the shares received over the    amount paid as the exercise price. Sec. 83(a), I.R.C.      Held, further, the assessment of a deficiency    is not barred by the statute of limitations because there was a    substantial omission of income. Sec. 6501(e), I.R.C.

D, a nonresident alien for U.S. tax purposes, possessed at the time of his death interests in certain properties located in the State of California. Held: The full value of D's interest in the encumbered residuary property, rather than the net equity value thereof, must be included in his gross estate. Held, further, the estate has failed to establish its entitlement to a marital deduction in excess of that allowed by respondent.

P manufactured bakery products. P had workers who produced its product (CPWs and BWs), delivered its product (RDs), and marketed its product (OSWs). Held: pursuant to sec. 7436(a), I.R.C., this Court has jurisdiction over additions to tax and penalties found in subtitle F, chapter 68, including deciding the proper amounts of such additions to tax and penalties, related to taxes imposed by subtitle C with respect to worker classification or sec. 530 treatment determinations.

H invested in a tax shelter limited partnership that passed    through substantial losses that were claimed on the joint    Federal income tax returns H and W filed for the taxable years    1985 and 1986, and disallowed by R. After H and W were divorced    W sought relief from joint and several liability. R denied W's    request for relief from joint and several liability under sec.    6015(b) and (c), I.R.C., on the ground that W had knowledge of    the items giving rise to the deficiencies.      Held, W is not entitled to relief from joint and    several liability under sec. 6015(b), I.R.C.; W had reason to    know of the understatements by reason of the size of the losses    in relation to the income of H and W. A reasonable person in W's    position would have made inquiries to determine the legitimacy    of the losses, and W failed to make any such inquiries.       Held, further, W is entitled to relief under    sec. 6015(c), I.R.C. The items giving rise to the deficiencies     (the disallowed partnership losses) are properly attributed to    H's activities and partnership interest. W did not have actual    knowledge of the items giving rise to the deficiencies at the    time she signed the tax returns. Under the standard enunciated    by this Court in King v. Commissioner, 116 T.C. 198    (2001), the test for actual knowledge under sec. 6015(c)(3)(C),    I.R.C., is whether the requesting spouse had actual knowledge of    the facts resulting in the disallowance of the losses. Contrary    to respondent's argument, the King standard should be    applied to both active and passive activities. Therefore,    petitioner is entitled to relief from joint and several    liability under sec. 6015(c), I.R.C.      Held, further, pursuant to sec.    6015(d)(3)(B), I.R.C., W is not relieved of liability under sec.    6015(c), I.R.C., to the extent that she received a tax benefit    from the disallowed partnership losses claimed on the joint    returns.

R's examination of Ps' tax liability commenced no later    than July 16, 1998. After Ps petitioned this Court to    redetermine the deficiency, R's trial counsel informally    contacted potential third-party witnesses without providing    advance notice to Ps.      1. Held: Sec. 7602(c), I.R.C., which requires that R    give the taxpayer advance notice of third-party contacts    regarding R's examination or collection activities, is    inapplicable with respect to R's examination activities here,    which all occurred before the Jan. 19, 1999, effective date of    sec. 7602(c).      2. Held, further, sec. 7602(c), I.R.C., is    inapplicable with respect to R's trial preparation activities.      3. Held, further, sec. 7602(e), I.R.C., which    restricts R's use of financial status or economic reality    examination techniques, is inapplicable with respect to R's    examination techniques which were employed before the July 22,    1998, effective date of sec. 7602(e), I.R.C.      4. Held, further, Ps bear the burden of    proof.      5. Held, further, the allowable business    expenses of Ps' salvage business determined.      6. Held, further, the cost of goods sold of    Ps' salvage business determined.

R determined that certain expenditures made by P's wholly owned subch. Held: In the factual context of this case, the return referenced in sec. 6501(a), I.R.C. , is the return of the taxpayer for whom the adjustment is determined and not the return of the entity from or concerning whom the taxpayer has realized an item of income.

Petitioners (Ps) filed returns for 1992-94. Held: Ps may not contest their underlying tax liability for tax years 1992-94 because, by signing Form 4549, they consented to the immediate assessment and collection of tax for those years.

Held: Approximately $ 22 million in claimed ordinary business expense deductions are disallowed because they relate to transactions lacking in business purpose and in economic substance. Held: Approximately $ 22 million in claimed ordinary business expense deductions are disallowed because they relate to transactions lacking in business purpose and in economic substance.