Volume 118 — Tax Court Reports

Ps are the shareholders of F, a subch. S corporation.    During its 1994 and 1995 taxable years, F incurred wages that    qualified for the targeted jobs credit (TJC) under secs. 38 and    51, I.R.C. F claimed TJCs of $ 456,264 and $ 259,434 for the    respective years and reported to Ps their proportionate shares    of the credits. F reduced its deduction of wages by the amount    of the TJCs, pursuant to sec. 280C(a), I.R.C., and reported to    Ps their proportionate shares of its resulting net income (F's    resulting net income). Ps computed their regular tax liability    by including F's resulting net income in their taxable income.    Ps were not subject to the alternative minimum tax but had to    compute their alternative minimum taxable income (AMTI) in order    to ascertain for purposes of sec. 38(c)(1)(A), I.R.C., the    tentative minimum tax ceiling on the amount of the TJCs that    could be applied against their regular tax liability. Ps    computed their AMTI by deducting their proportionate shares of    F's full wage expense (i.e., the wage expense unreduced by the    TJC). R determined that Ps' AMTI had to be computed using F's    resulting net income and that the tentative minimum tax ceiling    limited Ps' application of the TJC against their regular income    tax liabilities.      Held: Because sec. 280C(a), I.R.C., requires that a    wage deduction be reduced by the amount of the TJC, and pt. VI,    subch. A, ch. 1, subtit. A (secs. 55 through 59, I.R.C.) does    not allow for an adjustment of that reduction for purposes of    the alternative minimum tax regime, the portion of F's wages    equal to the TJC is not deductible in calculating Ps' AMTI.

Petitioners (Ps) filed a return for 1995 in which they correctly reported their tax liability but did not pay the tax owed. Held: We have jurisdiction under sec. 6330(d)(1)(A), I.R.C., to review R's determination to proceed with collection of the addition to tax under sec. 6651(a)(2), I.R.C. Held, further, Ps had no reasonable cause for failing to pay their 1995 income tax, and thus are liable for the addition to tax for failure to pay tax under sec.…

Controlled Foreign Corporation Issue : In 1992, Burndy-US (B-US), a predecessor of Framatome Connectors USA, Inc., one of the petitioners (Ps), owned 50 percent of the stock of Burndy-Japan (B-J). Held: B-J was not a CFC in 1992 because B-US did not own more than 50 percent of the voting power of B-J stock or more than 50 percent of the value of B-J stock.

R determined that P was liable as a transferee of assets from C and, therefore, was liable for C's tax liabilities. Held: The transfer to P was from C. Held, further, even though P was an insider under Texas law, the transfer was not in avoidance of creditors because it was made in good faith and as part of the usual business practices of P and C. Held, further, P is not liable as a transferee.

P agreed to sell a portion of its business (clinical    business) to N, a third party, pursuant to a prearranged sale    that was structured as a spinoff. P's basis in the clinical    business's assets was $ 105,015. On Oct. 29, 1993, P transferred    the clinical business to a newly incorporated entity, S, in    exchange for all of S's stock, pursuant to sec. 368(a)(1)(D),    I.R.C., and, on Oct. 30, 1993, P distributed the stock to P's    shareholders in a transaction it claimed satisfied the    requirements of sec. 355, I.R.C. On the same day as the    distribution of S's stock to P's shareholders, S's shareholders    sold all of S's stock to N for $ 5,530,000. P had accumulated E &    P as of the beginning of its taxable year and failed to prove    that P and S did not have current E & P as of Oct. 30, 1993.    Although P conceded that the spinoff followed immediately by the    prearranged stock sale constituted evidence that the transaction    was a device to distribute E & P within the meaning of sec.    355(a)(1)(B), I.R.C. , and sec. 1.355-2(d), Income Tax Regs., P    claimed it had valid corporate business purposes for structuring    the transaction as it did which overcame the evidence of device.    Alternatively, P argued that, even if the spinoff did not meet    the requirements of secs. 355 and 368, I.R.C., the value of S's    stock for purposes of calculating the gain P must recognize    under sec. 311(b)(1), I.R.C., should be calculated based on the    value of the assets transferred to S and not on the price paid    for S's stock by N.      1. Held: There is substantial evidence that the    spinoff was a device to distribute E&P, which is not overcome by    substantial evidence of nondevice or by evidence that P and S    lacked current and accumulated E&P. Consequently, the spinoff    does not qualify for  tax deferral under secs. 368 and 355,    I.R.C., and P's gain must be determined in accordance with sec.    311(b)(1), I.R.C.      2. Held, further, sec. 311(b)(1), I.R.C.,    requires P to recognize gain on the distribution of S's stock as    though the stock were sold to P's shareholders at its fair    market value. In this case, the best evidence of the fair market    value of S's stock on the distribution date is the price paid    for the stock by N on that same date.

H and W filed joint Federal income tax returns for 1981 and 1982 on which they took large deductions attributable to a tax shelter… Held: W had reason to know of the understatement attributable to the disallowed deductions, and, therefore, W is not entitled to relief under sec. 6015(b)(1)(C), I.R.C. 2. Held, further, it would not be inequitable to hold W liable for the deficiencies in tax, and, therefore, W is not entitled to relief under sec. 6015(b)(1)(D), I.R.C. 3.

Some of P's trees were partially damaged and P was compelled to salvage the trees or they would have been lost through decay, insects, etc. The damage forced P to harvest the trees before intended. Held: P's circumstances meet the threshold requirements for relief under sec. 1033.

Ps maintained active memberships in an agricultural cooperative, which processed and sold corn produced by its members. As active members, Ps were obligated to produce and deliver corn to the cooperative regularly, and, during 1994 and 1995, they met that obligation with corn they acquired from a pool maintained by the cooperative. The cooperative processed and sold the corn for Ps' benefit and paid to Ps value-added payments for the corn.

Held: A sec. 6020(b), I.R.C., return made by R, which shows an amount of tax, does not affect whether there is a deficiency under sec.… Held: A sec. 6020(b), I.R.C., return made by R, which shows an amount of tax, does not affect whether there is a deficiency under sec. 6211(a), I.R.C. Where P failed to file a return, the amount of tax shown on a sec. 6020(b), I.R.C., return made by R is subject to deficiency procedures, and R must follow those procedures before he can…

This opinion addresses petitioner's (P) 1992 through 1997 (1992-97) tax years. Respondent (R) issued notices of deficiency to petitioner (P) for tax years 1990 through 1997 (1990-97). Held: P may not contest his underlying tax liability for tax years 1992-97 because P received notices of deficiency for those years. Sec. 6330(c)(2)(B). Held, further, R's determination to proceed with collection with respect to P's tax years 1992-97 was not an abuse of discretion.

P claimed foreign tax credits under sec. 901(a), I.R.C., on its consolidated returns for 1982, 1983, 1984, and 1986. Held: Sec. 1.861-8(e)(2), Income Tax Regs., does not permit P to allocate and apportion net interest expenses. The Tax Court's decision in Bowater, Inc., & Subs. v. Commissioner, 101 T.C. 207 (1993), revd. 108 F.3d 12 (2d Cir. 1997), which holds the opposite, is hereby overruled.

R sought production of certain transcripts of depositions taken in a patent infringement suit in which P was a defendant. Held: P will be compelled to produce the protected materials, and this Court's compulsion order will incorporate the requirements of the District Court's protective order to continue the protection of any proprietary business information that may be contained in the deposition transcripts.

Before the years in issue, petitioner parent (EA) had relied on unrelated video games manufacturers in Taiwan and Japan to manufacture the video games that EA sold. Held: further, Ps are entitled to partial summary judgment that EAPR maintained a significant business presence in Puerto Rico within the meaning of sec. 936(h)(5)(B)(ii), I.R.C. 1986, without regard to the requirements of the final flush language of that provision. 3.

In 1995 and 1996, Ps A and C made gifts to their children and grandchildren of membership units in Treeco, LLC, a limited liability company. Held: The gifts of Treeco units made by Ps fail to qualify for the annual gift tax exclusion provided in sec. 2503(b), I.R.C.

P, an accrual method taxpayer, is a U.S. corp. and subs. wholly owned by S, a foreign corp. P accrued but did not pay interest owed to S… Held: the instant case raises the identical issue decided in Tate & Lyle, Inc. v. Commissioner, 103 T.C. 656 (1994), revd. and remanded 87 F.3d 99 (3d Cir. 1996), of whether sec. 1.267(a)-3, Income Tax Regs., is a valid exercise of the regulatory authority granted in sec. 267(a)(3), I.R.C. In light of the reversal by the Court of Appeals…

A and D, husband and wife, owned all of L's stock as community property. D predeceased A, leaving 44.069 percent of L's stock to a trust over which A had a testamentary general power of appointment. A also owned 50 percent of L's stock outright. Held: For Federal estate tax valuation purposes, the stock subject to A's general power of appointment must be aggregated with stock A owned outright.

P's S corporation (S) performed management services for real estate partnerships in which P had direct and indirect interests. Held: The management fee expense is passive and may not be deducted from petitioner's passthrough management fee income which is nonpassive within the meaning of sec. 469, I.R.C.

Ps petitioned the Court under sec. 6320(c), I.R.C., to review a notice of a Federal tax lien placed upon their property for 1991 and 1996 Federal income taxes. Held: We shall grant Ps' motion. Estate of Ming v. Commissioner, 62 T.C. 519 (1974), distinguished.

R disallowed deductions claimed on account of a    contribution of corporate shares to a private foundation (other    than a private foundation described in sec. 170(b)(1)(E),    I.R.C.) on the alternative grounds that the shares were not    qualified appreciated stock, within the meaning of sec.    170(e)(5)(B)(1), I.R.C., and that the shares were not publicly    traded securities, within the meaning of sec. 1.170A-13(c)(7)(xi), Income Tax Regs., so that the substantiation    requirements of sec. 1.170A-13(c)(1)(i), Income Tax Regs.,    applied but were not satisfied.      1. Held: Deductions disallowed; the shares were not    qualified appreciated property.      2. Held, further, deductions disallowed on    alternative grounds; the shares were not publicly traded    securities, so that the substantiation requirements were    applicable but not satisfied.

Ps filed for a ch. 11 reorganization in bankruptcy. R filed a proof of claim setting forth income tax liabilities for 3 taxable years. The bankruptcy court ordered Ps to file returns. Held: R is not estopped from determining deficiencies that could result in liabilities for the same tax years greater than those R claimed in Ps' confirmed plan of reorganization in bankruptcy.

Held: Earnings realized by petitioner, a member of the Chicago Board of Trade, from trading in commodities futures contracts are subject to self-employment tax. Held: Earnings realized by petitioner, a member of the Chicago Board of Trade, from trading in commodities futures contracts are subject to self-employment tax.

R determined deficiencies in tax and accuracy-related penalties for 3 years. Held: Summary judgment is appropriate with respect to the affirmative defense; stipulated facts establish that the period of limitations did not expire before R mailed the notice of deficiency, which suspended the running of that period. 2.

R's Appeals officer (A) issued a notice of determination to    P in which that officer determined to proceed with collection    with respect to P's taxable year 1996. In making that    determination, A relied on Form 4340, Certificate of    Assessments, Payments, and Other Specified Matters (Form 4340).    A provided to P a copy of that form with the notice of    determination but did not provide to him a copy of Form 23C,    Assessment Certificate -- Summary Record of Assessments (Form    23C). R has for a number of years been engaged in making a    transition in R's assessment procedure from the general use of a    manually prepared Form 23C to the general use of a computer-    generated Revenue Accounting Control System (RACS) Report 006    (RACS 006).      Held: R's use of the computer-generated RACS 006,    instead of the manually prepared Form 23C, in making an    assessment with respect to P's taxable year 1996 did not    constitute an irregularity in R's assessment procedure. Held,    further, R made a valid assessment with respect to P's    taxable year 1996. Held, further, for purposes of    complying with sec. 6330(c)(1), I.R.C., it was not an abuse of    discretion for A to have relied on Form 4340 to verify R's    assessment with respect to P's taxable year 1996.   See Davis v. Commissioner, 115 T.C. 35 (2000). Held, further,    any inability of P before or at R's Appeals Office hearing to    examine Forms 23C and 4340 and to cross-examine witnesses did    not constitute an abuse of discretion.    See Nestor v. Commissioner, 118 T.C. No. 10 (2002); Davis v. Commissioner,    supra. Held, further, R did not abuse R's discretion    in determining in the notice of determination to proceed with    collection with respect to P's taxable year 1996.    Held, further: P is required to pay a penalty    under sec. 6673(a), I.R.C.

P married his wife (W) in 1947. P and W were not legally separated or divorced. During 1998, W resided in Boise, Idaho (Boise address). During 1998, P stayed at the Boise address in excess of 30 days. Held: For purposes of sec. 86(c)(1)(C)(ii), I.R.C., live apart means living in separate residences. P and his wife lived in the same residence at least 30 days during the taxable year in issue.

Members of the C family wholly own three home health care organizations (P1, P2, and P3) exempt from Federal income taxes under sec.… Held: The transferred assets' value at the time of transfer decided. Held, further, the value of the transferred assets exceeded the value of the consideration received; thus, S1, S2, S3, and members of the C family are disqualified persons subject to excise taxes under sec. 4958, I.R.C., as beneficiaries of excess benefit transactions.

P filed a motion to redetermine interest under sec. 7481(c), I.R.C. R moves to dismiss for lack of jurisdiction on the basis that a sec. 6215, I.R.C., assessment has not been made. Held : Sec. 7481(c), I.R.C., requires that an assessment has been made by the Secretary under section 6215.

P, a trucking company, leases its drivers from an affiliated company. P compensates the drivers at a rate of 24 to 26 cents per mile dispatched, of which amount 6.5 cents is designated as a per diem allowance. R does not dispute that P's per diem payments are ordinary and necessary business travel expenses that are deemed substantiated pursuant to Rev. Proc. 94-77, 1994-2 C.B. 825, and Rev. Proc. 96-28, 1996-1 C.B. 686 Held: On the facts involved herein, P is the common law employer of the drivers and therefore is subject to the 50- percent limitation of sec. 274(n), I.R.C., to the extent the per diem payments are for the drivers' meal expenses. Held, further, pursuant to Rev. Proc. 94-77, supra, and Rev. Proc. 96-28, supra, the per diem payments are treated as being for the drivers' meal expenses and thus are subject to the sec. 274(n), I.R.C. limitation.

P (husband) entered into agents agreements (agreement) with State Farm Insurance Cos. (State Farm) wherein P agreed to write insurance policies exclusively for State Farm. Held: P did not own a capital asset or sell a capital asset to State Farm, nor did the termination payment P received from State Farm represent payment for transfer of a capital asset to State Farm or the successor agent.

Ps are H and W. H, a shareholder and former employee of D Corp., filed suit with W, also a shareholder of D, against D and its other… Held: Amounts paid by a former employer to a former employee in settlement of his wrongful termination claim fail to satisfy the first requirement for an accountable plan, the business connection requirement of I.R.C. sec. 62(a)(2)(A) as set forth in sec. 1.62-2(d)(1), Income Tax Regs.; the payment to Ps' attorneys is included in Ps' gross…

Held: Under sec. 6330(c)(4), I.R.C., in this judicial proceeding involving respondent's proposed collection activity, petitioner is precluded… Held: Under sec. 6330(c)(4), I.R.C., in this judicial proceeding involving respondent's proposed collection activity, petitioner is precluded from relitigating a statute of limitations issue that was previously adjudicated in a related District Court proceeding. Respondent's motion for summary judgment with regard thereto is granted.

P and H filed a joint return. A portion of the tax shown on    the return was not paid. R has not asserted a deficiency against    P or H. P submitted to R a request for relief from joint and    several liability under sec. 6015, I.R.C. R mailed a notice of    determination denying P relief under sec. 6015(b), (c), and (f),    I.R.C. The notice of determination was not mailed to P's last    known address. P actually received the notice of determination    by the 88th day after the notice was mailed. The envelope    containing P's petition was postmarked 92 days after the mailing    of the notice of determination. The petition was received and    filed 99 days after the date R mailed the notice of    determination. The petition was filed more than 6 months after P    submitted her request for relief to R.      Held: We have jurisdiction to determine whether P    is entitled to equitable relief under sec. 6015(f), I.R.C.,    regarding the underpayment of tax shown on P's joint return.      Held, further : P's petition was timely filed under    sec. 6015(e)(1)(A), I.R.C. In accordance with sec.    6015(e)(1)(A), I.R.C., P's petition was filed more than 6 months    after the date she submitted her request for relief to R. R    failed to mail his notice of determination to P's last known    address pursuant to sec. 6015(e)(1)(A), I.R.C. The misaddressed    notice of determination prejudiced P's ability to file her    petition within 90 days after the mailing of R's notice of    determination.

Ps claimed charitable contribution deductions for their payments to NHF of $ 36,285 in 1997 and $ 36,000 in 1998. Held: No part of Ps' payments to NHF is deductible as a charitable contribution to NHF because Ps did not meet the substantiation requirements of sec. 170(f)(8), I.R.C., and sec. 1.170A-13(f)(6), Income Tax Regs.

In conjunction with a criminal prosecution for tax evasion, P executed a Plea Agreement in which he agreed to file delinquent Federal… Held: This Court lacks jurisdiction over the additions to tax for fraudulent failure to file because such additions are not attributable to a deficiency. Sec. 6665(b)(1), I.R.C. Held, further, This Court lacks jurisdiction over the additions to tax for failure to pay estimated tax because P actually filed returns for the years in issue.

R issued an affected items notice of deficiency to P for 1992, attributable to P's distributive share of cancellation of debt income of an insolvent law partnership. Held: We have no jurisdiction to consider P's argument that he was not a partner. Whether P was a partner is a partnership item that can be challenged only at the partnership level.

P is a defendant in a criminal proceeding. The transactions    and circumstances which gave rise to the criminal proceeding    were also the predicate for R's civil tax determination. P's    criminal defense attorney selected 100,000 pages of documents    from a much larger universe of documents that were in the    possession of the prosecuting attorney. The documents were    converted by P's defense attorney into computer searchable    media. R seeks the production of copies of the documents and    computer searchable media. P resists turning over the documents    or media on the grounds that his defense attorney's selection of    the particular documents reflects his mental impressions and is    therefore protected work product. The documents sought are    otherwise discoverable.      Held: The mere selection of particular documents by    P's defense attorney does not automatically transmute the    documents into work product. Held, further, as P has    failed to make the requisite showing of how the disclosure of    the documents selected would reveal the defense attorney's    mental impressions of the case, the requested documents and    computerized electronic media are not protected by the work    product doctrine.

R disallowed a loss claimed by P on his Federal income tax return and issued a notice of deficiency. P received the deficiency notice and corresponded with R regarding the loss. Held: Because P received the deficiency notice and had an opportunity to dispute R's determination, P is statutorily barred from challenging the existence or amount of his liability in this proceeding.

P leased land from the State of Alaska to operate an airport. The leased land is surrounded by lands owned by a Native corporation and a federally recognized Native entity. Held: The term within an Indian reservation in I.R.C. sec. 45A(c)(1)(B) means located on an Indian reservation. Held, further, P does not qualify for the IEC because the airport is not located within an Indian reservation within the meaning of I.R.C. sec. 45A.