Volume 120 — Tax Court Reports

P excluded from gross income certain disability benefits    that he received under a pilot disability plan funded by his    employer, U.S. Airways, Inc. P alleges that in prior collective    bargaining negotiations, the Airline Pilots Association and U.S.    Airways pilots made wage concessions in exchange for the pilot    disability plan. P argues that, in reality, the concessions he    and the other pilots made represent the contributions to the    pilot disability plan for purposes of sec. 104(a)(3), I.R.C.      Held: P's employer, U.S. Airways, funded the pilot    disability plan for purposes of sec. 104(a)(3), I.R.C.    Contributions to the plan were not includable in P's gross    income. Accordingly, the disability benefits are not excluded    under sec. 104(a)(3), I.R.C.

On Feb. 26, 2001, R issued P a notice of deficiency for the taxable year 1996. On May 22, 2001, P mailed his petition to the Court. On July 18, 2002, P filed his 1996 Federal income tax return. Held: Sec. 6511(h), I.R.C., provides for the suspension of the running of the periods of limitation with respect to an individual during any period when such individual is financially disabled.

MP is the parent of an affiliated group (P) that filed consolidated income tax returns for the taxable years at issue. 1986 Transactions: In 1986, P decided to sell the… Held: The cross-chain sales qualified as redemptions in complete termination of MLL's and MLCR's interest in the subsidiaries sold cross-chain under sec. 302(b)(3), I.R.C., and must be taxed as distributions in exchange for stock under sec. 302(a), I.R.C., rather than as dividends under sec. 301, I.R.C.

P requested relief from joint and several income tax    liability pursuant to sec. 6015, I.R.C., regarding taxes that    had been previously assessed for the taxable years 1983 and    1984. R issued a notice of determination denying P's request,    and pursuant to sec. 6015(e), I.R.C., P filed a timely petition    seeking review of R's determination. Thereafter, P moved to    amend her petition pursuant to Rule 41(a), Tax Court Rules of    Practice and Procedure, in order to claim that "The statute    of limitation bars the assessment of the underlying income tax    liabilities for 1983 and 1984." R opposed the amendment,    arguing that sec. 6015(e), I.R.C., grants this Court    jurisdiction to determine whether R's denial of relief from    joint and several tax liability, as provided in sec. 6015,    I.R.C., was erroneous. R argues that since the expiration of the    period of limitations to assess the underlying tax is not a    ground for relief under sec. 6015, I.R.C., this Court is without    jurisdiction to determine the issue.      Held: Our jurisdiction under sec. 6015(e), I.R.C,    is limited to reviewing R's denial of relief available under    sec. 6015, I.R.C., from an otherwise existing joint and several    tax liability. In an action brought under sec. 6015(e), I.R.C.,    we lack jurisdiction over whether the underlying assessment was    barred by the statute of limitations.      Held, further, Since the Court is without    jurisdiction to decide whether the expiration of the period of    limitations bars the assessment of the underlying tax liability,    the proposed amendment to the petition is improper, and P's    motion for leave to amend is denied.

12484-9 For the years 1991-94, Ps made contributions to a voluntary employee benefit trust (the postretirement medical trust) for the purpose of providing postretirement medical benefits to their employees. For 1991, Ps' actuary computed the present value of future postretirement medical benefits for active employees to be $ 14,096,473 and for retired employees to be $ 27,759,057. The actuary divided the $ 14,096,473 for active employees by the average actuarial present value of future service to produce a 1991 funding amount of $ 2,930,660 for active employees. The actuary determined that the $ 27,759,057 for retired employees could be fully funded in 1991. Ps contributed $ 30,689,717 to the postretirement medical trust in 1991 and, on Ps' consolidated return for 1991, claimed a deduction for the contribution as an addition to a "qualified asset account" pursuant to sec. 419A(b), I.R.C. R determined that Ps' method for computing the 1991 contribution, for postretirement benefits for retirees was improper and resulted in a contribution that exceeded the account limit for a reserve under sec. 419A(c)(2), I.R.C. R further determined deficiencies for years 1992-94 as a result of the determined overfunding in 1991. Held, with respect to an employee who is retired when the reserve is created, the present value of that employee's projected benefit may be allocated to the year the reserve is created. Accordingly, Ps' contributions to the postretirement medical trust for 1991 did not cause the qualified asset account to exceed the account limit under sec. 419A(b), I.R.C., with respect to the reserve for postretirement medical benefits provided in sec. 419A(c)(2), I.R.C.

P filed individual Federal income tax returns as married, filing separate, for the taxable years 1993, 1994, 1995, and 1996. Held: Unlike sec. 6015(e), I.R.C., sec. 66, I.R.C. (Treatment of Community Property Income), does not provide for jurisdiction permitting a taxpayer to file a stand alone petition in response to a denial of a request for relief made pursuant to sec. 66(c), I.R.C. Since we are without jurisdiction to review the denial of the request for…

Ps claimed a refund of $ 80,000 on their 1998 Federal income    tax return attributable to "black taxes" or so-called    slavery reparations.      Held: The Internal Revenue Code does not provide a    deduction, credit, or any other allowance for slavery    reparations.      Held further: The doctrine of equitable estoppel is    not a bar to R's determination in this matter. Therefore, R's    Motion for Summary Judgment shall be granted.

Held: The Court has jurisdiction to determine whether the U.S. Bankruptcy Court discharged petitioners from their respective unpaid Federal income tax (tax) liabilities for… Held: The Court has jurisdiction to determine whether the U.S. Bankruptcy Court discharged petitioners from their respective unpaid Federal income tax (tax) liabilities for their taxable years 1994 and 1995. Held, further, The U.S. Bankruptcy Court did not discharge petitioners from such liabilities.

P and her then h usband, H, filed a joint Federal income    tax return for 1989 showing tax owed; they did not pay the tax    with the return. R garnished P's wages and applied P's    overpayments of tax from 1992 and 1994-98 to the unpaid 1989 tax    liability. P requested relief under sec. 6015(f), I.R.C. R    denied P's request for relief. P then filed a petition in this    Court seeking a review of R's determination and requesting    (pursuant to sec. 6015(g), I.R.C.) a refund of her garnished    wages and the o verpayments of tax from 1992 and 1994-98. R a    sserts that even if P is entitled to relief under sec. 6015(f),    I.R.C., sec. 6015, I.R.C., does not apply to the portion of the    tax liability that was paid on or before July 22, 1998.      Held: P is entitled to relief under sec. 6015(g),    I.R.C. R's denial of such relief was an abuse of discretion.      Held, further, P is entitled to a refund of    her wages garnished in June 1998 and the overpayment of tax for    1996-98, which were applied to the unpaid 1989 tax liability.   Sec. 6015, I.R.C., applies to the full amount of any preexisting    tax liability for a particular taxable year, if any of that    liability remains unpaid as of the date of en actment, and not    just to portions of tax liability that remain unpaid after July    22, 1998, the date of enactment of Internal Revenue Service    Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.3201(g)(1), 112 Stat. 740.   Flores v. United States, 51 Fed. Cl. 49 (2001),    followed.      Held, further, pursuant to sec. 6015( g)(1),    I.R.C., P's refund is limited to the time restraints for filing    refund claims under sec. 6511, I.R.C.

P received wages, interest, and distributions from a    pension fund and individual retirement accounts in 1997 and    1998. He filed Forms 1040 and 1040A for those years,    respectively, but entered zeros on the relevant lines for    computing his tax liability. P argues that the income tax is an    excise tax and that he is not engaged in taxable excise    activities. R did not accept P's return forms for 1997 and 1998    as valid returns because they contained no information upon    which P's tax liability could be determined. R prepared    substitutes for return for P for 1997 and 1998. R's substitutes    for return consisted of the first two pages of a Form 1040 and    contained zeros on the relevant lines for computing a tax    liability, showed a tax liability of zero, and were not    subscribed. R subsequently mailed to P a notice showing proposed    tax adjustments. A revenue agent's report was attached to the    notice.      Held: The wages, interest, and distributions that P    received represent taxable income in the amounts determined by    R.      Held, further, that P is liable for a 10-    percent additional tax on the taxable amounts of his pension and    IRA distributions. Sec. 72(t)(1), I.R.C.      Held, further, that P is liable for sec.   6651(a)(1), I.R.C., additions to tax for failure to file a    return on or before the specified filing date. The Forms 1040 and 1040A that P filed showing zeros are not "returns"    for Federal income tax purposes. P is also liable for sec. 6654,    I.R.C., additions to tax for a failure to pay estimated taxes.      Held, further, that the sec. 6651(a)(2),    I.R.C., additions to tax for failure to pay amounts of tax shown    on returns do not apply because there was no tax shown on any    returns attributable to P, and the unsubscribed substitutes for    return showing zero taxes do not meet the requirements for a   sec. 6020(b), I.R.C., return. The subsequently prepared notice    of proposed adjustments and the revenue agent's report, which    were not attached to the unsubscribed substitutes for return,    whether viewed separately or in conjunction with the substitutes    for return, do not constitute returns for purposes of   sec. 6020(b), I.R.C.      Held, further, that a penalty of $ 2,000 is    imposed under sec. 6673(a)(1), I.R.C.

F, a financial institution, enters into bilateral contracts    which are a type of derivative financial product known as    interest rate swaps. Most of F's swaps are of the plain vanilla    type where one party (first party) agrees to pay to the other    party (second party) amounts ascertained as of certain dates by    applying a fixed rate of interest to a set notional amount. The    second party agrees to pay to the first party amounts    ascertained as of the same dates by applying a floating rate of    interest (e.g., LIBOR rate) to the same notional amount. For    purpose of the mark-to-market rule of sec. 475(a)(2), I.R.C.,    which applies to taxable years ended after Dec. 30, 1993, F    reported that the fair market value of its swaps as of Dec. 31,    1993, equaled their mid-market values; i.e., the values derived    through a net cashflow/present value analysis that was based on    the average of each swap's market bid and ask rates. In    addition, F deferred the recognition of the difference between    its valuation and the bid or ask prices which it paid or    received for the swaps, treating that difference as deferred    income designed to compensate it for (1) the perceived credit    risks of its counterparties and (2) the estimated administrative    costs to be incurred on holding and managing the swaps until    maturity. F used a similar method to report its swaps income for    1990 through 1992. F ascertained the values of its swaps for    each of the years 1990 through 1993 as of a date that was    approximately 10 days before the last day of F's taxable year    and reported that value as the swaps' fair market value as of    the last day of that year. R determined that F's method of    reporting its swaps income did not clearly reflect F's swaps    income for any of the years from 1990 through 1993. R determined    that a proper method values F's swaps as of the end of each year    at the midmarket values and does not take into account any    deferral for credit risk or future administrative costs.    Pursuant to sec. 446(b), I.R.C., R changed F's method of    accounting for its swaps income to R's "proper" method.      Held: The mark-to-market rule of sec. 475(a)(2),    I.R.C., including the valuation requirement subsumed therein, is    a method of accounting that is subject to the clear reflection    of income standard of sec. 446(b), I.R.C.      Held, further, F's method of accounting for    its swaps income does not clearly reflect its swaps income under   sec. 475, I.R.C., in that F's values were not determined at the    end of its taxable years and did not properly reflect    adjustments to the midmarket values which were necessary to    reach the swaps' fair market value.      Held, further, R's "proper" method of    accounting for F's swaps income does not clearly reflect that    income under sec. 475, I.R.C., in that a swap's mid-market value    without adjustment does not reflect the swap's fair market    value.      Held, further, to arrive at the fair market    value of a swap and other like derivative products, it is    acceptable to value each product at its midmarket value as    properly adjusted on a dynamic basis for credit risk and    administrative costs. A proper credit risk adjustment reflects    the creditworthiness of both parties, with due respect to    netting and other credit enhancements. A proper administrative    costs adjustment is limited to incremental costs. * Brief of amici curiae was filed by Leslie B. Samuels and Edward D. Kleinbard as counsel for the American Bankers Association, the Institute of International Bankers, the International Swaps and Derivatives Association, Inc., the Securities Industry Association, the New York Clearing House Association L.L.C., and the Wall Street Tax Association.

P petitions this Court pursuant to sec. 7478, I.R.C., seeking a declaration that interest on certain bonds will be exempt from taxation under sec. 103(a), I.R.C. P proposes to issue bonds of $ 140… Held: Private business use does not exceed 10 percent of the proceeds of the bond issue. The private business use test of sec. 141(b)(1), I.R.C., is not met. The proposed bonds are not private activity bonds, and interest on those bonds will be excludable under sec. 103(a), I.R.C.

Ps, their children, and their children's partnership formed a family limited partnership (PT). Held: Ps assigned only economic rights with respect to PT; such assignments did not confer partner status on the assignees. 2. Held, further, the aggregate fair market value of the interests assigned by Ps on the date of the gifts was $ 9,883,832. 3.

D was not a citizen or resident of the United States. D's will provided for charitable bequests to Canadian-registered charities. Held: A charitable deduction on the estate tax return larger than that determined by respondent is not allowed because the convention between the United States and Canada, as amended by the 1995 Protocol, requires that the bequests be funded from property subject to the U.S. estate tax.

P was a medical service corporation that provided emergency    medical services to hospitals. P contracted with physicians to    staff hospital emergency rooms. P treated those physicians as    independent contractors. P failed to timely file required Forms    1096 and 1099, for 1996. P delinquently filed those forms on a    basis consistent with its treatment of the physicians as    independent contractors.      R determined that the physicians were employees, and that P    was not eligible for relief under sec. 530 of the Revenue Act of    1978, Pub. L. 95-600, 92 Stat. 2885, as amended (sec. 530). R    determined that P did not meet the filing requirement of sec.   530(a)(1)(B). R's interpretation of sec. 530(a)(1)(B) requires    that a taxpayer timely file all required returns in order to be    eligible for sec. 530 relief.      This Court granted R's motion to sever and continue    determinations of worker classification and proper employment    taxes until after our consideration of P's eligibility for    relief under sec. 530.      Held: Because P did not treat the physicians as    employees for any period, filed all Federal tax returns on a    basis consistent with P's treatment of the physicians as not    being employees, and had a reasonable basis for not treating the    physicians as employees, P is entitled to relief from employment    tax liability pursuant to sec. 530. P's untimely filing of    information returns does not preclude P from qualifying for such    relief, particularly in the circumstances of this case.

Held: Where petitioners made a qualified offer under sec. 7430(c)(4)(E), I.R.C., on a substantive tax adjustment and thereafter litigation… Held: Where petitioners made a qualified offer under sec. 7430(c)(4)(E), I.R.C., on a substantive tax adjustment and thereafter litigation occurred and court determinations were made on arguments or issues relating to the substantive tax adjustment and where the parties ultimately entered into a settlement of the substantive tax…

P filed a request for relief under sec. 6015, I.R.C., with respect to her joint and several tax liabilities for 1982 and 1983. Held: P is not precluded from claiming sec. 6015, I.R.C., relief because of her closing agreement. Sec. 6015, I.R.C., was enacted in 1998 in order to provide additional relief to taxpayers who had filed joint income tax returns. Sec. 6015, I.R.C., was made applicable to any tax remaining unpaid as of July 22, 1998.