Slip opinions decided 1995 — Tax Court Memorandum

These cases involve two similar transactions: A leasing company purchased equipment with funds borrowed from a bank. The leasing company leased the equipment to an end-user. Rent payments to be received from the end-user were assigned to the bank as security for the loan. The leasing company then sold the equipment to a middle company, which, in turn, sold the equipment to P. With regard to both of those sales, substantially all of the purchase price was evidenced by a long-term note and the equipment was acquired subject to both the lease to the end-user and the security interest of the bank. P then leased the equipment back to the leasing company. Payments from the leasing company to P, from P to the middle company, and from the middle company to the leasing company were, with one small exception, identical. Sec. 465, I.R.C., limits deductions for losses from certain activities to the amount for which the taxpayer is "at risk". Sec. 465(b)(4), I.R.C., provides that a taxpayer shall not be considered at risk with respect to amounts protected against loss through nonrecourse financing, guarantees, stop-loss agreements, or other similar arrangements. 1. Held: The ultimate test for determining whether a taxpayer is at risk pursuant to sec. 465(b)(4), I.R.C., is whether there is a realistic possibility of economic loss. Based on the facts presented, P has not established that there was any realistic possibility that he would be subject to economic loss as a result of his long-term notes. 2. Held further, Ps are subject to additions to tax under sec. 6653(a), I.R.C., for negligence. 3. Held further, Ps are subject to additions to tax under sec. 6661, I.R.C., for substantial understatement of income tax liability. 4. Held further, Ps are liable for the increased rate of interest imposed under sec. 6621(c), I.R.C., for substantial underpayments attributable to tax-motivated transactions.

Pursuant to the U.S. Code, U.S. employees may be either detailed or transferred to international organizations for foreign service. P was transferred from the U.S. Army to NATO. Held: P was an employee of NATO, and not an employee of the United States.

GS is an S corporation, and Ps' claimed losses passed through from GS. R disallowed Ps' losses on various grounds including Ps' failure to (1) establish that the losses were incurred in a trade or business for the production of income and (2) substantiate that the expenses giving rise to the losses actually were incurred or paid. Held: R's disallowance is sustained. Ps failed to prove that GS was carrying on a trade or business during the years in issue and that GS ever incurred or paid its claimed expenses.

P exhibited exotic automobiles, state-of-the-art, high technology vehicles with unique design features or equipment, for a fee. Held: The exotic automobiles were subject to obsolescence and, thus, were depreciable under secs. 167 and 168, I.R.C. 2. Held, further, the expenditures made by P's wholly owned S corporation are nondeductible under sec. 162(a), I.R.C., on account of being preopening expenses not incurred in a trade or business of the corporation. 3.

P filed late returns for 1984, 1985, and 1986. Held: P is not entitled to an award of administrative costs under sec. 7430, I.R.C., because R did not issue a notice of deficiency and Appeals did not issue a notice of decision. Sec. 7430(c)(2), I.R.C.; Estate of Gillespie v. Commissioner, 103 T.C. 395, 397 (1994).

Petitioners filed no Federal tax returns for 1990 and 1991, and failed to produce books and records from which their taxable income could be determined. Held: respondent's application of Consumer Price Index (CPI) to petitioners' 1989 return information to determine their 1990 and 1991 income approved; Held, further, respondent's revised application of CPI to petitioners' 1989 return figures for the purpose of asserting increased deficiencies not approved; Held, further, petitioners are liable for additions to tax under secs. 6651(a)(1), I.R.C., and 6654, I.R.C.

R determined deficiencies in income tax based in part upon: (1) a bank deposit analysis for the years 1982 through 1987, and (2) the… Held: Ps have in part carried and in part failed to carry their burden of proving that the income items in dispute were not gross income to them. 2. Held, further, R's determination of additions to tax under sec. 6651, I.R.C., are sustained. 3. Held, further, R's determination of additions to tax under sec. 6653(a), I.R.C., are sustained.

Before trial, the parties negotiated a settlement specifying the manner of resolving all issues raised in R's notice of deficiency. During discussions regarding the proposed stipulated decision document, P sought to raise an issue as to its entitlement to use the special use valuation provisions of sec. 2032A, I.R.C. This issue was not covered in R's notice of deficiency, and was not raised or preserved by P in the pleadings or the stipulated settlement agreement. Held: The issue raised by P is a new issue that is not before the Court.

Petitioner father (P1) entered into certain earnest money contracts to purchase land that P1 intended to develop through a joint venture with third parties who would provide the operating capital. P1 intended for his daughters (P2 and P3) to have an interest in both the land and a future joint venture to develop the land. To this end, P1 arranged to have an agent act on behalf of P2 and P3 with respect to the earnest money contracts and the joint venture. After the joint venture began, the third parties "bought-out" P1, P2, and P3 by giving them promissory notes. Years later, subsequent to litigation in which P2 and P3 participated, the notes were paid. R asserted inconsistent income tax deficiencies with respect to P1, P2, and P3. R claimed that P1 owned the promissory notes until the time they were paid, meaning that only P1 is taxable on the note proceeds. In the alternative, R claimed that P1 gave P2 and P3 an interest in the joint venture at the time of its inception, meaning that only P2 and P3 are taxable on the note proceeds. R also imposed additions to tax under secs. 6653 and 6661 (a), I.R.C., against all petitioners. 1. Held: P1 gave P2 and P3 certain rights under the earnest money contracts and is therefore not taxable on the note proceeds. 2. Held, futher, P2 and P3 owned the notes at the time the notes were paid and are therefore taxable on the note proceeds. 3. Held, further, R's imposition of additions to tax under secs. 6653 and 6661, I.R.C., is not sustained as to P1. 4. Held, further, because P2 and P3 failed to carry their burden of proof with respect to the additions to tax, R's imposition of additions to tax under secs. 6653 and 6661, I.R.C., is sustained as to P2 and P3.

Over several years Ps made payments to related foreign corporations without reporting the payments on Forms 1042 or withholding and paying the tax due. Ps sought to avoid additions to tax under secs. 6651(a)(1), 6656(a) and 6653(a), I.R.C., on the grounds, inter alia, that the governing law was complex, that they relied on accountants and counsel, and that they cooperated fully with R as soon as they discovered their mistake. Held: The additions are sustained.