Slip opinions decided 1996 — Tax Court Memorandum

R determined deficiencies based on, among other theories, P's failure to report as income legal fees that P, an attorney, earned in 1987. 1. Held: P's oral motion to shift the burden of proof is denied. 2. Held, further, P's oral motion to dismiss in petitioner's favor the 1987 year because the 3-year period of limitations on assessment and collection for that year has expired is denied. 3. Held, further, P earned the fee in question in 1987. 4.

On the facts, Held: respondent's application of bank deposits method to determine petitioner's gross income in the absence of books and… Held: respondent's application of bank deposits method to determine petitioner's gross income in the absence of books and records approved, with one modification; held, further, miscellaneous deductions redetermined; held, further, petitioner liable for additions to tax under sec. 6651(a)(1), I.R.C., for 1988, 1989, and 1990; the addition…

Before trial, the parties negotiated a settlement specifying the manner of resolving this case. Ps now seek to raise an issue as to the amount of income subject to self-employment tax. Held: The issue raised by Ps is a new issue that is not before the Court.

Petitioner (P) was involved in a number of businesses, most of which were incorporated. Held: The first mailing of the notice of deficiency was to P's last known address, and was timely. Secs. 6212(b)(1), 6501(a), I.R.C. 1986. 2. Held, further, P had unreported Schedule C gross receipts for 1982; amount determined. 3. Held, further, P had unreported interest income for 1984-1986; amounts determined. 4.

E is a limited partnership subject to the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648. P is one of E's limited partners. Held: The 1982 FPAA is invalid with respect to P because: (1) It was improperly mailed to him and (2) he did not receive notice of it in enough time to allow him to join in E's proceeding.

C is a corporation whose stock is not listed on an exchange. D owned 100 percent of the stock when he died. D's stock was valued at $ 12,582,000 on the estate's Federal estate tax return. Held: Because the stipulated value has not been shown to be representative of C's freely traded value, no discount for marketability is allowable.

Held: petitioners' rental losses redetermined; held, further, gain from sale of real property redetermined; held, further, petitioners are liable for additions to… Held: petitioners' rental losses redetermined; held, further, gain from sale of real property redetermined; held, further, petitioners are liable for additions to tax under sec. 6653(a), I.R.C., for 1988, under sec. 6661, I.R.C., for 1988, and for an accuracy-related penalty under sec. 6662(a), I.R.C., for 1989.

Ps own a beach condominium that is rented for an average period of 7 days or less during the June to September rental season. Held: For purposes of sec. 469, I.R.C., Ps' participation in the activity does not constitute participation on a regular, continuous, and substantial basis. Accordingly, the losses incurred are subject to the passive loss rules of sec. 469, I.R.C.

B is an S corporation involved in the business of yacht chartering. Held: B's yacht chartering activity was not engaged in for profit within the meaning of sec. 183, I.R.C. 2. Held, further, sec. 6653(a), I.R.C., addition to tax is not sustained against P. 3. Held, further, sec. 6661, I.R.C., addition to tax is sustained against P.

H invested $ 100,000 in an arrangement, as a result of which a $ 1,600,000 Schedule C deduction was claimed on the 1981 tax return. Held: The 1981 grossly erroneous item (the $ 1,600,000 deduction) is an item of H. Sec. 6013(e)(1)(B), I.R.C. 1954. 2. Held, further, when the tax return was signed, W did not know, and had no reason to know, that there was a substantial understatement of tax for 1981. Sec. 6013(e)(1)(C), I.R.C. 1954. 3.

R determined that deductions claimed by P for annual rental payments made to P's sole shareholder under a real property lease exceeded the fair rental value of the property, and disallowed… Held: Rental payments were not deductible to the extent that they exceeded the amount allowed by R. Held, further, the residence occupied by P's sole shareholder was used in P's business for purposes of sec. 167, I.R.C., and hence, depreciation may be deducted by P.

P guaranteed the obligation to M, his wholly owned corporation, under M's contracts with I. Pursuant to these contracts, I paid advance commissions to M and its agents for insurance policies that… Held: P did not realize cancellation of debt income on account of the release.

P gambled at T, a casino in Atlantic City, New Jersey, and incurred losses of $ 4,139,100 in 1987, $ 3,080,050 in 1988, and $ 1,215,900 in 1989. Aside from these losses, but as an enticement to frequent T, P received from T "complimentary" goods and services (comps) totaling $ 443,278 in 1987, $ 974,992 in 1988, and $ 1,126,856 in 1989. On his Federal income tax returns, P included these comps in his gross income and relied on sec. 165(d), I.R.C., to deduct from his gross income an equal amount of his gambling losses. Held: Sec. 165(d), I.R.C., allows him to deduct his gambling losses to the extent of the comps.

Held: Compensation paid by P to two of its officers/shareholders is reasonable. Held: Compensation paid by P to two of its officers/shareholders is reasonable. Both officers had the appropriate education and employment background for their positions with P, worked long hours for the company and its predecessor, and helped increase its gross sales in a volatile market.

R determined a deficiency in Federal estate tax liability. Held: The price term in the restrictive agreement does not control the value of the stock for Federal estate tax purposes. 2. Held, further, the value of the stock for Federal estate tax purposes is $ 4,000,000.

Held: P's miscellaneous deductions redetermined; held, further, for any underpayment due to denied deductions P is liable for penalties under sec. 6662(a), I.R.C.,… Held: P's miscellaneous deductions redetermined; held, further, for any underpayment due to denied deductions P is liable for penalties under sec. 6662(a), I.R.C., for 1989 and 1990; held, further, for any underpayment due to unreported income P is not liable for penalties under sec. 6662(a), I.R.C., for 1990.

S, a subsidiary of P, entered into a concession agreement with E, an entity owned and controlled by the Egyptian Government. Held: E was not authorized to credit Egyptian taxes paid on behalf of S against its income tax liability.

R determined that NITCO, a local telephone company, unreasonably accumulated its earnings and profits and, therefore, was subject to accumulated earnings tax. Held: NITCO is liable for accumulated earnings tax because its accumulated earnings exceeded its reasonable business needs and NITCO was availed of to avoid income tax with respect to its shareholders. 2. Held, further, most of the legal expenses in issue are not deductible under sec. 162, I.R.C. 3.

Petitioner husband (P), an attorney, claims that he was not a shareholder in an S corporation organized for the practice of law. Held: P was a shareholder of the S corporation for the taxable year in issue and must report his pro rata share of the income and other items of the S corporation. 2. Held, further, P failed to report the nonemployee compensation. 3.

Held: respondent's deficiency determinations are sustained; held, further, petitioners are liable for additions to tax under sec. 6651(a)(1), I.R.C., sec. 6653(a)(1), I.R.C., and sec. 6661,… Held: respondent's deficiency determinations are sustained; held, further, petitioners are liable for additions to tax under sec. 6651(a)(1), I.R.C., sec. 6653(a)(1), I.R.C., and sec. 6661, I.R.C., for 1988; and for the accuracy-related penalty under sec. 6662(a), I.R.C., for 1989.

Ps contributed three parcels of real property and their unsecured promissory note to their wholly owned corporation. The parcels were encumbered by deeds of trust securing debt obligations in amounts that were in excess of the combined adjusted basis of the parcels in the hands of Ps. The face amount of Ps' promissory note was greater than the excess of the encumbering liabilities over Ps adjusted basis in the properties. Held: Ps failed to carry their burden of proving that their unsecured promissory note constituted genuine indebtedness. Under sec. 357(c)(1), I.R.C., Ps are required to recognize gain measured by the excess of the debt obligations secured by deeds of trust over Ps' adjusted basis in the real property.

In 1989, Ps' boat, the PEDRO, partially sank as a result of an underwater valve explosion causing three feet of salt water to enter the steel hull. Held: Ps have not established their entitlement to a casualty loss deduction under sec. 165(a), (h), I.R.C.

In 1985, 1986, and 1987, P engaged in various tax protester activities, filed false Forms W-4, and did not file tax returns. Held: P is liable for the addition to tax for fraud for 1985, 1986, and 1987.

Held: With respect to P's 1990 taxable year, the Court will enter a decision in accordance with R's computation. Held: With respect to P's 1990 taxable year, the Court will enter a decision in accordance with R's computation.

The issues for decision are (1) whether petitioner failed to report certain items of gross income, (2) whether he is entitled to certain disallowed Schedule C and… Held: Except for one item, P has failed to prove that the income items in dispute were not gross income to him. 2. Held, further, P is not entitled to any of the disputed deductions disallowed by R. 3. Held, further, R's determination of the disputed addition to tax under sec. 6651, I.R.C., is sustained. 4.

1. Over several years M performed substantial services without compensation for P, a domestic corporation that M owned indirectly… Held: The payment is deductible as compensation, because remuneration was consistent with the expectation of the parties at the time the services were performed. 2. P accumulated earnings without specific, definite and feasible plans to use the accumulations and lent substantial amounts to affiliates for purposes unrelated to its business.

On the facts, Held: P wife is an innocent spouse within the meaning of sec. 6013(e), I.R.C., as to that part of the deficiencies in income tax determined by the Commissioner for 1976, 1977, and 1978,… Held: P wife is an innocent spouse within the meaning of sec. 6013(e), I.R.C., as to that part of the deficiencies in income tax determined by the Commissioner for 1976, 1977, and 1978, attributable to the grossly erroneous items of P husband in those years.

The parties have made opposing motions for summary judgment with respect to the period of limitations. Held: Petitioner's motion for summary judgment will be denied. 2. Held, further, respondent's motion for partial summary judgment will be granted.

Petitioner husband (H) and petitioner wife (W) were divorced. Held: The marital payments are not alimony; therefore H may not deduct such payments, and W need not include them in gross income. 2. Held, further, R's determination of penalties under sec. 6662, I.R.C., against H is sustained.

P owned stock in Dondi Financial (DF). DF held 97 percent of the stock of Vernon (V). V was a savings and loan. Held: R's contention in the amended answer is new matter upon which R bears the burden of proof. Rule 142(a), Tax Court Rules of Practice and Procedure. Held, further, oral testimony of the two FBI agents is not a record or report of a public agency of Fed. R. Evid. 803(8).

W's foreign subsidiary F was insolvent for many years. When economic instability greatly exacerbated F's financial problems, W wrote off F's intercompany debt and its investment in F's stock, but continued to operate F for 3 more years in the hope that F could be sold as a going concern or that its assets would increase in value. Held: Deductions for bad debts and worthless stock on the consolidated return of W's affiliated group were properly disallowed.

In 1980, P became a limited partner in a tax shelter limited partnership. Held: The closing agreement did not oust this Court of jurisdiction. Held, further, the closing agreement itself was in any event void because signed on behalf of the IRS by an Associate Chief of Appeals who did not have the authority to enter into a closing agreement in a case docketed in this Court.

The parties dispute the value of D's stock in E on: (1) The date of D's death and (2) the date of a gift that was made approximately 3 months beforehand. Held: The value on both dates is $ 50.50885 per share.

On May 12, 1995, the Court filed a stipulation of settled issues in this case. Held: The Court will grant R's motion and enter a decision based on the stipulation.

[Code Secs. 162, 446, 471, and 472] [Business expenses: Ordinary and necessary: Airplane: Accounting methods: Change: LIFO: Inventory valuation: Pools: Cars and trucks.] During the years in issue, P… Held: When I began defining its items of inventory for its new car LIFO pool by model line, rather than body size, it changed the treatment of a material item. This change in item was material because it affected the computation of beginning and ending inventory.

R determined a deficiency in estate tax. Held: R's valuation of such shares and the option is sustained, except that allowance will be made for the exercise price of the option shares.

P, engaged in the retail pharmacy and restaurant business, made substantial improvements to certain leased premises. Held: P's leasehold improvements allocated between Building Services and Distributive Trades and Services. Walgreen Co. & Subs. v. Commissioner, 68 F.3d 1006 (7th Cir. 1995), revg. and remanding 103 T.C. 582 (1994), applied.

P was the sole participant and plan administrator of a pension plan for corporation A and owned 18 percent of an unrelated corporation, C. In 1982, P requested the plan's independent trustee to… Held: P is not subject to the 5-percent excise tax of sec. 4975(a), I.R.C., because he did not engage in a prohibited transaction under sec. 4975(c)(1)(E), I.R.C.

Petitioner husband (P) was a traveling sales representative in 1989 and 1990 for a company that manufactured and distributed men's clothing (T). T did not control, and did not have the right to control, the manner or means by which P solicited sales. P had a substantial investment in facilities and bore substantially all the expenses of his sales activities. P also bore the risk of loss from his sales activities. P and T had a permanent working relationship, although terminable at the will of either party. P received employee-type benefits from T. Held: P was an independent contractor and was not an employee in 1989 and 1990. Sec. 62(a)(1), I.R.C. 1986.

On the facts, Held: P is not entitled to innocent spouse protection within the meaning of sec. 6013(e), I.R.C., as to the deficiency, additions, and penalties in income tax determined by the Commissioner for 1989.

P sustained work-related injuries to his hands. For that reason, the pension plan of which P was a member distributed to P 100 percent of his accrued plan benefit. Held: The distributions are not excludable from gross income under sec. 105(c), I.R.C., because the amount of the distribution was not computed with reference to the nature of the injuries sustained by P.

[Code Sec. 512] Exempt organization: Solicitation program: Advertising activity: Unrelated business taxable income: Low-cost article exemption. -- Amounts generated by an exempt labor organization's solicitation program for its annual yearbook constituted income from the sale of advertising as a trade or business. Thus, the organization was liable for the unrelated business income tax.

P is an oil field contractor that sells oil pipes, leases equipment used in oil fields, and provides crews necessary to operate the leased equipment. Held: It was not an abuse of discretion for respondent to conclude that income from the yearend contracts was accruable for the years in which performance of the contracts was completed.

P moves for reconsideration, arguing that the Court erred because we: (1) Concluded that the subject shares were marketable, (2) failed to account properly for minority and marketability discounts,… Held: P's motion for reconsideration will be denied.

P, a California corporation, substantially prevailed in a Tax Court case involving the deduction of business expenses, interest, depreciation, and net operating loss… Held: P's administrative costs were incurred prior to the issuance of the statutory notice of deficiency and are therefore not recoverable. 2. Held, further, R's litigation position was substantially justified as to all contended issues, and P is therefore not entitled to an award of litigation costs.

A, a corporation, agreed with P and Y to pay them commissions on any oil that it purchased in foreign countries as a result of their efforts. Held: The commissions attributable to P's services are taxable to him under the assignment of income doctrine.

D's will formed 3 trusts: Trust A, Trust B, and Trust C. P was the sole beneficiary of Trust C. Trust C distributed $ 46,936 to P during… Held: P's gross income includes a portion of the distribution based on the ratio between the taxable items and the nontaxable items making up Trust C's distributable net income. 2. Held, further, P is liable for the addition to tax under sec. 6651(a), I.R.C. 3. Held, further, P is liable for the addition to tax under sec. 6654(a), I.R.C.

P, a tax attorney, effectively controlled the daily operations of a group of closely held corporations (C). Held: The statute of limitations does not bar the assessment and collection of tax for 1985, but is a bar as to 1983 and 1984. Sec. 6501(c)(1), I.R.C. 1954. 2. Held, further, P is liable for fraud additions to tax for 1985 and 1986. Sec. 6653(b)(1), I.R.C. 1954; sec. 6653(b)(1)(A), I.R.C. 1986. 3.

R determined deficiencies in and additions to P's Federal income tax. Held: R's deficiency determinations are sustained. 2. Held, further, sec. 6651(a)(1), I.R.C., additions to tax are sustained against P. 3. Held, further, sec. 6654(a), I.R.C., additions to tax are sustained against P. 4.

P, P's accountant, and R's counsel engaged in a pretrial conference. The conference began with a discussion of settlement. Held: Under Fed. R. Evid. 408 both offers of settlement and statements made during settlement negotiations are not admissible to prove liability or invalidity of a claim. Held, further: It was substantially unclear to P and his accountant that settlement negotiations had concluded; any admissions made are not admissible under Fed.

P brews and sells beer. During the relevant years, many individuals and companies sought control over P through means which included hostile takeovers, tender offers, and proxy contests. Held: The aggregate fair market value of the transferred assets equals the amount set forth in the allocation agreement for all of the assets. Held, further: The fair market value of each asset is the corresponding amount set forth in the allocation agreement.

R determined a deficiency in estate tax on the theory that certain property titled in decedent's name was decedent's separately owned property, only one-third of which passed to decedent's wife. Held: The property in issue was decedent's separate property.

Ps operated the Maple Press and Acacia Press print shops during 1986 and 1987. Held: Ps must include in income the portion of Maple Press, Acacia Press, and Print Technology bank deposits which did not represent gross receipts reported, insufficient funds checks, bank debits, or interaccount transfers. 2. Held, further, R is not barred by the period of limitation from assessing tax for Ps' 1988 taxable year. 3.

P and K are related corporations that bought and sold securities for their own accounts. Held: The advances were debt. Held, further: The $ 5 million debt became worthless in the year of the deduction. Held, further: P is not liable for the additions to tax determined by R.

Ps owned and operated a retail gift store, and they deposited the stores' proceeds into bank accounts owned or controlled by them. Held: R's determinations sustained to the extent stated herein.