Slip opinions decided 1998 — Tax Court Memorandum

On remand from the United States Court of Appeals for the Ninth Circuit, HELD: Innocent spouse relief apportioned as to grossly erroneous items attributable to delinquent spouse. Sec. 6013(e)(1), I.R.C.; Wiksell v. Commissioner, 90 F.3d 1459 (9th Cir. 1996), revg. and remanding T.C. Memo. 1994-99, followed and applied.

Ps claim certain payments received in 1990, 1991, and 1992 are a return of capital. HELD: Ps have failed to so prove.

Carmino J. Santaniello, for respondent.

H's case was consolidated for trial, briefing, and opinion with that of W, H's former spouse. Held: The payments at issue constitute alimony within the meaning of section 71, I.R.C., and are therefore deductible by H and includable in the gross income of W for taxable year 1992. Secs. 61(a)(8), 71(a), and 215(a), I.R.C.

Respondent moved under Rule 37(c), Tax Court Rules of Practice and Procedure, that the undenied allegations in the answer be deemed admitted. Held: Respondent's motion for judgment on the pleadings is granted; decision will be entered for respondent as to all the deficiencies and additions to tax determined in the notices of deficiency.

D died on Mar. 18, 1992, and his Federal estate tax return reported the value of his estate (E) on the alternate valuation date. Held: Taxable estate redetermined, including redeterminations of fair market value. HELD, FURTHER, E is liable for the fraud penalty.

HELD: Respondent's motion for summary judgment is granted, and for 1986 through 1990, petitioner is liable for Federal income and self-employment taxes on unreported income and for additions to tax… Held: Respondent's motion for summary judgment is granted, and for 1986 through 1990, petitioner is liable for Federal income and self-employment taxes on unreported income and for additions to tax under secs. 6651 and 6654, I.R.C.

Tax certificates are sold at public auction by the tax collector for Pasco County, Florida, for an amount equal to delinquent real property taxes, interest accrued… Held: The statutory notice of deficiency was issued within period of limitations as properly extended. 2. HELD, FURTHER, respondent is not estopped from issuing a statutory notice of deficiency by either the doctrine of equitable estoppel or as a second examination of books and records. Sec. 7605(b), I.R.C. 3.

R filed a motion, and Ps filed a cross-motion, for partial summary judgment on the issue of whether certain payments made by P-H to a former spouse during taxable years 1993, 1994, and… Held: R's motion for partial summary judgment granted, and Ps' cross-motion for partial summary judgment denied, Rule 121(b), Tax Court Rules of Practice and Procedure; the payments at issue are treated as fixed for child support and are therefore nondeductible to Ps. Sec. 71(c)(2), I.R.C.

G. Michelle Ferreira, for respondent.

Gerald W. Douglas, for respondent.

P has a son, S, who is disabled within the meaning of the Individuals with Disabilities Education Act, Pub. Held: The reasoning of Gerstacker v. Commissioner, supra, does not apply to the facts of this case, and P is not entitled to deduct the legal expenses under sec. 213, I.R.C.

W II, a subsidiary of HEI, borrowed funds, a part of which was distributed to HEI with respect to its stock in W II. Held: the indebtedness was incurred to purchase tax-exempt obligations for the purpose of sec. 265(a)(2), I.R.C., and is directly attributable to the acquisition of portfolio stock for the purpose of sec. 246A, I.R.C.; respondent's disallowances of an interest deduction pursuant to sec. 265(a)(2), I.R.C. and of a dividend received…

In 1992, P deducted payments in the amount of $<>971,684 made to or on behalf of his former spouse pursuant to a final judgment and decree of divorce as alimony under sec. 215(a), I.R.C. R disallowed… Held: The obligation to make the lump-sum payments at issue would survive the death of P's former spouse under State law, and therefore such payments are not deductible to P as alimony. Secs. 71(b), 215(a), I.R.C. 2.

BOBBY E. WELCH AND KATHLEEN NEWMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 24065-95 MEMORANDUM OPINION

GARY B. AND KATHLEEN MITCHELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent /*/This opinion supplements a previously released opinion: Mitchell v. Commissioner, T.C. Memo. 1997-493. SUPPLEMENTAL MEMORANDUM OPINION

Docket No. 20970-96 1The case at docket No. 20798-96 concerns petitioner's taxable year 1993, and the case at docket No. 20970-96 concerns petitioner's taxable year 1994. MEMORANDUM FINDINGS OF FACT AND OPINION

HELD: P's resort activity constituted an activity engaged in for profit; sec. 183(a), I.R.C., not applicable. HELD, FURTHER: Sec. 6662(a), I.R.C., accuracy-related penalties not applicable.

R determined deficiencies in income tax on account of R's revaluation of certain numismatic materials contributed to charity; Ps claim an overpayment on account of their own, subsequent revaluation. HELD: Deficiencies sustained in part. HELD, FURTHER, no overpayments made.

FIRST BLOOD ASSOCIATES, RICHARD M. GREENBERG, TAX MATTERS PARTNER, ET AL., 1Cases of the following petitioners are consolidated herewith: First Blood Associates, Richard M. Greenberg, Tax Matters Partner, docket No. 13014-92; First Blood Associates, Richard M. Greenberg, Tax Matters Partner, docket No. 15641-92; and First Blood Associates, Eugene C. Lipsky, A Partner Other Than the Tax Matters Partner, docket No. 12062-94. Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 13014-92, 15641-92, 12062-94 Thomas E. Redding, for participants Michael J. and JoAnn Scarfia. Joseph F. Long and Gerald A. Thorpe, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

In 1990, D received a distribution from a qualified pension plan and reported that it was timely rolled over pursuant to sec. 402, I.R.C. In 1993, D received a distribution from the transferee plan. R determined that the 1993 distribution is taxable income to D. The 1990 distribution was not timely rolled over, and the period to assess tax for 1990 is expired. P contends that the 1993 distribution is not taxable because the taxable event occurred in 1990. R argues that P is estopped under the duty of consistency from arguing that the 1990 distribution was taxable. P argues that appellate venue in this case would be to the Court of Appeals for the Ninth Circuit, which does not recognize the doctrine of the duty of consistency in tax deficiency cases. HELD: The 1993 distribution is taxable under the duty of consistency.

CINEMA '84, RICHARD M. GREENBERG, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 621-92 MEMORANDUM OPINION

MEMORANDUM FINDINGS OF FACT AND OPINION

MEMORANDUM FINDINGS OF FACT AND OPINION

E's estate includes real estate and interests in five family-owned entities, the assets of which include real estate and interests in two other family-owned entities that own real estate. E's real estate consists of three apartment complexes. Collectively, the entities' real estate consists of commercial rental property, residential rental property, vacant land, and developed property held for sale. R and E agree that all the real estate mentioned above must be valued in order to determine the value of E's gross estate; and they agree on the value of each parcel of real estate, before any discount for market absorption; and they agree that large marketability and control discounts apply to most of the interests. R and E dispute whether a market absorption discount inheres in the value of E's real estate and the entities' real estate. HELD: A 6.189-percent market absorption discount inheres in the value of each apartment complex; none of the other real estate is valued by reference to a market absorption discount.

D died on June 8, 1993. In June 1994, the fiduciary of D's estate tendered a $<>225,400 payment to R for D's estimated Federal estate tax liability., In May 1995, P filed D's Federal estate tax… Held: We lack jurisdiction to decide the applicability of the $<>67,135.73 addition to tax under sec. 6651(a)(1), I.R.C. HELD, FURTHER, D's estate is liable for the additions to tax of $<>2,429 and $<>9,981.58 determined by R under sec. 6651(a)(1) and ( 2), I.R.C., respectively.

R determined deficiencies and fraud additions to tax against H and W for 1988, 1989, and 1990. Held: Ps, motion for leave to file an amended reply will be granted. Rule 41(a) of the Tax Court Rules of Practice & Procedure. 2. HELD, FURTHER, H is collaterally estopped from denying that (1) H had an underpayment of tax for each year in issue and (2) this underpayment was due to fraud.

H and W were owners and employees of P. H was convicted under sec. 7206(2), I.R.C. 1986, for aiding or assisting the filing of false tax returns as to P's 1988, 1989, and 1990 income tax return. Held: Collateral estoppel does not apply. R's motion for partial summary judgment will be denied.

P did not file a Federal income tax return for 1991, 1992, or 1993. R determined deficiencies and additions to tax for each year. Held: P is liable for an addition to tax for fraud under sec. 6651(f), I.R.C. 1986, for 1993. 2. HELD, FURTHER, P is liable for a penalty of $<>10,000 under sec. 6673, I.R.C. 1986.

Thomas E. Redding and Sallie W. Gladney, for participant William A. Newman. Joseph F. Long and Gerald A. Thorpe, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

C, the wholly owned corporation of H, constructed a building on land owned by H and W (Ps). Held: Because the expenditures were made with the primary intention and result of conferring a benefit on Ps, C's expenditures are constructive dividends to Ps to the extent of C's earnings and profits. HELD, FURTHER, Ps are liable for the accuracy-related penalties determined by R under sec. 6662(a), I.R.C., to the extent described herein.

MEMORANDUM FINDINGS OF FACT AND OPINION

MEMORANDUM FINDINGS OF FACT AND OPINION

P is the common parent of an affiliated group of corporations making a consolidated return of income. Held: Graphic design expenditures for cigarette packages are advertising expenses, deductible under sec. 162, I.R.C. HELD, FURTHER, the disputed portion of the arbitration award is an amount realized on the sale or other disposition of property.

MEMORANDUM FINDINGS OF FACT AND OPINION

COMET PRINTING, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 12140-96 1The cases of docket No. 12138-96 and docket No. 12140-96 were consolidated for trial, briefing, and opinion by order of this Court dated Aug. 28, 1996.

P filed his 1989 Form 1040NR on May 29, 1990. The notice of deficiency was issued on May 22, 1996. HELD: the deficiencies determined are barred by the expiration of the period of limitations. Held: the deficiencies determined are barred by the expiration of the period of limitations. Sec. 6501(a), I.R.C.

P, an airline pilot, spent several years and substantial sums attempting to develop a wind-powered distillery for the production of ethanol. Held: P's wind-powered distillery activity was not profit motivated.

D died testate on Feb. 19, 1992. At the time of his death, D owned a 3,489-acre parcel of real property (CMP), which was used to produce… Held: P failed to supply the information and documentation necessary under sec. 2032A(e)(7)(A) and secs. 20.2032A-4(b)(2) and -8(a)(3), Estate Tax Regs., to perfect its protective election for special use valuation with respect to the subject property; therefore, P is required to value CMP at its undisputed FMV on the date of decedent's…

The Court granted P's Motion for Reconsideration of Hernandez v. Commissioner, T.C. Memo. 1998-46, which held that interest received on redemption of tax certificates sold at public auction by Pasco… Held: The language at issue in sec. 1.103-1(b), Income Tax Regs., is restricted to special assessment obligations that are issued by a State or political subdivision in exercise of its sovereign borrowing power to finance public improvements.

P, a marijuana dealer, was arrested at his residence. At the time of the arrest, the police made a protective sweep of the residence, believing an accomplice might be present. Held: The search was proper, the evidence will not be excluded, and R's determination, as modified by agreement of the parties, is upheld.

Petitioners (Ps) were (1) trustees for several trusts and (2) principal owners of numerous business entities, some of which were incorporated. Held: Ps had substantial underpayment for 1980, 1981, and 1982. Sec. 6653(c)(1), I.R.C. 1954. 2. HELD, FURTHER, H is liable for additions to tax for civil fraud for 1980, 1981, and 1982. Secs. 6653(b) and 6653(b)(1), I.R.C. 1954. 3.

RTA, an S corporation within the meaning of sec. 1361(a), I.R.C., reported a loss to its shareholders on account of a failed investment in certain technology. Held: Respondent's determination is sustained because petitioners have failed to prove that RTA's chances for success on the lawsuit were remote or nebulous or, if not remote or nebulous, the financial condition of the defendant made unrealistic the possibility of an actual recovery.

Pursuant to sec. 482, I.R.C., R reallocated among a group of commonly owned corporations certain management service fees charged by one member of the group to the other members. HELD: Ps have failed to prove that R abused his discretion by making an arbitrary, capricious, or unreasonable reallocation. HELD, FURTHER, Ps were negligent in making their initial allocation.

Thomas C. Borders, Gail H. Morse, and Courtney N. Stillman, for participants. Mary P. Hamilton, William T. Hayes, and Howard A. Wiener, for respondent.

Ps filed a claim (Form 843) with R in May 1997 seeking an abatement of interest for the taxable year 1992. Held: There is nothing in sec. 6404(g) or the legislative history of this provision (in contrast to sec. 6532(a)), which imposes a time limit within which the Secretary must act or permits the filing of a petition with this Court, where the Secretary fails to act.

Ps timely filed petitions with the Tax Court. Subsequently, Ps became defendants in a criminal tax case before the U.S. District Court for the District of Nevada. Held: Ps' choice of the Tax Court to litigate their civil tax liabilities caused the Tax Court to acquire exclusive jurisdiction to decide the amounts of civil tax liabilities for the taxable years petitioned.

Docket Nos. 19874-96, 15455-97 1These cases were consolidated for purposes of trial, briefing, and opinion.

In these consolidated cases, R determined deficiencies in Ps' Federal income taxes for their 1992 taxable year due to their failure to include in gross income certain punitive damages and… Held: Ps' deductions for legal expenses attributable to punitive damages are miscellaneous itemized deductions, deductible to the extent they exceed 2 percent of adjusted gross income. Sec. 67, I.R.C; sec. 1.67-1T(a)(1)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 9875 (Mar. 28, 1988). 2.

P failed to file returns for 11 years. P claims that R's notice of deficiency constituted a naked assessment, that she is entitled to additonal… Held: R's determination of deficiencies is not arbitrary and, thus, is not a naked assessment. HELD, FURTHER, sufficient evidence supports R's determination of unreported income. HELD, FURTHER, P received interest on child-support arrearages. HELD, FURTHER, P failed to prove here entitlement to additional dependency exemptions.

HENRY A. SESSIONS AND BARBARA SESSIONS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 19321-96

An individual and his wholly owned corporation each received wire transfers of U.S. dollars from within the former Soviet bloc of countries. Held: Wire transfers to corporation and some of wire transfers to the individual are gross income to corporation; HELD, FURTHER, P had constructive dividend; HELD, FURTHER, all but one deduction disallowed; HELD, FURTHER, accuracy-related penalties sustained; HELD, FURTHER, delinquency addition sustained.

G was the president, the sole shareholder, and a highly compensated employee of O. O sponsored a defined benefit plan and defined contribution plan for its employees which were both qualified within the meaning of sec. 401(a), I.R.C. Ps alleged that O terminated both plans in the June 30, 1988, plan year when it adopted a resolution to terminate the plans immediately and distributed individual annuity contracts to plan participants. Subsequently, R disqualified both plans for the plan year ended June 30, 1991, for, among other reasons, their failure to meet the participation requirements of sec. 401(a)(26), I.R.C. R determined deficiencies in Ps' Federal income taxes for their 1991, 1992, and 1993 taxable years due to their failure to include in gross income G's vested accrued benefit in the Pension Plan in 1991, G's account balance in the Profit Plan in 1991, and accrued benefits under both Plans in 1992 and 1993. 1. Held, for purposes of the Internal Revenue Code, strict adherence to the requirements of ERISA sec. 4041 are the exclusive means of terminating a single-employer defined benefit plan. Held, further, whether a defined contribution plan is terminated is generally a question to be determined with regard to all the facts and circumstances in a given case. Secs. 1.411(d)-2(c)(3), 1.401-6(b)(1), Income Tax Regs. Held, further, P must include the value of his vested accrued benefits in gross income for 1991-93 taxable years.

P borrowed money from the pension plans of his wholly owned corporation. Held: P's transfer of property to his plan was a sale or exchange under sec. 4975(c)(1)(A), I.R.C.; hence, it was a prohibited transaction under sec. 4975(a), I.R.C., that subjects P to the initial tax set forth in sec. 4975(a), I.R.C. HELD, FURTHER, The prohibited transaction was never corrected within the meaning of sec. 4975(b), I.R.C.;…

Respondent disallowed substantially all of petitioners' claimed deductions. Held: On the facts, respondent was primarily responsible for the substantiation not having been provided by the time respondent filed the answer, and so respondent's position was not substantially justified. Sec. 7430(c)(4)(B)(i), I.R.C. 1986. Stipulated amount of litigation costs awarded.

At issue are (1) the deductibility of $ 50,000 claimed by P as an alimony payment, (2) the deductibility of $ 48,651.75 claimed by P as business-related legal fees, (3) whether P must include in… Held: the $ 50,000 payment is not alimony; P has failed to prove that his obligation to make that payment would not survive the death of his ex-spouse. HELD, FURTHER, P has failed to prove that the legal fees are either alimony or otherwise deductible.

CONTENTS Findings of Fact I. Background II. Stock Ownership and Control III. Operating Agreements Between DHL and DHLI and Related Entities IV. Development and Use of the DHL Trademark and Logo V. Financial Condition of DHL VI. Negotiations with UPS VII. 1990-92 Transaction With Foreign Investors VIII. The Imbalance and Transfer Fees IX. Technology and Systems X. Respondent's Determination Opinion I. Background II. Were Respondent's Determinations in the Notices of Deficiency Arbitrary, Capricious, or Unreasonable? III. The Question of Control A. Was There Common Control After December 7, 1990? B. Effect of the Trademark Transfer After the Foreign Investors Attained Their Collective Shareholding Majority of the New DHLI/MNV Entity IV. Ownership and Value of the DHL Trademark A. Ownership B. Value of the DHL Trademark 1. Effect of Section 482 Regulations on Allocation of Value 2. Respondent's Alternative Argument -- The Alstores Doctrine V. Allocation of DHLI Income to DHL From Imputed Royalties, Imbalance, Transfer, and Network Fees for the Period 1974 Through 1992 A. Background B. Royalties C. Imbalance and Transfer Fees D. Network Fee VI. Are Petitioners Entitled to Setoffs to Any of the Section 482 Allocations That Have Been Sustained? VII. Section 6662 Penalties Appendix