Slip opinions decided 1999 — Tax Court Memorandum

J is a corporation engaged in furniture delivery services. F is J's sole shareholder and president. Held: The period of assessment is unlimited because J and F filed fraudulent tax returns. Sec. 6501(c)(1), I.R.C. 2. HELD, FURTHER, the diverted funds were constructive dividends and taxable to F in the manner provided by secs. 301(c) and 316(a), I.R.C. 3. HELD, FURTHER, the diverted funds were properly includable in J's income.

HELD: P has failed to establish the existence, amount, or worthlessness in the years at issue of claimed nonbusiness and business bad debts. Held: P has failed to establish the existence, amount, or worthlessness in the years at issue of claimed nonbusiness and business bad debts. P has also failed to substantiate itemized deductions disallowed by R. P is liable for accuracy-related penalties for negligence under sec. 6662, I.R.C.

HELD: Compensation paid by P to its sole shareholder/CEO was reasonable. Held: Compensation paid by P to its sole shareholder/CEO was reasonable.

P received advance commissions on insurance written by him. The advance commissions were repayable on demand, and bore interest, and repayment was secured by earned commissioners. Held: Ps have proven the amount of advance commissions. HELD, FURTHER, the advance commissions were received as loans and are not gross income.

P filed a Motion for Reconsideration of our opinion in Wiksell v. Commissioner, T.C. Memo 1998-3, arguing that sec. 6015(c)(3)(C), I.R.C., enacted by sec.… Held: Our opinion in Wiksell v. Commissioner, T.C. Memo 1998-3, has adequately addressed whether P had actual knowledge with respect to income, not reported on P's joint return, derived from the receipt of checks from her husband's company. HELD, FURTHER, the issue of duress has previously been considered and rejected.

HELD: Under the facts of this case, the fact that respondent's notice of deficiency indicated that petitioner's taxable years ended on June… Held: Under the facts of this case, the fact that respondent's notice of deficiency indicated that petitioner's taxable years ended on June 30 of each year rather than on the actual last day of petitioner's taxable years does not invalidate respondent's notice of deficiency and does not deprive the Court of subject matter jurisdiction.

During 1993, 1994, and 1995, P conducted a videotape activity. Held: On the facts, P's activity was not engaged in for profit; deductions in excess of income from the activity were properly disallowed. Sec. 183, I.R.C. 1986. 2. HELD, FURTHER, P is liable for negligence additions to tax. Sec. 6662, I.R.C. 1986.

P and H cohabited for 24 years, H earning the income and P primarily taking care of the household. Held: H paid P the disputed amount in satisfaction of her interest in the property, an interest that she had received as a gift from H during their relationship. Because P's basis in the property is greater than the settlement amount, none of the disputed amount is income to her.

S, a gas utility company, collected funds from its customers which were earmarked for legislatively mandated energy conservation programs. Held: S' gross income includes the funds. HELD, FURTHER, S must capitalize the expenditures, less the amount paid as subsidies, which is currently deductible.

On remand from the Court of Appeals for the Ninth Circuit. Held: the receipts constitute royalties within the meaning of sec. 512(b)(2).

Petitioners move to dismiss for lack of jurisdiction on the grounds that (1) the primary adjustment in the notice of deficiency is wrong and (2) the period of limitations on assessment expired before… Held: Neither of these matters goes to the jurisdiction of this Court, and so petitioners' motion to dismiss is denied. 2.

In Dixon v. Commissioner, T.C. Memo 1991-614, vacated and remanded per curiam sub nom. DuFresne v. Commissioner, 26 F.3d 105 (9th Cir. 1994), following a trial of 14 docketed test cases of eight Ps, the Court sustained R's disallowance of interest deductions claimed by Ps in various tax shelter programs promoted by K. After the Court entered decisions against the test case Ps in accordance with its opinion, R moved to vacate the decisions entered in three test cases (T, C, and X). R alleged that, before the trial of the test cases, R's trial attorney and District Counsel had entered into contingent settlement agreements with T and C that had not been disclosed to the Court or to the other test case Ps or their counsel. R asked the Court to conduct an evidentiary hearing to determine whether the undisclosed agreements with T and C had affected the trial of the test cases or the opinion of the Court. The Court granted R's motions to vacate the decisions entered in the T and C cases, entered revised decisions in the T and C cases consistent with R's prior agreements with T and C, denied R's motion to vacate the decision in the X case, and denied R's request for an evidentiary hearing on the ground that the testimony, stipulated facts, and exhibits relating to the T and C cases had no material effect on the Court's opinion as it related to the remaining test case Ps. On appeal, the Court of Appeals for the Ninth Circuit vacated the decisions in the remaining test cases and remanded them to this Court with directions "to conduct an evidentiary hearing to determine the full extent of the admitted wrong done by the government trial lawyers." DuFresne v. Commissioner, supra at 107. The Court of Appeals, citing Arizona v. Fulminante, 499 U.S. 279, 309, 113 L. Ed. 2d 302, 111 S. Ct. 1246 (1991), directed the Court to consider "whether the extent of misconduct rises to the level of a structural defect voiding the judgment as fundamentally unfair, or whether, despite the government's misconduct, the judgment can be upheld as harmless error." Id. Further, the Court of Appeals directed this Court to consider on the merits all motions of intervention filed by affected parties. See id. This Court ordered that the cases of 10 nontest case Ps, the majority of whom had previously signed piggyback agreements, be consolidated with the remaining test cases for purposes of the evidentiary hearing. Three groups of Ps participated in all subsequent phases of the evidentiary hearing. Ps argue (under various theories) that the Court's decisions in the remaining test cases should not be reinstated, or, in the alternative, that the piggyback agreements are not enforceable. R counters that the decisions in the remaining test cases should be reinstated on the ground that Ps were not prejudiced by the Government misconduct in the trial of the test cases and that the piggyback agreements remain in force. HELD: The Government misconduct in the trial of the test cases did not result in a structural defect in the trial. HELD FURTHER: The Government misconduct in the trial of the test cases resulted in harmless error. HELD FURTHER: The Government misconduct in the trial of the test cases does not provide any other basis for invalidating the Court's decisions in the remaining test cases or for setting aside the piggyback agreements. HELD FURTHER: As a sanction against R, program participants who have not been the subject of a final determination are not liable for time-sensitive additions to tax for negligence under secs. 6653(a)(2) and 6653(a)(1)(B), I.R.C., or increased interest under sec. 6621(c), I.R.C.

S is a family-owned corporation, and D's estate (E) includes 46,020 shares of S's class A stock. Held: The fair market value of E's stock on the applicable valuation date was $ 56.50 per share.

P commenced a lawsuit in 1987, alleging that the defendant    was liable to him for breach of contract and conversion. As to    the conversion claim, the jury awarded P actual and punitive    damages. P received the punitive damages in 1992. P argues    primarily that sec. 104(a)(2), I.R.C., excludes the punitive    damages from his gross income because, he states, punitive    damages are awarded under applicable State (South Carolina) law    as compensation for a personal injury. P directs the Court to    numerous cases where the South Carolina Supreme Court has stated    that South Carolina law allows an award of punitive damages to    "vindicate a private right" and that this right is compensatory    in nature.      HELD: The punitive damages are not excludable from P's    gross income under sec. 104(a)(2), I.R.C., because punitive    damages are noncompensatory under applicable law. Although the    ultimate effect of a punitive damage award made under South    Carolina law is compensatory in nature, such an award does not    have a compensatory purpose in the sense of reimbursing the    plaintiff for actual damages.

SF, a dissolved corporation, moved for partial summary judgment on the ground that the period of limitations under sec. 6501(a), I.R.C., had expired with respect to… Held: R has established by clear and convincing evidence that C signed Form 872 with the intent to extend the period of limitations for SF's taxable year ended June 30, 1993. HELD, FURTHER, Form 872 may be reformed to conform with the intent of the parties. Woods v. Commissioner, 92 T.C. 776 (1989), applied.

R determined deficiencies in P's income tax liability on account of petitioner's failure to account for certain cash transactions. Held: P has failed to prove nontaxable sources for the cash transactions, which is prima facie evidence of income. See Tokarski v. Commissioner, 87 T.C. 74 (1986). HELD, further, P is liable for tax on self-employment income. HELD, FURTHER, P is liable for sec. 6662(a), I.R.C., accuracy-related penalty.

On the facts, HELD: (1) P may not deduct gambling losses in excess of amounts allowed by R; (2) P's deduction for State income taxes is… Held: P may not deduct gambling losses in excess of amounts allowed by R; (2) P's deduction for State income taxes is limited to the amount of New York State income tax withheld by P's employer in 1994; and (3) R's determination that there is an accuracy-related penalty due from P under sec. 6662(a), I.R.C., for the 1994 taxable year is…

On the facts, HELD: R has established by clear and    convincing evidence that at least part of F's underpayment for    the taxable years 1987 and 1988 is attributable to fraud with    the intent to evade tax and that F's failure to file her 1989    and 1990 tax returns is attributable to fraud. See secs.    6651(f), 6653(b), I.R.C.      HELD, FURTHER, R's determination that F is liable for the    additions to tax under sec. 6653(b)(1)(A) and (B), I.R.C., for    the 1987 taxable year, sec. 6653(b)(1)(A), I.R.C., for the 1988    taxable year and sec. 6651(f), I.R.C., for the 1989 and 1990    taxable years is sustained.

, a wealthy businessman, engaged in the activity of showing and selling cutting horses, incurring substantial losses during the years in issue, and during preceding and following years. Held: Losses disallowed; the activity was not an activity engaged in for profit; P undertook and carried on the activity primarily as a hobby. Held, further, Ps are liable for sec. 6662 accuracy-related penalties.

R filed a motion to dismiss for lack of jurisdiction on the ground that Ps did not file their petition for redetermination within the time prescribed by sec. 6213(a), I.R.C. Ps, 50- percent partners… Held: E is a small partnership under sec. 6231(a)(1)(B)(i), I.R.C., and is therefore not a partnership covered by the TEFRA partnership procedures. Thus, the extended period for filing a petition for redetermination under sec. 6226(b)(1), I.R.C., does not apply in this case.

HELD: R's determination that P had unreported income from her sole proprietorship as an income tax preparer in the amounts of $ 87,000, $ 128,000, and $ 153,000 for the 1990, 1991, and 1992 taxable… Held: R's determination that P had unreported income from her sole proprietorship as an income tax preparer in the amounts of $ 87,000, $ 128,000, and $ 153,000 for the 1990, 1991, and 1992 taxable years, respectively, is sustained.

Held: R's determination that Ps are liable for the addition to tax under sec. 6651(a)(1), I.R.C., for failure to timely file their Federal income tax returns for their 1991, 1992, and 1993 taxable… Held: R's determination that Ps are liable for the addition to tax under sec. 6651(a)(1), I.R.C., for failure to timely file their Federal income tax returns for their 1991, 1992, and 1993 taxable years is sustained.

Ps made gifts to their children of shares in S corporation, which, annually, distributed substantially all of its income. Held: Value of shares determined; marketability discount and cost of equity determined; tax affecting inappropriate under facts presented.

Ps filed a document purporting to be their 1995 Federal    income tax return; Ps' so-called return was filed on plain    sheets of paper. The IRS did not process the document as a    return because it did not include sufficient information. R    determined an income tax deficiency, an addition to tax under    sec. 6651(a)(1), I.R.C., and an accuracy-related penalty under    sec. 6662(a), I.R.C., for the 1995 taxable year. Ps have    conceded the deficiency and addition to tax under sec.    6651(a)(1), I.R.C., as determined by R. Held: Ps' putative    return of tax not filed on the proper form prescribed by the    Secretary, and carrying a disclaimer that it is not intended in    any way as a self-assessment of tax, is not a Federal income tax    return. See Commissioner v. Lane-Wells Co., 321 U.S. 219, 223, 88 L. Ed. 684, 64 S. Ct. 511    (1944).      Held, further, Ps are not liable for the accuracy- related    penalty under sec. 6662(a), I.R.C., for their 1995 taxable year    because they did not file a Federal income tax return for that    year. See sec. 6664(b), I.R.C.

P is a corporate law firm, and A is its sole shareholder    and only professional employee. P has represented a class of    plaintiffs from 1974 to date and was awarded $ 12,567,623 in    legal fees when the case was settled in 1989. P received those    fees from 1989 through 1992 and is not entitled to further fees    for significant ongoing services which it must perform on that    case. P's workload in and after 1990 was minimal, except for the    ongoing services. P paid A $ 10,492,500 of "compensation" from    1989 through 1992 and, for each year but one, reported no    taxable income. For 1990 P reported taxable income of   $ 3,775,699; $ 2,487,547 was retained for P's future operations,    and $ 1,282,998 was retained to pay P's 1990 Federal income tax    liability. P paid A $ 1,750,000 of "compensation" during 1993 and    reported a $ 1,857,933 loss that it carried back to 1990 to claim    a refund of $ 581,812. P borrowed $ 916,756 from A and sold most    of its assets to have the funds to pay A the $ 1,750,000.    Exclusive of $ 1,373,913 of Federal income tax refunds received    or accrued by P on its carryback of losses from 1991, 1992, and    1993, P's deficit in retained earnings on Dec. 31, 1993, was   $ 1,463,768.      HELD: R did not conduct a second examination of P's books    of account in violation of sec. 7605(b), I.R.C.      HELD, FURTHER, sec. 162(a)(1), I.R.C., allows P to deduct   $ 1,750,000 in 1993 as reasonable compensation paid to A.

Respondent recharacterized the income petitioner husband received from the rental of property to his wholly owned C corporation from passive to… Held: Pursuant to sec. 469(l), I.R.C., the Secretary properly promulgated the attribution and self-rented property rules. The self-rented property rule (by virtue of the attribution rule) is valid insofar as it recharacterizes rental income received by a controlling shareholder from a C corporation from passive to nonpassive.

P moved to stay the proceedings (delay entry of    decision) for up to 20 years so that the estate's beneficiaries,    who were already in possession of the estate's assets, could    borrow against, as opposed to selling, the assets because the    beneficiaries believed that market conditions were unfavorable.    The delay was to permit the deduction of interest on a loan    incurred by the estate's beneficiaries (or by their trusts) in    order to pay the estate tax owed by the estate. In all other    respects, the parties had agreed on all of the issues raised,    and a decision could be entered. At the time of P's motion the    estate tax liability had been paid. R objects to P's motion on    the ground that the interest in question is not deductible by    the estate under sec. 2053, I.R.C., and the underlying    regulations.      HELD: P's motion is denied because of failure to show    entitlement to interest deductions under sec. 2053, I.R.C.    Estate tax cases involving borrowing to pay estate tax and    involving delay in entry of decision reviewed.

L, J, D, and R are brothers. L, J, and D are each married, and each married couple has three children. R is not married and has no children. Held: Under the reciprocal trust doctrine, L and J (and their wives K and S) are treated as the donors of the stock that each of his or her children ultimately received from his or her aunts and uncles, and each donor is entitled to three annual exclusions under sec. 2503(b), I.R.C. R's unilateral gifts have no effect on the reciprocal…

For purposes of deferring gain on the sale of their former residence under sec. 1034, I.R.C., Ps sought to include expenditures made in the construction of an unfinished dwelling structure. Held: Ps have not placed the structure into residential use as required by sec. 1034, I.R.C., and are thus not entitled to include its costs in order to defer recognition of gain on the sale of their former residence. R's determination of a deficiency is sustained.

During 1990 and 1991, B, a domestic corporation, realized substantial capital gains from the sale of a number of its business units. Held: The disputed transactions were not motivated by legitimate non-tax business purposes and were not imbued with objective economic substance. HELD, further, the disputed transactions are shams that will not be respected for Federal income tax purposes.

Ps deducted losses sustained in their cattle-ranching and aircraft-rental operations. Held: On the facts, the cattle-ranching and aircraft-rental activities were not engaged in with a profit objective, and Ps are not entitled to deduct the losses therefrom. HELD, FURTHER, Ps failed to establish that they exercised reasonable care in deducting such losses and are thus liable for accuracy-related penalties based on negligence.

Following disallowance by R of amounts deducted as business expenses, P entered into a stipulation agreeing to an additional tax of $ 17,823 for the taxable year 1995. Held: On the facts, reliance upon a professional tax adviser does not constitute reasonable cause within the meaning of sec. 6651(a), I.R.C., for purposes of relieving P of liability for the delinquency addition to tax.

R disallowed deductions claimed on P's 1994 income tax    return and determined the civil fraud penalty pursuant to sec.    6663, I.R.C. In substantiation of these deductions, P offered    two documents which evidence at trial indicated were not    legitimate.      HELD: On the facts, P failed to establish her entitlement    to the deductions claimed and is therefore liable for the    deficiency determined by respondent.       HELD, FURTHER, P is liable for the sec. 6663, I.R.C.,    civil fraud penalty.

P organized A to acquire 100 percent of the stock of S. To finance the purchase, A and S borrowed $ 13.2 million from the bank, and A and S signed a promissory note in favor of the bank (the note). Held: In substance P functioned as a guarantor of $ 1.2 million of the note, and P is not entitled to include in his S basis the $ 1.2 million participation interest.