Slip opinions decided 2000 — Tax Court Memorandum

Ps, husband and wife, operated a child care business of which P husband was the sole shareholder. Held: Execution of a noncompetition agreement resulted in taxable income to Ps to the extent of the purchase price attributable thereto. Although the trust received all proceeds of the sale, Ps were the true earners of the income.

P did not report gross income on account of the receipt of    shares of W Corp. stock in 1983 and the sale of 25,000 W shares    in 1985. P is collaterally estopped from contesting the facts    established in his criminal case, United States v. Biaggi,    705 F. Supp. 864 (S.D.N.Y. 1988), including extortion,    bribery, and receipt of an unlawful gratuity in connection with    his demand and receipt of W shares, and filing false income tax    returns for failing to report income from his ownership of W    shares.      1. HELD: The fair market value of the W shares was $ 11.20 a    share; therefore, P omitted from gross income $ 1,260,000 in 1983    and $ 107,000 in 1985.      2. HELD, FURTHER, P is liable for additions to tax on    account of fraud under sec. 6653(b)(1) and ( 2), I.R.C.      3. HELD, FURTHER, P is liable for additions to tax under    sec. 6661, I.R.C.      4. HELD, FURTHER, R has met his burden of proof under sec.    6501(c)(1), I.R.C., and the statute of limitations does not bar    assessment and collection of tax for 1983 and 1985.

In July of 1990, P's husband, T, transferred to her for no consideration shares of stock with a value of $ 53,828.12. Held: R's assertion of transferee liability is not barred by the period of limitations set forth in the California Uniform Fraudulent Transfer Act. Bresson v. Commissioner, 111 T.C. 172 (1998), followed. HELD, FURTHER, P is liable as a transferee to the extent of the value of the assets received, plus interest thereon as provided by law.

DOUGLAS L. HADSELL,                Petitioner                  v.          COMMISSIONER OF INTERNAL REVENUE,               Respondent *This opinion supplements our opinion in Hadsell v. Commissioner, T.C. Memo 1994-198, vacated and remanded 107 F.3d 750 (9th Cir. 1997).

R determined deficiencies in both estate and gift    taxes. Ps claim overpayments of estate tax.  We must    determine whether (1) Ps are estopped from denying that    certain inter vivos payments to decedent's longtime    companion were gifts, (2) assuming there is no    estoppel, the payments were gifts or payments for    services, (3) a bequest to that companion is a    deductible claim against the estate, (4) only one-half    the value of decedent's residence is includable in the    gross estate, and (5) certain bequests to Masonic and    fraternal organizations are deductible for estate tax    purposes.      1. HELD: Ps are not estopped from denying the gift    character of the inter vivos payments.      2. HELD, FURTHER, the inter vivos payments were gifts.      3. HELD, FURTHER, the bequest is not a deductible claim    against the estate.      4. HELD, FURTHER, all of the value of the residence is    includable in the gross estate, but no portion is includable as    an "adjusted taxable gift".      5. HELD, FURTHER, no deduction is allowed for the bequests    to the Masonic and fraternal organizations, since petitioner has    failed to prove the exclusive charitable purpose of those    bequests.

In connection with a corporate reorganization and    consequent termination of her employment, P participated in an    enhanced severance program offered to eligible employees. Under    this program, P received a lump-sum payment, calculated based    upon rate of pay and years of service, in return for signing a    general release of all claims against her employer. An identical    payment formula was applied and release document signed in the    case of each participating employee. P excluded this payment    from income, and R determined a deficiency for taxes    attributable thereto. P contends that the payment was received    in settlement of and to compensate for emotional distress she    suffered as a result of sexual harassment in the workplace and,    therefore, is excluded from income pursuant to sec. 104(a)(2),    I.R.C.      HELD: The payment received by P is not excludable from    income under sec. 104(a)(2), I.R.C., as damages received on    account of personal injuries or sickness.

P is a one-sixth income beneficiary of a trust. In State court, P filed objections to an accounting by the trustee. Held: The origin and character of the claim resulting in P's payments was the trustee's filing of an accounting, proposing a distribution, and acknowledging that an argument could be made for a different apportionment of the proposed distribution; P's payments are deductible under sec. 212(1) and ( 2), I.R.C. 1986.

H pleaded guilty to criminal tax evasion for taxable year 1990, admitting to a specified amount of unreported income as determined through R's reconstruction of H's 1990 income by the net worth… Held: for taxable year 1989, respondent's determination of H's unreported income through use of the net worth method is not sustained. 2. HELD: for taxable year 1990, respondent's determination of H's unreported income through use of the net worth method is modified. 3.

HELD: Accrued unpaid losses on cancelable accident and health insurance policies are not to be treated as part of total reserves in the life insurance… Held: Accrued unpaid losses on cancelable accident and health insurance policies are not to be treated as part of total reserves in the life insurance company qualifying fraction, and petitioner therefore qualifies as a life insurance company under sec. 816(a), I.R.C. Statements made in United States v. Occidental Life Ins.

The issues for decision are: (1) whether P had sufficient    basis with respect to an S corporation to permit him to deduct    his pro rata share of that corporation's ordinary losses for the    years in question; and (2) whether (A) the corporation suffered    a sec. 1231, I.R.C., loss from the disposition of property in    one of those years and (B) P had sufficient basis to permit him    to deduct his pro rata share of that loss.      1. HELD: P established that he had sufficient basis for all    years;      2. HELD, FURTHER, P established that the S corporation    suffered only a portion of the sec. 1231, I.R.C., loss claimed;    HELD, FURTHER, P had sufficient basis to deduct his portion of    the loss suffered.

P filed a petition for a determination that R's failure to abate interest under sec. 6404(e), I.R.C., with respect to petitioner's 1985, 1986, and 1987 taxable years was an abuse of discretion and… Held: P has not established any erroneous or dilatory ministerial acts by R giving rise to the assessment of interest after P was first contacted in writing about the deficiency and before interest was assessed.

Ps move the Court for litigation costs under sec. 7430, I.R.C. R had determined a deficiency in Ps' 1994 and 1995 Federal income taxes and accuracy-related penalties with respect thereto. Held: R's position as to the deficiencies was substantially justified; hence, Ps are not entitled to an award of litigation costs with respect thereto.

R issued notices of deficiency to H and W determining Federal income tax liabilities for their 1981 and 1982 taxable years. Held: Ps are entitled, under the doctrine of equitable recoupment, to offset against their Federal income tax liabilities an overpayment of estate tax, the claim for which is barred by the statute of limitations.

Prepared Forms 1040 as joint tax returns for 1993, 1994, and 1995. Held: On the basis of the record herein, P has carried his burden of proving that it is more likely than not that he filed joint tax returns for 1993, 1994, and 1995 on or before Mar. 11, 1997, the date which is shown as the return received date on the transcript of account for each of the 3 years. 2.

FRISCIA CONSTRUCTION, INCORPORATED, ET AL., 1Cases of the following petitioners are consolidated herewith: Michael J. and Michelle R. Friscia, docket No. 19973-98, and Michael J. Friscia, docket No. 19975-98.                Petitioners                  v.          COMMISSIONER OF INTERNAL REVENUE,                Respondent

P was incorporated by K. K is a motion picture music editor and P's sole shareholder, director, and officer. P contracted with motion picture studios for K's services as a music editor. Held: P was a personal holding company for its taxable years of 1996 and 1997. HELD, FURTHER: P in good faith and reasonably relied on the return preparers for the position taken on its returns and is not liable for penalties under sec. 6662(a) I.R.C. pursuant to sec. 6664(c) I.R.C..

After L incorporated his cash method sole proprietorship, he received payments for its jobs in progress and paid the associated expenses. Held: the reduction of the receivable on the corporation's books, which reduced L's debt to the corporation and increased his net worth in a corresponding amount, is a constructive dividend to L.

P operated a truck stop that sold diesel fuel and engaged in several other business activities. 1. HELD: P underreported its income from the sale of diesel fuel. Held: P underreported its income from the sale of diesel fuel. Amounts determined. 2. HELD, FURTHER, P's disputed deductions for automobile and rental expenses are disallowed. Burden of proof. 3. HELD, FURTHER, P is liable for an accuracy-related penalty under sec. 6662(a), I.R.C. 1986, negligence, etc.

In 1991, FPL incurred a substantial capital loss on the sale of a subsidiary. Held: FPL's investment in S was not a sham in substance inasmuch as FPL invested in S in order to achieve legitimate business objectives independent of purported tax benefits and FPL's investment produced objective economic consequences.

R claims that P is liable as a transferee of H for deficiencies in H's income taxes. P and H contracted to buy property. P and two others contributed to the purchase price. Held: P has no transferee liability under sec. 6901(a), I.R.C.

P, a domestic corporation, entered into a cost-sharing agreement with its foreign subsidiaries in connection with certain intangibles that were transferred to the subsidiaries. Held: Under the regulations, R is not required to be aware of arm's-length circumstances as a prerequisite to the making of a determination allocating a cost in connection with a sharing agreement. HELD FURTHER: Petitioner has not shown that there is no genuine issue of material fact.