Slip opinions decided 2000 — Tax Court Memorandum

When decedent (D) died on May 4, 1992, she owned several parcels of real property located in California. Held: Fair market values of the properties determined. Sec. 2031, I.R.C. 1986. 2. Held, further, P is liable for an addition to tax for failure to timely file the estate tax return. Sec. 6651(a)(1), I.R.C. 1986; United States v. Boyle, 469 U.S. 241, 83 L. Ed. 2d 622, 105 S. Ct. 687 (1985). 3.

P executed a trust agreement in 1997 naming T as her trustee and giving T authority to control her assets and bank accounts and act in her stead for all purposes. Held: P is the proper party petitioner. HELD, further, T is no longer authorized to prosecute this action, and P should be substituted as the party petitioner.

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 is a former revenue agent with the Internal Revenue Service and has been a return preparer for over 28 years. Held: J-Co. is a sham, and we disregard it for tax purposes. Petitioner's gross receipts, less allowable business expenses, are includable in his income. Held, further: P is liable for the fraud penalty under sec. 6663, I.R.C.

P, maintaining that income tax could not constitutionally be imposed on his earnings, did not file income tax returns for the taxable years 1992 through 1996. Held: P is subject to Federal income tax statutes and is liable for the deficiencies determined by R. HELD, FURTHER, P is liable for the sec. 6651(a), I.R.C., delinquency addition to tax for failure to file.

In 1994, Ps contracted to purchase a home located in the Brentwood Park area of Los Angeles, California, adjacent to the residence owned… Held: Ps are not entitled to a casualty loss deduction for fluctuation in the market value of their property and are liable for the deficiency determined by R. HELD, FURTHER, Ps are not liable for the sec. 6662(a), I.R.C., accuracy-related penalty on the grounds that the deduction claimed was taken with reasonable cause and in good faith.

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.

P is a not-for-profit corporation that operates a commodity exchange in Chicago, Illinois. Held: The flush language on which R relies merely specifies when a corporation will be considered to be an affiliate of another corporation; it does not contain the exclusive definition of that word for purposes of TRA sec. 204(a)(7).

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).

P, a lawyer and owner of a law firm, purchased a residence in 1988, which he financed in part by a nonrecourse loan secured by a lien on the residence. Held: At the time of foreclosure P's residence belonged to him, not the bankruptcy estate; thus P is deemed to have paid all of the accrued and unpaid mortgage interest on the nonrecourse indebtedness. 2.

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.

R sent a notice of deficiency for 1995 to Ps. Held: Based on the evidence, the three additional digits on the end of the ZIP Code in the address used to mail the notice of deficiency did not affect the postal processing of the notice of deficiency and, as a result, did not render the address something other than Ps' last known address.

Joe Alfred Izen, Jr., counsel for petitioners in docket Nos. 9382-83, 4201-84, 15907-84, 40159-84, 22783-85, 30010-85, 30979-85, 29643-86, and 35608-86.    Robert Alan Jones, counsel for petitioners in docket Nos. 17646- 83, 19464-92, 621-94, and 9532-94.    Robert Patrick Sticht, counsel for petitioners in docket No. 7205-94.    Milton J. Carter, Jr., counsel for respondent.

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.

P failed to file Federal income tax returns for the years 1986 through 1995. Held: marital classifications in the Federal tax code are not unconstitutional; thus P was not entitled to a filing status other than single. HELD, FURTHER, P is liable for the deficiencies determined by R. HELD, FURTHER, P is liable for the additions to tax under secs. 6651(a)(1) and 6654, I.R.C.

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.

R issued a notice of final partnership administrative adjustment (FPAA) to P, the partnership's tax matters partner, for the taxable years 1995 and 1996. Held: The Court lacks jurisdiction to review the accuracy- related penalty in this partnership-level proceeding. See N.C.F. Energy Partners v. Commissioner, 89 T.C. 741 (1987). HELD, FURTHER, the amendments made by the Taxpayer Relief Act of 1997, Pub.

VIRGINIA M. MARTEN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent *This Supplemental Memorandum Opinion supplements Marten v. Commissioner, T.C. Memo 1999-340.

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

1. Decedent (D) gave an aggregate 24-percent interest in    her homestead property to her children. In the years following    the transfer, she continued to reside on the property. R    determined that the 24-percent interest is includable in D's    gross estate pursuant to sec. 2036, I.R.C. HELD: D's continued    use of the homestead property as her residence following the    transfer of minority interests in the property to her children    was not a retained life estate in the property interests    conveyed to her children. Consequently, the value of the    minority interests is not includable in her estate under sec.    2036, I.R.C.      2. D rented her interests in certain real estate to Coastal    Ranches, a corporation owned by her children, at a below-market    rent. R determined that the annual difference between fair    market rent and actual rent constituted taxable gifts. HELD: R's    computation of the amount of taxable gifts sustained.      3. On its Form 706, U.S. Estate (and Generation-Skipping    Transfer) Tax Return, P valued D's real estate at $ 2,261,800. R    determined that the fair market value was $ 2,785,248. HELD: The    fair market value was $ 2,417,491.      4. P elected special use valuation of certain farm real    property on its Form 706. R disallowed the election because P    failed to document comparable rental property in accordance with    sec. 2032A(e)(7), I.R.C., and the regulations thereunder. See    sec. 20.2032A-4, Estate Tax Regs. HELD: P may not value its    elected properties under the valuation formula of sec.    2032A(e)(7), I.R.C. HELD, FURTHER, by reason of sec. 20.2032A-4,    Estate Tax Regs. (which provides that if an executor does not    identify comparable property and cash rentals as required by    sec. 2032A(e)(7), I.R.C., all specially valued real property    must be valued under the rules of sec. 2032A(e)(8), I.R.C.), P    may value the properties under the provisions of sec.    2032A(e)(8), I.R.C. HELD, FURTHER, P's special use valuation    under sec. 2032A(e)(8), I.R.C., is allowed.

These cases involve the proper tax treatment of two types of payments received by Ps from an Israeli corporation: (1) Payments made directly to certain of Ps and upon which taxes were paid to the… Held: The payments made directly to Ps are to be characterized as compensation for services performed within the United States.

P and R filed stipulations that resolved most of the issues    in this case. R conceded the issues not resolved by the    stipulations. P asks us to characterize certain items as    business income (Sched. C) rather than Sched. B interest income.    The characterization of these items will not change P's    deficiency.      HELD: We decline to hold that the items in question are    business income.

P and R have both moved for partial summary judgment on the issue of whether royalties payable by an accrual basis publisher to authors based upon book sales, less actual returns, are fully… Held: The royalties are fully deductible in the year of sale.

P and R have both moved for partial summary judgment on the issue of whether property used in extending and maintaining a cable television system… Held: Property to be used by P's subsidiary M in extending and maintaining the cable television system is described in sufficient detail in the franchise agreement to permit a determination of whether property actually used by M for that purpose may be considered readily identifiable with such agreement within the meaning of sec.…

Five of the seven petitioners in these seven consolidated    cases have raised the affirmative defense of statute of    limitations. Those five petitioners argue that the notices of    final partnership administrative adjustment in question were not    timely because they were issued after expiration of the sec.    6229(a), I.R.C., assessment period.      HELD: In all five cases, either a valid Form 872-P,    Consent to Extend the Time to Assess Tax Attributable to Items    of a Partnership, was signed by the tax matters partner or    another person authorized in writing by the partnership to enter    into such an agreement, or no valid partnership return was filed    that would fix the time to assess tax under sec. 6229(a), I.R.C.

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.

D executed a will in 1970 which set forth a testamentary plan placing the majority of D's property into two trusts. Held: The estate is entitled to a deduction pursuant to sec. 2056(b)(7), I.R.C., for property placed in the residuary trust established under D's 1970 will.

On their 1997 income tax returns, Ps reported zero tax liability and claimed refunds resulting from claimed income tax withholding credits. Held: because the Court lacks jurisdiction over the underlying tax liabilities that R is attempting to collect, the Court lacks jurisdiction to review the administrative determinations in dispute.

On its 1997 income tax return, P reported zero tax    liability and claimed a refund resulting from claimed income tax    withholding credits. R paid P the claimed refund but later    determined that the payment of the refund was in error, as P had    made no income tax payments for which the withholding credits    were claimed. After R made summary assessment of the erroneous    refund, P requested a due process hearing. After R issued a    negative determination letter, P filed a petition for judicial    review of R's administrative determination. R filed a motion to    dismiss for lack of jurisdiction. Held, because the Court lacks    jurisdiction over the underlying tax liability that R is    attempting to collect, the Court lacks jurisdiction to review    the administrative determination in dispute.

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.

P's controlled foreign corporation, S, sold its operating assets to an unrelated corporation, C, in exchange for stock of C. The parties to the asset sale executed a lockup agreement prohibiting S… Held: The relation-back doctrine established in Arrowsmith does not apply based on the facts of this case to characterize S' gain on the sale of C stock for purposes of sec. 954, I.R.C., and accordingly the gain on the sale of the C stock constitutes FPHCI.

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.

Robert J. Percy, Bruce I. Judelson, Richard A. Levine, 2Richard A. Levine has entered an appearance as counsel for petitioners at docket Nos. 7561-98, 7563-98, 7564-98, 7567-98, 19356- 98, 19357-98, 19358-98, and 19359-98. Mortimer M. Caplin, 3Mortimer M. Caplin, Richard E. Timbie, and Christopher S. Rizek have each entered an appearance as counsel for petitioners at docket Nos. 7561-98, 7563-98, 7564-98, 7565-98, 7566-98, 7567-98, 19354-98, 19355-98, 19356-98, 19357-98, 19358-98, and 19359-98. Richard E. Timbie, 3 and Christopher S. Rizek,( 3 ) for petitioners.