Slip opinions decided 2001 — Tax Court Memorandum

D, a consultant, carried on his consulting business as an employee of P, a C corporation. Held: The notice of deficiency is valid. 2. HELD, FURTHER, R's disallowance of various deductions is sustained in substantial part. 3. HELD, FURTHER, R's penalty against P for the taxable year is sustained, in part, under sec. 6662, I.R.C.

R has moved for a partial summary adjudication that the    value of certain real and personal property is includable in the    gross estate. P avers that the property is not so includable    because the decedent sold it to his daughter prior to his death.    Relying on two State court actions finding no sale to the    daughter, R argues that the doctrine of collateral estoppel, or    issue preclusion, precludes such a finding. We agree with R that    P is estopped from litigating ownership of the property. P    having set forth no other basis for P's assignments of errors,    partial summary adjudication in R's favor is appropriate.      HELD: R's motion for partial summary judgment shall be    granted, and the value of the property is includable in the    gross estate.

R determined that Ps were liable for income tax deficiencies based on the disallowance of amounts claimed as business expense… Held: Amounts used to purchase gift certificates for corporate customers are deductible only to the extent of the $ 25 limitation set forth in sec. 274(b), I.R.C. HELD, FURTHER, sums paid for gift nut baskets given to employees are fully deductible pursuant to the language of secs. 102(c) and 274(b), I.R.C. HELD, FURTHER, $ 100 bills given…

P deducted amounts for alimony paid and an additional personal exemption. P omitted from income a distribution from the trustee of an employee plan. 1. Held: P has shown his entitlement to only a portion of the alimony deduction taken. 2. HELD, FURTHER, P has not shown his entitlement to the additional personal exemption. 3. HELD, FURTHER, P must include in income the distribution from the trustee.

P's counsel deposited an envelope containing P's petition with FedEx on the 87th day after R mailed the notice of deficiency. The envelope bore the correct name, address, and ZIP code for this Court. Held: the envelope was properly addressed as required by sec. 7502(a)(2)(B), I.R.C. 2. HELD, FURTHER, P's petition was timely filed because it was timely sent. See sec. 7502(a), (f), I.R.C. Thus, we will deny R's motion to dismiss for lack of jurisdiction.

HELD: Petitioners' motions to compel taking of a deposition under Rule 75, Tax Court Rules of Practice and Procedure, denied. Held: Petitioners' motions to compel taking of a deposition under Rule 75, Tax Court Rules of Practice and Procedure, denied.

Patricia Tucker, for movant Alfred J. Martin, Jr.

R examined Ps' 1981 tax return and issued a notice of    deficiency. Anticipating an assessment, Ps posted a cash bond    with R. Ps subsequently filed a refund claim for the 1985 tax    year, the proceeds of which were to be used to offset any    shortfall between the bond and the assessment. R denied the    refund claim, and the assessment exceeded the bond. Ps then    filed a claim for an abatement of interest for the 1981 tax    year. Ps supported their abatement claim with allegations of    errors or delays occurring during the processing of their refund    claim for 1985. R denied their claim for abatement of interest.      HELD, the delay in payment of the 1981 outstanding tax    liability was not attributable to procedures involved in the    processing of the refund claim for 1985 so as to allow relief    under sec. 6404(e), I.R.C., 1986.

R denied P deductions for his pro rata share of the losses    of an S corporation on the grounds that P had insufficient    adjusted basis in his S corporation shares. See sec. 1366(d)(1),    I.R.C. P argues that the corporation lacked borrowing power and    his guaranty of loans to the S corporation should be deemed to    signify his borrowing of the loan proceeds and subsequent    contribution of those proceeds to the capital of the S    corporation, which would increase his adjusted basis    sufficiently for him to deduct the losses in question.      HELD: P has failed to prove that the indebtedness in    question was not indebtedness of the S corporation; therefore, P    has failed to prove that he had sufficient adjusted basis to    deduct the S corporation losses in question.

Ps worked as blackjack and roulette dealers, and P-H worked as a pit boss, at a casino in Prince George's County, Maryland. The casino recorded on daily time sheets the number of hours Ps worked. Held: Ps are liable for additions to tax for civil fraud for 1991 and 1992. See sec. 6663, I.R.C. 1986. 2. HELD, FURTHER, Ps are liable for an addition to tax for negligence for 1993. See sec. 6662(a), I.R.C. 1986. 3. HELD, FURTHER, amounts of deficiencies redetermined.

In Charlton v. Commissioner, 114 T.C. 333 (2000), we held that (1) income from Medi-Task, a transcription service, is self-employment income attributable to Hawthorne (H), Charlton's (C's) former… Held: deductions related to Medi-Task are allocable to H. See sec. 6015(d)(3), I.R.C. HELD, FURTHER, R's determination that H was entitled to relief under sec. 6015(f), I.R.C., was not an abuse of discretion.

P is a personal service corporation in the business of providing pediatric surgical services. It employs both shareholder surgeons and nonshareholder surgeons to perform such services. Held: R has not raised new matters, and, therefore, the burden of proof remains with P. 2. HELD, FURTHER, R's disallowance of a portion of P's deductions for shareholder compensation is sustained in part. 2. HELD, FURTHER, the penalties are sustained.

P husband (H) carried on a financial planning business on behalf of individual clients. Held: R's disallowance of various Schedule C deductions is sustained in substantial part. 2. HELD, FURTHER, no portion of R's deduction disallowance may be treated as a disallowance of Schedule A itemized deductions rather than of Schedule C deductions. 3.

P and his spouse were separated but legally married when P prepared and filed a document as their joint 1994 income tax return, which P signed on behalf of his spouse. Held: R sustained as to res judicata. 2. HELD, FURTHER, the income tax return filed for 1994 was intended by P and his spouse to be their joint income tax return; it constitutes their joint income tax return even though P's spouse did not sign it. See sec. 6013, I.R.C. 1986.

HELD: Respondent's motion for leave to file amended answer under Rule 41(a), Tax Court Rules of Practice and Procedure, granted. Held: Respondent's motion for leave to file amended answer under Rule 41(a), Tax Court Rules of Practice and Procedure, granted.

Petitioner H was the sole proprietor of a business, A. Ps, H and W, filed original joint returns and, subsequently, amended tax returns for the tax years… Held: Each of Ps' amended returns is an admission of a tax underpayment. 2. HELD, FURTHER, P-H is liable under sec. 6653(b)(1)(A), I.R.C., for 1987 and sec. 6653(b)(1), I.R.C., for 1988 for the addition to tax for fraud on the portion of the underpayment attributable to the failure to report all gross income from A. 3.

In the early 1990's, P constructed, placed into service, and began depreciating gas station properties. Held: In filing returns for the years ended in 1996 and 1997 which depreciated the gas stations as 15-year property, P did not violate the rules set forth in sec. 446(e), I.R.C., regarding changes in method of accounting.

M and THEI were partners in IHCL, a limited partnership    formed in 1981 to hold interests in Landmark and Gateway, two    limited partnerships. Landmark and Gateway were formed to    construct, own, and manage separate hotel towers of a San Diego    resort complex. Landmark and Gateway financed their hotel    developments using nonrecourse debt.      The IHCL partnership agreement provided that upon    liquidation, the proceeds would be distributed only to those    partners having positive capital accounts. The partnership    agreement did not require the partners to restore any deficits    in their capital accounts upon liquidation of the partnership.      In 1985, D agreed to invest $ 19.8 million in IHCL in    exchange for a 15-percent interest in IHCL. D received a non-pro    rata (special) allocation of 99 percent of IHCL's income and    losses. Upon D's entry as a partner in IHCL, M withdrew as a    partner, and THEI's interest in IHCL was reduced.      D encountered financial difficulties and defaulted on its    contribution payment obligation. In 1987, the special allocation    of IHCL's gains and losses to D was terminated. Thereafter, the    gains and losses of IHCL were allocated to THEI and D pro rata    in accordance with their respective partnership interests. Under    this new allocation, 85 percent of the losses went to THEI,    creating a substantial deficit balance in THEI's partnership    capital account.      On June 20, 1991, M purchased D's interest in IHCL and    thereafter succeeded to D's then-positive $ 14.8 million    partnership capital account. At the time, THEI had a negative   $ 5.9 million partnership capital account balance.      Upon M's reentry into IHCL, the IHCL partnership agreement    was amended to provide that IHCL's income would be allocated    first to partners having negative capital account balances and    thereafter to the partners pro rata.      IHCL's 1991 information return reported an allocation of 99    percent of IHCL's income to D through June 20, 1991, and    thereafter an allocation of 100 percent of the income to THEI.    Respondent determined that 99 percent of IHCL's income after    June 20, 1991, should be allocated to M.      In our original opinion in this case, we sustained    respondent's position. On appeal, the parties agreed that a    minimum gain chargeback should be included in the Court's    calculations for purposes of the comparative liquidation test of    the partners' interests under sec. 1.704-1(b)(3)(iii), Income    Tax Regs.      HELD: In view of the parties' agreement, the special    allocation of 100 percent of IHCL's income earned after June 20,    1991, to THEI is in accordance with the partners' interests in    IHCL and is therefore respected. See sec. 704(b).

Respondent's (R) agents seized $ 149,200 cash from petitioners    (Ps) during a search of Ps' residence by Federal and State law    enforcement officers. R filed a jeopardy assessment in that    amount against petitioner husband (P-H). P-H filed suit in U.S.    District Court to obtain judicial review of the jeopardy    assessment.    The District Court subsequently sustained the determination that    P had taxable income of $ 48,473 in 1997 and found that P had    savings of $ 100,727.    R determined that the $ 149,200 seized from Ps was unreported    taxable income for 1997. Ps contend that it was not taxable    income because P-H had a cash hoard in that amount on Dec. 31,    1996.    Ps moved at trial to shift the burden of proving the amount of    the cash hoard to R under sec. 7491(a), I.R.C. Ps offered    evidence relating to the amount of P's cash hoard, but a    substantial amount of that evidence was not credible.    HELD: Ps bear the burden of proving the amount of the cash    hoard.    HELD, FURTHER, P-H had a $ 40,000 cash hoard on Dec. 31, 1996.

P and H filed a joint return for 1986. R determined a deficiency in tax on account of omission of embezzlement income and gain from… Held: P and H omitted from income embezzlement income and gain (in a reduced amount) of H. 2. HELD, FURTHER, P has failed to show error in the determination of sec. 6661, I.R.C., addition to tax for substantial understatement of income. 3. HELD, FURTHER, P has failed to show entitlement to relief from liability under sec. 6015, I.R.C.

P omitted from gross income certain payments, characterized by R as Pension Income. Held: Incident to P's divorce from her ex-husband, P received as her separate property an interest in ex-husband's military pension, and payments by ex-husband to her pursuant to agreement were gross income to her pursuant to sec. 61(a)(11), I.R.C. 2.

HELD: P's case is dismissed for failure properly to    prosecute pursuant to Rule 123(b), Tax Court Rules of Practice    and Procedure, with respect to income tax deficiencies    determined for taxable years 1993 and 1994.      HELD, FURTHER, P is liable for civil fraud penalties for    1993 and 1994 in accordance with sec. 6663, I.R.C.

H and W resided in Louisiana, a community property State, throughout their marriage. During their marriage, H purchased three policies of insurance on his life using community funds. Held: The policies of life insurance constitute community property under Louisiana law such that only one-half of the proceeds therefrom is includable in H's gross estate. Sec. 2042(2), I.R.C.; sec. 20.2042-1(c)(1), (5), Estate Tax Regs.

Respondent determined a deficiency for petitioners' 1996 taxable year based primarily on the disallowance of amounts claimed for cost of goods sold and business expenses on petitioners' Schedule C,… Held: Petitioners are liable for a deficiency as redetermined herein. HELD, FURTHER, petitioners are liable for the sec. 6662(a), I.R.C., accuracy-related penalty.

Mary Ellen Gaffner, personal representative at docket No. 5522-00 and pro se at docket No. 5523-00.

R attributed to P1 and P2, both joint return filers, various items with respect to certain trusts, P3, P4, P5, and P6, on the grounds that such trusts were either shams or grantor trusts, or on the… Held: Deficiencies and accuracy-related penalty with respect to P3, P4, and P5 sustained, subject to concession by R. 2. HELD, FURTHER, P6 has failed to establish that there is a proper party before the Court; we shall dismiss with respect to P6 for lack of jurisdiction. 3.

F. BROWNE GREGG, SR., AND JUANITA O. GREGG,                Petitioners                  v.          COMMISSIONER OF INTERNAL REVENUE,               Respondent *This opinion supplements our prior opinion in Gregg v. Commissioner, T.C. Memo 1999-10, vacated and remanded (11th Cir., Sept. 19, 2000).

Respondent determined deficiencies and additions to tax for petitioner's 1986, 1988, 1989, 1990, 1991, and 1992 taxable years. Held: Petitioner's sole proprietorship earned net income as redetermined herein for each of the 6 years involved in this case. HELD, FURTHER, petitioner recognized capital gain from the sale of stock in the amounts of $ 10,490 and $ 9,227 in 1989 and 1990, respectively.

In 1993, D gratuitously transferred her residence to an irrevocable trust, naming her daughter as trustee and her grandchildren as beneficiaries. Held: There existed an implied understanding that D would retain possession and enjoyment of the residence such that the property is includable in her gross estate under sec. 2036(a)(1), I.R.C. HELD, FURTHER, the value of the residence for purposes of inclusion in the gross estate is $ 125,000.

R attributed to Ps' various items with respect to two trusts, on the grounds that such trusts were either shams or grantor trusts, on the ground that the assignment of income doctrine applied, or on… Held: Trust income attributed to Ps for substantially the reasons stated by R. 2. HELD, FURTHER, Ps are liable for accuracy-related penalties under sec. 6662(a), I.R.C. 3. HELD, FURTHER, for various reasons, Ps are liable for a penalty under sec. 6673(a)(1), I.R.C.

R determined a deficiency for Ps' 1993 taxable year based    primarily on disallowance of: (1) Amounts claimed for cost of    goods sold with respect to a sole proprietorship and (2) a loss    claimed with respect to a partnership interest.      HELD: Ps have failed to overcome their initial reporting of   $ 244,270 as gross receipts from their sole proprietorship and,    for lack of substantiation, are not entitled to offset such    receipts by an identical amount for cost of goods sold.      HELD, FURTHER, Ps are not entitled to deduct a loss of   $ 19,791 allegedly attributable to their interest in a    partnership.      HELD, FURTHER, Ps are liable for the sec. 6651(a)(1),    I.R.C., addition to tax for failure timely to file their 1993    income tax return.      HELD, FURTHER, Ps are liable for the sec. 6662(a), I.R.C.,    accuracy-related penalty.

Kenneth M. Hart, for applicants.

R attributed to H and W gross receipts and interest with respect to a trust, on the grounds that the trust was either a sham or a grantor trust,… Held: Trust income is attributed to H and W for the reasons stated by R. 2. HELD, FURTHER, H and W omitted nontrust income and overstated deductions. 3. HELD, FURTHER, H and W are liable for the accuracy- related penalty under sec. 6662(a), I.R.C. 4. HELD, FURTHER, R's motion to dismiss for lack of jurisdiction will be granted. 5.

P paid the investment banking firm of Goldman, Sachs & Co. (G) approximately $ 17.5 million to advise it financially on a recapitalization. Held: P is collaterally estopped from claiming that it sustained a theft loss by virtue of the additional cash payment of $ 217,649,340.

Michael R. Schlessinger, Michael A. Clark, Jason K. Francl, Jay H. Zimbler, and William M. Sneed (specially recognized) for petitioner.

On remand from the Court of Appeals for the Ninth Circuit to elaborate the evidence relied on by the Court in Curtis v. Commissioner, T.C. Memo 1996-484, revd. and remanded without published opinion… Held: Findings made to support conclusion that proper foundation exists.

P and I filed a joint 1995 Federal income tax return. Held: P has failed to establish his entitlement to relief from joint and several liability pursuant to either subsec. (b) or subsec. (c) of sec. 6015, I.R.C. Mufthiha Sabaratnam , for intervenor.