Slip opinions decided 2002 — Tax Court Memorandum

H and W deducted net operating losses (NOL) on their joint Federal income tax return for 1994, the year in which H died. The NOLs, all of which were attributable to H's business activities, arose before and during H's bankruptcy proceeding under ch. 11 of the Bankruptcy Code. The bankruptcy proceeding terminated in 1994 after H's death. Pursuant to Fed. R. Bankr. 1016 the proceeding was continued and concluded after H's death as though he had not died.

Decedent owned 630 shares of F. Korbel & Bros., Inc. stock    representing a 39.62-percent ownership interest in the    corporation.    Held  : Fair market value of the shares determined. Sec.    2031, I.R.C.

P did not file Federal income tax returns for 1996, 1997,    and 1998. R issued a notice of deficiency for those years, in    which he determined deficiencies, as well as additions to tax    under secs. 6651(a)(1) and (2) and 6654, I.R.C. P does not    dispute the receipt of compensation and sale proceeds in the    amounts determined by respondent. However, P contends that the    Federal income tax is in the nature of an excise tax and that he    is not engaged in any taxable excise activities.      Held: Compensation and gain from the sale of    property are taxable as income in the year received. P's    arguments to the contrary are frivolous.      Held, further, the additions to tax under secs.    6651(a)(1) and 6654, I.R.C., are sustained.      Held, further, sec. 6651(a)(2), I.R.C., provides an    addition to tax where a taxpayer fails "to pay the amount    shown as tax on any return". The addition to tax under sec.    6651(a)(2), I.R.C., does not apply unless there was an unpaid    tax that was shown on a return. Since no returns were filed and    the record does not show that substitute returns were prepared,    the sec. 6651(a)(2), I.R.C., addition to tax does not apply.      Held, further, we shall impose a penalty of $ 2,000    on petitioner pursuant to sec. 6673(a)(1), I.R.C.

R disallowed certain losses claimed by Ps from various partnerships in tax years 1997, 1998, and 1999. Held: The Tax Court has jurisdiction to redetermine the deficiency for 1997. Partnership-level proceedings were not initiated, a notice of final partnership administrative adjustment was not issued by R, and the 3-year period of limitations for assessment under sec. 6229(a), I.R.C., expired.

Held : Petitioners did not make informal claims for refund entitling them to refunds attributable to NOL carrybacks from 1992 to 1989 and 1990.

On Sept. 28, 1993, A, a limited liability Wyoming company, composed of two Belgian citizens, BP and FBE, purchased a portfolio of 40 IBM mainframe computers (the equipment) from C, for $ 122,415,762,… Held: A is disregarded because BP and FPE did not intend to join together for the purpose of carrying on a business as partners or sharing in the profits and losses from an equipment leasing activity.

S-1 and S-2 were S corporations formed to finance the research and development activities of A, a nonpublicly traded C corporation engaged in the business of developing educational videodiscs. Held: Neither S-1 nor S-2 is entitled to a deduction under sec. 174, I.R.C. 1954, because the amounts S-1 and S-2 allegedly paid to A were not paid in connection with S-1's and S-2's respective trades or businesses.

HFLP, a limited partnership, was established in 1994 and was capitalized by the contribution thereto by D of the majority of his assets. Held: The property contributed by D to HFLP is includable in his gross estate pursuant to sec. 2036(a), I.R.C. Held, further, value of the assets to be included in the gross estate determined.

P appeals under sec. 6330(d)(1), I.R.C., from R's determination to proceed by levy to collect unpaid Federal assessments of income taxes,… Held: P was mentally competent when he signed Forms 4549-CG, Income Tax Examination Changes, for 1990-93; by signing Forms 4549-CG, P waived his rights to dispute the tax liabilities for those years prior to assessment and thereby conclusively acknowledged that he had an opportunity to dispute those liabilities within the meaning of sec.…

P filed a petition for judicial review pursuant to sec. 6330, I.R.C., in response to a determination by R to proceed with collection by levy of assessed tax liabilities for 1989, 1990, and 1991. Held: Because P received a notice of deficiency for 1989, 1990, and 1991 and failed to seek redetermination in this Court, P's underlying tax liabilities are not properly at issue in this collection proceeding.

For 1996 and 1997, Ps K and B filed with their joint tax    returns Schedules C, Profit or Loss From Business, on which they    reported income and deducted claimed expenses related to K's    rendering of medical services for DWP.      Held: During 1996 and 1997, K was an employee of    DWP and not an independent contractor. Ps therefore are not    entitled to report K's income and expenses on Schedules C.      Held, further, Ps are not entitled to deduct    business expenses claimed on their 1996 and 1997 returns.

B. Gray Gibbs, n* for petitioner.

In 1995, Ps leased (as lessee) retail space in a shopping center to operate a bakery. Held: Ps' expenditures for the permanent improvements they made to the leased space constitute capital expenditures that are not currently deductible. Sec. 263, I.R.C. 1986. Ps' cost recovery for the years in issue is by way of depreciation, as allowed in the notice of deficiency. 2.

UNITED STATES TAX COURT

R determined a deficiency in tax, and an accompanying accuracy-related penalty, attributable to Ps' failure to account for discharge of indebtedness income in 1994. Held: R's position with respect to the discharge of indebtedness issue was substantially justified within the meaning of sec. 7430(c)(4)(B)(i), I.R.C. 2. Held, further, R's position with respect to the penalty issue was not substantially justified within the meaning of sec. 7430(c)(4)(B)(i), I.R.C. 3.

Based upon the facts contained in the administrative record, Held: Petitioner is not operated as an organization entitled to exemption under sec. 501(c)(3), I.R.C. Held: Petitioner is not operated as an organization entitled to exemption under sec. 501(c)(3), I.R.C.

P is a nonprofit corporation described in sec. 501(c)(3), I.R.C., and exempt from taxation under sec. 501(a), I.R.C. P's articles of incorporation, as filed in conjunction with its application for… Held: P is to be classified as a private foundation on account of failure to satisfy the integral part test of sec. 1.509(a)-4(i)(3), Income Tax Regs.

Ps were successful in this Court in showing that a $ 130,000 payment received in settlement of an insurance claim was not for punitive damages and that any gain realized would not be recognized under… Held: Ps exhausted their administrative remedies and are entitled to litigation costs. Held, further,. sec. 7430(b)(1), I.R.C.; sec. 301.7430-1(b)(2), Proced. & Admin. Regs., interpreted.

P filed a petition for judicial review pursuant to sec. 6330,    I.R.C., in response to a determination by R to proceed with    collection by levy of assessed tax liabilities for 1993, 1994,    1995, and 1997.    Held: Because P's claim for overpayment credit was filed    within three years from the date P filed his return, P's claim    was timely filed. Omohundro v. United States, 300 F.3d 1065 (9th    Cir. 2002), followed; Rev. Rul. 76-511, 1976-2 C. B. 428    applied.    Held, further, because P made no tax payments    during the applicable look-back period of sec. 6511(b)(2)(A),    I.R.C., the ceiling limitation on P's credit is zero.    Held, further, equitable relief is unavailable to    P, and R may proceed with collection of balances due as    determined in a "NOTICE OF DETERMINATION CONCERNING    COLLECTION ACTION(S) UNDER SECTION 6320 and/ or 6330".

R determined a deficiency for P's 1993 taxable year. Held: P had unreported taxable income from her sole proprietorship. Held, further, based on all the facts and circumstances, the horse activity was an activity not engaged in for profit within the meaning of sec. 183, I.R.C., and P is not entitled to deduct the losses therefrom.

P failed to file returns for 1987 and 1989. P received a notice of deficiency for 1987 and 1989. P petitioned the Court. The Court ruled for R, and P appealed. Held: P raised the issue of interest abatement at the sec. 6330, I.R.C., hearing. Therefore we have jurisdiction over this issue. Katz v. Commissioner, 115 T.C. 329 (2000).

P suffered a permanent disability that arose out of, and in the course of, his employment as a municipal court judge. Held: Under sec. 1.104-1(b), Income Tax Regs., gross income does not include amounts received under a statute in the nature of a workers' compensation act. A statute that does not distinguish between work-related injuries and other types of injuries is not in the nature of a workers' compensation act.

R determined deficiencies in tax, additions to tax, and penalties for fraud with respect to P's 1991, 1992, and 1993 tax years. Held: R's assertion of the fraud penalty was substantially justified, within the meaning of sec. 7430(c)(4)(B)(i), with respect to one adjustment but was not substantially justified with respect to the balance of the adjustments. 2.