Slip opinions decided 2003 — Tax Court Memorandum

P filed a timely petition for judicial review pursuant to sec. 6330(d)(1)(A), I.R.C., in response to a notice of determination by R to proceed with collection of assessed tax liabilities for 1996. Held: We do not look behind a notice of determination to decide whether the determination is valid for jurisdictional purposes. The notice of determination is valid on its face, and we have jurisdiction pursuant to sec. 6330(d)(1)(A)), I.R.C.

On Dec. 18, 2001, R mailed to Ps separate, identical Notices of Determination Concerning Collection Action(s) Under Sec. 6320 and/or 6330, I.R.C. In addition to the Dec. 18, 2001, date stamped next… Held: Because Ps failed to file their petition within 30 days of the notices of adverse determination, the petition is dismissed for lack of jurisdiction.

During 1990 and 1991, B, a domestic corporation, realized substantial capital gains from the sale of a number of its business units. Held: There is no meaningful distinction between the partnerships in these cases and the partnership determined to be a sham in ASA Investerings Pship. v. Commissioner, 340 U.S. App. D.C. 55, 201 F.3d 505 (D.C. Cir. 2000), affg. T.C. Memo. 1998-305.

Ps claimed investment credits and losses arising out of a partnership in which they held a limited interest. By notice of deficiency, R disallowed these claimed credits and losses. Held: R's failure to abate interest for any disputed period through Jan. 24, 1995, and any disputed period from Apr. 25, 1995, onward was not an abuse of discretion, because the delays that Ps identify are not attributable to R's error or delay in performing a ministerial act.

P is engaged in the business of assembling, manufacturing, and selling furniture. Held: The change in MACRS classification of the items of equipment is excluded from the definition of a change in method of accounting, and an adjustment pursuant to sec. 481(a), I.R.C., is not required. Comm'r v. Brookshire Bros. Holding, Inc., 320 F.3d 507, 2003 U.S. App. LEXIS 1443 (5th Cir. 2003), affg. T.C. Memo. 2001-150, followed.

For P's 1998 taxable year, R disallowed P's claimed earned income credit, filing status as head of the household, and dependency exemptions for two children. Held: P is entitled to an earned income credit for an individual with one qualifying child.

Held: R's determination that P is not entitled to a deduction for an abandonment loss in tax year ended 1995 is sustained. Held: R's determination that P is not entitled to a deduction for an abandonment loss in tax year ended 1995 is sustained. Held, further, R's determination that P is liable for an addition to tax under sec. 6651(a)(1), I.R.C., for tax year ended 1995 is sustained.

M (who together with her husband, P, filed joint returns for the audit years) assigned her right to receive certain future annual lottery payments in exchange for a lump-sum payment to her by W of $… Held: M's right to receive certain future annual lottery payments does not constitute a capital asset. Davis v. Comm'r, 119 T.C. 1 (2002) followed. 2. Held, further, the $ 400,000 that M received from W is ordinary income. 3.

Robert D. Whoriskey for petitioner. Monica E. Koch for respondent.

Prior to and during the audit years (1989 and 1990), P practiced law in Houston, Texas. Held: The amounts listed on the withdrawal authorizations constituted valid promotional expenses of X, Inc., in part, and disguised dividends taxable to P, in part. 2.

Following P's assertion of numerous tort and nontort causes of action, P and his employer entered into a settlement. Held: Under sec. 7491(a)(1), I.R.C., if the taxpayer produces credible evidence as to any factual issue relevant to his tax liability, the burden of proof as to that issue shifts to the Commissioner.

P was the common parent of an affiliated group that was    restructured in 1986. In 1986, pursuant to the restructuring    plan, P formed a subsidiary, I. Following the formation of I, P    became a subsidiary of I through an inversion. I then    distributed, pro rata to its shareholders in a spinoff, all the    issued and outstanding common shares of P, which continued to    hold all the shares of one pre-existing subsidiary of P.      Following the restructuring and spinoff, P filed a    consolidated Form 1120, U.S. Corporation Income Tax Return, for    a 27-week 1986 tax year claiming a consolidated net operating    loss (CNOL). P filed a Form 1139, Application for Tentative    Refund under sec. 6411, I.R.C., carrying back the CNOL to the    affiliated group's 1981 and 1984 tax years and requesting    tentative refunds for 1981 and 1984. I filed a consolidated U.S.    corporation income tax return for a 52-week 1986 tax year    claiming a CNOL. I also filed an application for tentative    refund for 1984. The Internal Revenue Service paid P and I the    respective tentative refunds for which they had applied.      Following an examination, R determined that P, rather than    I, was the continuing common parent of the prespinoff affiliated    group, revised P's income on the basis of a 52-week taxable    year, and determined that P did not sustain the CNOL claimed on    its 1986 return. R also revised I's income on the basis of a 27-    week short 1986 tax year. As a result of the foregoing    determinations, R determined that P was not entitled to the    tentative refunds paid to P for 1981 and 1984 and issued a    notice of deficiency to P to recover the tentative refunds.      After P filed the petition in the case at hand, R agreed to    treat I as the successor common parent of the prespinoff    affiliated group and issued a duplicate notice of deficiency to    I, in exchange for P entering into a stipulation of settled    issues. The stipulation of settled issues provides, in pertinent    part, that P will be liable to disgorge the tentative refunds it    was paid for 1981 and 1984 if those tentative refunds are held    not to be rebates as to I.    In Interlake Corp. v. Commissioner, 112 T.C. 103 (1999), the Court held the    tentative refunds paid to P were not rebates as to I.      P now contends the Court does not have jurisdiction to    enter decision on the stipulation of settled issues because the    tentative refunds P received are nonrebate refunds not taken    into account in determining a taxpayer's deficiency. According    to P, the tentative refunds are nonrebate refunds because P, as    the former common parent of the prespinoff group as conceded by    R, was not an "authorized recipient" of the tentative    refunds. P contends that when R paid the tentative refunds to P,    rather than I, R paid the wrong taxpayer, giving rise to    nonrebate refunds.      R contends that the tentative refunds are rebate refunds    over which the Court has jurisdiction and that the Court may    enter decision on the stipulation of settled issues. According    to R, nonrebate refunds are issued because of clerical or    computer errors and P has not identified any clerical or    computer error that caused R to pay the tentative refunds to P.    According to R, the tentative refunds were paid, after a limited    examination pursuant to sec. 6411(b), I.R.C., to the correct    taxpayer (P) because they were paid to P, the taxpayer who    applied for the tentative carryback adjustments on the basis of    the CNOL that P claimed it had incurred.      Held: The tentative refunds in issue are rebate    refunds as to P giving rise to deficiencies over which the Court    has jurisdiction. Sec. 6411(b), I.R.C. requires R to make only a    "limited examination" of an application for tentative    carryback adjustment and pay the tentative refund within 90    days. When R paid the tentative refunds to P, R had not finally    determined which affiliated group was the continuation of the    prespinoff affiliated group, and R was not required to make that    determination prior to paying the tentative refunds. The    tentative refunds were not paid because of any clerical or    computer error requiring nonrebate characterization. The    tentative refunds paid to P are recoverable through the    deficiency procedures. Accordingly, the Court has jurisdiction    to enter decision on the stipulation of settled issues and will    do so.

P did not file Federal income tax returns for 1995, 1996, and 1997. R issued a notice of deficiency in which he determined    that P received wages, nonemployee compensation, and    distributions from individual retirement plans for each of the    years. R based his determinations on third-party information    returns.      Held: Various third-party records that R offered in    support of his determinations are admissible evidence under   rules 803(6) and 902(11) of the Federal Rules of Evidence, which    allow the introduction of records of a regularly conducted    activity if, inter alia, the records are accompanied by a    written declaration of their custodian or other qualified    person.      Held, further, R's determinations of    unreported income are sustained.      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 for an addition to tax where a taxpayer fails to pay    the amount shown as tax on any return. P did not file returns;    however, under sec. 6651(g), I.R.C., a return R prepares    pursuant to sec. 6020(b), I.R.C. , is considered a return for    purposes of the addition to tax under sec. 6651(a)(2), I.R.C.    Under sec. 7491(c), I.R.C., R has the burden to initially come    forward with evidence that it is appropriate to apply a penalty.    R failed to introduce evidence that returns showing an amount of    tax were prepared and subscribed in accordance with sec.   6020(b), I.R.C. See Millsap v. Commissioner, 91 T.C. 926    (1988); Phillips v. Commissioner, 86 T.C. 433 (1986),    affd. in part and revd. in part on other grounds 271 U.S. App. D.C. 265, 851 F.2d 1492    (D. C. Cir. 1988). Accordingly, the additions to tax under sec.   6651(a)(2), I.R.C., do not apply.

For 1993, P claimed a $ 2,816,540 capital loss on his sale of H    stock, believing that the loss in the value of the stock was    caused by the market. In 1997, P discovered that the loss in the    value of the stock was attributable to a theft. In 1997, P    claimed the $ 2,816,540 loss as a theft loss. At trial, P did not    establish that any portion of the capital loss claimed in 1993    remained for carryover after that year.    Held: P is not entitled to deduct in 1997 any of the loss    as a theft loss. In that P has failed to establish that any    portion of the capital loss remained for carryover after 1993, P    has not established that he had in 1997 any basis in the H stock    that would allow him to deduct for 1997 a theft loss with    respect to the H stock.

R determined a deficiency in Ps' tax for 1998 based on their failure to substantiate deductions for personal exemptions under sec. 151(c), I.R.C., with respect to persons claimed as dependents. Held: R's position in the proceeding at issue was substantially justified within the meaning of sec. 7430(c)(4)(B)(i), I.R.C., thereby precluding Ps' recovery of costs under that section.

Docket Nos. 787-91, 4876-94, 9550-94, 9552-94, 9554-94, 13595-94, 13597-94, 13599-94, 382-95, 383-95, 385-95, 386-95, 14718-95, 14719- 95, 14720-95, 14722-95, 14724-95, 21461-95, 5196-96, 5197-96, 5198- 96, 5238-96, 5239-96, 5240-96, 5241-96, 9779-96, 9780-96, 9781-96, 14038-96, 21774-96, 3304-97, 3305-97, 3306-97, 3311-97, 3749-97, 15747-98, 15748-98, 15749-98, 15750-98, 15751-98, 15752-98, 15753-98, 15754-98, 19106-98, 13250-99, 13251-99, 13256-99, 13257-99, 13258-99, 13259-99, 13260-99, 13261-99, 13262-99, 16557-99, 16563-99, 16568-99, 16570-99, 16572-99, 16574-99, 16578-99, 16581-99, 17125-99. Terri Ann Merriam and Wendy S. Pearson, for participating partners in docket Nos. 9554-94, 13599-94, 383-95, and 16578-99.

P has extensive technical expertise in the computer software industry. P's wholly owned corporation, C, was engaged in the marketing of software products. Held: At all times, P intended to market the developed technology through C. P did not have the objective intent to use the developed technology in an activity that would constitute his own trade or business and is not entitled to a current deduction for his R&D expenses.

R determined deficiencies for W's 1992, 1993, 1994, 1995, and 1996 taxable years. R determined deficiencies for H's 1995 and 1996 years. Held: The payments H made to W meet the criteria of sec. 71(b)(1), I.R.C. Specifically, the payments were received by W and, pursuant to State law, would have terminated at W's death.

R determined deficiencies in tax with respect to Ps (H and W) for the years 1991-95, as well as additions to tax under secs. 6651(a)(1) and 6654, I.R.C., with respect to various of those years. Held: R's motion for default judgment is granted. 2. Held, further, Forms 1040 and 1040EZ filed by Ps do not constitute valid Federal income tax returns. 3. Held, further, Ps are liable for the additions to tax at issue in the amounts determined by R, with minor adjustments. 4.

R determined deficiencies in, and additions to, tax with    respect to P John P. Trowbridge (Dr. Trowbridge) for 1996 and    1997. As a protective measure, R also determined deficiencies    in, and additions to, tax with respect to P Life Center Houston    Business Trust (Life Center) for 1996 and 1997 and P Life    Choices Business Trust (Life Choices) for 1997. Ps filed a    petition for redetermination but failed to appear at trial. R    moved for default judgment against Dr. Trowbridge with respect    to deficiencies in tax for 1996 and 1997 in the amounts of   $ 146,847 and $ 211,508, respectively. R proceeded to trial on the    issues of (1) an additional deficiency in tax (first raised in    R's amendment to answer) with respect to Dr. Trowbridge for 1996    based on additional gross business receipts for that year, and    (2) the additions to tax asserted against Dr. Trowbridge for    1996 and 1997.      1. Held: R's motion for default judgment is granted.      2. Held, further, R is not barred by the    statute of limitations on assessment with respect to Dr.    Trowbridge's 1996 taxable year.      3. Held, further, there is an additional    deficiency in tax with respect to Dr. Trowbridge for 1996 based    on gross business receipts of $ 1,632,140 for that year.      4. Held, further, Dr. Trowbridge is liable    for additions to tax under secs. 6651(a)(1) and 6654, I.R.C.,    with respect to his 1996 and 1997 taxable years.      5. Held, further, Dr. Trowbridge is liable    for a penalty under sec. 6673, I.R.C., in the amount of $ 25,000.

Ps timely filed their joint 1999 Federal income tax return wherein they failed to report a $ 30,000 payment P-W received from GM during 1999. That payment arose from a complaint that P- W had filed against GM and one of its employees for sexual harassment primarily in violation of the Elliott-Larsen Civil Rights Act, Mich. Comp. Law, secs. 37.2101-37.2804 (2001).

P seeks relief, under sec. 6015, I.R.C., from income tax liabilities that were assessed in accord with this Court's holding in an earlier… Held: The requirement of Rule 39 of this Court's Rules of Practice and Procedure to plead an affirmative defense is satisfied in this case by the implied consent principles of Rule 41 of this Court's Rules of Practice and Procedure, and it is Held further: Respondent is not collaterally estopped from denying that P did not know or had no…

P and her ex-husband filed joint Federal income tax returns for 1986 and 1987 showing tax owed; they did not pay the taxes with the returns. Held: Since a portion of P's 1986 and 1987 tax liabilities remained unpaid as of July 22, 1998, P is entitled to a refund of the amount levied from her individual retirement account that was applied to her 1986 and 1987 tax liabilities. Washington v. Commissioner, 120 T.C. 114, 137 (2003), followed.

P-H is a physician in California who during 1990 and 1991 performed his medical services through a business known as David Dung Le, M.D., Inc. (DDL). Held: In 1990 and 1991, P-H operated his medical practice in California as a corporation known as DDL. 2. Held, further, Ps' 1990 and 1991 gross income includes the amounts diverted from DDL, and Ps are liable for the individual income taxes and related fraud penalties determined by R. 3.

Ps realized a sec. 1231, I.R.C., gain when a partnership of which P husband was a 50-percent owner conveyed rental property to the holder of a security deed on the property in satisfaction of the… Held: further, Ps are liable for the sec. 6662(a), I.R.C., accuracy-related penalty on grounds of failure to prove that they acted with reasonable cause and good faith with respect to their substantial understatement of income tax for 1994 and 1995.

P was engaged in the waste pickup and disposal business,    servicing several California communities. During the years in    question, H was one of four officers of P, the other three being    her sons, who were responsible for all of the key management    functions on P's behalf. R disallowed a portion of P's deduction    for compensation paid to H on the ground that it was    unreasonable and excessive.      Held: Reasonable compensation for H determined. See   sec. 162(a), I.R.C.

On Aug. 26, 1994, P filed a malicious prosecution lawsuit in Texas against a former business associate. Held: further, the payment P received pursuant to the malicious prosecution lawsuit is not excludable from gross income for 1998 under sec. 104, I.R.C. There is no evidence that any of the judgment award was received on account of a personal physical injury or physical sickness as required by sec. 104(a)(2), I.R.C., or for medical care…

J. A. Cragwall, Jr., Norbert F. Kugele, and Dean F. Pacific for petitioner.

During the course of R's initial review of Ps' offer in compromise based upon doubt as to liability for tax liabilities for 1991, 1992,… Held: further, in light of the intervening decision of the U.S. Supreme Court in Young v. United States, 535 U.S. 43, 152 L. Ed. 2d 79, 122 S. Ct. 1036 (2002), this case will be remanded to the Commissioner to permit Ps to reconsider their rejection of AO Martin's suggested installment agreement based in part on Ps' required concession of…

R determined that P was not entitled to (1) a dependency exemption for his daughter, (2) head of household status, and (3) a child tax credit. 1. Held: P was the custodial parent of his daughter and therefore may claim a dependency exemption for her. 2. Held, further, P is entitled to head of household status and the child tax credit.

R determined deficiencies for H's 1995 and 1996 taxable years. Held: R's position that the payments made by H to W were not deductible by H as alimony paid was substantially justified, within the meaning of sec. 7430(c)(4)(B)(i), I.R.C. H is not entitled to recover litigation costs.

P transferred limited partner interests in a family limited partnership (PT) to a family trust (T) pursuant to two separate transactions. Held: Fair market value of the transferred PT interests determined. See sec. 2512, I.R.C.

P filed a petition for judicial review pursuant to secs. 6320 and 6330, I. R. C., in response to a determination by R to leave in place a filed notice of Federal tax lien. Held : Because the record does not establish an abuse of discretion by R in rejecting P's offer in compromise, R's determination to proceed with collection action is sustained.

Petitioners (Ps) claimed deductions relating to White Rim, a limited partnership in which they owned an interest in 1980- 83. Held: R's loss of Ps' 1981-82 amended returns from May 1987 to March 1998 was a ministerial error for purposes of sec. 6404(e), I.R.C. Held, further, R's refusal to abate interest that accrued from May 1987 to March 1998 on Ps' tax liability for 1980 was an abuse of discretion.

P was originally exempt from Federal income taxation. However, on Jan. 1, 1985, P became subject to taxation under the Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, sec. 177, 98 Stat. 709. Held: Sec. 177(a), I.R.C., provides an election to amortize trademark and trade name expenditures over a period of not less than 60 months for expenditures paid or incurred during a taxable year beginning after December 31, 1955.

Ps incorporated their farming operations in 1993. Prior to    the incorporation, P-H engaged in commodities trading activities    through several brokerage accounts. After the incorporation, P-H    continued to engage in such activities through those accounts.    Ps treated the gains and losses from P-H's commodities trading    activities as ordinary income or loss, as applicable, on their    1994-96 Federal income tax returns.      Held : Since P-H's commodities trading activities do    not constitute hedging transactions, gains and losses therefrom    are capital in nature.      Held, further, Ps are liable for penalties    under sec. 6662, I.R.C., as determined by R.

UNITED STATES TAX COURT

R filed a motion for reconsideration of our opinion in Harrell v. Comm'r, T.C. Memo 2003-271 (2003), arguing that our disposition of this case constitutes both substantial error and unusual… Held: We reaffirm our holding in Harrell v. Comm'r, supra, that R's decision to issue the notice of determination was an abuse of discretion. R's motion for reconsideration is denied.

P reported taxable income of zero on his 1986 tax return, claiming he was not liable for tax due as no section of the Internal Revenue Code imposed a tax upon him. Held: R's motion for summary judgment is granted in full. Held, further, P is liable for a deficiency in the amount of $ 14,611 for 1986 based on his deemed admission.

P was a high-profile, successful Hollywood talent agent. P    represented numerous Hollywood stars. Until 1996, P worked for a    major Hollywood talent agency (U).      On Apr. 21, 1996, U fired P. U leaked P's termination to    the media. The press coverage of P's termination was extensive    and defamatory to P.      P immediately hired attorneys to represent him against U.    P's attorneys prepared a complaint alleging, among other things,    defamation and breach of contract. P and U engaged in settlement    negotiations that were extremely hostile, adversarial, and    acrimonious. P and U quickly settled P's claims. U agreed to pay   $ 4 million to settle the defamation claim and $ 2 million plus    "back-end" payments to settle the breach of contract    claim. P was paid the $ 4 million in four installments of $ 1    million in May 1996, November 1996, May 1997, and November 1998.      Even though there was a quick settlement and a public    apology by U, P's career as a talent agent was ended by his    termination and the negative publicity. Subsequently, P became a    talent manager and producer.      P, after consultation with tax professionals, did not    include the May 1996, May 1997, or November 1998 payments in    income on his tax returns for 1996, 1997, and 1998. P initially    included the November 1996 payment in income but later filed an    amended return seeking a refund of taxes associated with this    payment. P's returns contained detailed statements disclosing    P's reasons for excluding the payments from income.      R audited P's 1996, 1997, and 1998 returns. During the    audit, P's attorney delayed several times in responding to R. P    did not provide certain documents requested by R. P refused to    be interviewed by R. R denied P's claim for refund and    determined that none of the $ 4 million paid to settle the    defamation claim was excludable from income, and P was liable    for a penalty pursuant to sec. 6662, I.R.C., for all years.      Held: P did not cooperate with R. Accordingly, P    bears the burden of proof. Sec. 7491(a), I.R.C. ; Rule 142(a).      Held, further, pursuant to sec. 104(a)(2),    I.R.C., before its amendment by the   Small Business Job Protection Act of 1996 (SBJPA), Pub. L. 104-188, sec. 1605, 110 Stat. 1838   , the May 1996 payment is excludable from income for    1996.      Held, further, pursuant to sec. 104(a)(2), I.R.C.,    , as amended by the SBJPA, P is not entitled to an    overpayment for 1996, and the May 1997 payment and the November    1998 payment are not excludable from income.      Held, further, P is not liable for the    penalty pursuant to sec. 6662, I.R.C., for 1996, 1997, and 1998.

P is a funeral home organized and operating in Massachusetts. Held: Payments received by P under its preneed funeral contracts are includable in gross income only upon the provision of the subject goods and services. Held, further, P is liable for the sec. 6662, I.R.C., accuracy-related penalty with respect to items conceded by P, apart from the preneed accounting issue.

Ps resided in Louisiana, a community property State. Shortly before their wedding, in 1989, they filed for registry (La. Civ. Held: Ps' marriage contract did have the effect of stopping application of Louisiana's usual community property laws for Federal income tax purposes.