Volume 45 — Tax Court Memorandum

H and W were divorced in 1977. In 1977 and 1978, both claimed dependency deductions for their two children, who were in the custody of W. Held, for both 1977 and 1978, the Commissioner clearly… Held: for both 1977 and 1978, the Commissioner clearly established that W provided more for the support of such children than did H. Sec. 152(e)(2)(B), I.R.C. 1954.

Petitioner corporation was engaged in the excavation and hauling business during the years in question. Held: because there was no evidence that kickback payments in the nature of those made by petitioner were a customary practice in the excavating and earthmoving industry in the locality of petitioner's activities, such payments were not ordinary within the meaning of sec. 162(a), I.R.C. 1954, and therefore are not deductible.

Held, costs of sending dependent child to a private school and for a tutor are not deductible under sec. 213, I.R.C. 1954. Held: costs of sending dependent child to a private school and for a tutor are not deductible under sec. 213, I.R.C. 1954.

Petitioner-husband, a tax protester, was convicted for corruptly endeavoring to impede or obstruct the due administration of the Internal Revenue Code, 26 U.S.C. 7212(a). Held: respondent's Motion to Dismiss Based Upon Failure to State a Claim Upon Which Relief Can be Granted, is granted.

P treated payments to his former wife as wages and paid withholding and FICA taxes on these payments. He has conceded that the payments were actually for child support and that the net amounts paid to his former wife were improperly deducted. Held, P was not entitled to deduct the withholding and FICA taxes paid with respect to his former wife. Held further, the Tax Court lacks jurisdiction to determine whether the withholding and FICA taxes constituted overpayments and cannot grant equitable recoupment.

Three physicians formed a professional corporation (NA).They then formed a subchapter S corporation (S) to provide X-ray services for NA. Held: S is recognized for tax purposes as a separate corporation. (2) S earned income from providing X-ray services to NA. (3) Respondent's allocation of income between NA and S under sec. 482, I.R.C. 1954, is upheld in part. (4) Income thus allocated is treated as dividends from NA to the physicians, as NA's shareholders.

P, a nonprofit corporation, received fees from the City of New York for managing eight apartment buildings owned by the city as a result of tax foreclosures. Held: P has failed to prove that it is organized and operated exclusively for charitable purposes under sec. 501(c)(3), I.R.C. 1954.

H and W were divorced in 1971. In 1977, both claimed dependency deductions for two of their children, who were in the custody of W. In that year, H furnished over $1,200 in support of each child. Held: W clearly established that she provided more for the support of such children than did H. Sec. 152(e)(2)(B), I.R.C. 1954.

Held: Petitioner's Federal Reserve Notes are to be taken into account for chapter 1 and chapter 2 tax purposes at their face amount, without any diminution on account of their value relative to that of gold.

Petitioner transferred a diamond engagement ring and a ring guard to G, a woman he was dating. About a week later G decided to terminate their relationship. Petitioner sued for the cost of the diamond engagement ring and the ring guard and was awarded a default judgment for the full amount in 1976. This judgment created an enforceable obligation on G to pay petitioner this amount. In 1977, petitioner obtained execution of this judgment, but it was returned nulla bona. Held: Petitioner has failed to prove that his debt became worthless in 1976, and so no deduction is allowable for 1976. Sec. 166(d)(1), I.R.C. 1954.

Respondent's notice of deficiency determined unreported income and imposed the sec. 6653(a), I.R.C. 1954, negligence addition. Held: amount of unreported income redetermined and imposition of addition sustained.

D died in 1905, bequeathing certain property in trust, the donee to be incorporated, to found and maintain a home for aged and infirm men. Held: Under the circumstances of these cases, the organization's private foundation status, if any, terminated before the transfers of assets to the heirs; no tax is imposed on the organization under section 4945, I.R.C. 1954; and so no transferee liability is imposed on the heirs.

Petitioners have failed to produce documents despite a specific order of this Court directing them to do so. Held, petitioners' failure constitutes a default under the circumstances of this case. Respondent's Motion to Impose Sanctions seeking a judgment for default under Rule 104(c)(3), Tax Court Rules of Practice and Procedure, is granted.

W incurred legal expenses related to a law suit in the total amount of $38,974.40. Of this amount, he paid $2,263.30 in 1968. Held: For the taxable year 1968, W is not entitled to a deduction for the legal expenses in excess of the amount paid during that year, i.e., $2,263.30.

Petitioner was a medical doctor who was licensed to practice in the State of Louisiana and who had graduated from the University of Santo Tomas, located in the Philippines. In 1977, several Philippine organizations sponsored conferences and invited petitioner to attend. Petitioner deducted $2,349 on his 1977 return for expenses allegedly incurred during his trip to attend such conferences. Held, pursuant to sec. 274(h), I.R.C. 1954, petitioner is not entitled to a deduction for expenses incurred in connection with the foreign conventions since he failed to satisfy the explicit requirements for deductibility imposed by the statute.

Held: Petitioner received a constructive dividend in 1970 when a corporation in which he was a shareholder paid for stock transferred by a retiring shareholder to petitioner's wife, as nominee for petitioner. Held further: Fire insurance proceeds which were payable to the corporation but were used by petitioners to purchase a savings certificate were not a constructive dividend. Held further: A partnership in which petitioner was a 50 percent partner was entitled to deduct the entire amount claimed as compensation paid to petitioner's sister-in-law. Held further: Petitioners are not liable for the sec. 6653(a) addition to the tax for their understatement of income in 1970 because they reasonably relied on the advice of their accountant, who had been furnished with necessary information, but they are liable for sec. 6653(a) additions to the tax for 1973 and 1974.

Held: Petitioner's wages and salary are income subject to taxation. Additions to tax are sustained.

Two physicians formed a professional corporation (A) to engage in orthopedic surgery. A, from its inception, owned and operated X-ray equipment. Shortly thereafter, the physicians formed a subchapter S corporation (S) and transferred the X-ray equipment from A to S. They gave the stock in S to their children. When a third physician later joined A, his children also received stock in S. Held: (1) S was a sham. (2) A earned the X-ray income and incurred the expenses. (3) Distributions from S to the children, S' nominal shareholders, are constructive dividends to the three physicians.

Held, respondent's determination upheld on the ground that P's farming activity was not an activity engaged in for profit pursuant to sec. 183. Held: respondent's determination upheld on the ground that P's farming activity was not an activity engaged in for profit pursuant to sec. 183.

On Dec. 15, 1975, petitioner purchased the United States and Canadian distribution rights to a motion picture. Held: Petitioner derived no income from the film in 1975 and, accordingly, is entitled to no depreciation deduction under sec. 167, I.R.C. 1954, with respect to it for that year under the income forecast method of computing depreciation.

Petitioner is a duly ordained minister in Louisiana. He was initially licensed as a local preacher on August 30, 1954. Held: petitioner signed and filed the Form 2031 and thereby made a knowing and irrevocable election to be covered by Title II of the Social Security Act. Accordingly, petitioner is liable for self-employment taxes for the years in issue.

Petitioner used his representative's address as his own for tax purposes. Held: the notice was not addressed to petitioner at his last known address. Sec. 6212(b)(1), I.R.C. 1954.

Held, petitioners' taxable income during 1976 was $29,789. Their legal and constitutional arguments to the contrary are frivolous and wholly without merit. Held: petitioners' taxable income during 1976 was $29,789. Their legal and constitutional arguments to the contrary are frivolous and wholly without merit. Held further, petitioners are liable for the addition to tax pursuant to sec. 6651(a), I.R.C. 1954, for 1976.

In 1970, petitioners purchased a home in New Orleans that had been built on a floating slab foundation in 1959. Held: the full extent of the damage, incurred as a result of the alleged casualty, was fixed and ascertainable in 1974. Accordingly, no casualty loss arising therefrom is deductible in 1975 or 1976.

Held: Respondent's determination that petitioner does not qualify as an organization exempt under sec. 501(c)(3) upheld. Held: Respondent's determination that petitioner does not qualify as an organization exempt under sec. 501(c)(3) upheld.

Petitioners' tax return was filed approximately two weeks after the due date, and the tax shown thereon was assessed and paid. Thereafter, an additional amount of tax and an addition to tax for fraud, under section 6653(b), I.R.C. 1954, were found to be due. Held, the addition to tax under section 6653(b), I.R.C. 1954, is computed on the basis of the total tax due, without reduction for the amount shown on the untimely return.

In his answer, respondent specifically alleged the facts upon which he determined the understatements of taxable income and fraud in the notice of deficiency. Petitioners failed to file a reply and respondent's motion that the facts alleged in his answer be deemed admitted under Rule 37, Tax Court Rules of Practice and Procedure, was granted. Petitioner, Charles L. Lewis, appeared pro se at the hearing on respondent's motion for summary judgment and orally objected to the motion, claiming that there were disputes as to the facts which he would prove if given the opportunity at a trial on the merits with respect to the underlying deficiencies. Held: 1. Respondent may rely on the allegations of fact in his answer deemed admitted to prove fraud and the underlying deficiencies. 2. In light of the allegations deemed admitted, there are no material facts in dispute and summary judgment is appropriate. 3. The allegations in respondent's answer which are deemed admitted are sufficient to prove both fraud and the underlying deficiencies and respondent's motion for summary judgment is granted.

Held, petitioners incurred a nondeductible expense for legal fees arising out of a defense against a libel action brought by a real estate agent as a result of a controversy over the purchase of a… Held: petitioners incurred a nondeductible expense for legal fees arising out of a defense against a libel action brought by a real estate agent as a result of a controversy over the purchase of a personal residence by them.

Petitioners have failed to produce documents and answer interrogatories despite a specific order of this Court directing them to do so. Held: petitioners' failure constitutes a default under the circumstances of these cases. Respondent's Motion to Impose Sanctions filed in each case is granted in that a judgment for default will be entered. Rule 104(c)(3), Tax Court Rules of Practice and Procedure.

Petitioner is a corporation in the business of real estate investment, management and development. Held: such payments constitute rental income and are correspondingly deductible as interest pursuant to sec. 163(a), I.R.C. 1954. In addition, pursuant to the lease, Mr. Hill paid $33,699.96 to the partnership in 1973 and $30,891.63 in 1974.

Petitioner has failed to produce documents and answer interrogatories despite a specific order of this Court directing her to do so. Held, petitioner's failure constitutes a default under the circumstances of this case. Respondent's Motion to Impose Sanctions seeking a judgment for default under Rule 104(c)(3), Tax Court Rules of Practice and Procedure, is granted.

Held, petitioners' dog breeding and showing activities were activities not engaged in for profit as defined by sec. 183, I.R.C. 1954. Held: petitioners' dog breeding and showing activities were activities not engaged in for profit as defined by sec. 183, I.R.C. 1954. Consequently, their losses from such activities are not deductible.

Held: (1) Funds obtained by the fraudulent assignment of nonexistent collateral is income to P; (2) farming activity not engaged in for profit; (3) sec. 6653(a) addition imposed. Held: Funds obtained by the fraudulent assignment of nonexistent collateral is income to P; (2) farming activity not engaged in for profit; (3) sec. 6653(a) addition imposed.

During 1977, decedent was employed as a pari-mutuel clerk at various racetracks in northern Ohio. He also was an habitual gambler who placed wagers almost daily in 1977. Held: decedent was in the separate trade or business of gambling in 1977. Accordingly, the gambling losses incurred by him and used to offset gambling winnings do not constitute items of tax preference. Ditunno v. Commissioner, 80 T.C. (Feb. 7, 1983), followed.

In 1977 petitioners became the managers of a retail grocery store. During that year, they took a trip to California and two trips to the San Juan Islands assertedly "to learn how to run a resort grocery store." They claimed deductions for the costs of the three trips as educational expenses. Held, the expenses incurred by petitioners were primarily of a personal nature, the business conversations being unscheduled with no definitive benefits, and therefore the expenses are not deductible by virtue of sec. 262, I.R.C. 1954.

V and I were consolidated in 1968. The Commissioner determined deficiencies against V for certain preconsolidation years and against I for certain postconsolidation years. Both V and I filed petitions in this Court. Thereafter, V filed a petition in bankruptcy and was adjudicated a bankrupt. The IRS filed a proof of claim in the bankruptcy proceeding including the deficiencies determined against V and I. The IRS claim was allowed in full. The determination of the bankruptcy court was not appealed and has become final. Held, the prior determination of the bankruptcy court effectively disposed of all of the issues in the Tax Court proceeding against V. Therefore, that case will be dismissed. Comas, Inc. v. Commissioner,23 T.C. 8 (1954), followed. Held, further, I is properly before this Court; since the parties have reached a basis of settlement in that case, the Court will enter a decision in accordance with their settlement.

Held: Petitioner is entitled to claim his father and mother as dependents for 1976 but not to use head of household rates. Held further: Deduction for work tools computed. Held: Petitioner is entitled to claim his father and mother as dependents for 1976 but not to use head of household rates. Held further: Deduction for work tools computed.

Held: Petitioner's 1978 filing status was married, filing separately; Held further: petitioner was not entitled to deductions for sales taxes, gasoline taxes, or business transportation expenses in excess of the amounts allowed by respondent; Held further: petitioner is not entitled to a current deduction for the replacement of a furnace or water heater on rental property; Held further: petitioner is not entitled to costs of litigation.

Held: P is liable for income tax for the years 1976, 1977 and 1978 of $809.06, $766.82 and $619.95, respectively. Held: P is liable for income tax for the years 1976, 1977 and 1978 of $809.06, $766.82 and $619.95, respectively. His constitutional arguments for relief are frivolous and wholly without merit. Held further: P is liable for the addition to tax pursuant to secs. 6651(a), 6653(a) and 6654 for these years.

Held, petitioner had taxable income during the years 1976, 1977 and 1978 of $15,949.68, $18,693.08 and $19,871.45, respectively. Held: petitioner had taxable income during the years 1976, 1977 and 1978 of $15,949.68, $18,693.08 and $19,871.45, respectively. His legal and constitutional arguments to the contrary are frivolous and wholly without merit.

Petitioner is a trial lawyer specializing in family law.During 1975 and 1976, he took numerous trips in connection with his profession. On his income tax returns for those years, petitioner deducted various amounts as "legal fees, travel expenses, entertainment, business promotion, finders fees, legal expenses and bar seminars." He also deducted $3,184 as a charitable contribution. Held, in many cases petitioner has failed to satisfy the rigorous substantiation requirements of sec. 274, I.R.C. 1954, and the deductible amounts are determined accordingly. In addition, petitioner has failed to carry his burden of proof with respect to the alleged charitable contribution and with respect to certain other business expenses. Held further, petitioner is liable for the addition to tax pursuant to sec. 6651(a) for the taxable year 1976. Held further, petitioner is liable for the additions to tax pursuant to sec. 6653(a) for the taxable years 1975 and 1976.

Petitioner filed a joint return with his former wife for the taxable year 1978. Respondent determined a deficiency based on an omission from gross income of amounts embezzled by petitioner's former wife. Held: Petitioner does not qualify as an innocent spouse under section 6013(e), so as to be relieved from liability for the deficiency, because he had reason to know of the omission. Held further: Petitioner is liable for an addition to tax under section 6653(a).

Held: Imposition of additions to tax for fraud upheld. Held: Imposition of additions to tax for fraud upheld.

Petitioner's husband died intestate in 1966. Upon his death, the community property of the couple passed to petitioner. She received an undivided one-half interest in the property, and ownership and possession of the usufruct (similar to a life estate) of the other undivided one-half interest.Subject to the usufruct, each of the four children received an undivided one-fourth interest in their father's share of the community property. The community property consisted for the most part of an 800-acre farm. Held, for the years in question, a family partnership did not exist for Federal income tax purposes. Petitioner's children were not the true owners of the capital interests that they were supposed to have contributed to the alleged partnership. Accordingly, petitioner is taxable on the farm income.

Held: Petitioner, a school for retarded children (an organization otherwise exempt from Federal income taxation under section 501(c)(3)),… Held: Petitioner, a school for retarded children (an organization otherwise exempt from Federal income taxation under section 501(c)(3)), received net unrelated business taxable income of $1,138.04 and $2,732 during the taxable years ending August 31, 1972 and 1973, respectively from the simultaneous purchases and sales of properties.

J corporation had 1,000 shares of common stock outstanding. Of the 1,000 shares, H owned 545 shares, H's wholly-owned corporation owned 175 shares, S's wife owned 90 shares, and S's sone owned 40 shares. On May 4, 1977, J corporation redeemed 30 shares of its stock from S's wife for $18,000. On the same day, H transferred 30 shares of his stock in J corporation to S or S's wife for $18,000. Held: J corporation's redemption of 30 shares of its stock for $18,000 and H's transfer of 30 shares of J corporation stock to S or S's wife for $18,000 were, in substance, a redemption of 30 shares of J corporation from H. Held, further: Such redemption was "essentially equivalent to a dividend" within the provisions of section 302(b)(1). United States v. Davis,397 U.S. 301 (1970).

Taxpayer (TP) was a fifty percent partner in a partnership (PS) which owned a medical office building. PS leased space in the building to various tenants including a hospital, doctors and dentists. Held: payments received for the performance of services are not payments on a sale of real or personal property within the meaning of section 453(b), I.R.C. 1954. Held,further, payments made by P for improvements completed after closing were for the provision of services.

Held: (1) Compensation for labor is taxable; (2) Federal Reserve Notes are to be taken into account at their face amount; (3) additions to tax are upheld; and (4) petitioners are not entitled to a… Held: Compensation for labor is taxable; (2) Federal Reserve Notes are to be taken into account at their face amount; (3) additions to tax are upheld; and (4) petitioners are not entitled to a jury trial in the Tax Court.

In January 1977, petitioner Albert J. Willinger began his own construction business. Held: The incorporation of the business was a disposition within the meaning of sec. 52(c), I.R.C. 1954; thus, petitioners are not entitled to a new jobs credit in 1977 based on the hiring of new employees to start the construction business. Sec. 1.52-2(a), Income Tax Regs.

Held: Petitioner's operation of a farm was not an activity engaged in for profit.

Held: Portion of basis allocable to improvements as of the time of acquisition of real property determined. Held: Portion of basis allocable to improvements as of the time of acquisition of real property determined. Held further: Respondent's disallowance of claimed business entertainment expense deduction sustained.

H entered into an arrangement with his closely held corporation, G, wherein he purchased property from G at a price which was less than its fair market value and borrowed money from a bank. Held: H is not entitled to a deduction on the disposition of stock in G since he failed to prove that he sustained a loss on such disposition. (2) H realized a constructive dividend in 1971 by reason of his purchase of property from G at a price which was less than its fair market value.

A trust, of which petitioners were trustees but not beneficiaries, transferred a parcel of real estate to a subchapter S corporation wholly owned by H, for no proven consideration. Held: H's basis in his stock in the subchapter S corporation was not increased by the value of the property transferred to the corportion by the trust, and H's deduction for the net operating loss of the subchapter S corporation is limited to his basis in the stock. Sec. 1374, I.R.C. 1954.

Held: W has failed to meet his burden of proving that he did not purchase individually or with an associate an option to purchase stock of a corporation, a mortgage and note, and certain contractual… Held: W has failed to meet his burden of proving that he did not purchase individually or with an associate an option to purchase stock of a corporation, a mortgage and note, and certain contractual relationships and agreements. The option was permitted to expire.

Held, value of restricted stock determined for estate tax purposes. Held: value of restricted stock determined for estate tax purposes.

P, the owner of a large, master-planned industrial park, leased most of its buildings to industrial tenants on a net, net, net basis. Held: Respondent's determination of useful lives of building shells sustained. Held further: P is not entitled to depreciation deductions respecting the entire cost of certain components over their physical useful lives, but rather over a longer period as contended by respondent. Held further: Useful lives of other components determined.

Held: The petition in this case was received within the time period prescribed by I.R.C. sec. 6213(a) since the private postmark date qualifies under I.R.C. sec. 7502(b) as the date of filing. Held: The petition in this case was received within the time period prescribed by I.R.C. sec. 6213(a) since the private postmark date qualifies under I.R.C. sec. 7502(b) as the date of filing.

Held, P could not deduct payments for a flight training coursae that were reimbursed by the Veterans Administration. Held: P could not deduct payments for a flight training coursae that were reimbursed by the Veterans Administration.

During the years 1969 through 1972, P, an attorney, cashed many of the checks sent to him by insurance companies in settlement of the claims… Held: the Commissioner's determination of deficiencies for 1969, 1970, 1971, and 1972, as modified herein, are sustained. Held, further, P is liable for the addition to tax under sec. 6653(b), I.R.C. 1954, for fraud for each year.Held, further, the statute of limitations does not bar the assessment and collection of the deficiencies.

P, an employee of C, exercised two options to purchase C stock which had been granted to him pursuant to a qualified stock option plan. Held: for purposes of the minimum tax, the restrictions imposed upon the transferability of P's stock must be considered in determining its fair market value. Gresham v. Commissioner,79 T.C. 322 (1982), on appeal (10th Cir., Jan. 24, 1983), followed.

Held: Deduction for automobile travel on job hunting trips disallowed for failure to substantiate under I.R.C. sec. 274(d). Held further: Amounts deductible for tools and work clothing determined.

Held: the fair market value of real property subject to a nonrecourse indebtedness which a partnership contributed to a charitable organization in 1973 determined. Held: the fair market value of real property subject to a nonrecourse indebtedness which a partnership contributed to a charitable organization in 1973 determined.

Held: P's motion for leave to file reply out of time is denied. Held: P's motion for leave to file reply out of time is denied. Held further: R's motion for summary judgment as to deficiencies and additions to the tax, based on facts deemed admitted under Rule 37(c), is granted.

1. In March 1976, Expo delivered $155,000 to Miljac, a related corporation. Miljac used the funds to purchase chemicals that it intended to sell to Expo for export. Market conditions changed, and Miljac eventually sold the chemicals domestically and returned the deposit to Expo. Expo reported the deposit on Schedule L of its Form 1120-DISC as a qualified export asset. Held, such deposit did not constitute a qualified export asset within the meaning of sec. 993(b), I.R.C. 1954. 2. In August 1976, Expo delivered $155,000 to Cemco, its parent corporation. Cemco was to use the money as a security deposit in guaranteeing purchases made by Expo. The deposit was to be held by Cemco for a period of not less than 3 years, and Cemco was to pay interest of 5 percent per annum. Expo reported the deposit on Schedule L of its Form 1120-DISC as a qualified export asset. Held, such deposit did not constitute a qualified export asset within the meaning of sec. 993(b), I.R.C. 1954. 3. Because Expo's deposits with Miljac and Cemco were not qualified export assets, less than 95 percent of the adjusted basis of Expo's assets were qualified export assets as of March 31, 1976 and as of March 31, 1977, and Expo therefore failed to qualify as a DISC for those years.

On the 90th day after respondent mailed the notice of deficiency, P placed his petition in the hands of a private air express service, which hand-delivered it to the Court on the 91st day. Respondent did not move to dismiss the petition but answered it, denying P's assignments of error and most of his allegations of fact. The case was subsequently tried and briefed on the merits by the parties. Shortly thereafter the Court noticed that the petition may not have been timely filed. Accordingly, the parties were ordered to show cause why the case should not be dismissed for lack of jurisdiction. Held, the Court can and should at any time, on its own motion, question its jurisdiction to hear and decide a case. Held further, the period of time in which a taxpayer must file a petition with the Court begins to run from the date on which the notice of deficiency is mailed by the Commissioner and not from the date on which it is received by the taxpayer. Sec. 6213(a), I.R.C. 1954. Held further, the timely-mailing/timely-filing provisions of section 7502, I.R.C. 1954, do not apply where the taxpayer places the petition in the hands of a private air express service for delivery to the Court. Blank v. Commissioner,76 T.C. 400 (1981), followed. Held further, the petition was not timely filed and must therefore be dismissed for lack of jurisdiction.

Held, the fair market value of section 631(a) timber determined as of June 1, 1973. Held: the fair market value of section 631(a) timber determined as of June 1, 1973.

Held, taxpayer, surviving spouse of decedent, is not entitled to deduct amounts paid by her in settlement of a claim for back alimony brought against taxpayer, as executrix of… Held: taxpayer, surviving spouse of decedent, is not entitled to deduct amounts paid by her in settlement of a claim for back alimony brought against taxpayer, as executrix of decedent's estate, by decedent's former wife, and for attorney's fees incurred by her in defending against such claim.