Volume 53 — Tax Court Memorandum

Petitioner sold his interest in an accounting partnership to his partner for $250,000. Held: The $200,000 was to be paid for a covenant not to compete and payments with respect thereto were taxable as ordinary income to petitioner.

Petitioner mined coal for a dollar amount per ton under a mining agreement with the owner of the coal in place. Held: Petitioner had no economic interest in the coal and was not entitled to a deduction for depletion.

P (wife) seeks a summary adjudication that she is an innocent spouse within the meaning of section 6013(e). Held: there are genuine issues of material fact in controversy and, accordingly, this matter is not appropriate for summary judgment. P's motion is denied.

During 1965, petitioner-husband received in a corporate reorganization all the preferred stock of a construction company. Held: Neither petitioner-husband's stock nor any debts of the corporation to petitioners became worthless during any of the years before the Court (1965 through 1974), and so no loss or bad debt deductions are allowable. Secs. 165(g) and 166(d), I.R.C. 1954.

Held: Charitable contribution deductions disallowed. Held further, petitioners were negligent and disregarded rules and regulations in connection with claimed charitable contributions. Held further, damages awarded to the United States in the amount of $5,000.

Held: Petitioner established that the use of his fishing boat was primarily for business purposes. Held: Petitioner established that the use of his fishing boat was primarily for business purposes. Held further, petitioner is entitled to a deduction for certain expenses incurred in connection with the use of the boat and to depreciation deduction and investment tax credit.

Ps' business involved developing and marketing devices for slimming and shaping the human body and operating health salons. Held: corporate Ps did not accumulate their earnings and profits beyond the reasonable needs of their business, and therefore, are not liable for the accumulated earnings tax. Held further, the use of the Excalibur Roadster is not dividend income to Jack and Eileen.

Held: Petitioners Davis, not petitioner Southeastern Mail Transport, Inc., purchased during 1977 12 tractors; petitioner, Southeastern Mail… Held: Petitioners Davis, not petitioner Southeastern Mail Transport, Inc., purchased during 1977 12 tractors; petitioner, Southeastern Mail Transport, Inc., is not entitled to investment tax credits on tractors purchased and resold and is taxable on gain from such sales; petitioners are not entitled to include in the basis of certain…

P filed a Chapter 7 petition in bankruptcy. One of the assets included in the bankruptcy proceedings was a parcel of rental property owned by P and her then-husband (W). P and W paid the trustee in bankruptcy $9,000 in exchange for title to the property. Held, the exchange of $9,000 to the trustee in bankruptcy for title was a sale and therefore a nondeductible capital expenditure. Section 263, I.R.C. 1954. Held further, P is not entitled to a "sweat equity" deduction. Held further, P may not compute her depreciation deduction for the property according to her pre-bankruptcy basis.

Ps directed their stockbroker on Feb. 12, 1980, to transfer stock to their church. Such transfer was effected on the books of the stockbroker on Feb. 25, 1980. Ps received no consideration for such transfer. Ps established a family trust using materials purchased from the promoters of family trust plans. Ps relied entirely on the representations of such promoters regarding the suitability of family trusts and, despite questions, did not obtain advice of an independent expert regarding such trusts. Held: (1) Ps' gift of stock to their church was complete on the date the stock was transferred on the books of the stockbroker; the stock is to be valued as of such date in determining the amount of Ps' charitable contribution. (2) Under the circumstances, Ps' failure to consult independent experts regarding their family trust was unreasonable; addition to tax for negligence sustained. (3) Ps are not entitled to itemized deductions in excess of amounts allowed by the Commissioner. (4) Ps are not entitled to deductions for business expenses. (5) Ps are liable for the addition to tax for failure to file a valid tax return for 1980. (6) Ps are liable for the addition to tax for underpayment of estimated taxes for 1980.

By 1980, a decorating business was commenced in the name of P, and on the returns filed by him and his wife for 1980 and 1981, he reported income and expenses of the business, showing a loss for each… Held: P failed to prove that he was not the owner of the business.

Held: Respondent's determination sustained in the absence of evidence showing it to be incorrect. Rule 142(a).

In 1972, P, the majority shareholder in L Corp., exchanged all of his shares in L Corp. for shares in D Corp. After such exchange, an account receivable due from P to L Corp. was carried over on the… Held: The writeoff by D Corp. resulted in cancellation of the debt represented by P's account and resulted in income to P. (2) P is not liable for the addition to tax for negligence under sec. 6653(a), I.R.C. 1954.

Held: Respondent's determinations of the amount of depreciation petitioner must recapture on the sale of certain assets and the amount petitioner received for an agreement not to compete sustained. Held: Respondent's determinations of the amount of depreciation petitioner must recapture on the sale of certain assets and the amount petitioner received for an agreement not to compete sustained.

Held: Basis for computing gain or loss on certain sales of stock determined; loss for alleged worthlessness of shares of stock denied; negligence addition sustained; innocent spouse status determined. Held: Basis for computing gain or loss on certain sales of stock determined; loss for alleged worthlessness of shares of stock denied; negligence addition sustained; innocent spouse status determined.

Held: Proceeds from sale of gravel taxed as ordinary income not capital gains and entire proceeds includible in petitioners' income. Held: Proceeds from sale of gravel taxed as ordinary income not capital gains and entire proceeds includible in petitioners' income.

Held, P's deductions of his wages are disallowed. Held further, P's arguments are frivolous and damages are awarded in addition to deficiencies in income tax and additions to tax. Held: P's deductions of his wages are disallowed. Held further, P's arguments are frivolous and damages are awarded in addition to deficiencies in income tax and additions to tax. Section 6673, I.R.C. 1954.

Held: Wages earned after vows of poverty are taxable to petitioners. Negligence addition sustained and damages under sec. 6673 awarded. Held: Wages earned after vows of poverty are taxable to petitioners. Negligence addition sustained and damages under sec. 6673 awarded.

P was a resident of the Republic of Panama whose earned income was from sources outside the United States. Held: the amounts credited to P's loan account pursuant to the 1973 settlement were exempt income under sec. 911, I.R.C. 1954.

Held: No part of compensation for services as intern-resident is subject to section 117(a) exclusion. Held: No part of compensation for services as intern-resident is subject to section 117(a) exclusion.

Held: Cost of goods sold determined for each year in issue. Held: Cost of goods sold determined for each year in issue.

J entered into a sale-leaseback transaction with P-R, L-B and J&P, related corporations, involving collapsible containers for the transportation of plants. Held: the transaction lacked business purpose and economic substance. Rice's Toyota World, Inc. v. Commissioner,752 F.2d 89 (4th Cir. 1985), affg. and revg. 81 T.C. 184 (1983). Held further, substantial underpayment attributable to tax motivated transaction determined. Sec. 6621(c), I.R.C. 1986, applies.

Petitioner-husband was the sole limited partner of a limited partnership formed to purchase and exploit a made-for-television movie musical entitled It's A Bird, It's A Plane . . . It's Superman. Held: the statute of limitations does not bar the assessment or collection of any deficiency determined, based upon agreements to extend the time for assessment. Sec. 6501(c)(4), I.R.C. 1954.

P devoted his full time to the management of the extensive investments owned by him and his family. Held: the management of investments is not a trade or business for such purposes.

Ps purchased certain ranch property in 1979 from S. Ps and S reported on their respective tax returns inconsistent allocations of the purchase price among depreciable and nondepreciable components of… Held: Ps' Motion to Compel is denied since the information sought is not relevant to a determination of Ps' Federal income tax liability. Held further, that despite the fact that R has taken inconsistent positions, Ps have the burden of proof.

R determined deficiencies against a trust, directing the notices of deficiency to the trustee (T). Held: the trust as a nonexistent party cannot litigate before this Court. Thus, neither T nor B can file a petition on behalf of the trust. Held further, that B cannot file a petition in her individual capacity since no notice of deficiency or notice of liability was issued to her.

Held: (1) The Commissioner's determination of deficiencies for 1978, 1979, and 1980 through means of net worth computations is sustained, as modified herein. Held: The Commissioner's determination of deficiencies for 1978, 1979, and 1980 through means of net worth computations is sustained, as modified herein. (2) P is not liable for the addition to tax for fraud under sec. 6653(b), I.R.C. 1954.

M sued her husband R for divorce and obtained an order awarding her alimony pendente lite. R's appeal automatically stayed execution of the order. Held: the order for alimony pendente lite, although stayed, remained effective for purposes of sections 71 and 215, I.R.C. 1954, and R's support payments to M made while they were living separately were alimony.

Petitioner did not file forms purporting to be Federal income tax returns for the years 1975 through 1977 until October, 1980. He was criminally convicted under section 7203, I.R.C. 1954, for willfully failing to file returns for the years in issue. Petitioner is an attorney with extensive work experience in the area of criminal tax fraud. He made a misleading statement to respondent's agents during the course of their investigation. He also did not cooperate with respondent's agents during their investigation. Held, respondent met his burden of proving fraud by clear and convincing evidence for the years 1975 through 1977. Accordingly, petitioner is liable for the addition to tax under section 6653(b), I.R.C. 1954, for each of the years in issue.

Ps filed their 1979 Federal income tax return showing an address of Tempe, Arizona. Ps' 1983 Federal income tax return was filed reflecting an address of Las Vegas, Nevada. Held: R exercised reasonable care and diligence in mailing the notice of deficiency to the address reflected on Ps' most recently filed return. Held further, R's Motion to Dismiss for Lack of Jurisdiction is granted since a timely petition was not filed. Held further, Ps' Motion to Dismiss is denied.

Held: Petitioners James J. and Betty Ward's charter boat activity was not engaged in for profit. Held: Petitioners James J. and Betty Ward's charter boat activity was not engaged in for profit. Held further, petitioners James J. and Betty Ward are not entitled to an investment tax credit with respect to their charter boat.

S, a partnership, rented construction equipment to CC and CT on an as needed basis, and they paid rent to S for the actual use. S purchased the equipment needed by CC and CT. Held: The parties to the lease realistically contemplated a lease of indefinite duration. The equipment was not leased for less than 50 percent of its useful life, and therefore, P does not qualify for the investment tax credit within the meaning of sec. 46(e)(3)(B), I.R.C. 1954.

Mr. Bujol was employed on an oil rig off the coast of the United Arab Emirates. Mr. Bujol's work schedule consisted of a 28-day work period followed by a 28-day rest period. Held: Mr. Bujol's abode remained at his residence in Louisiana; consequently, Mr. Bujol did not have a tax home in a foreign country for purposes of sec. 911.

R issued a final adverse determination letter to P denying the organization tax exempt status under section 501(c)(3). Held: under section 7428, a petition in response to an adverse determination must be filed within 90 days to be considered timely. Held further, since the petition was filed beyond the 90th day after issuance of the adverse determination letter, R's Motion to Dismiss for Lack of Jurisdiction is granted.

Held, the affirmative allegations in R's answer were deemed admitted under Rule 37(c), Tax Court Rules of Practice and Procedure. Held: the affirmative allegations in R's answer were deemed admitted under Rule 37(c), Tax Court Rules of Practice and Procedure. Such allegations deemed admitted are sufficient to sustain deficiencies for the taxable years 1980 and 1981 against petitioner.

Petitioner was employed on an offshore oil rig located in foreign waters. As a result of his employment on the rig, petitioner spent a total of 410 days outside the United States during 1980 and 1981. Held, petitioner was not physically present in a foreign country for 510 full days during a period of 18 consecutive months and is therefore ineligible for the foreign earned income exclusion pursuant to sec. 911(a)(2).

Petitioner was employed on offshore oil rigs located in foreign waters. As a result of his employment on the rigs, petitioner spent a total of 157 days outside the United States during 1983. Held: petitioner was not physically present in a foreign country for 330 full days during a period of 12 consecutive months and is therefore ineligible for the foreign earned income exclusion pursuant to sec. 911(a)(1).

Held: Petitioner made a donation to a church of part of the proceeds of the sale of his property, not a donation of a fractional equity interest in the property as such, and is entitled to a… Held: Petitioner made a donation to a church of part of the proceeds of the sale of his property, not a donation of a fractional equity interest in the property as such, and is entitled to a deduction only for the cash contribution.

Respondent received an unsigned and unverified Form 1040 that purported to be the joint 1980 Federal income tax return of petitioner and her former husband. Held: the purported return is not a valid Federal income tax return. Held further, petitioner therefore received unreported income in 1980. Held further, petitioner is liable for additions to tax pursuant to secs. 6651(a)(1) and 6653(a), I.R.C. 1954.

Petitioners established a local chapter of the Universal Life Church, Inc. Bank accounts were opened in the local chapter's name, and amounts were withdrawn from accounts to pay for petitioners'… Held: petitioners are not entitled to charitable deductions for amounts contributed to their local chapter of the Universal Life Church, Inc.Held further, petitioners are not entitled to deduct living expenses purportedly incurred while away from home.

Respondent made a series of determinations with respect to real estate transactions that were engaged in by petitioner A and various… Held: the income from the sales of ownership interests in apartment building FW during 1973 and 1974 is attributable to petitioner-corporation AVL; (2) the income from the sales of ownership interests in apartment building CC during 1973 and 1974 is attributable to partnership WY; (3) the income from the sales of ownership interests in…

Petitioners and M entered into a written agreement whereby M agreed to leave her residence and certain furnishings to petitioners in her will, provided they would live with her and perform certain… Held: The fair market value of the residence and furnishings is taxable to petitioners in the year of decedent's death as compensation for services rendered under sec. 61, I.R.C. 1954.

Ps established a trust in 1978 to provide for the college education of their children. Ps contributed $20,000 of savings certificates and $80,000 borrowed from a bank to the trust. Ps then borrowed $80,000 from the trust to repay their bank loan, and gave two $40,000 promissory notes to the trust. The notes did not provide for payment of principal until four months after termination of the trust on February 7, 1989. Held, the substance of the series of transactions in connection with the creation of the trust was the transfer by petitioners of their notes to the trust without consideration. Since no valid indebtedness was created, subsequent "interest" payments are not deductible under section 163(a), I.R.C. 1954.

Held, allegations deemed admitted under Rule 90(c) were sufficient to satisfy R's burden of proving fraud under section 6653(b). Marshall v. Commissioner,85 T.C. 267 (1985), followed.

Petitioners-husbands were limited partners of a limited partnership formed to purchase and distribute motion pictures. Held: the activities of the partnership lack economic substance, and respondent properly has disallowed petitioners' reported losses, deductions and credits with respect to their partnership interests. Rose v. Commissioner,88 T.C. 386 (1987).

Petitioners did not file income tax returns for 1977 through 1981 but had income taxes withheld from their wages. Held: In computing the amounts of the underpayments to which the percentage additions to tax are to be applied, petitioners' tax liabilities may not be reduced by the income taxes withheld from their wages.

Held, Real property owned by a decedent who died in 1980 failed to qualify for special use valuation under sec. 2032A, I.R.C. 1954, because the estate tax return in which the election was made was… Held: Real property owned by a decedent who died in 1980 failed to qualify for special use valuation under sec. 2032A, I.R.C. 1954, because the estate tax return in which the election was made was not timely filed.

Petitioners, in consideration for property, promised to provide a residence to A and B for the rest of A and B's lives. Held: the transaction was a lease with an advance rental payment in the form of property. Held further, petitioners' basis in such property for the purpose of determining gain on subsequent disposition is the fair market value of the property as of the date of acquisition. Held further, fair market value determined.

Held, P failed to prove that he was entitled to deductions in excess of the zero bracket amount. Held: P failed to prove that he was entitled to deductions in excess of the zero bracket amount.

Held, P, a supervisor of ironworkers on the construction of a nuclear plant, was not away from home within the meaning of sec. 162(a), I.R.C. 1954. Held: P, a supervisor of ironworkers on the construction of a nuclear plant, was not away from home within the meaning of sec. 162(a), I.R.C. 1954.

During 1981 and 1982, Ps were employed and filed joint Federal income tax returns but they claimed that their wages were not taxable because they were payable in Federal Reserve… Held: The wages are taxable income. (2) Ps are liable for addition to tax under sec. 6653(a)(1) and (2), I.R.C. 1954, for negligence or intentional disregard of rules and regulations. (3) Ps did not engage in the horse-breeding activities with the actual and honest objective of making a profit.

Ps operated a dental practice through two corporations owned by them. P Corp. provided dental care to patients. Held: S Corp. was formed for a valid business purpose and engaged in business activity. Therefore, S Corp. is entitled to recognition for Federal income tax purposes. (2) Deficiency determined with respect to Ps' dental practice is redetermined.

Held: Decedent's activities with respect to the operation of her two farms did not constitute material participation within the meaning of section… Held: Decedent's activities with respect to the operation of her two farms did not constitute material participation within the meaning of section 2032A(b)(1)(C)(ii), I.R.C. 1954. Accordingly, petitioner's election of special use valuation for the farms is disallowed. Estate of Coon v. Commissioner,81 T.C. 602 (1983), followed.

Held, fair market value of certain real estate on the date of its gift to a municipality determined.

A petition for declaratory judgment under section 7476 was received and filed on the 98th day after R mailed a final adverse determination letter. The envelope in which the petition was contained was not postmarked. Held, R's Motion to Dismiss for Lack of Jurisdiction granted; P failed to prove that the petition was timely mailed.

Held: Respondent's Motion to Dismiss for Lack of Jurisdiction granted. Held: Respondent's Motion to Dismiss for Lack of Jurisdiction granted.

Petitioner's records were seized from and returned to their accountant's offices in an independent investigation by respondent's agents, but have since been lost. Held: petitioners' deductions disallowed, as they have not met their burden of proof.

From 1973 until 1979, petitioner was a vice-president of Medfield Corporation. In 1976 and 1977, petitioner was granted options to purchase Medfield stock. Petitioner exercised these options in 1979 after Medfield's merger with National Medical Enterprises, Inc., but prior to termination of her employment. Held: The options were not exercised in a timely manner under sec. 251(c) of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 259. Therefore the options do not qualify as incentive stock options under sec. 422A and ordinary income must be recognized in 1979.

Held: With one exception, neither party has satisfied burden of proof with respect to the useful lives of various components of five housing… Held: With one exception, neither party has satisfied burden of proof with respect to the useful lives of various components of five housing projects, therefore, useful lives assigned in respondent's statutory notice are sustained; held further, investor services fee paid to general partner is a currently deductible expense of the…

P, who was a coach with the Atlanta Braves baseball team in 1980 and 1981, maintained his residency in Albany, Georgia, during such years and claimed deductions for his expenses of living in Atlanta and traveling to and from Atlanta. Held, P may not deduct such expenses since he was not away from home within the meaning of sec. 162(a)(2), I.R.C. 1954.

Ps had in several farms -- in one as the owner and in several as a partner. The farms were located on real estate which had been improved by the installation of subsurface drainage systems. Held: amounts allocable to subsurface drainage systems determined.

Held: The benefits and burdens of ownership of units of cattle did not pass to petitioners in the year of purported acquisition. Held: The benefits and burdens of ownership of units of cattle did not pass to petitioners in the year of purported acquisition. Held further, alleged indebtedness was not genuine since neither debtor nor creditor intended it to be paid.

In 1974 petitioners formed a corporation that issued stock to them based on a written plan. The corporation issued stock in exchange for $ 50,000. Held: the stock does not qualify as section 1244 stock.

Petitioners prevailed in the Memorandum Findings of Fact and Opinion reported as T.C. Memo. 1986-529 and now claim an award of litigation costs under sec. 7430,… Held: Petitioners exhausted the available administrative remedies within the Internal Revenue Service; the Government's position in the case was unreasonable; petitioners are entitled to recover reasonable costs of litigation including the costs of litigating their motion for the recovery of their litigation costs.