Volume 55 — Tax Court Memorandum

(1) P and his wife owned several motels during the years in issue. They operated some motels themselves and leased others to T, a corporation owned by them. Held: Ps received constructive dividends from T equal to the fair rental value of the apartment furnished to them by T. Held, further, the Commissioner's determinations with respect to numerous items of income redetermined.

Held: Petitioner failed to prove that the taxable estate does not include the value of bearer notes purchased by decedent before his death; held further, petitioner is not entitled to a deduction for… Held: Petitioner failed to prove that the taxable estate does not include the value of bearer notes purchased by decedent before his death; held further, petitioner is not entitled to a deduction for payments in settlement of claims of beneficiary of testamentary trust.

Held: Losses from commodity futures trading by a trader, as distinguished from a dealer, are capital losses. Held: Losses from commodity futures trading by a trader, as distinguished from a dealer, are capital losses.

Held: As petitioner Church was operated for other than exempt purposes, it is not an organization described in section 501(c)(3) and not exempt from taxation.

A and B, physicians, were on the staff of H, a hospital. A and B frequently ate in H's cafeteria where, as staff physicians, they exercised their privilege to charge the cost of their meals. Held: A and B may not exclude M's monthly meal bill payments from their income under sec 119, I.R.C. 1954. (2) M may not deduct its monthly meal bill payments. (3) M's monthly meal payments are dividends to A and B.

In March 1982, P filed his Federal income tax returns for 1975 and 1976. In July 1982, the Commissioner issued a notice of deficiency with respect to such years. Held: the Commissioner's determinations with respect to deficiencies and additions to tax are sustained. Held, further, the statute of limitations does not bar the assessment and collection of such deficiencies and additions to tax.

R made affirmative allegations in his Answer to support fraud under section 6653(b). P's Reply and Amended Response failed to expressly admit or deny many of R's affirmative allegations. Held: under Rule 37(c) the affirmative allegations set forth in R's Answer not expressly admitted or denied in the Reply or Amended Response are deemed admitted.

P filed multiple returns under different names and different Social Security numbers and claimed exemptions to which he was not entitled, thereby claiming larger refunds than he was due for each of the years in issue. Held, R has sustained his burden of proving fraud. Held further, no statute of limitations bars assessment or collection of tax in this case. Section 6501(c)(1), I.R.C.Held further, P is liable for additions to tax under section 6653(b), I.R.C.

L was a medical doctor who purchased a model 6.9 Mercedes-Benz in 1977 for transportation in connection with his medical practice. Held: Ps are not entitled to deduct the costs of L's commute between his residence and places where he conducted his medical practice.

P was a shareholder of CVI and wished to obtain control of the corporation. Held: the redemption did not constitute a constructive dividend to P because P did not incur a primary personal obligation to purchase the stock. Held further, P failed to report $ 3,570 in commission income in 1981. Held further, P is liable for additions to tax as set forth in R's notice of deficiency.

Petitioner H and respondent entered into an oral agreement, confirmed in writing by petitioner H's counsel, settling all issues pertaining to petitioners' Federal income tax liabilities for the years… Held: Decision will be entered in accordance with the parties' original settlement.

Petitioner was a shareholder in a small business corporation that was a partner in a joint venture with a partnership in which petitioner was a general partner. Held: real property held by the joint venture was held for sale to customers in the ordinary course of business; its sale gives rise to ordinary income.

During the trial allegations of misconduct and violations of Court orders were made against R's counsel and R's revenue agent. Held: The behavior of R's revenue agent demonstrated bias which warrants disregarding his testimony except to the extent it is relied upon by P. The testimony of a witness not disclosed prior to trial is stricken. Other requested relief is denied.

Petitioner-husband, in a purported "sale" transaction, allegedly acquired part of a community antenna television system. Held, petitioners are not entitled to the losses and investment credit that they claimed with respect to the system. Held further, petitioners are liable for increased interest as determined under sec. 6621(c), I.R.C. 1954.

Held, Ps' Universal Life Church-related payments disallowed as charitable contributions. Held: Ps' Universal Life Church-related payments disallowed as charitable contributions. Held further, various additions to tax determined; damages awarded to the United States under I.R.C. section 6673.

P filed her 1982 individual Federal income tax return under the name of Susan L. Taylor. Held: that after R became aware that P no longer resided at the South Home address, he was required to exercise reasonable diligence to ascertain P's last known address. Held further that R failed to establish that he made a reasonably diligent effort to ascertain P's last known address.

Held: Value of facade donation decided.

With respect to petitioner's 1976 and 1977 joint Federal income tax returns, there were underpayments of tax required to be shown on the returns, and all or part of these underpayments were due to fraud. On April 11, 1983, and April 18, 1986, respondent assessed additions to petitioners' Federal income taxes for 1976 and 1977, respectively, pursuant to sec. 6651(a)(1), (a)(2), I.R.C. 1954. On or before November 30, 1987, respondent abated these additions to tax. By notice of deficiency dated April 9, 1986, respondent determined that petitioners were liable for an addition to tax pursuant to sec. 6653(b), I.R.C. 1954, for each of the calendar years 1976 and 1977. Held, petitioners are liable for an addition to tax pursuant to sec. 6653(b), I.R.C. 1954, for each of the years in issue as determined by respondent.

Petitioner made donations to a congregation of the Universal Life Church. Petitioner was not a minister or director of such congregation. Held: Petitioner has not proven that the congregation is an organization to which charitable contributions as defined in section 170(c) may be made. Held further, the value of other donations determined. Heard further, petitioner is not liable for additions to tax under section 6653(a)(1) and (2).

Petitioner terminated 66-2/3 percent of its workforce in 1982. Held: the trust did not constitute a qualified trust under section 401(a), I.R.C. 1954, for plan years beginning on or after May 1, 1982.

Ps, individual investors, each invested in 1981 as partners in separate partnerships which were formed to exploit master sound recordings leased K as part of a program promoted by K. During settlement negotiations, respondent refused to offer Ps a deduction for 100 percent of their out-of-pocket expenses in relation to their 1981 investment in the K program, an offer which respondent previously extended to all 1979 and 1980 investors in the K program and extended to various other 1981 investors at the administrative stage. Held, the partnerships were "generic tax shelters" whose activities lacked economic substance, and respondent properly disallowed the deduction of Ps' distributive shares of their respective partnerships' lossses, deductions and investment tax credits. Rose v. Commissioner,88 T.C. 386 (1987). Held further, respondent did not violate Ps' constitutional rights under the equal protection component of the Fifth Amendment due process clause by refusing to offer Ps the same settlement proposal for 1981 that was previously extended to other investors in the K program for 1981 or prior years. Held further, (1) Ps are liable for additions to tax pursuant to sections 6653(a)(1) and (a)(2), I.R.C. 1954. (2) Ps are liable for the addition to tax pursuant to section 6659, I.R.C. 1954. (3) Ps are liable for the increased rate of interest provided in section 6621(c), I.R.C. 1986.

Petitioner, a regulated savings and loan institution, simultaneously sold and purchased loan participations in a three-cornered transaction with two other unrelated savings and loan institutions. Held: petitioner realized and may recognize losses on the transaction. Cottage Savings Assoc. v. Commissioner, 90 T.C. (Mar. 14, 1988), and Federal National Mortgage Assoc. v. Commissioner, 90 T.C. (Mar. 14, 1988), followed.

Machines which petitioners thought they were purchasing under installment sales contracts did not exist. Held: transactions were factual shams, investment tax credits, depreciation and expenses not allowable. Held further, petitioners are not liable for negligence additions. Held further, petitioners are not subject to section 6659 additions. Todd v. Commissioner,89 T.C. 912 (1987). Held further,section 6621(c) addition sustained.

Petitioner, in investing in a master video recording shelter, relied upon its promoters for advice concerning the tax consequences of his investment. Held: petitioner's reliance upon the promoters' advice was not reasonable, and petitioner is liable for an addition to tax for negligence pursuant to section 6653(a).

P, a sublessee in coal mining property, agreed to pay S (sublessor) a minimum annual royalty, payable out of the proceeds of coal production. Held: P is not entitled to a deduction for advanced minimum royalty payments under section 1.612-3(b)(3), Income Tax Regs., because his liability for payments is contingent, and he bears no real risk of loss. Held further, P is not liable for additional interest under section 6621(c).

Stock owned by P became worthless during the year, but P kept few, if any, records with respect to capital contributions to corporations controlled by her. Held: P has established her entitlement to a loss on worthless stock. Held further: P's basis determined by making an approximation thereof. P also reported NOL and ITC carryforwards on her tax return, much of which were not usable because P's reported income was zero.

Ps made contributions to a research fund maintained by EACB, a corporation formed to develop, produce, and market a motor vehicle powered by electricity. Held: Ps' contributions to the research fund for research and development were not made in connection with a trade or business within the meaning of sec. 174(a), I.R.C. 1954, and therefore are not deductible under such section.

Decendent died in 1981, owning farmland. Held: petitioner may not claim Special Use Values for the farmland. In valuing the estate, petitioner deducted the full amount of decedent's indebtedness to the Federal Land Bank, even though decedent owned stock in the bank that otherwise reduced that indebtedness, at retirement, but the full face value of the stock.

P earned wages and other income in 1980 through 1982. P claimed that because such income was received in the form of Federal Reserve Notes, he was not taxable on such income. Held: P is liable for the deficiencies in, and additions to, tax determined by the Commissioner; held, further, P is liable for damages under sec. 6673, I.R.C. 1954, for instituting and maintaining a frivolous proceeding.

In 1979, pursuant to subpoena, P appeared as a witness before a New York State grand jury investigating the business practices of a hospital, an institution for which P had provided plumbing an heating services. P's books and records and other financial materials had been subpoenaed previously by the grand jury. Before the grand jury was discharged, the New York State Special Prosecutor's office sent a letter to the Criminal Intelligence Division, Internal Revenue Service, informing respondent that P had underreported his income for taxable years 1973, 1975 investigation of P's income tax liabilities for taxable years 1976 and 1977 and obtained information pursuant to subpoenas, court enforced summons proceedings and third-Party contacts. The results of this investigation were subsequently forwarded to the Examination Division. Separate notices of deficiency were issued on March 6, 1984, respecting P's 1976 and 1977 taxable years. Upon P's motion to suppress and for summary judgment, Held: Regardless of whether the letter disclosed "evidence or other matter attending a grand jury proceeding," respondent did not obtain or use privileged grand jury materials in determining petitioner's civil tax liabilities. Held further: investigation did not violate either rule 6 (e), Red. R. Crim. P., or the Fourth or Fifth Amendments. Consequently, respondent's actions, in forwarding the results of his investigation to the Examination Division for preparation of deficiency notices, did not give rise to an intrasovereign violation requiring application of the exclusionary rule. Held further: Because suppression of evidence is not warranted in this case, respondent will not be required to go forward with separate or independent evidence at trial.

Held: Petition dismissed since it was filed during the period in which a stay was in effect pursuant to 11 U.S.C. sec. 362(a)(8) (1982).

H and W, husband and wife, received wages and other income in 1976 through 1980, and filed Federal income tax returns for such years. In preparing each year's return, H summarized the information relating to W's income on a worksheet. He did not include the wages and other income earned by him individually and the income earned jointly by the couple on such worksheet. He presented such worksheet to W for her review, along with a blank Form 1040 for her to sign. After W signed such Form and returned it to H, H completed the Form by adding certain personal information. He then signed and filed such Form as a joint return. H and W failed to report the wages and other income received by H during the years in issue. In separate notices of deficiency, the Commissioner determined that H and W are liable for deficiencies and additions to tax with respect to the omitted income. H has conceded that he is liable for such deficiencies and additions. Held, W does no qualify as an income spouse under sec. 6013(e), I.R.C. 1954, because, under the facts and circumstances, it is not inequitable to hold her liable for the deficiencies in tax determined by the Commissioner; held, further, W lacked the intent to evade tax owed on the omitted income; therefore, she is not liable for the addition to tax for fraud under sec. 6653(b), I.R.C. 1954.

Petitioners and respondent duly executed a Form 872-A. Petitioners subsequently attempted to terminate the consent by mailing a Form 872-T to Fresno Service Center where their return was filed even… Held: Deficiency notice was timely. To hold otherwise would permit petitioners to benefit from their failure to comply with instructions on 872-T.

Respondent sent notices of deficiency determining deficiencies for each of 4 years. Held: This Court lacks jurisdiction to redetermine the deficiencies for the fourth year. O'Neil v. Commissioner,66 T.C. 105 (1976); Rule 41(a), Tax Court Rules of Practice & Procedure.

Held: Petitioners' new evidence was available in their prior criminal proceeding and cannot now be relied upon to preclude the application of collateral estoppel. Held: Petitioners' new evidence was available in their prior criminal proceeding and cannot now be relied upon to preclude the application of collateral estoppel.

During 1981, P was employed by the Federal government as a computer analyst. He was also an attorney and wished to establish his own law practice after he retired from the government. He performed legal services for clients on weekends during 1981. In performing such services, his primary objective was to gain legal experience, rather than to earn a profit. He sent bills to clients in only a few of the cases handled by him. He did not keep adequate records of the time spent performing legal services, did not carry malpractice insurance, and did not otherwise conduct his law practice in a business-like manner. Held, under the facts and circumstances, P's activities in connection with his law practice did not rise to the level of a trade or business. Held, further, the gross income received from such practice is not subject to self-employment tax.

H and W, who were husband and wife during the years in issue, filed joint Federal income tax returns for 1975 through 1978. H owned B, a company engaged in the business of manufacturing and selling insulation. During the years in issue, H circumvented the accounting system established for B by cashing, rather than depositing, many checks made payable to B. Such practice caused H and W, and B, to underreport their income on their Federal income tax returns. After an investigation by the Commissioner, H pled guilty to one count of income tax evasion for 1978. H and W were divorced in 1979. Held: (1) H and B are liable for the deficiencies in tax and additions to tax for fraud, as determined by the Commissioner. (2) W is not liable for the deficiencies determined by the Commissioner because she qualifies as an innocent spouse under sec. 6013(e), I.R.C. 1954; under the facts and circumstances, W also is not liable for the addition to tax for fraud. (3) The Commissioner is not barred by the statute of limitations from assessing and collecting the determined deficiencies and additions from H and B. (4) H's plea of guilty to a charge of criminal tax evasion for 1978 does not prevent the Commissioner from proceeding against the petitioners in a civil action.

P Corp. was experiencing liquidity problems due to business difficulties and the death of B, its managing stockholder. A sister corporation of P, W, that held real estate for investment, was a likely source of the needed capital. W's stock had a stepped-up fair market value basis because it was held by B's estate. All of W's stock was contributed to P. W sold two parcels of land and distributed the proceeds to P. Subsequently, P and all of its subsidiaries, including W, adopted a plan of liquidation under sec. 337, I.R.C. 1954. W sold three more of its properties and distributed the proceeds to P. Shortly thereafter, P revoked its plan to liquidate, leaving W's liquidation plan intact. W was then liquidated, distributing its remaining properties to P. P, in consolidated returns with W, reported the sales using a fair market value basis in W's properties. Held,sec. 332, I.R.C. 1954, applies to the liquidation of W, because W was a more than 80 percent owned subsidiary of P and the plan called for completion of W's liquidation within 3 taxable years, notwithstanding W's failure to completely comply with the application regulations. Burnside Veneer Co. v. Commissioner,8 T.C. 442 (1947),affd. 167 F.2d 214 (6th Cir. 1948) followed. Held further,sec. 337, I.R.C. 1954, does not apply to grant nonrecognition to sales of properties by W because sec. 332, I.R.C. 1954, applies. Sec. 337(c), I.R.C. 1954. Held further, the basis adjustment to W's properties was improper, because sec. 1014, I.R.C. 1954, only applies to W's stock.

Ps leased children's master recordings from J in transactions that can be characterized as generic tax shelters. Held: applying an objective analysis, the transactions lacked economic substance apart from anticipated tax benefits. Rose v. Commissioner,88 T.C. 386 (1987). Held further, (1) Ps are liable for additions to tax pursuant to sections 6653(a), I.R.C. 1954. (2) Ps are liable for the addition to tax pursuant to section 6659, I.R.C. 1954.

Petitioners entered into contracts with an unrelated corporation whereby petitioners purportedly bought cattle. Held: Petitioners did not buy cattle; deductions and investment credits are not allowed. Held: Petitioners did not buy cattle; deductions and investment credits are not allowed.

Petitioners invested $ 120,000 in three partnerships in 1978. Held: petitioners did not realize income under the tax benefit rule. Held further, petitioners did not realize income under the alternative theories that the partnerships abandoned the research and development contracts or petitioners abandoned their interests in the partnerships.

A timely filed petition was served on respondent on July 26, 1985. R failed to file a timely answer. Held: R failed to establish that he exercised reasonable diligence to ensure that his Answer was timely filed.

P's brother transferred real property to P at a time when he owed deficiencies in tax. R determined that P was liable as a transferee of assets under I.R.C. section 6901(a). Held, R has failed his burden of proving that the deed was voluntary and that P's brother was insolvent at the time of the transfer.

R issued Notices of Final Partnership Administrative Adjustment to Otis L. Vienna (V), whom R believed was the tax matters partner of Sente Investment Club Partnership (Sente) by reason of his holding the largest profits interest in the partnership. Section 6231(a)(7)(B). V forwarded the notices to Zell Mills (M) whom V considered to be the tax matters partner. M had no profits interest in the partnership, but acted as "managing partner." M filed a petition within 900 days after issuance of the notices. R moved to dismiss on the ground that the petition was not filed by a proper party as M was not the tax matters partner. Held, V, not M, is the tax matters partner and thus is the proper party to file a petition. Held further, since M was authorized by V to file the petition, the Court will treat the petition as an imperfect petition and grant leave to V to file a proper amended petition.

Petitioner deducted the cost of ornamental trees purchased during each of the years 1977 through 1982. Held: The purchase costs of the trees in issue are capital in nature and therefore are not currently deductible. Held further: Petitioners failed to establish that the trees in issue qualify as "young plants" under sec. 1.162-12(a), Income Tax Regs.

Held, various items of income, deductions and additions to tax determined. Held: various items of income, deductions and additions to tax determined.

P was an officer in the Air Force. No tax was withheld from P's Air Force wages. P failed to file his income tax returns for each of the years in issue and offered no explanation or proof that his failure to file was due to reasonable cause. P now claims that he is entitled to various deductions for each of the years in issue. Held, P has failed his burden of proving that he is entitled to any deductions he claims except for a short-term capital loss for failure to exercise a silver option, $ 4.76 in unreimbursed travel expenses and a medical transportation deduction. Held further, P is liable for additions to tax under I.R.C. sections 6651(a), 6653(a) and 6654(a) for each of the years in issue.

1. Value of stock in J. W. Giselman Corporation held by decedent at time of his death determined. 2. The value of real estate decedent transferred to a trust for the benefit of his wife and children many years before his death is not taxable in decedent's estate. Section 2036(a), I.R.C. 1954, as amended, not applicable.

On the facts, held: the Commissioner did not err in determining that various unexplained bank deposits, together with substantial capital contributions to a partnership, the source of which contributions petitioner could not adequately explain, constituted taxable income to petitioner for 1978, and interest on one of petitioner's bank accounts constituted taxable income to him; held further, petitioner is liable for the addition to tax for fraud under section 6653(b), I.R.C. 1954.

Petitioner claims to be an innocent spouse with respect to disallowed deductions on petitioner's and husband's joint income tax returns attributable to a horse racing and breeding activity. Husband and respondent settled husband's tax deficiency by accepting disallowance of such deductions in excess of income from the activity. Held: Respondent is not precluded by the settlement with husband from contending that the deductions were not grossly erroneous and petitioner has failed to prove that they were.