Volume 56 — Tax Court Memorandum

Petitioner claimed a depreciation deduction and an investment tax credit for 1981 with respect to a FoodSource container which was not placed in service or available for use during that year. Held: The underpayment for 1981 was not attributable to an overstatement of petitioner's basis within the meaning of sec. 6659, I.R.C. 1954. Todd v. Commissioner,89 T.C. 912 (1987), on appeal (5th Cir., Jan. 26, 1988), followed.

After receiving an extension of time within which to file, petitioner prepared a 1983 joint Federal income tax return on behalf of himself and his wife shortly before the August 15, 1984, due date. Held: based on deemed admitted facts, sec. 6653 (b). Held further: the purported return individually is not a valid return and not a separate return for purposes of sec. 6013(b). Held further: petitioner is entitled to elect to file a joint return under sec. 6013(b)(1).

Decedent's husband (H) died on August 8, 1973, without an opportunity to change his will, which left his entire estate, largely his community property half… Held: the transaction involving conveyance of life estate is independent of the transfer of farm equipment, the agreement not to probate will, and decedent's disclaimer. Held further: decedent's disclaimer is a valid partial disclaimer under sec. 37A(e), Texas Probate Code, and is valid for Federal gift tax purposes.

Held, respondent properly determined additions to tax for late filing and late payment under section 6651(a), I.R.C. 1954. Held: respondent properly determined additions to tax for late filing and late payment under section 6651(a), I.R.C. 1954.

Held: Petitioners have not shown that respondent's reconstruction of their income for 1977 and 1978 and the determination of an addition to tax for negligence under section 6653(a) for those years are incorrect. Held further: as petitioners have not substantiated some expenditures for 1980, 1981, and 1982 as required by section 274(d), those expenditures will be disallowed as deductions. Held further: petitioners have proven that respondent erred in attributing to them the income of certain corporations in which petitioners had an interest. Held further: respondent's motion for default judgment for petitioners' failure to comply with an order of this Court will be granted in part. Held further: the addition to tax for fraud in 1980, 1981, and 1982 is sustained.

Ps filed no returns for the years in issue and declined to offer proof regarding their income, deductions and credits. Held, taxable income and miscellaneous additions to tax determined. Held: taxable income and miscellaneous additions to tax determined.

Ps seek reasonable litigation costs pursuant to I.R.C. section 7430. Held, Ps having failed to comply with the statutory requirements of I.R.C. section 7430, their motion is denied. Held: Ps having failed to comply with the statutory requirements of I.R.C. section 7430, their motion is denied.

Held: Statutory notices were issued before expiration of the 3-year limitation period. Held further, fraud addition sustained. Held: Statutory notices were issued before expiration of the 3-year limitation period. Held further, fraud addition sustained.

Held: Petitioner is not entitled to exclude from Federal income tax under section 911 compensation earned in Angola because his abode remained in the United States. Held: Petitioner is not entitled to exclude from Federal income tax under section 911 compensation earned in Angola because his abode remained in the United States. Held further, a refund of state income tax and a trust fund distribution are taxable income.

Held, the fair market value of a collection of domestic and foreign mathematical journals determined. Held: the fair market value of a collection of domestic and foreign mathematical journals determined.

Leroy H. Lehmann did not file Federal income tax returns for the years 1977 through 1982. The Service determined deficiencies for those years, plus penalties for negligence, substantial understatement, and failure to pay estimated tax. Lehmann petitioned the Tax Court. The Service moved for an order requiring Lehmann to respond to proposed stipulations. Lehman did not respond or show cause why the stipulations should not be deemed admitted.

David Litzenberg, in 1981, accepted five horses from a neighbor in satisfaction of a $74,994 debt. Though Litzenberg raced and bred the horses, he lost money; one of the horses was destroyed. The Service determined deficiencies with respect to David Litzenberg's 1982 through 1984 taxes, contending Litzenberg's horse breeding activities were not engaged in with a profit motive. Accordingly, the Service contended that Litzenberg could not deduct horse breeding expenses.

When decedent died she owned an interest in the estate of another arising under a will not probated at the valuation date. Held: the date-of-death fair market value of decedent's interest was $ 270,179 after discount for the nuisance value of the anticipated claim of undue influence against the will giving rise to that interest. Sec. 2031(a).

Petitioner was employed as a tool pusher on a mobile rig off the coast of England in the North Sea during 1982, 1983, and 1984. Held: Petitioner is not a qualified individual eligible to exclude foreign-earned income from his gross income under section 911(a), Internal Revenue Code of 1954.

Held: Petitioner is not entitled to exclude compensation earned in Saudi Arabia from Federal income tax under section 911 because his abode remained in the United States. Held: Petitioner is not entitled to exclude compensation earned in Saudi Arabia from Federal income tax under section 911 because his abode remained in the United States.

P, a bank, sold a building in Albuquerque to a partnership in exchange for cash and a promissory note. Held: P disposed of the promissory note at face value and must recognize gain on the note consistent with I.R.C. section 453(d).

Petitioners purchased compressed gas cylinders for lease to a welding business. In order to determine whether the term of the lease is less than 50 percent of the useful life of the property for purposes of section 46(e) (3), we look to the applicable class life in the Asset Depreciation Range System. Held: Class life 57.0 applicable to Distributive Trades and Services applies to the lessee welding business, which is the business activity to be considered pursuant to section 1.167(a)-11(e) (3) (iii), Income Tax Regs.

Held: Neither petitioner is entitled to litigation costs since the position of respondent was substantially justified. Held: Neither petitioner is entitled to litigation costs since the position of respondent was substantially justified.

Petitioner entered into a sale-leaseback transaction whereby he purchased from and leased back to Health-Chem certain computer peripheral and copying equipment. Held: petitioner did not have a business purpose for entering into the transaction which also lacked economic substance; neither did petitioner prove that he acquired the benefits and burdens of ownership of the equipment or that a nonrecourse note used to finance the transaction constituted genuine indebtedness.

Respondent determined deficiencies for 1977, 1979, and 1980, based on unreported income from a photography business. Held: Respondent has not met his burden of proving a substantial omission of income for 1977; the statute of limitations bars assessment and collection for that year. Secs. 6501(e)(1)(A) and 6501(a), I.R.C. 1954. (2) Petitioners have not met their burden of proof as to the unreported income; deductions allowed.

Held: P is entitled to a charitable contribution deduction of $ 3,281.69. Held: P is entitled to a charitable contribution deduction of $ 3,281.69. Held further: Because P's calendar notations substantiate her charitable contributions she is not liable for additions to tax under section 6653(a)(1) and 6653(a)(2).

In furtherance of their farming activities, Ps constructed a barn, acquired and constructed various properties and improvements, incurred land clearing and contouring costs, and planted 45 almond… Held: Ps' barn was not section 38 property. Held further, Ps failed to establish that unclaimed ITC attributable to property placed in service in prior years was currently available for use as a carryover.

P did not file Federal income tax returns for 1974, 1975, or 1979 through 1982. P filed unsigned Forms 1040 for 1977 and 1978. Held: P is not entitled to joint return status. Held further: P had unreported income for 1974, 1975, and 1977 through 1982. Held further: P is not entitled to a deduction for business expenses for 1976. Held further: P recognized a capital loss in 1976. Held further: P is liable for self-employment taxes.

P and his wife jointly filed state income tax returns for 1983. When the jointly payable refund checks arrived at P's home in 1984, P and his wife were undergoing marital discord. P's wife withheld the state refund checks and failed to turn any proceeds over to P. In 1985, P's wife obtained a court order requiring P's credit union to accept P's wife's signature on the checks. The court designated the funds as emergency financial relief to P's wife in 1985. P also omitted dividend income from his 1984 return. Held: P did not constructively receive income from the state refund checks in 1984 since he did not receive the funds and did not authorize his wife to withhold the funds. Further held, that P is liable for negligence for failure to report dividend income.

On Sept. 15, 1980, Dr. Thomas Mallory signed a power of attorney, Form 2848. Held: The power of attorney executed by Thomas Mallory on Sept. 15, 1980, does not operate as a valid power of attorney for Kelly Mallory. The Mallorys purchased tax shelters involving master recordings and art lithographs. Thomas Mallory discussed the purchase of the shelters with Kelly, his wife.

P was engaged in a business operation wherein, through a bucket shop operation and various other devices, he raised money purportedly for charity. Held: R proved fraud for the years 1972 through 1974 by clear and convincing evidence, using the bank deposits method for determining P's income. Held further, P is collaterally estopped from denying fraud for 1975 by reason of a guilty plea under section 7201, I.R.C. 1954.

Held, on the facts, petitioner is not entitled to a theft loss deduction for 1983. Held: on the facts, petitioner is not entitled to a theft loss deduction for 1983.

Ps are commodities dealers who entered into futures straddle transactions on the London Metal Exchange similar to those evaluated by this Court in Glass v. Commissioner,87 T.C. 1087 (1986), affd. sub… Held: Ps' transactions were as a matter of law shams in substance despite respondent's failure to produce specific information regarding the amount of capital gains subsequently realized on closing out the second leg of the straddle.

Held: Petitioner's transferor, Allied Mills, Inc., is entitled to bad debt and worthless stock deductions on the liquidation of Allied's wholly owned subsidiary, Polo Food Products Co., as Polo was… Held: Petitioner's transferor, Allied Mills, Inc., is entitled to bad debt and worthless stock deductions on the liquidation of Allied's wholly owned subsidiary, Polo Food Products Co., as Polo was insolvent on the date of liquidation; section 332 inapplicable.

Petitioner acquired used IBM computer equipment from H subject to short term leases made by prior owners to end users. Held: The purchase price of the equipment petitioner agreed to pay was about the fair market value of the equipment including its residual value. (2) The transactions were not shams devoid of economic substance. (3) Petitioner acquired the benefits and burdens of ownership in the equipment through the transactions.

Held: Amounts substantiated pursuant to section 274(d) for entertainment expenses are found. Amounts claimed for travel not substantiated.

P did not file Federal income tax returns for 1974, 1975, or 1979 through 1982. P filed unsigned Forms 1040 for 1977 and 1978. Held: P is not entitled to joint return status. Held further: P had unreported income for 1974, 1975, and 1977 through 1982. Held further: P is not entitled to a deduction for business expenses for 1976. Held further: P recognized a capital loss in 1974. Held further: P is liable for self-employment taxes.

Forms 872-A were executed on behalf of petitioners and respondent for the years in issue. Held: Forms 872-A do not expire by operation of law after a reasonable time. Held: Forms 872-A do not expire by operation of law after a reasonable time. Estate of Camara v. Commissioner,91 T.C. 957 (1988).

Petitioners have failed to distinguish the facts pertaining to claimed charitable contribution deductions during 1973 from the facts pertaining to similar deductions during the years 1971 and 1972,… Held: Petitioners have failed to show that alleged charitable contributions made during 1973 qualify as deductions under section 170.

Held: Petitioners, members of the Seneca Indian tribe, are not exempt from taxation on their income. Held: Petitioners, members of the Seneca Indian tribe, are not exempt from taxation on their income.

In calculating imputed interest pursuant to the 6-month rule of section 1.482-2(a)(3), Income Tax Regs., shipments of merchandise to a domestic importer (taxpayer) by its foreign parent should be taken into account in strict chronological order and applied against the earliest balance outstanding of indebtedness, whether prepaid or deferred, unless treated otherwise on the taxpayer's books by agreement in accordance with regular trade practice.

P, primarily a grocer, spent between 30 and 50 percent of his time pursuing the trade or business of promoting, organizing and financing various enterprises over a 15-year period. P suffered losses when several enterprises he had financed, by advancing funds and guaranteeing loans, failed and his co-venturer and obligor went bankrupt. Held, such losses are deductible as business bad debt losses under I.R.C. section 166.

P was a limited partner in a limited partnership formed for the purpose of investing in another limited partnership. Held: P is not entitled to deduct payments made to the general partners of the partnership in which she was a limited partner under section 212 because such payments were for services rendered in connection with the organization and syndication of that partnership and the acquisition of its only asset.

Petitioners executed consent Forms 872 extending the statute of limitations on assessment and returned them to respondent with a cover letter stating they were conditioned upon respondent transferring the related audits from Connecticut to California. Respondent's delegated agent executed the consents and either did not see or ignored the cover letter. Respondent's efforts to transfer the audit to California were unsuccessful. Held: the consent Forms 872 were invalid, the cover-letter condition to which they were subject not having been met. Further held, petitioners are not equitably estopped to claim the bar of the statute of limitations. Further held, assessments for the years 1979, 1980, and 1982 are barred by the expiration of the period of limitations and assessment for 1978 is barred as to both petitioners unless respondent proves fraud.

Held: Civil Service disability retirement pension is includable in income for Federal income tax purposes. Held: Civil Service disability retirement pension is includable in income for Federal income tax purposes. Petitioner's liability for additions to tax under sections 6651(a)(1), 6653(a), 6653(a)(1), and 6654(a) redetermined.

Held: Pursuant to a stipulated property settlement agreement incident to divorce, petitioner was awarded all of her former spouse's Air Force retirement benefits, Veterans Administration educational… Held: Pursuant to a stipulated property settlement agreement incident to divorce, petitioner was awarded all of her former spouse's Air Force retirement benefits, Veterans Administration educational benefits, and weekly payments of $ 210.

A timely petition was served on R on May 31, 1988. R failed to file a timely answer. On Oct. 27, 1988, in response to an Order of the Court, R's Motion to File Answer Out of Time was filed and R's Answer was lodged. Held: R failed to establish that he exercised reasonable diligence to ensure that his Answer was timely filed. Held further: R's Motion to File Answer Out of Time is granted , except that as a sanction under Rules 104 and 123, Tax Court Rules of Practice and Procedure, for R's failure to timely file his Answer, it shall be taken as established that R erred in determining that additional interest is due from Ps under sec. 6621(c), I.R.C. 1954.

Held: Petitioner is an innocent spouse with respect to the specific adjustments in the deficiency notice as to which she is found to be an innocent spouse but not as to balance of the deficiency. Held: Petitioner is an innocent spouse with respect to the specific adjustments in the deficiency notice as to which she is found to be an innocent spouse but not as to balance of the deficiency.

Petitioner-husband was one of a group of investors which acquired an option to buy a hospital. They acquired the option on April 1. The option was extended to October 9. The optionees needed more time to obtain financing, so they negotiated for more time, agreeing to different terms and a higher consideration. The optionees acquired a "new option", reflecting the negotiations, on October 9. On October 25, the optionees donated their purchase rights to an eligible charitable donee. Held: The optionees donated a second, separate option which they did not hold for more than 6 months. Petitioners' charitable contribution deduction is not to exceed petitioner-husband's basis in the new option. Sec. 170(e)(1)(A), I.R.C. 1954. Reily v. Commissioner,53 T.C. 8 (1969), followed.

Petitioner's wife embezzled more than $ 500,000 from her employer, a bank, during 1978 through 1981. Held: Respondent has failed to show by clear and convincing evidence that petitioner has an underpayment due to fraud for any of the years 1978 through 1981. Sec. 6653(b), I.R.C. 1954. (2) Petitioner is not an innocent spouse for any of the years 1978 through 1981. Sec. 6013(e), I.R.C. 1954.