Volume 57 — Tax Court Memorandum

Petitioners' transferor adopted a plan of liquidation pursuant to section 337 of the Internal Revenue Code of 1954. Held: The distribution of assets to petitioners pursuant to that plan was in their capacity as shareholders and not as creditors. Petitioners are therefore liable as transferees pursuant to section 6901.

In Continental Grain Co., Transferee v. Commissioner,T.C. Memo. 1988-577, we found that the subsidiary (Polo) of petitioner's transferor (Allied) was insolvent for purposes of section 332 on the date of Polo's liquidation. Respondent thereafter moved that we reconsider and revise that opinion, and vacate our decision for petitioner. Held: On the date of its liquidation, Polo was indebted to Allied for interest on intercompany debt. Held further: petitioner is not bound by evidence of fair market value submitted in its behalf which we find unreliable. Held further: respondent's motion will be denied.

Held: Allegations deemed admitted under Rule 90(c), Tax Court Rules of Practice and Procedure, were sufficient to sustain respondent's deficiency determination and his claim for an increased… Held: Allegations deemed admitted under Rule 90(c), Tax Court Rules of Practice and Procedure, were sufficient to sustain respondent's deficiency determination and his claim for an increased deficiency. Held further: Respondent's motion for summary judgment is granted.

Held: Petitioner's unreported income redetermined. Additions to tax in reduced amounts sustained. Held: Petitioner's unreported income redetermined. Additions to tax in reduced amounts sustained.

Ps were limited partners in F, a limited partnership formed in 1976 to mine coal in West Virginia. Held: The partnership was engaged in a business with the actual and honest objective of making a profit. (2) The nonrecourse promissory note does not represent genuine indebtedness. (3) Ps are not liable for additional interest under section 6621(c).

Ps reported a distributive share of losses and investment tax credits allegedly generated by KJP, a limited partnership formed to… Held: Ps failed to establish that KJP purchased and commercially exploited the film with an actual and honest objective of turning an economic profit. Accordingly, KJP's loss is disallowed pursuant to I.R.C. sec. 183, and KJP's property fails to qualify as section 38 property for purposes of the investment tax credit. I.R.C. sec. 48(a)(1).

Held, reasonable litigation costs awarded. Held: reasonable litigation costs awarded.

On his 1983 return, P offset wages he received as a steampipe fitter by claiming an itemized deduction in an equal amount for tools. Held: For purposes of computing the understatement of income tax for purposes of section 6661, P did not provide sufficient information on his 1983 return to constitute adequate disclosure. For 1984, P did provide sufficient information on his return to constitute adequate disclosure.

Held: Petitioners' trust is a sham entity; its gross receipts are attributable to petitioners. Held: Petitioners' trust is a sham entity; its gross receipts are attributable to petitioners. Held further: petitioners are liable for additions to tax pursuant to sections 6653(a)(1) and (2) and 6661. Held further: petitioners are liable for increased interest pursuant to section 6621(c).

Held: Petitioners' Schedule C and Schedule F losses for the year 1982 redetermined.

At the time set for trial there was no appearance by or on behalf of P. R moved to dismiss for lack of prosecution as to the deficiency and additions to tax for which P had the burden of proof. Held: R's motion to dismiss as to issues on which P has the burden of proof is granted. (2) P's failure to appear at trial constituted a default and all well-pleaded facts in R's Answer are deemed admitted.

R issued a notice of deficiency to Ps on December 21, 1983, for the taxable years 1977, 1978, and 1979. On December 22, 1983, Ps forwarded a check to R with the designation that the remittance be credited to accrued interest on the 1977, 1978, and 1979 deficiencies. On their 1983 return, Ps deducted the amount paid as a payment of interest, and R disallowed the deduction.

R offered to settle issues regarding Ps' investment in various partnerships by allowing out-of-pocket expenditures for the taxable years at issue. The offer was communicated to Ps' representative. Held: the circumstances of this case constitute unilateral mistake, error and/or negligence and are insufficient to set aside the closing agreements.

Petitioner omitted $ 820 unemployment compensation from gross income on his 1985 tax return. Held: The ceiling on petitioner's taxable unemployment compensation under section 85 was in excess of $ 820 so that entire amount is includable in petitioner's income for 1985.

Held, Ps' motion for allowance of litigation costs denied. R's motion for an award of damages for delay denied. Held: Ps' motion for allowance of litigation costs denied. R's motion for an award of damages for delay denied.

Ps claimed substantial losses attributable to a weekend photography business which they operated out of the basement of their home. Held: Ps failed to establish that they incurred losses in connection with their photography activities. Held further, Ps failed to substantiate various rental property expenses, itemized deductions and child care expenditures.

Held: Petitioner is not entitled to deductions for partnership losses with respect to an Arizona gold mining venture. Held further: petitioner's liability for additions to tax and increased interest determined.

The decedent's will created a split-interest trust, the beneficiaries being the decedent's grandnephew and the Holston Home for Children, a charitable organization. Held: the estate's claimed charitable deduction is denied. Held further, P filed the necessary estate tax return late and has failed to establish that such filing was due to reasonable cause. Therefore, P is liable for the late filing addition under section 6651(a)(1), I.R.C.

Petitioner-husband was a house staff physician with the Baylor College of Medicine graduate program in Houston, Texas, during 1979, and with… Held: Payments to petitioner-husband are not excludable from income as scholarships or fellowship grants. Sec. 117(a), I.R.C. 1954. (2) Petitioners are not entitled to deduct travel expenses because they have not satisfied the requirements of sec. 274, I.R.C. 1954. (3) Amounts of auto expenses for local transportation are determined.

Random provided computerized single-entry bookkeeping services to the public. Held: P is not entitled to deduct any part of the $ 24,000 for 1979. (2) The resulting deficiencies are underpayments attributable to tax motivated transactions. Sec. 6621(c), I.R.C. 1954 and 1986.

Held: Petitioners are liable for additions to tax pursuant to section 6653(b). Held: Petitioners are liable for additions to tax pursuant to section 6653(b).

In October 1981, P executed pension and profit sharing plans modeled after those of a previous employer which had received a favorable determination from the IRS in 1969. Held: P failed to demonstrate good cause why we should allow P to augment the administrative record, having had adequate opportunity to introduce this evidence into the record during the administrative determination proceeding prior to the issuance of the final adverse determination letter.

On the facts,held, (1) P's writing activity was not carried on with an actual and honest objective of making a profit. Dreicer v. Commissioner,78 T.C. 642, 646 (1982), affd, without opinion 702 F.2d 1205 (D.C. Cir. 1983); (2) Ps are not entitled to a dependency exemption deduction under I.R.C. sections 151 and 152(a); (3) Ps are not liable for the addition to tax for negligence under I.R.C. sections 6653(a)(1) and (2); and (4) Ps are liable for the late filing addition under I.R.C. section 6651(a)(1).

Petitioner's exemption from income taxes was revoked in May 1982 retroactively to the beginning of its fiscal year 1977. Deficiencies were determined for the fiscal years 1977 through 1983. It is Held, that petitioner is entitled to have its income from Adgap, its principal source of income, determined in the light of all the evidence, not just the Adgap ledgers; Held further,sec. 277, I.R.C. 1954, is not applicable because petitioner was not operated primarily to furnish goods and services to its members, whether all the residents of the Synanon communities or only the members of the Board of Directors were members of the corporation. Held further, cash contributions solicited and obtained by petitioner are taxable income. Held further, the value of food and clothing contributed to petitioner is taxable to it; the value of such food and clothing is determined. Held further, four activities, the Synanon Distribution Network, Lifestyler Operations, Education/School, and Corporate Investment and Realty, carried on by petitioner, were not sec. 162(a) trades or businesses; petitioner is not, therefore, entitled to deduct any expenses in excess of income from such activities except the expenses of Corporate Investment and Realty in earning rental income and in operating an investment office. Held further, petitioner is entitled to deductions for amounts determined to be executive compensation, other salaries and wages for nonexecutive employees, and in-kind compensation. Held further, petitioner is entitled to deductions for amounts determined for taxes, interest, depreciation, printing, postage and office supplies, minor consumables, air fares, telephones, and professional fees. Held further, petitioner is liable for additions to tax under secs. 6651(a), 6653(a)(1) and (2), and 6655.

In 1983, petitioner-husband, a municipal judge of the County of Ventura, State of California, contributed eight percent of his judicial salary to the California Judges' Retirement System. Held: petitioner-husband's contributions are not excludable from his 1983 income under section 457 of the Internal Revenue Code or section 252 of the Tax Equity and Fiscal Responsibility Act of 1982.

Petitioner operated an income tax return preparation service and was paid fees from clients for these services and additional fees for reporting fictitious deductions on clients' returns. For many of his clients, petitioner reported fictitious partnership losses with respect to partnerships some of which, petitioner represented, sold manure in the United States to third world countries as fertilizer. To evade income tax on fees paid by petitioner's clients for petitioner's "loopholes", no fees were paid directly to petitioner. Instead, petitioner arranged it so that his fees were payable by check nominally to an organization that did not exist, or were payable in cash at a local coin store which would remit fees to petitioner at least partially in gold and silver coins. For the years at issue, petitioner did not file an income tax return because he claimed he was an uncompensated employee of an organization which he claimed actually performed the services. Held, petitioner is subject to the additions to tax under section 6653(b).

Petitioners made a cash investment in a partnership in 1977. In 1977 and 1978, such partnership experienced operating losses and had unused ITCs. Petitioners erroneously reported their distributive share of such losses and credits when filing Federal income tax returns with respect to 1977 and 1978, and carried such losses and credits back to 1975. Petitioners' 1977 taxable year is closed by virtue of the expiration of the period of limitations. Petitioners' 1978 taxable year is still open to assessment. Petitioners assert that, for purposes of determining the net operating loss and ITC carrybacks to 1975, they are entitled to rely on the erroneously reported figures from 1977. Petitioners concede the adjustments made with respect to the 1978 net operating loss and ITC. Held, section 6214(b) gives the Court the authority to consider, in redetermining a deficiency for any taxable year, the correct facts in other taxable years and to determine the correct net operating loss and ITC carrybacks to the open year at issue.

P, a Tennessee savings and loan association, was a member and shareholder of the Cincinnati District Bank, one of 12 district banks established by the Federal… Held: P realized losses on its mortgage swaps of both 90 percent participation interests and whole mortgage loans; these losses are recognized for Federal income tax purposes and are deductible. FNMA v. Commissioner, 90 T.C. 405 (1988), and Cottage Savings Association v. Commissioner, 90 T.C. 372 (1988), followed.

Held: Petitioner, rather than corporation in which he was a shareholder, is taxable on consulting fees.

Held: Petitioner is an innocent spouse only with respect to one particular item of omitted gross income. Held: Petitioner is an innocent spouse only with respect to one particular item of omitted gross income.

After receiving an extension of time within which to file, petitioners deposited their 1983 Federal income tax return in the United States mail sometime after April 19, 1984. Held: Petitioners did not file a Federal income tax return for 1983, and respondent's notice of deficiency is not barred by the statute of limitations.

In 1973, petitioners guaranteed a $ 300,000 loan made to a partnership by a bank. Held: Petitioners' payments applied against the partnership debt gave rise to nonbusiness bad debts, deductible under sec. 166(d)(1) and not under secs. 166(f), 166(a), and 162, I.R.C. 1954.

Mr. and Mrs. Hunt transferred large sums of money to their children between January and the end of March 1980 to enable the children to make margin calls in the silver and/or gold commodities markets… Held: The transfers by Mr. and Mrs. Hunt to the children up to and including March 14, 1980, were bona fide loans. The notes executed on those loans represented full and adequate consideration for the funds. Held further: No transfers were made on March 15 or 16, 1980.

Held: Petitioner is not entitled to depreciation deductions with respect to a master recording. Held: Petitioner is not entitled to depreciation deductions with respect to a master recording.

V abandoned a home security system which it paid to have installed in Ps' residence. Held: The amount of the distribution received by Ps equaled $ 8,250, the fair market value of the home security system on the date of distribution. UVB discharged a portion of Ps' indebtedness at a time when Ps were not insolvent. Held: Ps realized income from the discharge of indebtedness.

P purchased a crane from his brother-in-law for consideration consisting of $ 20,000 cash and $ 80,000 of nonrecourse indebtedness. Held: P did not purchase the crane with the objective of engaging in the activity of crane leasing for profit under I.R.C. section 183. Sutton v. Commissioner, 84 T.C. 210 (1985), affd.

On Nov. 10, 1988, R mailed notices of deficiency to P for the years 1985 and 1986. Held: since bankruptcy proceeding was pending on date Tax Court petition was filed, 11 U.S.C. sec. 362(a)(8) (1982) precludes P from commencing a proceeding in the Tax Court. McClamma v. Commissioner, 76 T.C. 754 (1981), followed. Held further, petition is dismissed for lack of jurisdiction.

Petitioners contend that they are not subject to United States income tax on rental income from property located in Liberia because petitioner-husband is a nonresident alien. Held: Petitioner-husband meets the substantial presence test for resident alien individuals and does not qualify for the exception for foreign government-related individuals under section 7701(b)(5).

Petitioners were nominal lessors of metal shelving to a manufacturer of folding cardboard boxes, which sought off-balance sheet financing. Held: Petitioners, on motions for partial summary judgment, have not established that the transaction was a true lease rather than a financing arrangement for the supposed lessee. Consequently, petitioners' Motions for Summary Judgement are denied.

Held: Petitioners' entitlement to Schedule C deductions determined. Held further: Petitioners are not liable for an addition to tax for fraud pursuant to section 6653(b)(1) and (2). Held: Petitioners' entitlement to Schedule C deductions determined. Held further: Petitioners are not liable for an addition to tax for fraud pursuant to section 6653(b)(1) and (2).

Held: Petitioners' Motion for Partial Summary Judgment denied. Held: Petitioners' Motion for Partial Summary Judgment denied.

Held: P, a member of the Onondaga Nation of Indians, is not exempt from taxation on his income. Held: P, a member of the Onondaga Nation of Indians, is not exempt from taxation on his income.

P and her husband formed a corporation to receive kickbacks from her husband's employer and several of its subcontractors. P deposited all of the kickbacks into the corporation's bank account. Held: P does not qualify for innocent spouse relief under I.R.C. section 6013(e). Held further, P is liable for additions to tax under I.R.C. section 6653(b).

Held: On the facts, the transfer of ownership of two adjoining buildings from MMB to his children found to be a gift rather than an installment sale. Held: On the facts, the transfer of ownership of two adjoining buildings from MMB to his children found to be a gift rather than an installment sale. Failure to report such transfer as a gift not due to fraud.

During 1979 and 1980, petitioner was the payee of several checks issued by Quality Labs. Held: The proceeds of such checks are not income to petitioner; although petitioner derived some benefit from such proceeds, she was not their true earner. Neither was petitioner an active participant or essential element in any kickback scheme which might involve her husband and Quality Labs.

R mailed separate notices of deficiency for the taxable years 1982, 1983 and 1984 to the address reported by P on his 1981 return, which was his… Held: the notice for 1982 was mailed to P's last known address. Secs. 6212(a) and (b)(1), I.R.C. 1954. Held further, the petition with respect to 1982 was not timely filed. Secs. 6213(a) and 7502(a), I.R.C. 1954. Held further, R's Motion to Dismiss for Lack of Jurisdiction and to Strike As to the Taxable Year 1982 will be granted.

Petitioner was an employee of HPNA, a professional corporation, from 1974 through 1984. Held: petitioner's receipt of the lump-sum distributions was not on account of her separation from the service of HPNA, and petitioner is not entitled to use the 10-year forward-averaging provisions of section 402(e)(1).

Ps' claim they mailed the petitions to the Tax Court by certified mail return receipt requested. Held: Ps' failed to prove they mailed the petitions by certified mail and, therefore, they may not rely on sec. 7502(c)(2), I.R.C. 1954, or sec. 301.7502-1(c)(2), Proced. & Admin. Regs. R's Motions to Dismiss For Lack of Jurisdiction are granted.

Held: Petitioner is estopped by collateral estoppel from denying that during each of the years before the Court he obtained some amount of money under circumstances constituting both embezzlement and… Held: Petitioner is estopped by collateral estoppel from denying that during each of the years before the Court he obtained some amount of money under circumstances constituting both embezzlement and false pretenses under New Jersey law.

Held: Advances made by petitioner's wholly owned corporation to another corporation in which petitioner was a shareholder are not deductible by petitioner as bad debts. Held: Advances made by petitioner's wholly owned corporation to another corporation in which petitioner was a shareholder are not deductible by petitioner as bad debts.

Petitioner, a 21 dealer, failed to file income tax returns and report income for 1983, 1984 and 1985. Held: Respondent's methods of reconstructing petitioner's income are reasonable and not arbitrary. Held, further: Petitioner is liable for additions to tax for failure to file, negligence and failure to make estimated tax payments.

On Jan. 8, 1988, R mailed duplicate original notices of deficiency to Ps at two addresses, one of which was Ps' last known address as known to R on the date of… Held: the petition was not timely filed. Secs. 6213(a) and 7502(a). Held further, even if the notice of deficiency was not mailed to Ps at their last known address, the notice is valid because Ps received it without prejudicial delay and with sufficient time remaining to file a timely petition with this Court.

Held: Petitioners' petition was untimely filed; respondent's motion to dismiss for lack of jurisdiction is granted. Held further: Petitioners' motion to dismiss is denied. Held: Petitioners' petition was untimely filed; respondent's motion to dismiss for lack of jurisdiction is granted. Held further: Petitioners' motion to dismiss is denied.

Held: Motion to reopen record and receive testimony on new issue denied. Held: Motion to reopen record and receive testimony on new issue denied.

P failed to file returns for several years. Held: the applications for extension of time to file did not specifically indicate an address change and did not constitute notice to respondent of a change of address for purposes of determining P's last known address.

Held: Statutory notice was mailed to petitioners' last known address notwithstanding an immaterial mistake in the spelling of the street name in that address.

Petitioner husband's father owned and operated an insurance agency. Held: Respondent has failed to show by clear and convincing evidence that petitioner-husband has an underpayment due to fraud for 1973. The statute of limitations bars assessment of any deficiency or addition to tax. Sec. 6501(a), I.R.C. 1954.

Held: Respondent's hearsay objections to receipt in evidence of certain written certifications overruled, with limited exceptions. Held: Respondent's hearsay objections to receipt in evidence of certain written certifications overruled, with limited exceptions.

P began as a custom computer software business and, based upon its accountant's recommendation, reported its income (derived mainly from services) on the cash method of… Held: P did not show that R abused his discretion in determining that the cash method did not clearly reflect income. Held further, P's business changed from a service-oriented to a product-oriented business and P's consistent use of the cash method did not, per se, cause the clear reflection of income.

P did not file a Federal income tax return for 1982. In determining a deficiency in P's 1982 income, R's examiner prepared a series of documents which R considers together to constitute a return under sec. 6020(b), I.R.C. 1954. R issued a statutory notice to P determining therein an income tax deficiency and additions to tax for 1982. P timely filed a petition and now, after an answer was filed, raises the issue of jurisdiction on the ground that a return defectively prepared under sec. 6020(b) invalidates the notice of deficiency. Held, R is not required to prepare or execute a return under sec. 6020(b) before determining a deficiency and the fact that he may have done so, correctly or incorrectly, will not invalidate an otherwise valid notice of deficiency. Roat v. Commissioner, 847 F.2d 1379 (9th Cir. 1988), affg. on this issue an Order of this Court.