Volume 60 — Tax Court Memorandum

Held: Respondent's motion for summary judgment will be granted with respect to deficiencies determined for the years 1983, 1984, and 1985, and with respect to that portion of the deficiency determined for 1986 which is not attributable to unemployment compensation received by petitioner in that year. Held further: Respondent's motion for summary judgment will be granted with respect to additions to tax determined under sections 6651(a)(1), 6653(a), and 6654 for the years 1983 through 1985. Held further: Judgment is reserved on the amount of unemployment compensation petitioner must include in his 1986 gross income pursuant to section 85, and consequently on the amount of additions to tax for which petitioner is liable for the year 1986.

This matter is before the Court on P's motion to seal the trial record. Held: The record will not be sealed after trial where the documents sought to be sealed are used by the experts in estimating the decedent's interest in the companies, and where the age of the documents diminishes their importance.

Petitioner husband (H) owned 50 percent of three corporations and a partnership. Held: Petitioners suffered a casualty loss; amount of loss determined. Sec. 165(c)(3), I.R.C. 1954. (2) Petitioners are not entitled to any deductions on account of their Robin Moore book tax shelters, notwithstanding IRS Policy Statement P-4-64. (3) Petitioners are not entitled to any deductions on account of their payment to HAA.

Ps filed a motion to dismiss for lack of jurisdiction as to their 1985 and 1986 taxable years on the grounds that the notice of deficiency was not sent to their "last known address." R had received Ps' 1987 return reporting a new address 67 days prior to mailing the notice. R did not place the new address information into his computer until 105 days after receipt. In T.C. Memo. 1990-280 we held that R, due to a lack of evidence or proof, did not show that he exercised "reasonable care and diligence" in processing new address information. R moved to open the record for new evidence, to vacate, and to reconsider our opinion. In Abeles v. Commissioner, 91 T.C. 1019 (1988), we established a new standard for "last known address." R argues that we have varied from that standard or misapplied it. Held: Abeles v. Commissioner, supra, interpreted. Held further: R's motions to open the record, to vacate, and to reconsider are all denied.

Held: Petitioner's motion for summary judgment will be denied on the basis of Fehlhaber v. Commissioner, 94 T.C. (June 13, 1990). Held: Petitioner's motion for summary judgment will be denied on the basis of Fehlhaber v. Commissioner, 94 T.C. (June 13, 1990).

Ps hired a cleaning service which provided no direct childcare or babysitting services. Ps claimed a credit for Child and Dependent Care using the cost of the cleaning services to compute the credit. Held: Ps are not entitled to the Child and Dependent Care credit provided for in sec. 21, I.R.C. 1954.

Petitioner was indicted on 15 counts of aiding and assisting in the preparation of false income tax returns of others in violation of… Held: the plea agreement letter does not relieve petitioner of income tax liabilities on matters not covered by the indictment and plea. Held further: the plea agreement letter is not a valid compromise of petitioner's civil income tax liabilities because the government's attorneys were not authorized to enter into a compromise agreement.

Held: Petitioners' music activity was engaged in for profit, within the meaning of section 183. Held: Petitioners' music activity was engaged in for profit, within the meaning of section 183. Held further: Petitioners failed to substantiate a portion of the deductions claimed on their 1984 and 1985 tax returns for travel expenses, as required under section 274.

P studied art under Alvin Gittins, a well-known portrait artist in the Intermountain area. In 1984, she purchased one of his paintings which she placed in her studio. Held: The enactment of the accelerated cost recovery system (ACRS) under the Economic Recovery Tax Act of 1981 did not abolish the requirement that an asset have a determinable useful life in order to be depreciable. 2.

Held: Reallocation under sec. 61 of 100 percent of the income of a disqualified DISC, which was still subject to a valid DISC election, to its parent corporation was improper because the disqualified DISC was imbued with a business purpose and carried on substantive business activities from which it derived income. Addison International, Inc. v. Commissioner, 90 T.C. 1207 (1988), affd. 887 F.2d 660 (6th Cir. 1989) followed. Held further: The fact that the DISC was imbued with a business purpose and carried on substantive business activities does not invalidate respondent's allocation of income and deductions between the disqualified DISC and its parent to the extent necessary to clearly reflect income of the two related entities, but respondent's allocation of 100 percent of the disqualified DISC's income to the parent is arbitrary, capricious, and unreasonable under the facts of this case. Held further: Allocation of overhead, administrative, and other indirect expenses from the parent corporation to the disqualified DISC is proper to clearly reflect the income of each.

Beginning after her husband's death in 1971, until 1982, D had a general power of appointment with respect to a controlling interest in a family-run, closely held corporation which owned publishing and broadcast subsidiaries. Several experts for both parties testified regarding the value of the stock. D was president of the corporation until 1980. She was chairman of the board from 1980 until her death. Her son became president in 1980. Her daughter became vice president in 1980 and president of the broadcast subsidiaries in 1981. Eighteen days before her death, D transferred .88 percent of the stock to each of her two children. D made a testamentary gift in trust for their benefit of the remaining 49.65 percent. The sole purpose of the pre-death transfer of .88 percent to each child was to obtain a minority discount for the stock. The transfers did not appreciably affect D's beneficial interest except to avoid Federal transfer taxes on the control premium. Held, value of stock decided. Held further, a discount is allowed for lack of marketability, and because Wisconsin State law limits sales of substantially all of the assets of the corporation. Held further, a minority discount is not allowed. Estate of Bright v. United States, 658 F.2d 999 (5th Cir. 1981) (en banc), distinguished.

During 1981 and 1982, petitioner acquired seven banks. Held: petitioner proved that its core deposits intangible had an ascertainable value separate and distinct from the goodwill and going-concern value of the acquired banks, and that it had a limited useful life, the duration of which could be ascertained with reasonable accuracy.

Agents of the Commissioner examined the income tax returns of petitioner and related corporations for taxable years subsequent to the years before the Court. One of the issues raised in the examination is identical to the issue involved in this proceeding. Counsel for respondent in this proceeding actively participated in the examination of the returns for subsequent years. Held, the activities of respondent's counsel and the use of administrative summonses of petitioner's employees in the subsequent years' audit undermines the Court's Rules on discovery. Title VII, Tax Court Rules of Practice and Procedure. Respondent's counsel in the instant proceeding may not participate in both the trial of this case and the examination of petitioner's returns and those of related corporations for subsequent years. Held further, respondent shall maintain a log of all evidence obtained in the examination of such returns to assist the Court in maintaining the integrity of its Rules. Held further, respondent will be prohibited from using in this proceeding any testimony, documents, or other information obtained pursuant to the administrative summonses. Universal Manufacturing Co. v. Commissioner, 93 T.C. 589 (1989), followed.

Held: Petitioners' motion to reconsider is denied. Held: Petitioners' motion to reconsider is denied.

Petitioner is the Estate of Robert F. Klein (decedent). Decedent's will provided that the residue of his estate was to pass to a trust created by decedent prior to his death and prior to the elimination by the Economic Recovery Tax Act of 1981 of the limitation on the marital deduction then contained in sec. 2056. Decedent died after that limitation was eliminated, and the residue of his estate passed to the trust. A portion of the corpus of the trust was then used to fund a marital trust. The amount funding the marital trust was limited (under one alternative) to the greater of 50 percent of the adjusted gross estate or $ 250,000. Petitioner argued that the alternative in question showed decedent's intent to incorporate into his estate plan the maximum marital deduction allowed by sec. 2056, since the language reflected the maximum deduction allowed by that section at the time the language was adopted. Held: The language in question unambiquously limits funding of the marital trust to the greater of 50 percent of the adjusted gross estate or $ 250,000, and respondent's determiniation of a deficiency in estate tax is sustained.

From November 1976 through December 1978 H and W operated a massage and prostitution business and W made calls for purposes of prostitution. Held: income and expenses of the massage and prostitution activities are determined. Held further: W's argument that she was merely a conduit for H's income is rejected, and she is not relieved of income tax liability for the years in issue.

Petitioner elected to deduct part of the cost of a bulldozer used on his farm under section 179. He now seeks to substitute other farm equipment without first obtaining the Commissioner's consent. Held: under section 179, the substitution of one item of equipment for another requires the Commissioner's consent. Held, further, petitioner is not entitled to an investment tax credit on that portion of the bulldozer he deducted under section 179.

Petitioner husband (H) was sole owner of the voting stock of MFC, an industrial loan company in Hawaii. Hawaii requires industrial loan companies to maintain a debt-to-capital ratio of ten-to-one. Held: Certain of H's interest expenses are subject to the investment interest deduction limitations under section 163(d), I.R.C. 1954. Burden of proof. However, respondent's assertion of collateral estoppel is rejected.

P's son was arrested in 1984 while driving H's (P's husband) car containing narcotics and cash. In 1986, H was convicted on narcotics related charges. Held: portions of P's affidavit and portions of transcripts from prior proceedings otherwise excludable as hearsay are not admissible under the Rule of Completeness, pursuant to Fed. R. Evid. 106; United States v. Burreson, 643 F.2d 1344 (9th Cir. 1981).

In 1984, petitioner gave money to fortunetellers. These transactions occurred in the State of New York. Petitioner discovered the theft in 1984. Held: Under New York law, fortunetelling is a crime. Held further: Under New York law, the crime of fortunetelling constitutes an inchoate theft offense. Held further: Petitioner is entitled to a theft loss deduction in 1984 for monies given to fortunetellers in 1984.

Pursuant to an agreement incident to his Illinois divorce decree, petitioner was obligated to pay his ex-wife $ 100,000 as nonmodifiable maintenance in gross. Held: A lump-sum payment of maintenance in gross is not a periodic payment within the meaning of section 71 and is therefore not deductible to petitioner under section 215. Held further: Petitioner is liable for the additions to tax set forth in sections 6651(a)(1) and 6661.

In 1985, P-husband received disability benefits from a disability plan established by his employer. Held: the disability benefits are not excludable from gross income under I.R.C. sec. 104(a)(1). Held further, the amount received from the State Teacher's Retirement System of Ohio is not excludable from gross income. Held further, Ps are liable for additions to tax under I.R.C. secs. 6653(a)(1), 6653(a)(2), and 6661(a).

Ps filed a motion for reasonable litigation costs pursuant to I.R.C. sec. 7430. Held: R's litigation position was substantially justified in that R reasonably relied on his expert's appraisal report valuing a conservation easement.

Petitioner purchased computer equipment and leased the equipment back to the seller who previously leased the equipment to an end user. Held: Petitioner is at risk within the meaning of sec. 465, with respect to debt obligations associated with the transaction.

Held: The net capital gain deduction claimed by petitioners on their 1984 return is a tax preference item under section 57(a)(9)(A) for the purpose of computing their alternative minimum tax under… Held: The net capital gain deduction claimed by petitioners on their 1984 return is a tax preference item under section 57(a)(9)(A) for the purpose of computing their alternative minimum tax under section 55. Petitioners' liability for the alternative minimum tax is sustained.

Petitioners were taxpayers in the refund case of Berry v. United States, an unreported District Court opinion, affd. without published opinion 767 F.2d 919 (6th Cir. 1985). Held: Petitioners are collaterally estopped to deny that capital is a material income-producing factor in the operation of Mr. Berry's business during the taxable years 1977 and 1978.

Between 1979 and 1986 petitioners invested funds in (1) a double trust scheme promoted by Frank Forrester, and (2) Mexican pagares (notes) purchased through a Mexican investment counsellor, Laura… Held: Petitioners failed to carry their burden of proof that they were entitled to theft losses in 1985 or 1986. Net operating loss carrybacks to the years 1982 through 1984 denied.

H, a general partnership of which P was a general partner, engaged in commodities trading utilizing both futures contracts and forward contracts. Held: The trading in both the futures market and with forward contracts had the requisite economic substance and profit motive. Held further: The cancellation fees are denied as ordinary losses on the ground that the contracts were not cancelled, but were offset. The losses are allowed as capital losses.