Volume 61 — Tax Court Memorandum

Based on the inadequacy of the petition, the Court previously dismissed this case with regard to all issues for which petitioner bears the burden of proof, leaving only the issue of fraud to be tried or otherwise disposed of. Based on the inadequacy of petitioner's reply to respondent's answer, the Court previously deemed admitted under Rule 37(c) 42 allegations relating to fraud contained in that answer. This proceeding concerns only respondent's motions for partial summary judgment and for imposition of a penalty under section 6673 and petitioner's cross-motion for summary judgment. Held: Respondent is entitled to the addition to tax for fraud provided for in section 6653(b), having adequately pled fraud and, considering the facts deemed admitted pursuant to Rule 37(c), having carried his burden of showing by clear and convincing evidence both an underpayment and that some portion of that underpayment was due to fraud with intent to evade tax. Held further: A penalty of $ 25,000 is imposed under section 6673, petitioner's "tax-protestor" arguments being considered frivolous and groundless and this proceeding having been instituted primarily for delay.

Held, petitioners failed to substantiate their claims for employee business expenses, entertainment expenses, referral fees, business gifts, educational… Held: petitioners failed to substantiate their claims for employee business expenses, entertainment expenses, referral fees, business gifts, educational expenses and charitable contributions. Held further, where petitioners failed to maintain records, their local automobile expenses estimated from available information.

Petitioners purchased a home financed in part by a loan from the Bank of America. The loan was evidenced by a note secured by a deed of trust. Held: petitioners failed to prove that the delinquency charges are deductible as interest.

D executed a will and a trust agreement on March 24, 1978, prior to the enactment of the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, 95 Stat. 305. Held: The provision of the trust agreement providing for the funding, at D's death, of a "marital trust" does not contain the type of formula marital deduction clause contemplated by section 403(e)(3) of ERTA. Therefore, section 403(e)(3) of ERTA does not preclude petitioner from qualifying for an unlimited marital deduction under section 2056. Estate of Levitt v. Commissioner, 95 T.C. 289 (1990), controlling.

Ps created a trust naming their children as beneficiaries. Ps funded the trust by making demand loans to the trust from the proceeds of loans Ps had obtained from a commercial bank. To ensure repayment of the loan extended to the trust, Ps were given a security interest in the trust's Eurodollar deposit account. To ensure repayment of the loan extended to Ps, the lending bank was provided a security interest in Ps' secured demand note. Held, Ps are owners of the trust pursuant to the grantor trust provisions of I.R.C. sections 671 through 679. Held further, Ps are liable for additions to tax prescribed by I.R.C. section 6661(a).

Held: Petitioner's filing of his 1984 Individual Income Tax Return in April 1988 breached his duty to timely file, and a breach of that duty is sufficient evidence of negligence. Held: Petitioner's filing of his 1984 Individual Income Tax Return in April 1988 breached his duty to timely file, and a breach of that duty is sufficient evidence of negligence. Emmons v. Commissioner, 92 T.C. 342 (1989), affd. on other issues 898 F.2d 50 (5th Cir. 1990) followed.

R filed computations for entry of decision in these cases pursuant to Rule 155, Tax Court Rules of Practice and Procedure. Held: the Court will not consider whether Ps are entitled to a deduction for their out-of-pocket expenses related to their investment in straddle transactions because the deductibility of those expenses is a new issue involving facts not in the record that may not be considered for the first time in a Rule 155 proceeding.

Held: Petitioner is liable for the addition to tax under section 6651(a) (1). Held: Petitioner is liable for the addition to tax under section 6651(a) (1).

D executed a will on Aug. 29, 1980, that contained a formula giving his wife an amount equal to the maximum marital deduction but provided that such amount should, if necessary, be reduced in order to take full advantage of the unified estate and gift tax credit. On Oct. 4, 1982, D transferred, without consideration, 10,269 shares of common stock of Dominion Bankshares Corporation (Dominion) to corporation H. At the time of transfer, D was the controlling shareholder of H. The remaining shareholders of H, with the exception of one shareholder, were all members of D's family. D died testate on Nov. 21, 1983. Held: The formula in D's will is not a "formula expressly providing that the spouse is to receive the maximum amount of property qualifying for the marital deduction" within the meaning of sec. 403(e)(3), Economic Recovery Tax Act of 1981 (ERTA). Estate of Levitt v. Commissioner, 95 T.C. 289 (1990), followed. Held further: P has failed to meet its burden of proving that D's transfer of 10,269 shares of Dominion common stock to H was not a gift to the shareholders of H.

Petitioner entered into a settlement agreement with respondent in an earlier case. The agreement was entered into the record in that earlier case. Held: The parties are not bound by this agreement with respect to issues in the years 1982 through 1985. Petitioner's Motions to Compel Compliance with Settlement Agreement will be denied.

Held: Petitioner is not entitled to certain foreign tax credits both where petitioner failed to substantiate that the withholding tax was paid and where the foreign borrower had no legal liability to… Held: Petitioner is not entitled to certain foreign tax credits both where petitioner failed to substantiate that the withholding tax was paid and where the foreign borrower had no legal liability to withhold and pay such tax.

Held: Respondent's motion for summary judgment granted and petitioner's cross-motion for summary judgement denied. Held: Respondent's motion for summary judgment granted and petitioner's cross-motion for summary judgement denied.

Held: (On remand.) The term of the lease of gas cylinders by petitioners was indefinite, and thus for purposes of section 46(e)(3)(B), the term is not "less than 50 percent of the useful life of the property."

Petitioner is a social club which is exempt from Federal income tax. Petitioner had unrelated business taxable income for the years in issue. Held: Petitioner is not entitled to offset losses from nonexempt, nonmember undertakings against investment income because petitioner did not enter into such undertakings with an intent to profit.

P, a college-educated yachtsman and skier, and two long-time friends planned and carried out a drug smuggling operation. Held: P had income under section 61, I.R.C. 1954. Held further: Section 280E disallows deductions for trade and business expenses incurred in a drug trafficking business.

Petitioner husband (H) invented a patentable water-economical toilet (the Meditator). Held: T is not an association taxable as a corporation, because it does not have associates. Sec. 7701(a)(3), I.R.C. 1954; sec. 301.7701-2(a)(2), Proced. & Admin. Regs. (2) T is subject to the grantor trust rules of sections 671 through 677, I.R.C. 1954.

Petitioner owned 30,250 shares of section 1244 stock in a corporation organized to build and operate a water slide. Petitioner's stock became worthless in 1980 when the water slide business failed. Petitioner claimed an ordinary loss in the amount of $ 12,000 for 2,400 shares of section 1244 stock. Held: Petitioner substantiated the basis in his stock and is entitled to an ordinary loss for 2,400 shares of section 1244 stock in the amount of $ 957.34 which represents the basis in those shares.

Held: The values of conservation easements on Maryland lands granted to the Maryland Environmental Trust in 1981 and 1984 determined. Held: The values of conservation easements on Maryland lands granted to the Maryland Environmental Trust in 1981 and 1984 determined.

Decedent's husband (H) predeceased her by about 1 year. H's estate consisted mainly of two ranch properties valued on his return at $ 1,680,087. H's will contained a marital deduction bequest which passed to decedent that amount of property qualifying for the marital deduction which, in conjunction with the 1983 unified credit ($ 275,000 exemption amount), resulted in no estate tax. The remainder of H's estate passed to decedent and the couple's two children pursuant to a residuary/bypass trust. The will did not specify which assets were to fund the marital bequest. However, certain will provisions and a codicil executed by H directed that the ranchlands pass into the residuary trust for the benefit of H's bodily heirs. In his statutory notice, R valued the ranches at $ 4,560,904. He also determined that 100 percent of both properties passed outright to decedent pursuant to the martial deduction bequest in H's will. The estate offered two employees of the bank who served as executor under the wills of H and decedent to testify as to the value of the real property. R objected on the grounds that the officers were not experts and not qualified to testify under Fed. R. Evid. 701 and 702. Held, Employees of executor-bank did not qualify, under Fed. R. Evid. 702, as experts for purposes of presenting opinion testimony on certain valuation issues. Additionally, neither of P's trust officers had sufficient personal knowledge of the properties to admit testimony on the valuation issues pursuant to Fed. R. Evid. 701. Held further, value of two separate ranch properties determined. Held further, H's will interpreted to contain testamentary intentions that ranches may be fractionalized to fund both marital and residuary bequests. Held further, the estate is not entitled to a minority discount for the fractional interest held by decedent in the ranch properties.

Petitioner was divorced from her husband (H) in 1977. H appealed the trial court judgment, and on remand in 1978, a second divorce decree was issued. The second decree retroactively reduced the amount of alimony due under the first decree by $ 175 per week. Petitioner was obligated to repay $ 19,425 to H, with a $ 10,535 offset, resulting in a net obligation to H of $ 8,890. Petitioner claimed she made the payments totalling $ 8,890 to H. Petitioner received from H amounts "for her support and maintenance", and included those amounts in income on her tax returns for 1977 through 1982; however, for 1981 and 1982 she deducted the amounts she had included. Held: (1) Petitioner is entitled to deduct the amounts that she repaid but had previously included in income. (2) Petitioner's 1981 and 1982 receipts from H are "periodic payments" and not a property settlement; petitioner must include them in income; the claimed 1981 and 1982 deductions are disallowed. Sec. 71, I.R.C. 1954. Petitioner and H formed a corporation (M) in 1968, contributing cash and depreciated property in exchange for stock. M ceased operations in 1977. Petitioner and H also owned other corporations. She contends that her stock in (and loans to) those corporations became worthless. Held: (3) Petitioner's stock in M became worthless in 1977. Amount of loss determined. Petitioner is entitled to capital loss carryover deductions. Secs. 1212(b), 165(f), 165(g)(1), and 1211(b), I.R.C. 1954. (4) Petitioner is not entitled to bad debt deductions or other worthless stock deductions for any of the years in issue; burden of proof. Petitioner and her former husband were involved in litigation in connection with their divorce and with the corporations they owned. Held: (5) Petitioner is entitled to deduct 10 percent of the legal fees paid incident to her divorce. Cohan v. Commissioner, 39 F.2d 540 (CA2 1930). (6) Petitioner is not entitled to deduct the claimed additional amounts relating to the corporate litigation; burden of proof. (7) Petitioner is not entitled to other claimed deductions; burden of proof. Petitioner's 1981 and 1982 tax returns were received by respondent on August 19, 1983. Held: (8) Petitioner timely filed a request for an automatic 4-month extension to file her 1982 tax return. Sec. 6081, I.R.C. 1954. (9) Petitioner failed to file her 1981 and 1982 tax returns on time; her failure to file timely was not due to reasonable cause; burden of proof. Petitioner is liable for additions to tax under sec. 6651(a)(1), I.R.C. 1954, for 1981 (25 percent) and 1982 (5 percent).

In 1979 petitioners purchased a farm with an acreage allotment for the production of peanuts. Petitioners depreciated the allotment as an intangible asset for the taxable years 1982 through 1985. Held: Petitioners' allotment was not subject to depreciation. Held further: Petitioners are liable for the addition to tax for substantial understatement of income tax for the taxable year 1985.

We are bound to follow our Court-reviewed opinion in Fehlhaber v. Commissioner, 94 T.C. 863 (1990). Held: The notice of deficiency mailed to petitioners on December 4, 1987, was timely under section 6501(a) and, therefore, the assessment is not barred by the statute of limitations.

Held: Unreported compensation income is taxable to petitioner, and the negligence addition as determined by respondent is applicable. Held: Unreported compensation income is taxable to petitioner, and the negligence addition as determined by respondent is applicable.

Petitioner removed precious metals from his place of employment without authorization. Petitioner sold the precious metals in 1980 and 1981. Held: Petitioner is liable for the addition to tax pursuant to section 6653(b) for the taxable year 1981.

Held: Petitioner is liable for the deficiency as increased during trial and for the additions to tax, and a penalty under section 6673 in the amount of $ 5,000 is imposed on petitioner. Held: Petitioner is liable for the deficiency as increased during trial and for the additions to tax, and a penalty under section 6673 in the amount of $ 5,000 is imposed on petitioner.

In 1986, P received a cash distribution following the termination of a qualified profit-sharing plan in which P was a participant. Held: Ps failed to establish that the distribution in question is a lump sum distribution as defined in I.R.C. section 402(e)(4)(A), and therefore Ps are not entitled to use the 10-year averaging method in computing the tax due on the distribution.

During the years in issue, petitioners engaged in Arbitrage and Carry transactions in the Futures Trading, Inc. program, and/or in spread transactions in the related Merit… Held: transactions in the Merit T-Bill, T-Bond and stock forward contract programs were factual shams and losses therefrom are disallowed. Held further, even if petitioners' Merit transactions had a factual existence, the transactions lacked economic substance and a business or profit-making purpose.

When this case was called for trial, counsel for the parties stated that a basis for settlement had been reached. Respondent's counsel then proceeded to read into the record stipulated deficiencies. Held: Petitioners' motion will be granted and decisions entered. Respondent stipulated without condition to the deficiencies read into the record. Respondent must bear the risk of any ambiguity resulting from the settlement agreement read into the record by his counsel.

Petitioner and her husband, Charles Raymond, filed joint income tax returns for the years at issue, 1969 and 1970. Petitioner and Charles Raymond were divorced in 1974. In 1975 Charles Raymond pled guilty to Securities Act violations, mail fraud, and aiding and abetting for activities during 1969 and 1970. In 1976 respondent dropped criminal tax charges against Charles Raymond relating to those activities. Charles Raymond died in 1983. Respondent issued notices of deficiency to petitioner on November 5, 1987. Respondent relies on the fraud exception to the statute of limitations because of the fraud of Charles Raymond. Respondent does not allege fraud on the part of petitioner. Held: (1) Respondent has shown by clear and convincing evidence that at least some of the underpayment of tax was due to the fraud of Charles Raymond. Held: (2) The period for assessment of tax is extended for petitioner because of the fraud of Charles Raymond. Held: (3) Petitioner is eligible for relief as an innocent spouse under section 6013(e).

Petitioners failed to stipulate to facts, failed to comply with this Court's orders, failed to cooperate with respondent's requests for information as required by this Court's discovery rules, failed to file pretrial memoranda, and failed to personally appear at trial. Held: Respondent's motion to dismiss for failure to properly prosecute is granted. Rule 123(b), Tax Court Rules of Practice & Procedure.

Petitioners failed to stipulate to facts, failed to comply with this Court's orders, failed to cooperate with respondent's requests for information as required by this Court's discovery rules, failed to file pretrial memoranda, and failed to personally appear at trial. Held: Respondent's motion to dismiss for failure to properly prosecute is granted. Rule 123(b), Tax Court Rules of Practice & Procedure.

On December 21, 1982, petitioners paid $ 18,500 ($ 15,000 -- distributorship fee; $ 3,000 -- gemstones; $ 500 -- consulting fee) in connection with an arrangement assertedly to sell jewelry in certain geographic areas to which petitioners were to be assigned exclusive licenses. On their 1982 tax return, petitioners deducted $ 15,500 of these payments (the distributorship fee and the consulting fee). Held: (1) Petitioners are not entitled to their claimed deductions. (2) Petitioners' deficiency is attributable to a tax-motivated transaction ( sec. 6621(c)(3)(A)(v), I.R.C. 1954 and 1986).

Held: The term of the leases of gas cylinders owned by petitioners was indefinite, and thus for purposes of section 46(e)(3)(B) the term was not "less than 50 percent of the useful life of the property." Hauptli v. Commissioner, T.C. Memo 1988-518, revd. and remanded 902 F.2d 1505 (10th Cir. 1990), T.C. Memo 1991-72 (on remand), controlling.

We previously rejected petitioner's argument that the unified audit and litigation provisions of sec. 6244 of the Code did not apply to the three-shareholder subchapter S corporation at bar. Held: the ten-person partnership exemption from unified proceedings is not incorporated by reference by sec. 6244. Held, prior to the effective date of sec. 301.6241-1T(c), Temporary Proced. & Admin. Regs., no S corporations are exempt from the unified audit and litigation procedures.

Petitioner filed a motion for administrative and litigation costs requesting reimbursement pursuant to Rule 33(b), Tax Court Rules of Practice and Procedure, or alternatively, section 7430, Internal… Held: Because of the Federal Government's sovereign immunity, the Internal Revenue Code is the basic authority allowing an award of administrative and litigation costs against the Federal Government for cases involving Federal taxes as defined in section 7430.