Volume 63 — Tax Court Memorandum

On his 1982 return, petitioner, a member of a professional musical group, claimed a net loss for his alleged tour promotion business activities. Held: Petitioner is liable for additions to tax under secs. 6653(a)(1) and (2) and 6661.

Decedent donated certain land and improvements to the Palmer College Foundation, an eligible charitable donee. Held: reproduction cost of the improvements determined; fair market value of the contributed property determined. Sec. 170(a)(1), I.R.C. 1954.

R determined deficiencies in and additions to P's Federal income tax liability for the taxable years 1985 and 1986 after disallowing losses claimed by P with respect… Held: P operated his pecan farm as an activity engaged in for profit for purposes of sec. 183(a), I.R.C.Held, further, P is entitled to that portion of the investment credit which he claimed for the taxable year 1985 with respect to a truck, to the extent the truck was used in connection with his farm activity.

A notice of deficiency was mailed to P's Florida address on Jan. 5, 1990. Held: R's motion to dismiss for lack of jurisdiction is granted since the notice of deficiency was sent to P's last known address and the petition is untimely. Held further: The petition and other documents executed by V were not well grounded in fact and law and caused unnecessary delay and needless increase in the cost of litigation.

R hired G, a psychiatrist, as an expert to determine whether P husband was a compulsive gambler and whether P wife was aware of P husband's gambling compulsion. Held: R's expert's report and testimony, if offered, will not be relied upon by the Court as to whether P wife is a truthful witness.

Held: Evidentiary motions addressed.

R determined that P's profit-sharing plan does not satisfy the requirements of section 401(a), I.R.C., for plan years beginning on and after October 31, 1984, and therefore the plan is not exempt… Held: R's determination is sustained.

Petitioners H and W each hold a 25-percent interest in a general partnership. In addition to her distributive share of the partnership's trade or business income, W received guaranteed payments for services rendered. Petitioners argue that only the guaranteed payments constitute self-employment income. R contends that the entire amount received represents W's distributive share of the partnership's taxable income and therefore is subject to self-employment tax. Held, under sec. 1402(a), I.R.C., net earnings from self-employment includes W's distributive share of partnership trade or business income.

Held: Petitioner Patrick J. Keogh's stock option does not qualify under sec. 422A(b)(4); petitioners are not liable for the negligence additions or the sec. 6661 addition. Held: Petitioner Patrick J. Keogh's stock option does not qualify under sec. 422A(b)(4); petitioners are not liable for the negligence additions or the sec. 6661 addition.

For 1981 and 1982, petitioner and her former husband filed joint tax returns on which they claimed losses attributable to an investment in a computer-leasing activity. Held: Petitioner has failed to meet her burden of proving that the losses claimed by her and her former husband were grossly erroneous within the meaning of sec. 6013(e)(1)(B), I.R.C.Held, further, petitioner is not entitled to be relieved of liability under sec. 6013(e), I.R.C.

Held: Respondent's deficiencies and negligence additions sustained; Mrs. Zafiratos determined to be an innocent spouse. Held: Respondent's deficiencies and negligence additions sustained; Mrs. Zafiratos determined to be an innocent spouse.

Petitioner owned and operated a gas station, a liquor store, and a ranch as a sole proprietor during 1973, 1974, and 1975. Held: Petitioner's income for 1973, 1974, and 1975 was underreported. Amounts determined. 2. Held, further, petitioner must recapture investment credits under sec. 47(a) (1), I.R.C. 1954, for 1973, 1974, and 1975; burden of proof. 3.

1. Held: Respondent's notices of deficiency, determining, by a source and application of funds analysis, that petitioners had unreported income, from petitioner Melvin Williams' narcotics… Held: Respondent's notices of deficiency, determining, by a source and application of funds analysis, that petitioners had unreported income, from petitioner Melvin Williams' narcotics distribution activities, is sustained due to petitioners' failure to carry their burden of proof.

P is a notice partner of CL. CL purchased a building from FNL on which FNL had made rehabilitation expenditures. Held: CL's basis in the building for purposes of determining whether CL had substantially rehabilitated the building so as to be entitled to any rehabilitation investment tax credit is CL's adjusted cost basis in the building less the amount of qualified rehabilitation expenditures made by FNL, but treated as incurred by CL.

During 1985 and 1986, Ps operated two Schedule C businesses. Ps did not maintain or produce adequate records with regard to their business activities. Held: R's determinations are sustained.

P was arrested and incarcerated on July 12, 1985. P was committed to Metropolitan Correctional Center, San Diego (M.C.C. San Diego), from Aug. 5, 1985, until Mar. 24, 1987. From Mar. 24, 1987, through Apr. 22, 1987, P was in transit in custody of the U.S. Marshals Service. On Apr. 22, 1987, P arrived at his new location at Danbury, Connecticut. Since the time of his arrest and incarceration, P did not give notice to R of a change of address. However, R was aware in Feb. 1987 that P was incarcerated at M.C.C. San Diego. On Apr. 9, 1987, R sent duplicate notices of deficiency to P at P's address in New York, where he resided prior to his incarceration, and to M.C.C. San Diego. P filed an untimely petition with this Court. P and R filed cross-motions to dismiss for lack of jurisdiction. Held: R mailed a notice of deficiency to P's "last known address" within the meaning of sec. 6213(b) and since a timely petition was not filed, R's motion to dismiss will be granted. Held further: P's motion to dismiss for lack of jurisdiction will be denied.

S owned and operated a facility that converted solid waste into electricity by burning the waste and generating electricity from the heat. Held: the notice of final partnership administrative adjustment was not arbitrary. Held, further, whether an individual partner is at risk pursuant to sec. 465, I.R.C., is an affected item which is not an item over which the Court has jurisdiction in a partnership level proceeding. Dial USA, Inc. v. Commissioner, 95 T.C. 1 (1990).

During 1981, Ps purchased a second-tier partnership interest in a sale-leaseback transaction structured around plastics recycling equipment. Held: the transaction here in issue is so lacking in economic substance that it is disregarded for Federal income tax purposes and respondent's determination of deficiency in tax is sustained. 2. Held further, respondent's determination of additions to tax under secs. 6653(a) and 6659, I.R.C., are sustained. 3.

P, an accrual basis taxpayer, declared bonuses for its two 50-percent owner employees in early March 1987. P deducted the bonuses as compensation for its 1986 taxable year. Held: P is not entitled to deduct the bonuses for taxable year 1986 because P has not shown that payment of the bonuses was impracticable and the impracticability was unforeseeable as of Dec. 31, 1986. Sec. 1.404(b)-1T, Q&A 2(b)(2), Temporary Income Tax Regs., 51 Fed. Reg. 4321 (Feb. 4, 1986).

Respondent determined adjustments to petitioner's partnership return for 1983 and 1984. The partnership ostensibly was formed to drill for oil and gas. Held: Petitioner lacked a profit objective and respondent properly disallowed all deductions at issue; sec. 183, I.R.C.; Golanty v. Commissioner, 72 T.C. 411 (1979), affd. without published opinion 647 F.2d 170 (9th Cir. 1981).

P, a beneficiary of insurance proceeds on decedent's life, was personally liable for decedent's unpaid estate tax to the extent of the… Held: A final Tax Court decision deciding the amount of estate tax imposed on the transfer of decedent's estate was res judicata for purposes of determining the amount of personal liability imposed on P pursuant to section 6324(a)(2); P's personal liability under section 6324(a)(2) constitutes a liability at law for purposes of section…

P, a beneficiary of insurance proceeds on decedent's life, was personally liable for decedent's unpaid estate tax to the extent of the… Held: A final Tax Court decision deciding the amount of estate tax imposed on the transfer of decedent's estate was res judicata for purposes of determining the amount of personal liability imposed on P pursuant to section 6324(a)(2); P's personal liability under section 6324(a)(2) constitutes a liability at law for purposes of section…

Respondent issued a notice of deficiency for 1985 and 1986. The 1985 deficiency was determined by using income averaging. Respondent moved to amend her answer to assert an increased deficiency for 1985, by asserting that petitioner's taxable income for each of the base period years, 1982-1984 (for which respondent is barred by sec. 6501(a), I.R.C. 1986, from assessing a deficiency), is more than the amounts reported on petitioner's income tax returns for those years, and used by respondent in income averaging in calculating the deficiency for 1985. Held: Respondent may amend the answer to increase the deficiency for 1985. Sec. 6214(b), I.R.C. 1986.

On cross-motions for partial summary judgment, the parties stipulated that Ps paid $ 3,200 to participate in a tax shelter that was a sham transaction without economic substance, but that Ps… Held: Ps are not entitled to deduct their payment under sec. 165(c)(2), I.R.C. If a tax shelter transaction is a sham that lacks economic substance, the taxpayer's state of mind is irrelevant under sec. 165(c)(2), I.R.C. 2.

Held: Respondent has failed to show by clear and convincing evidence that petitioner has an underpayment due to fraud for either of the years in issue. Sec. 6653(b), I.R.C. 1954.

A designated P as the beneficiary of his employee retirement plan. Prior to naming P as his beneficiary, A asked P to pay A's debts upon his death, and P orally agreed to do so. Held: Taxation of the distribution is computed under the provisions of secs. 402(a) and 72(e).

Petitioner husband was a runner engaged in illegal gambling activities. He did not report his income from such activity. 1. Held: Petitioners have not carried their burden of proof as to deficiencies, and an addition to tax under sec. 6661, I.R.C., determined by respondent. 2. Held, further: respondent has carried her burden of proof as to additions to tax for fraud under sec. 6653(b)(1)(A) and (B), I.R.C., as to petitioner husband but not as to petitioner wife.

Saline Sewer treated fees received between 1976 and 1983 as nontaxable contributions to capital pursuant to sec. 118, I.R.C. Respondent recharacterized the fees as taxable customer connection fees,… Held: Petitioners' motion for partial summary judgment concerning sec. 481, I.R.C., is granted. Respondent's proposed adjustments are not a change in Saline Sewer's method of accounting, therefore, sec. 481, I.R.C., does not apply.

Held: Respondent's deficiency, to a substantial degree, sustained; respondent's additions to tax for fraud, under sec. 6653(b)(1) and ( 2), I.R.C., sustained in part.

P received unemployment compensation under California's Unemployment Compensation statute. P subsequently received disability benefits under California's Unemployment Compensation Disability statute. The parties agree that petitioner's unemployment compensation is includable in his gross income but disagree as to whether any portion of his disability benefits must also be included. Held: P's disability benefits are "in the nature of unemployment compensation" to the extent that they equal the amount of unemployment compensation P could have collected but for his disability. Accordingly, P must include such portion of his disability benefits in his gross income under sec. 85, I.R.C.

P entered into an agreement to purchase a vacation condominium for a stated purchase price in excess of $ 1.5 million. Held: P has failed to show that the benefits and burdens of ownership of the condominium were acquired more than 6 months prior to the due date of the first installment; accordingly, no unstated interest is allocated to the first installment pursuant to sec. 1.483-1(a)(1), Income Tax Regs.

P-W had been divorced and then married P-H. P-H obtained money by means of a Ponzi scheme and failed to report the income or file returns. P-W, who had some income of her own and was unfamiliar with P-H's business matters, provided P-H with her tax information and signed joint returns of income which she believed were filed. P-H did not file these returns. At one point when confronted by R's officer as to why she did not file, P-W obtained photocopies of the joint returns from P-H and provided them to R's officer explaining that she had been divorced and was not filing under P-H's family name. R's officer accepted the copies of returns and P-W's explanations, and closed his inquiry. About 2 years later, P-H's Ponzi scheme collapsed and thereafter R's agents began an inquiry into P-H and P-W's tax matters, whereafter it was discovered that no returns had been filed. R's agents inquired about whether P-W filed returns and they were provided with photocopies of returns which P-W believed had been filed. R's agents caused the photocopies to be filed even though the copies did not contain original signatures and it is generally not R's policy to file such return documents. The photocopies were filed without P-W's knowledge or consent. P-W contends that she is an innocent spouse under either sec. 6013(e) or sec. 66(c), I.R.C. R contends that she is not and that sec. 66(c), I.R.C., is not applicable because of the photocopies of returns that R's agents caused to be filed. P-W also contends that P-H never had title to the embezzled funds and that under California law, such funds were not community property. Held, the photocopies of returns were not "joint returns" for purposes of sec. 6013(e), I.R.C.Held, further, P-H did not obtain title to the property obtained through the Ponzi scheme and California law interpreted not to include such property as community property.

Decedent's gross estate included 7.5 percent of the outstanding shares of M Co., a privately held corporation. Held: under the facts of this case, a modified arbitrage analysis, rather than traditional analysis of fundamentals, is the preferable method for valuing the shares, inasmuch as the corporation was the subject of a takeover bid on the valuation date.

Held: Petitioner was misclassified by his employer as an independent contractor and no withholding of tax was made. Held: Petitioner was misclassified by his employer as an independent contractor and no withholding of tax was made. Petitioner is nevertheless liable for income tax and additions to tax on such income. We have no jurisdiction over FICA tax under these circumstances.

O, which operates a large commercial mushroom production facility, claimed an investment tax credit in 1984 for its entire facility. Held: some of the assets for which the Commissioner disallowed the investment tax credit are sec. 38 property because they are part of a single purpose horticultural structure or because they qualify as tangible property used as an integral part of manufacturing or production. 2.

R filed a motion to dismiss for lack of jurisdiction on the ground that P did not file his petition for redetermination within the time prescribed by sec. 6213(a), I.R.C. P contends that R did not… Held: R mailed the deficiency notice to P's last known address -- the address appearing on P's last filed tax return. Held, further, because P did not file his petition within the time prescribed in sec. 6213(a), I.R.C., R's motion to dismiss for lack of jurisdiction is granted.

After receiving a letter from the IRS denying their claim for administrative costs incurred in securing a refund of a wrongful levy, Ps filed a… Held: the Court has jurisdiction in this case. Gustafson v. Commissioner, 97 T.C. 85 (1991). Held, further, Ps are not entitled to an award of administrative costs because such costs were not incurred after the earlier of the decision of the IRS Office of Appeals or a deficiency notice, as required by sec. 7430(c)(2), I.R.C.

Decedent owned shares in Fair Lanes, Inc. Certain of those shares were subject to a redemption agreement between decedent and Fair Lanes, Inc. Decedent transferred, within 3 years of death,… Held: The value, for estate tax purposes, under sec. 2032, I.R.C., of the shares subject to the redemption agreement is $ 2,650,362. Held, further, the value, for estate tax purposes, under sec. 2032, I.R.C., of the shares not subject to any redemption agreement is $ 9,193,510.73. 2.

K, a partner in H Graphics, and R executed a "Settlement Agreement for Partnership Adjustments" (Form 870-P). Sec. 6224(c)(1), I.R.C., provides that a partnership settlement agreement is binding on all parties to the agreement absent fraud, malfeasance, or misrepresentation of fact. Sec. 6224(c)(2), I.R.C., further provides that R must offer consistent settlement terms to any other partner who so requests. After requests by other H Graphics partners for settlement terms consistent with those in K's settlement agreement, R repudiated the settlement with K contending that it had been procured by fraud, malfeasance, or misrepresentation of fact. Accordingly, R refused to offer consistent settlement terms to the other partners who requested consistent treatment. Held: In order to establish fraud, malfeasance, or misrepresentation of fact within the meaning of sec. 6224(c), I.R.C., the party making such allegations must prove that the execution of the settlement agreement was induced by intentional and deliberate misstatements or silence calculated to mislead or deceive. R has failed to prove that the settlement agreement with K was procured by fraud, malfeasance, or misrepresentation of fact. Pursuant to sec. 6224(c)(1), I.R.C., the settlement agreement is binding and, under sec. 6224(c)(2), I.R.C., R must offer consistent settlement terms to all other partners who made timely requests for such settlement terms.

P filed a motion for reasonable litigation costs pursuant to sec. 7430, I.R.C.Held, P's motion is denied on the ground that R's litigation position was substantially justified. Held: P's motion is denied on the ground that R's litigation position was substantially justified.

Petitioner Herbert Sharer effectively controlled petitioner Federated Graphics Companies, Inc., and Federated's pension plan. Held: R did not err in disallowing Federated's bad debt deduction.

The Court of Appeals held that petitioner's off-season conditioning and training camp expenses are deductible to the extent that they contribute to his fitness… Held: none are deductible because they are either personal or not substantiated. In addition, the Court of Appeals directed us to decide whether expenses for trade journals, sewing, conditioning expenses during the hockey season, and hockey tickets purchased for fans are deductible under sec. 162, I.R.C. 1954.

P claimed net operating losses which it carried over to fiscal year 1988. Pursuant to sec. 60(b)(5) of the Deficit Reduction Act of 1984, Pub. Held: It is within this Court's discretion to accept or reject a concession. Whether we will accept a concession or proceed to decide the underlying substantive issues is determined by considering what will best serve the interests of justice. McGowan v. Commissioner, 67 T.C. 599 (1976).

In Estate of Killian v. Commissioner, T.C. Memo. 1987-365, the Court held that petitioner was an innocent spouse under section 6013(e). Held: petitioner's liability as a transferee is determined by Texas law. Commissioner v. Stern, 357 U.S. 39 (1958); Gumm v. Commissioner, 93 T.C. 475 (1989), affd. without published opinion 933 F.2d 1014 (9th Cir. 1991).

Prior to her death, decedent transferred fractional undivided interests in her residence to her children. Held: Only the value of decedent's cotenancy is includable in the gross estate; decedent neither had the benefit of any agreement, express or implied, that the residence would remain her home ( Estate of Honigman v. Commissioner, 66 T.C. 1080 (1976); Estate of Linderme v. Commissioner, 52 T.C. 305 (1969), distinguished), nor did her rights…

R mailed a statutory notice of deficiency for 1986 to the address on P's 1985 income tax return. After the notice of deficiency was mailed, P filed his 1986 tax return. Held: the notice of deficiency was mailed to P's last known address.