Volume 66 — Tax Court Memorandum

H and W overpaid their Federal income taxes for 1986 and 1987 through withholding. H and W's period for filing their 1986 income tax return was extended until Oct. 15, 1987. Held: Under sec. 6512(b)(3)(B), I.R.C. 1986, the statute of limitations on credit or refund of a tax overpayment determined by the Tax Court requires application of rules to facts existing at the date of the mailing of the notice of deficiency.

In order to more easily obtain loans from shareholders, employees, and certain other persons, C developed a system allowing those lenders to take advances against amounts on loan by them to C. An… Held: Advances made from C to P in 1986 against amounts already on loan by P did not constitute gross income.

Petitioner (P) and her former husband (H) filed joint Federal income tax returns for 1979, 1980, and 1981, the taxable years in issue. Held: Petitioner is entitled to innocent spouse relief under sec. 6013(e), I.R.C., for the 1979 and 1980 taxable years, but not for the 1981 taxable year.

P, a chiropractor, carried on his chiropractic business as an employee of C. P is the sole shareholder of C. C, which is also a petitioner in this consolidated case, was operated as a C corporation… Held: R's disallowance of consulting expenses claimed by C for its 1986 and 1987 taxable years is sustained. 2. Held, further, R's disallowance of automobile expenses claimed by C for its 1986 through 1989 taxable years is sustained. 3.

C, an individual, and P, a related corporation, formed a limited partnership to run a racetrack. Held: The allocation of 99 percent of the partnership's losses to the limited partner lacks substantial economic effect. The losses should be reallocated in accordance with the partners' interests in the partnership, which in this case is their relative capital contributions to the partnership.

This case pertains to the qualification and substantiation of costs of goods sold and certain deductions claimed on P's 1985, 1987, 1988, and 1989 Federal income tax returns. Held: P failed to substantiate his claimed deductions and costs of goods sold for all the taxable years in issue. Held, further: P's gross income is increased for unreported interest and/or dividend income for the 1988 and 1989 taxable years.

P invested in a limited partnership (Harding) which was involved in coal mine leases. On his income tax return for 1976, P deducted, as a loss, a $ 48,315 loss attributable to Harding's operations. P claimed, in the alternative, a theft loss in regard to Harding. P also invested in a limited partnership which purchased a motion picture. In regard to this investment, P deducted $ 19,195 as an ordinary loss and claimed investment tax credits of $ 13,650 for the tax year 1978. P asserted the statute of limitations as a bar against respondent in regard to the tax years 1976 and 1977. Held: 1. P failed to demonstrate any defects in the waiver of period of limitations. Deficiencies for 1976 and 1977 are not barred by the statute of limitations. 2. As a result of P's stipulation agreeing to all findings of fact and legal conclusions in Hawley v. Commissioner, T.C. Memo. 1988-77, P may not deduct $ 48,315 as a loss in the operations of Harding. 3. P fails to satisfy the criteria of sec. 165, I.R.C.; as a result, P is not entitled to a theft loss deduction in regard to his investment in Harding. 4. P did not establish that the limited partnership which acquired the above-mentioned motion picture had a profit motive or that the venture had economic substance. Thus, P is not entitled to deduct ordinary losses and claim investment tax credits with respect thereto. 5. R's determination of additions to tax under sec. 6651(a), I.R.C. for 1976 sustained.

P, a veterinary specialist, entered into a service contract with a foreign-country livestock association. The U.S. Agency for International Development (USAID) agreed to fund the contract. Held: Ps are eligible for the sec. 911, I.R.C., foreign earned income exclusion since P was not an employee of USAID.

P and H jointly owned an interest in a partnership. Held: The Form 870-L(AD) signed by P and H was a single offer to settle the liability of both P and H. The filing of H's bankruptcy petition brought into effect an automatic stay, precluding R from settling as to H. 11 U.S.C. sec. 362(a).

H and W ran a shrimping business. Respondent disallowed a deduction from the income of this business for commission expense for H's 1982… Held: Respondent's disallowance of commission expense is sustained for all years in issue. Held further: The 1983 taxable income of H and W is increased in the amount of $ 80,000, the amount that they could not prove to be from a nontaxable source. Held further: H and W are liable for additions to tax under sections 6653(a) and 6661.

In January 1985, P, a domestic manufacturer of heat recovery equipment, entered into an agreement (the Yamada agreement) with K, a Japanese… Held: Because P reserved the right to disclose the Data within the Region upon termination of the Kubota agreement, P retained substantial rights of value in the Data; consequently, the Kubota agreement did not effect a sale or exchange of the Data under sec. 1222(3), I.R.C. Held further, the payments received by P under the Kubota…

JP and RP were divorced in 1983. JP received temporary support of $ 2,000 per month until the divorce decree was filed. Held: JP's 1984, 1985, and 1986 receipts from RP in the amount of $ 24,000 per year are for support; JP must include them in her income. Sec. 71, I.R.C. 1954. 2. Held, further: JP's 1984, 1985, and 1986 receipts from RP in excess of $ 24,000 per year are part of a property settlement; JP does not have to include them in income.

Ps operated a farm on which they bred, trained, and sold horses. Ps personally did all the work on the farm, sought and followed expert advice, and kept detailed records. Held: Based on the facts and circumstances of the case, the horse farm was an activity engaged in for profit under sec. 183.

Respondent examined petitioners' 1986, 1987, and 1988 Federal income tax returns and determined tax deficiencies and additions to tax aggregating $… Held: the Court will grant one of two motions by petitioners for sanctions against respondent for noncompliance with petitioners' discovery requests. 2. Held further, petitioners exhausted the administrative remedies available to them within the Internal Revenue Service. Minahan v. Commissioner, 88 T.C. 492 (1987), followed. 3.

Held: P wife is an innocent spouse as to 1981 and 1982, but not as to 1983. See sec. 6013(e), I.R.C. Held: P wife is an innocent spouse as to 1981 and 1982, but not as to 1983. See sec. 6013(e), I.R.C.

1. Ps pledged their farm property as collateral for a loan from Bank to W. W defaulted on the loan and Bank instituted proceedings to foreclose on Ps' property. Held: Ps may not increase their bases in the farm property to reflect the payment to Bank. 2. Held further: The $ 130,000 of stock issued to Ts in 1987 does not qualify for ordinary loss treatment under sec. 1244(a), I.R.C.

Held: Ps' lacked a profit objective with respect to the purchase and lease transaction at issue. Accordingly, the majority of deductions claimed by Ps with respect thereto are disallowed. Sec. 183, I.R.C. However, Ps are entitled to an interest deduction under sec. 163, I.R.C.Jacobson v. Commissioner, 915 F.2d 832, 840 (2d Cir. 1990); Golsen v. Commissioner, 54 T.C. 742 (1970).

In our earlier Memorandum Opinion, Nicholson v. Commissioner, T.C. Memo. 1993-183, we found that three issues, argued on brief by P, had been neither formally pleaded nor tried with R's consent. We therefore held that P could not raise those issues. See Rule 41, Tax Court Rules of Practice and Procedure.Held: P's motion for reconsideration with respect to those issues will be granted. Upon reconsideration, we find that the three issues were tried by implied consent under Rule 41(b)(1), Tax Court Rules of Practice and Procedure. We hold for P on two of those issues. With respect to a claimed bad debt deduction (which was properly pleaded), we accepted in our earlier opinion a concession by P that a nonbusiness bad debt loss in 1980 should be treated as a short-term capital loss that cannot be carried forward to 1981 (the year for which it was claimed as a deduction). The parties agree that this was an error of law. R does not oppose our granting P's motion with respect to this issue. Held: P's motion for reconsideration with respect to this issue will be granted. Upon reconsideration, we hold that P may carry forward the 1980 bad debt loss to 1981. See sec. 1212(b), I.R.C.

G was diagnosed with esophageal cancer in May 1985. Although G's condition initially improved following radiation therapy, the cancer recurred in September 1985. Held: the amendments to the partnership agreements executed after G was diagnosed with cancer will not be disregarded in determining the fair market value of G's partnership interests on Mar. 5, 1986.

In October 1989, P entered into an oral immunity agreement with the Government. P alleges that the agreement included immunity from civil tax liability, precluding assessment of the taxes in issue. Held: P did not establish that the oral agreement included immunity from civil tax liability.

Decedent's will provided for the creation of two subtrusts for the purposes of implementing the missionary work of charitable organizations through two named individuals and of establishing foreign… Held: The bequests to the subtrusts qualify for the charitable deduction.

Petitioner wife and her husband filed a joint income tax return for their 1983 taxable year. Held: Petitioner is not entitled to relief as an innocent spouse under sec. 6013(e), I.R.C.

P, an attorney who also ran a real estate development business with B, purchased a parcel of land with B in 1985. Held: The Backland is not a capital asset, as it was held for sale in the ordinary course of P and B's real estate business; P's share of the gain on sale of the Backland is ordinary income to P.

The T family owned C corporation whose primary asset was a diner. Held: Respondent's deficiency determinations against the Theodoulous and CMEM, Inc. (CMEM), were not arbitrary. 2. Held, further, respondent has met her burden of proving, as alleged in her posttrial amended answer, that the Theodoulous had unreported rental income for their 1982 through 1984 taxable years. 3.

Petitioner husband, a medical doctor, and petitioner wife, a noted sidesaddle rider, operated a farm at which horses were boarded, bred, and trained. Held: Based on all the facts and circumstances, the horse farm activity was not conducted for profit within the meaning of sec. 183, I.R.C. 2. Held, further, petitioners failed to substantiate various Schedule A deductions claimed for their 1988 and 1989 taxable years. 3.

Ps have operated a pet store since at least 1963. Although the store was profitable in its early years, it did not earn a profit in the 1980 through 1987 taxable years. Held: Ps' pet store was not an activity entered into for profit during the years in issue.

Pursuant to the divorce decree of P and B, Teachers Insurance and Annuity Association-College Retirement Equities Fund transferred 58 percent of the balance of B's sec. 403(b), I.R.C., tax-sheltered… Held: The funds transferred from B's TSA to P's TSA are taxable to P in the year of transfer.

P worked exclusively for B corporation, L corporation, and another related corporation. P was the president, director, and sole shareholder of B and L. P received compensation from B and L and deducted amounts for Keogh contributions. Held: P was an employee of B and L, not an independent contractor, so he could not make deductible Keogh contributions.

P, an airline pilot, was employed by a U.S. corporation, but lived in the United Kingdom for the years in issue. Held: P was not qualified to elect under sec. 911, I.R.C., because he did not have a tax home in a foreign country for the years in issue.

D created a revocable trust in which she alone retained until death both a power to terminate and a power to invade trust principal. Held: The appointment by D of two co-trustees, who were granted administrative powers only, had no impact on D's powers to terminate the trust and invade trust principal; consequently, the co-trustees could not alter beneficial interests in the trust, and any transfers made by D during their joint tenure did not amount to a relinquishment…

In 1977, Malone & Hyde incorporated Eastland, a wholly owned foreign subsidiary, to carry on the business of insurance, reinsurance, and coinsurance. Held: the portion of the insurance premiums ceded to Eastland that was charged back to the subsidiaries is deductible as ordinary and necessary business expense for insurance.

P was a closely held corporation engaged in residential development in New England. Held: R's determination that a portion of the payments made by P to its two shareholder-officers during its 1988 and 1989 taxable years did not constitute reasonable compensation is sustained.

P, a long time employee of G, was terminated from employment pursuant to an agreement executed by P and G in 1986. Under the agreement, P was to receive certain payments over a 6-year period. P received amounts according to the terms of the agreement from 1986 through 1988. In 1988, P and G agreed to accelerate the remaining payments into a single lump-sum payment. P did not report this lump-sum payment on his return for 1988. P claimed the sec. 104(a)(2), I.R.C., exclusion for damages received pursuant to an agreement entered into in lieu of prosecution of a claim based on personal injuries or sickness. R determined a deficiency and addition to tax on the grounds that P did not qualify for the sec. 104(a)(2), I.R.C., exclusion. 1. Held: P is not eligible for the sec. 104(a)(2), I.R.C., exclusion because P failed to prove that the agreement was entered into in lieu of prosecution of a claim based on personal injuries or sickness. 2. Held, further, P has not shown that he should be excused from the additions to tax determined by R, pursuant to sec. 6661, I.R.C.

P had ordinary income and capital gain in 1987. P also prematurely withdrew money from an IRA account. Taxes were withheld from P's income. Held: P did not timely file his 1987 Federal income tax return and is liable for an addition to tax under sec. 6651(a), I.R.C. 1986.

Held: A Saudi crude oil resale pricing restriction in effect during a period in which Saudi crude was priced below other comparable… Held: A Saudi crude oil resale pricing restriction in effect during a period in which Saudi crude was priced below other comparable crudes prohibited the sale of Saudi crude oil for an amount in excess of the Saudi official selling price, and petitioners complied with the restriction; consequently, respondent is precluded from allocating…

Ps owned two farms, Burton and Billenbrook. In the late 1970s, oil was discovered on Burton and Ps signed a lease permitting WCS to drill there for oil. Held: Ps were not engaged in a trade or business on Burton during the years in issue. Held further: Ps did not operate Billenbrook for profit during the years in issue. Held further: The activities of B after February 1985 were not engaged in for profit.