Volume 68 — Tax Court Memorandum

R issued notices of final S corporation administrative adjustment (FSAA) to CT for its 1984 and 1985 tax years. Held: CT's S corporation election was invalid because not all of CT's shareholders consented to the election. Held, further, CT is not entitled to its claimed deductions for 1984 and 1985, because CT was not carrying on a trade or business in those years.

In 1981 P, an attorney, tried to buy a lithograph package known as Green Sonata. P was a one-third partner in a partnership (E). Held: P is not entitled to a depreciation deduction or an investment credit on account of Green Sonata for 1981. Secs. 167(a), 38(a), I.R.C. 1954. 2. Held, further, P Must take into income for 1982 and 1983 the amounts of his excess withdrawals from E, and is not entitled to relief under Sec. 1341. Secs. 61(a), 1341, I.R.C. 1954. 3.

In 1988 through 1990, W embezzled $ 154,412.40 from B as follows: $ 19,260.53 in 1988; $ 94,251.87 in 1989; $ 40,900 in 1990. Held: We sustain respondent's determination that H and W failed to report embezzlement income for their 1989 and 1990 taxable years. Held, further, we sustain respondent's determination that H and W are liable for accuracy-related penalties under sec. 6662(a) for their 1989 and 1990 taxable years.

Ps, husband and wife, filed joint returns for 1988. R determined deficiencies and additions to tax against Ps based upon the omission of items from gross income during 1988. Held: R has not shown by clear and convincing evidence that fraud exists. The addition to tax for fraud is not sustained.

P is a California nonprofit public benefit association. Held: P failed to establish that its religious purposes are accomplished in such a manner as to fulfill the requirements for church status. Further, any religious worship associated with P's program is incidental to its primary activities of advocating proper exercise, nutrition, and stress management.

P, a nonprofit rural electric cooperative, is generally exempt from Federal income tax under sec. 501(a), I.R.C. P borrowed funds to replace funds that it had spent in its exempt activities. Held: The interest is unrelated debt-financed income under sec. 514, I.R.C., that is subject to Federal income tax under sec. 511, I.R.C.

P and R submitted this case on the basis of fully stipulated facts subsequent to this Court's opinion in Walker v. Commissioner, 101 T.C. 537 (1993). Walker involved an issue (transportation expenses) and facts indistinguishable from this case. In Walker, we treated Rev. Rul. 90-23, 1990-1 C.B. 28, as a concession by R. Seventy-eight days after this case was submitted fully stipulated and 5 days before R's brief was filed, R released Rev. Rul. 94-47, 1994-29 I.R.B. 6 (July 18, 1994), which significantly modified Rev. Rul. 90-23, supra. R now relies on Rev. Rul. 94-47, supra, in arguing that P is not entitled to deduct his transportation expenses. Held: Rev. Rul. 90-23, supra, which we have previously decided constituted a concession of the issue presented in this case, was in existence when the evidentiary record in this case was submitted. R's reliance upon Rev. Rul. 94-47,supra, which was issued after the factual record was submitted, is fundamentally unfair to P. We will decide this case on the basis of the facts existing on the date of submission. P is entitled to prevail in light of our decision in Walker v. Commissioner, supra.

R issued a notice of deficiency based in part upon the disallowance of certain partnership loss deductions that were claimed by P for the tax years 1983, 1984, 1985, and 1986. Held: Although R's statutory notice was issued after the normal 3-year limitation period had expired, the period of limitations was extended by valid consent agreements and by the conversion, upon filing for bankruptcy protection, of P's partnership items to nonpartnership items. 2.

In 1989, the year in issue, P maintained two bank accounts in which he deposited moneys for services that he performed for various customers. Held: P is required to include in income amounts received on account of services performed by him during 1989. Held, further, P is liable for an addition to tax for fraud under sec. 6663(a).

Pursuant to a divorce instrument, P received certain payments from her former husband. Some of the payments were designated as spousal support. Held: The provision which allows spousal support to be decreased by future court-ordered increases in child support does not constitute a contingency related to a child under sec. 71(c)(2), I.R.C. Therefore, payments received by petitioner during 1989 constitute taxable alimony.

H, an attorney, moved to Sacramento, California, from Los Angeles, California, in 1985 to work for law firm 1. H's wife, W, remained in Los Angeles and worked for law firm 2. Held: H and W failed to prove that Los Angeles was not their tax home during 1990; thus, we sustain R's determination that sec. 162(a)(2) does not allow H and W to deduct the rental payments for the house in the Los Angeles area.

P is the sole shareholder of E. P filed Forms 1120S for E for the 1989 and 1990 taxable years. P did not (and has never) filed a Form 2553. Held: E has not made an effective subchapter S election. The filing of Form 1120S does not constitute such an election. Furthermore, the filing of Form 1040 does not constitute a valid consent by the shareholder.

Held: The fair market value of certain real estate in Piraeus, Greece, owned by D on the date of her death was $ 531,036. Held, further, D's estate is entitled to a $ 73,900 credit for the payment of foreign death taxes. Held, further, D's estate is liable for an $ 89,074 addition to tax for the failure to file timely a Federal estate tax return.

P was convicted of two counts of filing false personal income tax returns, one count of filing false corporate returns, and one count of conspiracy… Held: The assessment and collection of deficiencies are not barred by the statute of limitations since R has established, by clear and convincing evidence, that P intentionally sought to evade the payment of taxes known to be owing. 2. Held, further, P was not acting as an agent in receiving and spending the funds in question.

P, McNeill Stokes, and his former wife, Judy F. Stokes, were divorced by a final decree of divorce entered May 14, 1986. Held: P is not entitled to deduct under sec. 215, I.R.C. the $ 14,400 paid under the settlement agreement to his former spouse in 1987 as alimony, since the payments do not meet the requirement of sec. 71(b)(1)(D), I.R.C., that the payments not extend beyond the death of the payee spouse.

Held: Services rendered by husband petitioners, ministers, to organization constituted performance of sacerdotal functions within meaning… Held: Services rendered by husband petitioners, ministers, to organization constituted performance of sacerdotal functions within meaning of secs. 1.107-1(a) and 1.1402(c)-5(b)(2)(ii), Income Tax Regs., such that parsonage rental allowances paid for 1989 and 1990 were excludable from gross income under sec. 107, I.R.C.Held, further, no…

Following R's audit of P's 1964-68 taxable years, R and P agreed that P was not entitled to the $ 19 million reduction in sale price reported for 1966, but that P could claim $ 15.2 million of this… Held: The mitigation provisions do not allow R to assess a deficiency in P's 1966 Federal income tax.

In 1973, a partnership (A-I) was formed, with petitioner (P) as the only general partner; and A-I bought an apartment complex. Held: BT-I and BT-II are shams; the interest received on the note in 1986 and 1987, and the capital gain on the sale of the note in 1987, are taxable to P.

P received worker's compensation benefits as a result of an injury sustained as a welder. Held: Sec. 104(a)(1), I.R.C., does not authorize exclusion of interest awarded pursuant to a State statute for the delayed payment of worker's compensation benefits. Kovacs v. Commissioner, 100 T.C. 124 (1993), affd. without published opinion 25 F.3d 1048 (6th Cir. 1994), applied. 2.

P, a nonprofit organization, was created in order to foster the cultural heritage of Bergenfield, New Jersey's Spanish-American residents. Except for modest charitable donations and scholarships, P primarily engages in social activities designed to provide Bergenfield's Spanish-American residents with a sense of community. P was granted exempt status under sec. 501(a), I.R.C., as a social welfare organization described in sec. 501(c)(4), I.R.C. Thereafter, P applied for exempt status as a charitable organization described in sec. 501(c)(3), I.R.C.Held: P does not qualify as a charitable organization described in sec. 501(c)(3), I.R.C., because its social activities are more than insubstantial in comparison to its charitable activities.

H, a cash method partnership that provides legal services, has always deducted from taxable income its payment of reimbursable client expenses. Held: The Court will not reconsider its position on the erroneous deduction exception to the tax benefit rule. Held, further, the doctrine of quasi-estoppel negates the erroneous deduction exception so that H must include the $ 422,457 in its 1989 taxable income.

Petitioners filed joint tax returns for 1977, 1978, and 1980. The parties have settled the deficiencies. Held: Petitioner wife is not entitled to innocent spouse treatment, because (1) she had reason to know of the understatements of tax, and (2) it is not inequitable to hold her liable for the deficiencies. Sec. 6013(e) I.R.C. 1954.

P's Federal estate tax return reported a $ 100,000 deduction for an estimated personal representative fee and a $ 125,000 deduction for an estimated selling expense that purportedly would be paid on… Held: P may deduct $26,400 for an estimated personal representative fee. Held, further, P may not deduct any estimated selling expense for the prospective sale of the real estate.

Held: R is not estopped from assessing Federal income taxes (and additions thereto) in Ps' 1987 and 1988 taxable years.

R issued a foreign document request under sec. 982, I.R.C., to a corporation that is solely owned by Ps. No similar request under sec. 982, I.R.C., was addressed to Ps. Held: Admission of the documents presented by Ps is not prohibited by sec. 982 I.R.C. 2. Held, further, Ps did not understate their taxable income by $ 136,245. 3. Held, further, Ps received unreported interest income of $ 17. 4.

Held: Petitioner's tutoring business determined to be a legitimate business activity and his business losses for the years in issue determined.

P was divorced in 1985. Pursuant to a Judgment of Dissolution, entered by the Los Angeles County Superior Court, P's ex-husband was ordered to pay spousal support to P in the amount of $ 4,000 per… Held: the Superior Court's reservation of jurisdiction to modify or terminate spousal support did not violate the minimum term rule provided in sec. 71(f)(1), I.R.C.; Held, further, sec. 1.71-1T(d)(Q&A-23), Temporary Income Tax Regs., 49 Fed.