Volume 73 — Tax Court Reports

Decedent left a will containing both specific and residuary bequests to his wife. Held: in determining the effect of Federal estate taxes on the surviving spouse's residuary share of the estate for purposes of computing the marital deduction, the decisions of the State probate and appellate courts, although not binding on this Court, are controlling in this case absent a showing that the Supreme Court of Ohio, if it had…

Petitioner, a professional medical corporation, formed a partnership with a doctor. Each partner owned a 50-percent interest in the partnership. The corporation adopted a pension plan which did not cover the employees of the partnership. Petitioner was not required by either sec. 414(b), I.R.C. 1954, or sec. 414(c), I.R.C. 1954, to cover the partnership employees under the plan. Nevertheless, respondent determined that the plan did not qualify under sec. 401(a), I.R.C. 1954, because it did not comply with the antidiscrimination provisions of secs. 401(a)(4) and 410(b)(1), I.R.C. 1954. Held, secs. 414(b) and 414(c) are the exclusive means for determining whether the employees of affiliated entities should be aggregated for purposes of applying the antidiscrimination provisions. Held, further, since petitioner did not control the partnership employees, they were properly excluded from participation in the plan. Thomas Kiddie, M.D., Inc. v. Commissioner, 69 T.C. 1055 (1978), followed.

Equipment Leasing, in which petitioners were general partners, purchased equipment for a price of $ 1,284,612 by nonrecourse financing. Held: the gain realized by Equipment Leasing upon the repossession was the amount by which the balance of the nonrecourse financing exceeded the adjusted basis. Held, further, under sec. 1245, I.R.C. 1954, the gain realized is characterized as ordinary income.

Pursuant to an overall plan, petitioner established a trust with a nominal corpus of $ 100. Held: based upon all the facts and circumstances, the transfer of assets was not a sale or exchange for an annuity but a transfer in trust with a reserved interest, with the result that the payments received by petitioner were includable in her gross income under secs. 677 and 671, I.R.C. 1954, to the extent of the lesser of the gross…

Petitioner paid and properly deducted, pursuant to sec. 164(e), I.R.C. 1954, State ad valorem taxes imposed upon its individual shareholders on their interests as shareholders. Held: petitioner had a sufficient recovery of the refunded taxes so as to render it taxable on the refunds pursuant to the tax benefit rule. Tennessee Carolina Transportation, Inc. v. Commissioner, 65 T.C. 440 (1975), affd. 582 F.2d 378 (6th Cir. 1978).

Prior to issuing the statutory notice, respondent notified petitioner of proposed deficiencies in its income tax and accumulated earnings tax for 1974. Held: In calculating petitioner's accumulated taxable income for 1974, the portion of the income tax deficiency which was protested is a contested tax within the meaning of sec. 1.535-2(a)(1), Income Tax Regs.Great Island Holding Corp. v. Commissioner, 5 T.C. 150 (1945), followed.

Decedent transferred by gift his personal residence to his two daughters, but most of the time he continued living in it. Held: the value of the residence is includable in the decedent's gross estate under sec. 2036(a)(1), I.R.C. 1954.

P sold his ranch and received in partial consideration a $ 178,000 promissory note of the purchaser secured by certificates of deposit of the same value placed by the purchaser in an escrow account. Held: the creation of the escrow account did not constitute a payment in the year of sale within the meaning of sec. 453(b)(2).

Petitioner was organized to purchase and sell products manufactured at the WisconsinWorkshop for the Blind (WWB), an agency of the Wisconsin State Department of Public Welfare, and at 19 additional… Held: petitioner's principal purpose is to provide employment for blind individuals, alleviating the hardships these handicapped individuals experience in securing and holding employment, and it is therefore exempt under sec. 501(c)(3), I.R.C. 1954.

One of petitioners collected, without payment therefor, used eyeglasses, frames, and lenses from his friends, and patients before and during the years here… Held: The glasses, lenses, and frames collected by petitioner were not gifts to him within the meaning of the income tax laws. Petitioner did acquire ownership of the glasses, lenses, and frames and therefore is entitled to a charitable deduction to the extent of the fair market value, if any, of the items transferred.

In 1968, two trusts sold shares of common stock for 5 1/2-percent convertible subordinate debentures of the purchaser-corporation. Held: the long-term capital gain reported by the two trusts following the 1972 sales of corporate debentures received in the 1968 stock sales qualifies as subsection (d) gain as defined in sec. 1201(d)(1), I.R.C. 1954, for purposes of computing the alternative tax under sec. 1201(b), I.R.C. 1954.

Petitioner maintained a home in Saigon. While he was away on a short business trip, the city fell to the North Vietnamese. Held: The unprecedented suddenness with which the United States left Saigon and Saigon's subsequent seizure by the North Vietnamese resulted in petitioner's loss of property in a casualty comparable to those set forth in sec. 165(c)(3), I.R.C. 1954.

Petitioner Bernard was employed in the early 1970's by the U.S. Navy in Vietnam. He met But Thi there. They planned to stay in Vietnam after marriage. Held: petitioners suffered no deductible loss in 1975 under the Internal Revenue Code of 1954.

Petitioner's advance ruling that it was exempt within meaning of sec. 501(c)(3), I.R.C. 1954, revoked on grounds that it was not organized and operated for a charitable purpose. Held: Petitioner is entitled to sec. 501(c)(3) exemption. Purpose cited above qualifies as an exempt organizational purpose. Broncos was an amateur team with a large number of college players who were not paid to play.

In order to provide a better education for her son in a safer environment, and in order to free herself to seek and hold gainful employment, petitioner enrolled her 13-year old son in boarding school. Held: such portion of the boarding school costs as is allocable to child care rather than to education was deductible for 1974 and 1975 under sec. 214(b)(2), I.R.C. 1954, as expenses for child care incurred to obtain gainful employment.

Held, funds provided by Volunteers in Service to America (VISTA) to pay the costs of food and lodging by a volunteer are taxable income under sec. 61, I.R.C. 1954. Held: funds provided by Volunteers in Service to America (VISTA) to pay the costs of food and lodging by a volunteer are taxable income under sec. 61, I.R.C. 1954. Held, further, such payments are not excludable from her income under sec. 119, I.R.C. 1954.

Petitioner entered into a contract to excavate dirt and debris that had accumulated behind a dam. Held: the expenditures made by petitioner in recovering, repairing, and replacing the equipment were deductible as ordinary and necessary business expenses in the year paid or incurred.

In 1970, petitioner adopted a money purchase pension plan, contributions to which were integrated with Social Security to the maximum extent then allowed. Held: since no amendments were suggested until more than 3 years after the remedial amendment period otherwise expired, respondent did not abuse his discretion under sec. 1.401(b)-1(e), Income Tax Regs., by refusing to extend the remedial amendment period.

Petitioner was organized in 1971 for religious purposes. However, it had no place of worship and conducted no public religious services during the years 1972-74. Held: Petitioner was not operated exclusively for an exempt purpose and it has not shown that no part of its net earnings inured to the benefit of private individuals. Respondent's retroactive revocation of his ruling that petitioner was exempt under sec. 501(c)(3), I.R.C. 1954, is sustained.

Held: 1. Conviction of petitioner under sec. 7206(1), I.R.C. 1954, for the same years involved in the instant case in which an addition to tax under… Held: Conviction of petitioner under sec. 7206(1), I.R.C. 1954, for the same years involved in the instant case in which an addition to tax under sec. 6653(b), I.R.C. 1954, is asserted estops him from denying that his returns were false and fraudulent and that there was an omission of income from his return in each year; 2.

Petitioner's income tax return for the taxable year ended July 31, 1974, after extensions of time for filing, was required to be filed on or before Apr. 15, 1975. Held: The return was timely filed without regard to the provisions of sec. 7502(a), I.R.C. 1954. Such section does not apply to a tax return unless it is untimely filed.

In anticipation of divorce, H and W entered into a property settlement agreement that was incorporated in the divorce decree. The agreement provided for payments of alimony for 10 years and 1 month, and H agreed, in a separate paragraph of the settlement agreement, to pay an aggregate amount of $ 25,000 as "additional alimony" over a period of 2 years. Payment of this lump sum was to be made in two installments of $ 12,500 each, and $ 7,500 of each such installment was for the purpose of paying W's attorneys' fees. Held: H is not entitled to an alimony deduction for the $ 12,500 annual installments under secs. 215, 71(a)(1) and (c), I.R.C. 1954, because the payments are not "in the nature of alimony or an allowance for support," as is required for deductibility of installment payments payable over less than 10 years. Sec. 1.71-1(d)(3)(i)(b), Income Tax Regs. Payments of W's attorneys' fees for services in respect of the divorce are held not to be a part of W's support, and the remaining $ 5,000 component of each installment was not shown to be in the nature of an allowance for support.

Petitioner borrowed $ 100,000 from Dycap, Inc., a small business investment corporation. Under the loan agreement, petitioner was to pay a variable rate of interest pegged to the prime interest rate being charged by a New York bank, $ 3,000 in points, and agreed to sell Dycap a 20-percent equity interest in petitioner for $ 500. The 20-percent equity interest involved 24,050 shares of petitioner's $ 1 par value stock for which Dycap paid about $ 0.02 per share. At about the time the agreement was executed, the book value of petitioner's stock was in excess of its $ 1 par value, and petitioner sold 17,500 shares of its stock to four knowledgeable individuals for $ 1 per share. Held: The sale of 24,050 shares of stock to Dycap for $ 500 was an integral part of the loan agreement without which petitioner could not have obtained the loan. The fair market value of the 24,050 shares of stock was $ 24,050 at the time of the sale. Petitioner is entitled to amortize the $ 23,550 difference between the fair market value of the stock and the amount paid therefor over the life of the loan as a cost of obtaining the loan.

On Mar. 21, 1975, petitioners executed a contract for the purchase of their present residence, which was to be constructed by the seller. However, the lot was not cleared and construction was not begun until after Mar. 26, 1975. Nevertheless, petitioners claimed a credit from their income taxes for 1975, attaching a certificate to their return, as required by statute, stating that the residence was for a qualifying price and that construction was begun prior to Mar. 26, 1975. Held, the filing of the required certificate of price and date does not shift the burden of proof from petitioners. Held, further, petitioners are not entitled to a credit against their 1975 income taxes under sec. 44, I.R.C. 1954, for the purchase of a new principal residence.

Decedent died in 1973. A shopping center constituted more than 35 percent of his gross estate. Petitioner elected deferred payment under sec. 6166, I.R.C. 1954. Held: the broker's commission qualifies as an administration expense under sec. 2053(a)(2), I.R.C. 1954.

Petitioner, a construction company, used the cash method of accounting except that it historically accrued as a deduction bonuses for its… Held: respondent has the authority under sec. 1.446-1(c)(2)(ii), Income Tax Regs., to authorize the continued use of a method of accounting not specifically authorized by the regulations. Held, further, respondent's subsequent administrative review did not amount to the authorization of an otherwise unauthorized method of accounting.

Decedent's employment agreement provided that if the employer-company, owner of two life insurance policies on decedent's life, elected not to pay the premiums on or to surrender and terminate the… Held: at his death, decedent's rights, being too contingent and under another's control, were not incidents of ownership under sec. 2042(2), I.R.C. 1954; therefore, the proceeds of the policies are not includable in his gross estate.

Held, petitioners are not entitled to an order directing respondent to release funds subject to a lien of a jeopardy assessment in order to pay fees to counsel for representation in the… Held: petitioners are not entitled to an order directing respondent to release funds subject to a lien of a jeopardy assessment in order to pay fees to counsel for representation in the above-docketed cases.

Petitioner was one of a group of investors who acquired oil and gas leases, drilled wells thereon, and sold the gas to Southern Natural Gas Co., an interstate carrier. Held: petitioners did not realize taxable income in the form of an economic benefit from the use of the advances made by Southern, interest free. Dean v. Commissioner, 35 T.C. 1083 (1961), and Greenspun v. Commissioner, 72 T.C. 931 (1979), followed.

In a reorganization intending to comply with sec. 368(a)(1)(C), I.R.C. 1954, substantially all the assets of one corporation were… Held: under the rule in Gittens v. Commissioner, 49 T.C. 419 (1968), the distributions to petitioners were not made on account of the employee's * * * separation from the service and, therefore, the amounts received by them in 1974 are not entitled to lump-sum distribution treatment and are taxable as ordinary income and not as long-term…

Petitioners, citizens of the United States residing in Puerto Rico, received compensation for services rendered to the Veterans' Administration, an agency of the United States Government. Held: sec. 933(1), I.R.C. 1954, validly taxes income earned by a bona fide Puerto Rican resident as an employee of an agency of the United States Government and does not violate the Compact between Puerto Rico and the United States.

Held: 1. Petitioners retained an economic interest in the gravel in place under the contract they had with Maudlin for removal of the… Held: Petitioners retained an economic interest in the gravel in place under the contract they had with Maudlin for removal of the gravel necessary to supply two county road projects and another county's requirements for a payment of 25 cents per ton as weighed by the county authorities, and therefore income from the gravel is ordinary…

1. P was heavily in debt to B. As part of the settlement of such debt, P sold various items of collateral to third parties and transferred his stock… Held: The dispositions of the collateral by P were sales of such collateral, and P realized gain or loss on such sales measured by the difference between the amount realized and his basis in such collateral. The entire amount of such gain or loss is recognizable, subject to the provisions relating to capital gains and losses.

P purchased shares of its own stock from a shareholder, who at the time had several legal actions pending against P. As part of the transaction, the seller also released the legal actions. Held: P failed to carry its burden of showing by strong proof that the written agreement did not reflect the intentions of the parties.

Petitioner received sales commissions pursuant to several sales representation agreements. Held: the commissions were not personal holding company income under sec. 543(a)(7), I.R.C. 1954.

Petitioner is a family-owned corporation. Held: the income from the dividends in kind will be imputed to petitioner. Held, further, the year in which the income will be imputed to petitioner is determined by the timing of the income to the shareholders and not the timing of the effects of dividend declaration on the earnings and profits of petitioner.

Held, the receipt of shares of stock as a finders' fee by persons who were independent contractors and not employees of the corporation is taxable under sec. 83, I.R.C. 1954. Held: the receipt of shares of stock as a finders' fee by persons who were independent contractors and not employees of the corporation is taxable under sec. 83, I.R.C. 1954.

Held: 1. Additional reserves established by petitioner with respect to life insurance policies issued in the 1930's and 1940's, which… Held: Additional reserves established by petitioner with respect to life insurance policies issued in the 1930's and 1940's, which provided an option to the insured or his beneficiary to elect a life annuity at a predetermined rate which was approved by the State insurance commissioner and could not be changed without his consent, qualify…

Rules 70 through 72 and 104, Tax Court Rules of Practice and Procedure. -- 1. Held: Since R takes the position that the transactions at issue are not bona fide, that the payments are not ordinary and necessary expenses under sec. 162(a), I.R.C. 1954, and that an adjustment is authorized under sec. 482, I.R.C. 1954, the requested information and documents are relevant for purposes of discovery.

Petitioner-husband, a Native Alaskan, was engaged in the Alaska Rural Teacher Training Corps program, which involved classroom instruction and extensive practice teaching as a teacher's aide in native villages. Held, the stipend he received under this program, on the facts, was excludable from petitioners' gross income as a scholarship under sec. 117, since the primary purpose of the practice teaching was to train petitioner-husband rather than to obtain his classroom assistance.

Petitioner Brountas was a limited partner in an oil and gas drilling partnership, Coral I, while petitioner CRC was a general partner in Coral I, Coral II (another similar venture), and a direct… Held: on the facts, the nonrecourse notes had value and commercial reality and were not shams.

Three subsidiaries of petitioner accounted for certain of their inventories on the last-in, first-out (LIFO) method and reported to petitioner on that basis. Held: such annual report did not violate the conformity provision of sec. 472(e), I.R.C. 1954, so as to deprive the affiliated group (of which petitioner and the three subsidiaries were members) of the right to use LIFO for the inventories of those subsidiaries on a consolidated tax return.

As part of an intensive investigation to identify persons who may be evading taxes by use of foreign bank accounts, the IRS obtained the name of B, a partnership, through an admittedly illegal search and seizure. The IRS subsequently began a civil tax audit of B, and all information obtained during the audit was provided voluntarily by B's accountant. As a result of the audit, statutory notices of deficiency were issued to the partners of B, in which certain operating losses were disallowed. Ps filed a motion to suppress evidence and to quash the notices, or in the alternative, to shift to the Commissioner the burden of producing and going forward with the evidence. Held, the motion will be denied because the evidence on which the statutory notices were issued was not obtained as a result of an illegal search and seizure and because the connection between that evidence and the tainted evidence is so attenuated as to dissipate the taint. Silverthorne Lumber Co. v. United States, 251 U.S. 385 (1920); Nardone v. United States, 308 U.S. 338 (1939).

Petitioner stored her possessions in a home she previously shared with her estranged husband. Held: on the facts, petitioner is entitled to a theft loss. Held, further, under sec. 6013(b)(2)(C), I.R.C. 1954, petitioner may not switch from a separate to a joint return after a notice of deficiency has been mailed to her with respect to such taxable year where she subsequently filed a petition in the Tax Court for such year.

Taxpayer's petition was received and filed by Tax Court 101 days after mailing of statutory notice of deficiency; postmark stamped on envelope in which petition was mailed was dated 98 days after… Held: Respondent's motion to dismiss for lack of jurisdiction under sec. 6213(a), I.R.C. 1954, granted.

During 1974, petitioners paid a "utility users tax" imposed by the city of Seal Beach, Calif., at the rate of 5 percent of the charges they paid for gas, electric, and certain telephone utilities. Held, the amount of such tax paid by petitioners is not deductible under sec. 164, I.R.C. 1954, either as a local real property tax or as a local general sales tax. Petitioner-husband, an attorney, incurred the expense of his own morning, evening, or weekend meals on days when meetings with clients outside of regular business hours made eating those meals at his home inconvenient. Held, the cost of such meals is a personal expense (sec. 262) which is not deductible under sec. 162, I.R.C. 1954.

Petitioner is a testamentary trust. The decedent's will, which is petitioner's organizing document, specified that the income of the trust was to be used to provide college scholarships for members… Held: in the particular circumstances of this case, petitioner is a supporting organization within the meaning of sec. 509(a)(3) and is therefore not a private foundation.

Held: 1. An attorney admitted to practice before this Court who files a petition in the name of a taxpayer to whom a notice of deficiency is addressed is presumed to have the… Held: An attorney admitted to practice before this Court who files a petition in the name of a taxpayer to whom a notice of deficiency is addressed is presumed to have the authority to do so, and if respondent challenges that authority, it is incumbent on him to prove a lack of such authority; 2.

T is a perpetual, irrevocable trust organized to operate an experimental model demonstration farm in North Carolina. T conducts large-scale research projects designed to demonstrate (1) marginally arable land should be held as conservation land to improve the watershed, provide ground cover and food for wildlife, and for timber production; and (2) modern, ecologically sound farming techniques can restore to productive use land exhausted by repetitive cash-crop farming. T will keep the public and the farming community informed about its activities and will be open to the public on a partially restricted basis. Held, respondent properly raised in his answer to the petition an issue not addressed during administrative review. Held, further, T is organized exclusively for exempt purposes under sec. 501(c)(3), I.R.C. 1954. Held, further, the administrative record shows T is operated exclusively for scientific and educational purposes under sec. 501(c)(3). Held, further, T is not operated for private benefit. Therefore, T is exempt under sec. 501(a) as an organization described in sec. 501(c)(3).

Petitioners had depreciated the cost of carpets, draperies, dishwashers, a refrigerator, and an air conditioner. In 1974 and 1975, petitioners treated the cost of replacing these items as a business expense under sec. 162, I.R.C. 1954. Held, the replacement costs were capital expenditures within the meaning of sec. 263(a)(2) and depreciable in accordance with sec. 167. Held, further, sec. 6653(a) penalty not applicable.

Held, Larry Lange Ford, Inc., was the owner of a partnership interest in Rollingwood Apartments, Ltd., in 1973 and 1974, and is entitled to deduct its allocable share of the partnership losses for those years. Held, further, under sec. 1561, I.R.C. 1954, Larry Lange Ford, Inc., is entitled to one-half of the single surtax exemption allowed by sec. 11(d).

A notice of transferee liability was mailed to petitioner's former college address in Oxford, England, where respondent's agent had interviewed petitioner some 2 years earlier. Held: The time for filing the petition was 150 days since the notice was addressed to a foreign address. 2. The temporary Oxford, England, college address was not petitioner's last known address. 3.

C, a corporation, adopted an educational benefit plan, which provided for the payment of certain college expenses of the children of its key employees, and it made contributions under the plan during… Held: the distributions from the plan to the children of Ps during the years in issue constituted deferred compensation to Ps and are includable in their income. Armantrout v. Commissioner, 67 T.C. 996 (1977), affd.

Petitioner, a New York not-for-profit corporation, owns one airplane which it rents at low cost to its members, a limited group of 30 persons. Petitioner neither provides aviation instruction nor supervision of its members' flights. Although petitioner serves as somewhat of a recruitment incentive and is available for aerial assistance to the Syracuse Air National Guard, it also operates for recreational purposes. Held, petitioner is not operated exclusively for educational, charitable, or other exempt purposes under sec. 501(c)(3), I.R.C. 1954.

Held: 1. Costs of obtaining a bachelor's degree in accounting not deductible because the expenses were incurred to meet the minimum educational requirement for… Held: Costs of obtaining a bachelor's degree in accounting not deductible because the expenses were incurred to meet the minimum educational requirement for qualification in petitioner's trade or business and the education qualified petitioner for a new trade or business. Sec. 1.162-5(b), Income Tax Regs. 2.

Held: Amount of college scholarships must be included in computing support to determine whether a taxpayer is an eligible individual under sec. 1303(c)(1). Held: Amount of college scholarships must be included in computing support to determine whether a taxpayer is an eligible individual under sec. 1303(c)(1).

Rule 123(a), Tax Court Rules of Practice and Procedure. -- Held, where fraud has been pleaded in respondent's answer, initially denied by… Held: where fraud has been pleaded in respondent's answer, initially denied by petitioner in his reply, but at the time of trial petitioner's counsel and heirs clearly indicated they would not contest either the deficiencies or the additions to tax under sec. 6653 (b), I.R.C. 1954, and they did not appear at the trial, the Court may, in…

Held, component depreciation not available in the circumstances of this case in respect of existing improvements to used real property acquired for a lump sum. Held: component depreciation not available in the circumstances of this case in respect of existing improvements to used real property acquired for a lump sum.

In 1968, petitioner adopted a profit-sharing plan and trust agreement. Under the trust agreement, participants' interests became nonforfeitable upon any one of three specified types of terminations. Held: the deduction for the fiscal 1973 contribution to petitioner's profit-sharing plan is not allowable under sec. 404(a), I.R.C. 1954, because the profit-sharing plan and trust do not meet the requirements of sec. 401(a)(7), I.R.C. 1954.

Petitioner, a dermatologist employed by a hospital, also owned and managed six rental properties. Held, his rental activities constituted a business for the purpose of sec. 280A, I.R.C. 1954. Held: his rental activities constituted a business for the purpose of sec. 280A, I.R.C. 1954.

In 1974, petitioner received a net lump-sum distribution of $ 25,485.98 from a profit-sharing trust. Held: portion of distribution attributable to contributions made in years trust exempt, entitled to capital gain treatment under sec. 401(a)(2), I.R.C. 1954; portion attributable to contributions made when trust nonexempt, taxable as ordinary income, sec. 402(b).

Petitioners, as responsible officers of two corporations they owned which became insolvent, were assessed and paid both U.S. and Minnesota withholding taxes which were withheld by the corporations… Held: petitioners are not entitled to deduct as bad debts the above taxes. Held, further, petitioners are not entitled to deduct the Minnesota withholding taxes withheld by the corporations but paid by petitioners under sec. 164(a)(3), I.R.C. 1954.

P filed a petition in this Court to contest the disallowance of deductions taken by him as a protest to using part of his taxes for war purposes. P had twice previously filed similar petitions and had been twice informed by this Court that such deductions were without merit. Held, the Commissioner's motion for judgment on the pleadings is granted since there is no genuine issue as to any material fact, and his determination of deficiencies and additions to tax under sec. 6653(a), I.R.C. 1954, is sustained. Held, further, on the Commissioner's motion, damages under sec. 6673, I.R.C. 1954, are awarded to the United States since P instituted these proceedings merely for delay.

On his Federal income tax return for 1977, P claimed a deduction for conscientious objection to war as a right retained by the people under the Ninth Amendment to the United States Constitution. Held: The Commissioner's motion for judgment on the pleadings is granted since the petitioner's claim raises no genuine issue as to any material fact, and the Commissioner's determination is sustained.

Held: 1. A State legislator is eligible for the deduction for living expenses permitted by sec. 604 of the Tax Reform Act of 1976 only when he is away from the tax home elected under the provisions… Held: A State legislator is eligible for the deduction for living expenses permitted by sec. 604 of the Tax Reform Act of 1976 only when he is away from the tax home elected under the provisions of that section. 2.

P, a mortgage banker, sold mortgages to the Federal National Mortgage Association (FNMA) which it then serviced. Held: in determining fair market value pursuant to sec. 162(d), the restriction on sale must be considered, and fair market value is accordingly determined.

Petitioner was in the trade or business of being an author. In 1974, while writing two books, he incurred expenses for office rent, postage, telephone, research, entertainment, and transportation. Held: the expenditures made by petitioner in his trade or business of being an author are deductible under sec. 162, I.R.C. 1954, as ordinary and necessary business expenses.

Guardians of an incompetent decedent petitioned a New Jersey court requesting that the court approve a plan to gratuitously transfer a portion of the decedent's assets. Held: the transfers and the factors which the New Jersey court considered in approving the transfers are imputed to the decedent for purposes of sec. 2035. City Bank Farmers Trust Co v. McGowan, 323 U.S. 594 (1945). Held, further, the transfers were made in contemplation of death under sec. 2035.

1. During 1973 and 1974, petitioner Westward, Inc., purchased tax refund claims from taxpayers filing Form 1040 or 1040A Federal income tax returns. Held: the discount income Westward, Inc., derived on the receipt of taxpayers' refund checks does not constitute interest within the meaning of sec. 1372(e)(5), I.R.C. 1954. Held, further, Westward, Inc.'s election under sec. 1372(a) to be treated as a small business corporation remained in effect in 1973 and 1974. 2.

Rules 10(e) and 22, Tax Court Rules of Practice and Procedure. -- A petition in an envelope addressed to U.S. Tax Court, Box 70, Washington,… Held: Sec. 7502 is not applicable because the envelope in which the petition was originally mailed was not properly addressed as required by Rules 10(e) and 22, Tax Court Rules of Practice and Procedure, nor was the petition timely filed under sec. 6213 because it was ultimately received by the Tax Court after the statutory period.

The statutory notice of deficiency upon which this case is based is solely attributable to determined income tax deficiencies resulting from the disallowance of a… Held: Upon discovering the erroneous allowance of a tentative carryback adjustment under sec. 6411, respondent generally has the option to issue a notice of deficiency under sec. 6212, to bring a suit for an erroneous refund, or to assess a deficiency as if it were a mathematical error under sec. 6213(b).

Held: Respondent's motion for summary judgment granted where stipulations revealed that charitable trust created by P was not to be treated as an organization described in sec.… Held: Respondent's motion for summary judgment granted where stipulations revealed that charitable trust created by P was not to be treated as an organization described in sec. 501(c)(3), I.R.C. 1954, for the taxable year 1974 for failure to comply with the filing requirements for tax-exempt status.

Respondent's motion to dismiss declaratory judgment action by retired employee on grounds that petitioner has not exhausted his administrative remedies denied. Employer-applicant for favorable determination with respect to amendments to plan did not give petitioner, whom respondent admits was an interested party, adequate notice as required by sec. 1.7476-2(b), Income Tax Regs., and sec. 601.201(o)(3)(xvi), Statement of Procedural Rules.

Held: A $ 250,000 money judgment entered against the husband in a decree of divorce was part of a property settlement and not in the nature of support. Held: A $ 250,000 money judgment entered against the husband in a decree of divorce was part of a property settlement and not in the nature of support. Therefore, the payments are neither includable in the wife's gross income under sec. 71(a)(1), I.R.C. 1954, nor deductible by the husband under sec. 215(a), I.R.C. 1954.

Ps, farmers who reported their income on the cash method, sold cotton in 1973 under a contract which deferred payment until later years. Held: Ps received in 1973 all the income from the sale, since the contractual rights and letter of credit were the equivalent of cash. Held, further, Ps were not entitled to elect the installment method of reporting the income from the sale since, in the year of sale, they received a payment exceeding 30 percent of the price of the cotton.

Y owned all the stock of P, which in turn owned all the stock of S. S made loans to Y in 1970 and 1971. Held: Y's transfers to S are not exchanges for stock -- the nonrecognition provisions of sec. 351 do not apply. 2. Sec. 1239 does not apply to the transfers.

If certain third-party medical payments under Medicaid are excluded from the support computation, petitioner provided over half of her mother's support and is entitled to claim her as a… Held: for purposes of the third-party medical payments in issue, payments pursuant to Medicaid will be treated similar to the treatment respondent concedes applies to private insurance and Medicare. Turecamo v. Commissioner, 64 T.C. 720 (1975), affd. 554 F.2d 564 (2d Cir. 1977), followed.

Held: 1. Individual petitioners, who were the sole shareholders of the corporate petitioner herein, received constructive dividends due to their corporation's performance of electrical contracting services on their separate personal properties where such work was performed primarily for their own benefit and without any expectation of repayment; 2. Intercorporate transfers of funds between the corporate petitioner and its sister corporation did not result in a constructive dividend to the individual petitioners owning all the stock of both corporations where such transfers were made for substantial business reasons and did not directly benefit the individual shareholders. 3. Since individual petitioners' underpayment of taxes during 1970 and 1971 was due to negligence, they are liable for the penalty under sec. 6653(a) for those years; 4. Individual petitioners are liable for an addition to tax under sec. 6651(a) due to their failure to timely file their 1971 income tax return; 5. Corporate petitioner is not entitled to deduct expenditures incurred in completing jobs on properties belonging to the individual petitioners herein, since the costs of such services constituted constructive dividends to the individual petitioners; 6. Corporate petitioner is not entitled to a bad debt deduction for "uncollectible job cost advances" which it made to its sister corporation in the amount of $ 337,300 for its taxable year ended Apr. 30, 1973, since the debt in question did not become worthless until 1974; 7. Since corporate petitioner did not pay any expenses on behalf of its sister corporation during its taxable year ended Apr. 30, 1974, it is not entitled to a deduction under sec. 162 for such costs for that year; 8. Since corporate petitioner had consistently used a cash method of accounting for its income and expenses from construction contracts it may properly follow that method of accounting for tax purposes; 9. Since corporate petitioner's underpayment of tax for the year ended Apr. 30, 1971, was due to negligence, it is liable for the penalty under sec. 6653(a) for that year.

Rule 123(a), Tax Court Rules of Practice and Procedure. -- Held, where fraud was pleaded in respondent's answer, initially denied by… Held: where fraud was pleaded in respondent's answer, initially denied by petitioner in his reply, but after the pleadings were closed and prior to the time a notice of trial could have been issued, petitioner and his counsel clearly indicated that they no longer desired to contest either the income tax deficiency or the addition to the…

Notice of deficiency issued to petitioner-estate on Sept. 23, 1977. Prior to November 1977, the estate's executor retained attorney "1" to file a petition with this Court. Attorney "1" never at any time filed a petition, although he repeatedly misrepresented to the executor that one had been filed. Attorney "2" for the first time filed a petition with this Court 697 days after issuance of the notice. Held, the nonfeasance of attorney "1" in not filing a petition is not a "fraud on the Court." Held, further: Sec. 7502, I.R.C. 1954, not applicable since petition was hand-delivered and filed on Aug. 21, 1979. Petition was not timely filed under sec. 6213 because it was received and filed after the statutory period. Respondent's motion to dismiss for lack of jurisdiction granted.

Petitioner was parent of a foreign subsidiary. Held: as petitioner chose not to abide by the condition of the ruling, the ruling does not serve to qualify the liquidation transaction, as actually carried out, under sec. 332. Held, further, sec. 331 and sec. 1248 apply to the liquidation.

Held, P, a bona fide resident of Switzerland since 1968, abandoned his Swiss residence on May 12, 1974, when he and his family severed all community ties, took all their possessions, and left for the… Held: P, a bona fide resident of Switzerland since 1968, abandoned his Swiss residence on May 12, 1974, when he and his family severed all community ties, took all their possessions, and left for the United States with the definite intention of not returning.

In 1975 and 1976, petitioner received earned income from sources outside the United States. This income was the community property of petitioner and his nonresident alien wife. Held: petitioner is entitled to the full amount of the exclusion under sec. 911(a) and (c)( 1)(B), I.R.C. 1954. Bottome v. Commissioner, 58 T.C. 212 (1972), affd.

P, a citizen of the United Kingdom who first began working in the United States in August 1973, used a fiscal tax year ending Feb. 28, 1974, for his 1973 income tax return. P excluded certain income earned as wages, claiming the amount was exempt under the United States Income Tax Treaty with the United Kingdom. Held: 1. P must follow the calendar tax year in filing, because he did not keep adequate books and records for the fiscal tax year filing requirements under sec. 441(g), I.R.C. 1954; 2. P's income earned while he was working in the United States is not exempt from taxation under terms of the U.K. tax treaty. P was not a resident of the United Kingdom for treaty purposes, but rather was a resident in the United States for the purposes of U.S. tax. Adams v. Commissioner, 46 T.C. 352 (1966). The question of residence is factual and must be resolved in light of all the facts and circumstances. Sec. 1.871, Income Tax Regs. Additionally, P worked "for or on behalf" of a U.S. corporation within the meaning of the treaty rather than a U.K. corporation.

Held, petitioner failed to prove that respondent abused his discretion in disallowing part of its additions to its bad debt reserve. Held: petitioner failed to prove that respondent abused his discretion in disallowing part of its additions to its bad debt reserve. Held, further, petitioner's galvanizing facilities were buildings within the meaning of sec. 48(a)(1)(B), I.R.C. 1954, and, therefore, did not qualify for the investment credit.

1. Since 1944 petitioner, with others, has organized and financed numerous corporations and other business entities. Held: petitioner was not engaged in the separate business of promoting, financing, managing, and organizing businesses, and the above worthless debts owing to him are deductible only as nonbusiness bad debts under sec. 166(d), I.R.C. 1954.

Petitioner, a trainer and driver of trotting horses, was involved in an automobile accident while traveling between the farm where he had trained horses that morning and his principal office, located in his home, where he intended to conduct business that day. Held, the amount paid by petitioner to settle the lawsuit arising out of the car accident was a deductible business expense under sec. 162, I.R.C. 1954.

Petitioner C made payments during 1975 to his former wife, B, under the terms of a divorce decree. Held: The payments are in satisfaction of a principal sum under sec. 71(c)(1), I.R.C. 1954, and not periodic payments under sec. 71(a). No deduction is allowable for the payments under sec. 215. Kent v. Commissioner, 61 T.C. 133 (1973).

Petitioners leased and occupied a new house as their principal residence in October 1974, expressing a written intent at that time to purchase the property. Held: petitioners are entitled to a sec. 44, I.R.C. 1954, tax credit because they acquired and occupied, within the purview of sec. 44(e)(1)(B), a new principal residence after Mar. 12, 1975.

Petitioners acquired limited partnership units of a partnership in December of 1972 and April of 1973. Held: petitioners may deduct only that portion of the losses allocable to the partnership units acquired by them for the period subsequent to the date they acquired those units. Moore v. Commissioner, 70 T.C. 1024 (1978), followed.

From 1971 through 1975, X, Y, and Z received very substantial compensation from C consisting of salaries, bonuses, and commissions based on a percentage of the sales of C. X and Y, who were related, owned, with their families, slightly more than 50 percent of the stock of C; Z, who was not related to X and Y, owned a negligible amount of stock. From 1971 thorugh 1975, C enjoyed extraordinary success in sales and profits; it paid high dividends, and the value of its stock increased sharply. Held, under all the circumstances, the compensation of X, Y, and Z during such years was reasonable within the meaning of sec. 162(a)(1), I.R.C. 1954.

Held, a series of transactions whereby petitioner Alan B. Karme purportedly borrowed money to purchase stock did not create a genuine indebtedness with the result that petitioners are not entitled to a deduction in 1969 under sec. 163, I.R.C. 1954, for a purported $ 60,000 interest payment.

Subsequent to a termination assessment for the period Jan. 1, 1973, to Nov. 12, 1973, respondent collected funds belonging to petitioner… Held: refund of the amount by which the funds collected by respondent as a result of the termination assessment exceed petitioner's tax liability for the year 1973, as agreed upon by the parties, is barred by the expiration of the statutory periods of limitation ( sec. 6512(b)(2), I.R.C. 1954) because: (a) Respondent's failure to send a…

Petitioner was a wholesale liquor dealer. Pursuant to agreements with its customers, petitioner made cash payments to customers based upon the types and quantities of liquor purchased. The payments were made in violation of State law. Held, the cash payments constituted adjustments to the sales price of the goods sold and were not, therefore, deductions which could be disallowed under section 162(c)(2), I.R.C. 1954. Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477 (1977), on appeal (9th Cir., June 14, 1978), followed.

The Tax Reform Act of 1976, enacted Oct. 4, 1976, amended the minimum tax provisions -- sec. 56, I.R.C. 1954 -- for all taxable years beginning after Dec. 31, 1975. Held: provision of the Tax Reform Act of 1976 making the amendments to sec. 56 retroactive is constitutional. Buttke v. Commissioner, 72 T.C. 677 (1979), followed. Held, further, sec. 56, as amended, applies to contracts entered into prior to 1976 if the payments are received during 1976.

Petitioner, which was discharging sewage waste from its premises into an underground waterway, entered into an agreement with the Commonwealth of Pennsylvania, under its Clean Streams Law, to make… Held: the monthly payments were not a fine or similar penalty within the meaning of sec. 162(f) and were deductible under sec. 162(a), I.R.C. 1954.

Petitioners transferred all of their business and personal assets, including Louis' dental equipment, his lifetime services, and all remuneration therefrom, to a family trust under which they were… Held: the trust was devoid of economic reality and is to be treated as a nullity for Federal income tax purposes.

Petitioners created trusts to which lifetime services and all remuneration accruing therefrom were purportedly conveyed. Included in the trust instrument was a provision which allowed for the application of income for the benefit of the grantor's spouse. Held: 1. The purported conveyances were merely an assignment of income ineffective to shift the incidence of taxation to the trusts on amounts paid as compensation for services. 2. Petitioners as grantors are to be treated as owners of the entire trust under secs. 671 and 677, I.R.C. 1954. 3. Petitioners are liable for additions to tax under sec. 6653(a). 4. Petitioners in docket No. 7108-77 are liable for additions to tax under sec. 6651(a).