Volume 74 — Tax Court Reports

Under an agreement made part of a divorce decree, petitioner was awarded custody of her three children, and the father was to pay her $ 200 per month for child support. Held: petitioner is not entitled to dependency exemptions for two of the children. Sec. 152(e)(2)(A), I.R.C. 1954.

A small business corporation issued all its stock to a third party. Held: petitioners have continuously held the stock from the date of issuance within the meaning of sec. 1.1244(a)-1(b), Income Tax Regs.Held, further, petitioners are not entitled to ordinary loss treatment under sec. 1244, I.R.C. 1954, because they failed to prove that the corporation received any new funds by virtue of the stock sale.

Federal and State officers conducted a search pursuant to a State warrant for narcotics -- the means of committing a crime or offense and the means of preventing a crime or offense from being… Held: the evidence in question was legally seized.

Petitioners received sec. 1231 gain during their taxable year ended Dec. 31, 1976. Held: sec. 1231 capital gain is an item of tax preference within the meaning of sec. 57(a)(9)(A), I.R.C. 1954. Held, further, effective date provision in sec. 56 constitutional. Buttke v. Commissioner, 72 T.C. 677 (1979), followed.

Petitioner operates a country club. It is composed of corporate members and privileged members. Held: Petitioner's motion for summary judgment will be denied. The intent or motive of the corporate member who acquired a proprietary interest involves a genuine issue of material fact as to whether any part of the amount he paid is for the right to use the club's facilities and services.

Petitioner was convicted of filing fraudulent income tax returns for the taxable years 1965, 1966, and 1967 and conceded that he was collaterally estopped to deny the imposition of the civil fraud… Held: the lead-check rule set forth in Holland v. United States, supra, does not apply here where petitioner, not respondent, has the burden of proof.

Petitioner husband was the sole shareholder of corporation A and a 50-percent stockholder of B. A borrowed $ 20,000 and transferred that sum to B to enable B to redeem the remaining 50 percent of B's… Held: the transfer did not constitute a loan from A to B. Held, further, the transfer constituted a constructive dividend from A to petitioner husband.

P is a corporation organized to benefit the poor of the Navajo Nation by assisting in the organization and operation of businesses that employ or are owned by residents of the Navajo Reservation. Held: Notwithstanding that P also engages in other activities which could be classified as charitable at least to some extent, it is not operated exclusively for exempt purposes by reason of its participation in the equipment leasing enterprise in the circumstances of this case.

Held, psychoanalysis costs are deductible educational expenses for petitioner wife, a clinical social worker, because the analysis… Held: psychoanalysis costs are deductible educational expenses for petitioner wife, a clinical social worker, because the analysis improved the diagnostic and treatment skills required in her employment as a psychotherapist and was undertaken neither to meet the minimum requirements of a clinical social worker nor to qualify her for a new…

Held: The fair market value of Mattel stock was the mean price at which the stock was sold on the New York Stock Exchange on the dates stock options were exercised by Ps. Misstatements of the corporation's financial condition by its officers, and the officers' subsequent indictment and pleas of nolo contendere, do not warrant using a fair market value different from the mean price of the stock. Horwith v. Commissioner, 71 T.C. 932 (1979), followed. Held, further, Ps are liable for the addition to tax under sec. 6653(a), I.R.C. 1954, for their negligent failure to report the income from the exercise of stock options on their 1971 income tax return.

Petitioner, a professor at the University of Wisconsin-Milwaukee (UWM) was awarded by UWM a 3-year research professorship under which he would be excused from teaching duties and given a stipend to… Held: the stipend did not, on the facts, constitute a fellowship grant qualifying for tax-exempt status under sec. 117, I.R.C. 1954.

Petitioner operated a foodstand near her residence. A room in the residence was used for bookkeeping, and the kitchen was used to prepare food sold at the stand. Held, under sec. 280A(a), I.R.C. 1954, 1All section references are to the Internal Revenue Code of 1954 as amended and in effect during the year in issue. petitioner is not entitled to deduct any expenses attributable to her use of the kitchen or bookkeeping room; petitioner's principal place of business under sec. 280A(c)(1)(A) was the foodstand and not her residence.

Held, on the facts, petitioners did not suffer a deductible loss in 1970 on the disposition on Dec. 30 of stock which they had acquired in early December of that year because the stock purchase and sale transaction lacked significant economic substance. Held, further, on the facts, the amounts paid by petitioner's partnership to certain trusts were not deductible as interest under sec. 163(a), I.R.C. 1954, because the transactions between the trusts and the partnership were not loans, in substance, and the trusts were mere conduits of the funds which were the subject of the purported loans.

Scott issued debentures which were convertible into shares of common stock. Interest on the debentures was paid twice yearly, on Mar. 1 and Sept. 1. Held: no part of the common stock received by converting debenture holders was received in exchange for interest owed the debenture holders. Held, further, neither the fact nor the amount of Scott's liability for interest on the debentures was fixed or determinable between interest payment dates.

Petitioners formed a subch. S corporation in 1968 to acquire a tract of undeveloped land. They intended to sell the entire property intact as soon as the local municipality approved the corporation's application to subdivide the property. A dispute between the municipality and the corporation developed over the subdivision application. A major portion of the property was sold in 1973, after resolution of the controversy. The corporation acquired no other property and was engaged in no other activity. Held, the property sold in 1973 was not held for sale to customers in the ordinary course of a business and thus was a capital asset under sec. 1221, I.R.C. 1954. Held, further, the activities of the corporation's shareholders do not preclude capital gain treatment. Sec. 1.1375-1(d), Income Tax Regs.

Held, petitioner has failed to prove that it operates primarily for the education of individuals, and that the training of dogs is an incidental purpose of its activities; therefore, petitioner is not exempt from Federal taxation under secs. 501(a) and 501(c)(3), I.R.C. 1954, as amended.

Petitioner is an organization controlled jointly by four tax-exempt hospitals. Held: under the reenactment doctrine applicable to regulations and interpretations long continued without substantial change applying to unamended or reenacted statutes, and deemed to have congressional approval, petitioner is a feeder organization under sec. 502, I.R.C. 1954, and sec. 1.502-1(b), Income Tax Regs., and is therefore not…

Petitioner was organized as a professional standards review organization authorized by the Department of Health, Education, and Welfare to establish a physician-sponsored organization responsible for… Held: petitioner's principal purposes are to ensure effective and economical delivery of health care services to patients, and reduce unnecessary Federal spending on health care programs.

Petitioner, a finance company, had in earlier years made aircraft loans to customers of petitioner's sister corporation. During all of the 3 years in issue, however, none of these loans remained, and petitioner's sole lending activities and income were from loans to Sky Harbor and two other sister corporations. Held: On the facts, petitioner did not, during the years in issue, derive income "from the active and regular conduct of a lending or finance business" within the meaning of sec. 542(c)(6)(A), I.R.C. 1954, and could not, therefore, qualify for the financing company exception to personal holding company status under sec. 542. Petitioner was subject to the personal holding company tax for each of the 3 years.

Based upon information furnished to an undercover agent by an informant and the agent's personal knowledge, respondent determined that petitioner purchased cocaine during 1974. Held: Sufficient evidence introduced to render statutory notice not arbitrary and excessive. Jackson v. Commissioner, 73 T.C. 394 (1979), and Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672 (1977), distinguished. Taxable income determined under the expenditures method.

Petitioners, active members of the Seventh Day Adventist Church, believe that any participation in the Social Security program violates the tenets of their religion. Held: petitioner Stella Randolph is not collaterally estopped from contesting this deficiency because this Court decided the principal issue against Ronald E. Randolph in Randolph v. Commissioner, T.C. Memo. 1969-289, a proceeding in which she was not a party.

On Oct. 18, 1976, Life Science Church, Chapter 669 (L.S.C.), submitted an application together with its charter and supporting documentation to respondent seeking exempt status under sec. 501(c)(3),… Held: Petitioner, A.N.C., is a legal entity, separate and apart from L.S.C. Accordingly, it has no standing to seek a declaratory judgment as to the status of L.S.C., to which respondent issued an adverse determination.

A newly constructed department store was sold to a single-purpose financing corporation and leased back under a long-term triple net lease. Held: Since the sale-leaseback was not a genuine multiparty transaction with economic substance, the petitioners acquired no interest in the property which would produce deductible partnership losses through depreciation allowances and interest expense payments.

Petitioner relies upon a corporate resolution providing only that bonuses for two corporate officers were discussed, as supporting its deduction of said bonuses as accrued and constructively received… Held: No definitive corporate action was taken. Other facts do not support petitioner's contentions for accrual and constructive receipt. The bonuses were not due and owing to the officers within petitioner's taxable year and the period of 2 1/2 months thereafter.

Petitioners were criminally convicted for Federal income tax evasion for the years 1970 to 1973. The criminal proceedings were initiated by respondent's audit procedures, prosecuted upon respondent's recommendation, and participated in by respondent's agents. After petitioners' appeals had been rejected, petitioner husband surrendered to the custody of Federal prison authorities and petitioner wife moved, subject to the jurisdiction of Federal probation authorities, near the Federal penitentiary in Leavenworth, Kans., where petitioner husband was imprisoned. After petitioner husband's surrender to Federal authorities, respondent mailed the notice of deficiency to petitioners' former address at Winona, Mo., an address not listed on any of the returns for the years involved, without making any inquiry as to petitioners' whereabouts. Held: Notice of deficiency mailed to petitioners was invalid because it was not mailed to their last known address as required by sec. 6212, I.R.C. 1954. Petitioners' motion to dismiss for lack of jurisdiction will be granted.

Petitioners, a regulated public utility and two nonregulated companies all engaged in the business of selling gas to both residential and commercial customers, required new customers to deposit sums… Held: in the circumstances of this case, sums received by petitioners were security deposits subject to refund rather than income within the meaning of sec. 61, I.R.C. 1954.

Petitioner First Libertarian Church claimed exemption from tax under sec. 501(c)(3), I.R.C. 1954, as a religious organization. Held: Petitioner failed to show that it successfully segregated the clearly social and political aspects of its supper club meetings and its publication from its purpose to further the doctrine of ethical egoism.

T, a U.S. citizen residing in France, spent 5 business days in the United States during each of the years 1972 and 1973, and received compensation from his employer for services performed here in the amounts of $ 1,108 and $ 1,157, respectively. In computing the foreign tax credit under secs. 901 and 904, I.R.C. 1954, the Commissioner treated these amounts as U.S. source income (sec. 861(a)(3)), the net effect being to subject such income to U.S. income tax. The French authorities taxed T upon his entire compensation for each of the years without exclusion of these amounts. Held: This Court does not have jurisdiction to consider any claim for relief from double taxation under art. 25 of the 1967 Convention between the United States and France. 19 U.S.T. 5280, 1968-2 C.B. 691. The provisions of art. 25 merely establish an international administrative (competent authority) procedure, in respect of which this Court does not have any powers of participation or review. Held, further: The substantive provisions of the convention reserve to the United States the right to impose taxes upon its citizens under its own laws with respect to compensation for services performed in the United States, art. 22(4)(a), while at the same time affording them relief from double taxation by means of a credit against their French tax, art. 23(2)(b). Relief from double taxation must therefore be sought from the French authorities.

Petitioner, a U.S. citizen, went to Canada in 1973 to teach at a university there. Held: in claiming exemption from Canadian income tax under art. VIII A of the United States-Canada Income Tax Convention, petitioner did not make a statement to Canadian authorities, either explicitly or implicitly, that he was not a resident of Canada during 1973 and 1974, and is, therefore, not precluded by sec. 911(c)(6), I.R.C. 1954,…

On Apr. 3, 1978, respondent mailed a notice of deficiency for petitioners' 1974 taxable year to the address given as petitioners' residence on their income tax return for that year. Held: While taxpayers are required to notify the Commissioner of a change of address, no requirement exists that such notice be given to the particular agent of the Commissioner responsible for gathering the facts for the determination of the deficiency.

Individual petitioners H and W are liable as transferees of Corporation B, which sold all its machinery for a lump sum to a syndicate of used machinery dealers… Held: in calculating depreciation recapture, the allocation contained in the letter was neither realistic nor the result of arm's-length negotiations and is therefore not binding on respondent. Held, further, all of the items sold by B will not be treated as a single item for purposes of depreciation recapture.

Held, payments petitioner received from a union during 1976 were includable in his gross income in that year rather than excludable as gifts under sec. 102, I.R.C. 1954. Held: payments petitioner received from a union during 1976 were includable in his gross income in that year rather than excludable as gifts under sec. 102, I.R.C. 1954.

Petitioner-husband's partnerships elected to deduct depreciation of expenditures to rehabilitate low-income rental housing under the accelerated method provided by sec. 167(k), I.R.C. 1954. Held: the requirements of secs. 1.167(k)-4(b)(1)(vii) and 1.167(k)-4(b)(2)(ii), Income Tax Regs., are procedural or directory, and not mandatory; the partnerships substantially complied with the regulations; and therefore, the elections under sec. 167(k) are valid.

1. Cash rebates paid by petitioners, wholesale milk dealers, to their customers, retail milk dealers, are excludable from petitioners' gross income. Sec. 162(c)(2), I.R.C. 1954, not applicable. Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956); Atzingen-Whitehouse Dairy, Inc. v. Commissioner, 36 T.C. 173 (1961); Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477 (1977), followed. 2.

Respondent advised petitioner that a sale of a 50-acre tract of land by petitioner to a private foundation in 1971 was an act of self-dealing and would have to be reversed to avoid imposition of the… Held: Motion for judgment on the pleadings denied. The 1973 transactions cannot be considered shams. The Court cannot find on the undisputed facts that petitioner is not liable for the tax as a matter of law.

Petitioner, having been denied tax-exempt status as a religious organization under sec. 501(c)(3), I.R.C. 1954, as amended, petitioned this Court for a declaratory judgment pursuant to sec. 7428. Held: petitioner is not entitled to exemption from Federal taxation under secs. 501(a) and 501(c)(3), I.R.C. 1954, as amended, because a part of its net earnings inures to the benefit of private shareholders or individuals.

Rules 36 and 53, Tax Court Rules of Practice and Procedure. -- Respondent mailed a motion to strike to the Tax Court 45 days after a copy of the petition was served on him. Held: Despite the inconsequential delay in serving a copy of the motion upon petitioners' counsel, the motion was timely mailed to the Court, and thus, timely filed with the Tax Court as required by sec. 7502, Rules 21, 22, and 36, Tax Court Rules of Practice and Procedure.

Liens were placed on petitioner's real estate with respect to support provided by the county to his minor son who was placed in a foster home. Held: an unfulfilled obligation of support is insufficient to justify a dependency exemption. Held, further, petitioner was in the trade or business of being an author. Held, further, home office and business expense deductions determined.

Held, in an action for declaratory judgment under sec. 7428(a), I.R.C. 1954, the administrative record does not establish that no part of petitioner's net earnings inure to the benefit of private individuals in violation of sec. 501(c)(3), I.R.C. 1954.

Pursuant to an agreement entered into prior to decedent's death, P, an estate, had the right to participate in a percentage of any contingent fees subsequently awarded in 13 pending Indian claims… Held: Under secs. 2031 and 2033, I.R.C. 1954, the term property encompasses choses in action, including claims for services performed. There is no rule of law that contingent legal fees, merely by virtue of their contingency, are automatically excluded from the gross estate.

Petitioners took legal title to their new principal residence on Feb. 21, 1975, but they did not occupy their residence until Mar. 22, 1975. Held: petitioners are not entitled to a credit under sec. 44, I.R.C. 1954, as amended, since they did not acquire their new principal residence within the time prescribed by sec. 44(e)(1)(B), I.R.C. 1954, as amended.

Petitioner owned the Demion property and wanted to acquire the Casa El Camino property from an unidentified third party in a tax-free exchange. Goodyear wanted to acquire the Demion property. Held: Petitioner's transfer of the Demion property for the Casa El Camino property, which took the form of a four-party exchange, qualified as a sec. 1031 like-kind exchange. 2. Gain is not recognized to petitioner under the boot rule of sec. 1031(b), I.R.C. 1954.

On Aug. 27, 1975, petitioners purchased 100 shares in a cooperative apartment corporation. The building in which the cooperative was located had been previously used for commercial purposes. Adaptation of the building for residential use began prior to Mar. 26, 1975. Petitioners were the first residential users of the cooperative apartment. Held, petitioners' cooperative apartment qualified as a "new principal residence" within the meaning of sec. 44(e)(1), I.R.C. 1954, and sec. 1.44-5(a), Income Tax Regs.Held, further, petitioners are entitled to the sec. 44 tax credit on the purchase of the cooperative shares.

Petitioner husband was employed by a State hospital, A, near the family residence. On June 15, 1972, he transferred his employment to another State hospital, B, because A closed down. Held: petitioner husband's 1975 and 1976 expenses for food and lodging at B and transportation between the family residence and B are not deductible as expenses incurred while traveling away from home.

Petitioner incurred expenses in obtaining certain special use permits and in removing sand from one of its minesites to a second minesite. Held: the costs of acquiring the special use permits are capital expenditures and not development expenditures. Geoghegan & Mathis, Inc. v. Commissioner, 55 T.C. 672 (1971), affd. 453 F.2d 1324 (6th Cir. 1972), followed. Held, further, the costs of sand removal are currently deductible under sec. 162.

Petitioners operated radio stations KAVR and KAVR-FM. Held: the legal expenses were ordinary and necessary and had a business nexus, and since the origin and character of the FCC litigation proximately resulted from the taxpayer's business activities and not from the acquisition or disposition of property, the expenses are deductible under sec. 162, I.R.C. 1954.

At the time of his accidental death, the decedent was a covered person under his employer's travel accident policy. Held: since under California law applicable to the facts of this case the court order divested decedent of all incidents of ownership in the policy, its proceeds are not includable in his gross estate. Morton v. United States, 457 F.2d 750 (4th Cir. 1972), followed.

Decedent entered into an agreement with his employer whereby he was to be paid an annual rate of compensation for performance of services for a fixed term of employment. Held: The agreement did not provide for postemployment benefits. Decedent did not have a right to an annuity or other payment. Therefore, the commuted value of the payments due decedent's children is not includable in decedent's gross estate under sec. 2039(a), I.R.C. 1954. 2.

Decedent contracted to deliver to buyer approximately 3,300 head of calves at 49 cents per pound. Held: The estate's receipts on delivery of the calves were not income in respect of a decedent.

Held: The statutory notice of deficiency requirements of secs. 6212(a) and 6213(a), I.R.C. 1954, do not apply to the assessment of the 50-percent penalty under sec. 6652(c) for failure to report tips and, therefore, the Tax Court lacks jurisdiction over such an assessment. Petitioners' motion to vacate an order to dismiss for lack of jurisdiction is denied.

Held: The exchange by petitioner of his Wagensen Ranch for the Napier Ranch and cash was an exchange of like-kind property within the meaning of sec. 1031, I.R.C. 1954, and petitioner recognized no… Held: The exchange by petitioner of his Wagensen Ranch for the Napier Ranch and cash was an exchange of like-kind property within the meaning of sec. 1031, I.R.C. 1954, and petitioner recognized no gain in excess of the amount of cash he received on the exchange.

As the first step in the development of a luxury residential community, X built a golf course and country club. Held: Y is to be respected as an entity separate from X. Held, further, the transfer of assets to Y by X and the existence of the estate for 40 years will not be disregarded for tax purposes. X claimed a depreciation deduction due to the amortization of the estate for 40 years, which deduction was disallowed by respondent.

Held: 1. The sale of an apartment building by two individuals to trusts of which they were trustees were bona fide sales recognizable of tax… Held: The sale of an apartment building by two individuals to trusts of which they were trustees were bona fide sales recognizable of tax purposes where the declarations of trusts authorized such sales and the sales were advantageous to the trusts even though the following day the trusts sold the apartments to a third party; 2.

Rules 10(e) and 22, Tax Court Rules of Practice and Procedure. -- An envelope containing a petition which was addressed to the Clerk of the Court Washington, D.C. 91217 was not properly addressed within the meaning of sec. 7502, I.R.C. 1954, since it was not addressed in accordance with the requirements of Rules 10(e) and 22, Tax Court Rules of Practice and Procedure.

Rules 71 and 103, Tax Court Rules of Practice and Procedure. -- Petitioner filed a motion to compel respondent to answer interrogatories for statistical and other information concerning its… Held: Petitioner's motion to compel discovery of statistical and other information concerning alleged invidious discrimination is denied where petitioner has failed to show that the selectivity was based upon a constitutionally impermissible ground.

An attorney embezzled funds from decedent's estate. Held: pursuant to sec. 2054, I.R.C. 1954, petitioner must reduce the amount of theft loss in an amount equal to the reimbursement received.

Held, petitioner realized long-term capital gain on the sales of currency contracts in 1968.

P owned an apartment project constructed in accordance with Sec. 236 of the National Housing Act. Under such act, HUD made so-called interest reduction payments on P's behalf. Held: The interest reduction payments are includable in P's gross income, and he is entitled to deduct the interest payments made by HUD on the mortgage on the project. 2.

Petitioner, through its various subsidiaries, is engaged in the transportation by truck of general commodities freight. As part of this business, petitioner invested in truck dock facilities. Held: the docking facilities are buildings and therefore fail to qualify for the investment tax credit. Held, further, various lighting fixtures, truck bay doors, and fences qualify for the credit.

Held, for calendar year 1974, petitioner's collection of written documents fails to create a qualified profit-sharing plan within the dimensions of sec.… Held: for calendar year 1974, petitioner's collection of written documents fails to create a qualified profit-sharing plan within the dimensions of sec. 401(a), I.R.C. 1954. Held, further, in 1974, these writings do not constitute a nonqualified profit-sharing plan within the meaning of secs. 401 through 415 of the Code.

Held, that part of sec. 1.165-11(e), Income Tax Regs., which imposes a 90-day time limitation for revoking an election is invalid… Held: that part of sec. 1.165-11(e), Income Tax Regs., which imposes a 90-day time limitation for revoking an election is invalid because a time limitation for revoking an election, which is shorter than the time limitation for making an election under sec. 165(h), I.R.C. 1954, as amended, effectively frustrates the purpose of the statute.

Petitioner, having been denied tax-exempt status as a religious organization under sec. 501(c)(3), I.R.C. 1954, as amended, petitioned this Court for a declaratory judgment pursuant to sec. 7428. Held: petitioner has the burden of proof in this proceeding. Held, further, petitioner is legally distinct from its parent church and therefore must prove that it qualifies for tax-exempt status on its own merits.

Two weeks prior to her death in 1974, decedent executed a 1-year note with the bank. Held: Under Indiana law, an oral compromise does not preserve a valid claim against an estate. Therefore, the note executed by decedent is not a deductible claim against the estate within the concept of sec. 2053(a)(3).

Rule 121, Tax Court Rules of Practice and Procedure. -- P filed a petition in this Court to contest the disallowance of a deduction taken by him for alimony. Held: the Commissioner's motion for summary judgment is granted since there is no genuine issue as to any material fact, and his determination of a deficiency in income tax is sustained.

In June 1976, the board of trustees of Central, a multiemployer pension plan, requested a determination that the plan, as amended to comply with the Employee Retirement Income Security Act of 1974… Held: the Commissioner did not err in failing to determine that the plan violated sec. 412, I.R.C. 1954.

1. P and others were partners in PS, a coal mining joint venture. PS acquired by lease the rights to mine coal from the properties of various landowner-lessors. Held: PS and its partners may not deduct from ordinary income advanced minimum royalties and earned royalties paid to landowner-lessors. Under sec. 631(c), PS must instead subtract royalties paid from royalty income for purposes of sec. 1231. 2.

The city of Buffalo condemned petitioner's land, building, and fixtures. Held: the entire condemnation award constituted an amount realized upon the involuntary conversion of property into money. E. R. Hitchcock Co. v. United States, 514 F.2d 484 (2d Cir. 1975), affg. 382 F. Supp. 236 (D. Conn. 1974); Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

Petitioner agreed to construct an office building for no profit in exchange for an interest in partnership capital. Held: on the facts, petitioner must include the value of the partnership interest in taxable income in the year that the partnership agreement was executed. Held, further, the value of that interest to be recognized as income to petitioner is equal to the value of the services exchanged for it by petitioner in an arm's-length agreement.

In 1965, petitioners conveyed certain real estate to Capri Builders, Inc., receiving therefor a note in the amount of $ 250,000 (later reduced to $ 225,000)… Held: issue of donative intent was properly before the Court. Held, further: That part of the $ 20,000 sent to Tabor Academy in 1970 equal to the value of the 1/21 interest in the note and deed of trust that Tabor Academy quitclaimed to the judgment creditor was not a gift and was not deductible by petitioner in 1970.

Petitioner bought real estate in California for $ 50,000, paying the seller $ 9,000 cash and giving her a purchase-money mortgage in the amount of $ 41,000. Held: the reconveyance constituted a sale, and petitioner's loss on the transaction was a capital loss.

By trust agreements, two sisters created reciprocal revocable inter vivos trusts. Held: the transfer was a split interest and subject to the provisions of sec. 2055(e), I.R.C. 1954.

Petitioners lived in and were domiciled in Maryland. In order to render themselves unmarried on Dec. 31, petitioners traveled to Haiti in December of 1975 and obtained a Haitian divorce decree. Held: The determination of marital status must be made in accordance with State law. Under Maryland law, the foreign divorce decrees would not be recognized as valid to terminate petitioners' marriage because at all times petitioners remained domiciled in Maryland.

Decedent was trustee and life income beneficiary of a testamentary trust created by her husband. The trustee could invade the trust corpus in cases of emergency or illness. Held: Power to invade in cases of emergency can include occurrences other than maintenance and/or support and hence can have independent significance. Accordingly, decedent's power to invade corpus was a general power of appointment within the meaning of sec. 2041(a)(2), I.R.C. 1954.

Held: Trees and shrubs growing in a nursery are part of the land and are not to be classified as a nonproperty interest on condemnation to permit an allocation of the lump-sum award. Held: Trees and shrubs growing in a nursery are part of the land and are not to be classified as a nonproperty interest on condemnation to permit an allocation of the lump-sum award. Petitioners' condemned property was replaced with property of a like kind, and gain is therefore not recognized.

Petitioner, a TWA pilot based in New York and flying primarily international flights, began in April 1974 to spend all his time, insofar as the demands of his employment allowed, in France. Held, a taxpayer must offer "strong proof" of bona fide residency in a foreign country to qualify for an exclusion from gross income under sec. 911(a)(1), which provides that such bona fide residency must be established "to the satisfaction of the Secretary or his delegate." Held, further, applying this standard of proof to the circumstances revealed in the record herein, petitioner was a bona fide resident of France for an uninterrupted period beginning Apr. 15, 1975, and continuing throughout the year 1976, but was not a bona fide resident of France prior to Apr. 15, 1975.

EFH, a corporate employer, established a profit-sharing plan with the majority of its participants being corporate officers, shareholders, supervisors, and highly compensated personnel. Held: The Commissioner has no discretionary authority under sec. 401(a)(4), I.R.C. 1954, to determine discrimination in contributions or benefits.

Petitioner-husband was an active participant in one employer's tax-qualified profit-sharing plan until Mar. 14, 1975. Held: petitioner-husband made an excess contribution to an IRA (within the meaning of sec. 4973(b)(1), I.R.C. 1954) for 1975, that amount remained as an excess contribution (within the meaning of sec. 4973(b)(2), I.R.C. 1954) for 1976, and so the 6-percent excise tax under sec. 4973(a) applies for 1975 and 1976.

Held: The term "disposition" as used in sec. 1.636-1(c)(1), Income Tax Regs., includes abandonments of mineral properties burdened by sec. 636, I.R.C. 1954, production payments. On the facts, a constructive disposition for gain purposes occurred when all the wells on leases in a cross-collateralized package of leases proved to be dry holes. Held, further, under respondent's concession, the gain is sec. 1231 gain if the requisite holding period has been met and, if not, is ordinary income.

Respondent has subpoenaed certain records from Bank of America N.T. & S.A. (Bank). Held: under the circumstances, Bank's motion to be reimbursed for costs of compliance with the subpoena is denied.

Petitioner is a profit-sharing trust qualified under sec. 401, I.R.C. 1954. Held: the transfers from the corporation to the trust to purchase the shopping center are acquisition indebtedness within the meaning of sec. 514. Held, further, the trust's unrelated business taxable income is taxable at trust and not corporate rates. Held, further, sec. 6651(a) addition to tax not applicable.

On his 1974 return, P claimed a credit under sec. 31, I.R.C. 1954, for taxes withheld on his wages in excess of the amounts shown on the attached W-2 forms. Held: P had unreported income during 1974 in the amount determined by the Commissioner. Held, further, this Court is without jurisdiction under secs. 6214(a) and 6213(b)(2)(A), I.R.C. 1954, to consider the Commissioner's claim for the amount erroneously refunded to P.

Held, petitioners' retirement plans satisfied the coverage requirements of sec. 401(a)(3)(B), I.R.C. 1954, during the initial year they went into effect and thereby met the requirements of a… Held: petitioners' retirement plans satisfied the coverage requirements of sec. 401(a)(3)(B), I.R.C. 1954, during the initial year they went into effect and thereby met the requirements of a qualified trust within the meaning of sec. 401(a), I.R.C. 1954, for that year.

Petitioner requested a determination that its plan met the requirements of sec. 401(a), I.R.C. 1954. Held: petitioner has carried its burden of proof with respect to jurisdiction, date of mailing the application for determination, Office of Internal Revenue Service to which it was mailed, and lack of a notice of determination; respondent bears the burden of proof as to every ground upon which he relies to sustain his position that the…

P entered into a contract to sell his farm in St. Charles County, Mo., to M for cash. Held: the transaction qualified as an exchange of St. Charles farm for like-kind property under sec. 1031, I.R.C. 1954, and P was required to recognize as gain only the cash boot he received.

Petitioner, a resident of California, owned 50 percent of a parcel of improved real estate in New Jersey. The other 50 percent was owned by petitioner's brother who lived in New Jersey. Petitioner and his brother had the building on the parcel demolished and claimed demolition loss deductions therefor. Immediately after demolition, the parcel was leased to a person with whom lease negotiations had previously collapsed. Petitioner's return was audited and a "no change" letter issued. Later petitioner's brother's return was audited and certain disallowances proposed, including that brother's one-half of the demolition loss claimed. The IRS in New Jersey notified the IRS Office in California of these adjustments. The deficiency herein resulted. Held, the test for deductibility of demolition losses claimed by lessors is the same under either the pre- or post-1976 version of sec. 1.165-3(b)(2), Income Tax Regs.Held, further, petitioner's claimed demolition loss allowable. Held, further, no second inspection of petitioner's books of account within the meaning of sec. 7605(b), I.R.C. 1954, occurred.

Petitioners owned and operated a legal house of prostitution, Mustang Ranch Brothel, Nev. The only contemporaneously prepared document evidencing the income of the prostitution during the years in issue was a sheet showing earnings of each prostitute during a 24-hour period. Petitioners also owned the Starlight Ranch Brothel. For the calendar years 1973 through 1976, petitioners filed a "Sullivan" Form 1040. Held: 1. Gross income from the Mustang and Starlight brothels determined; 2. Business expenses determined; 3. Amount of deductible legal fees determined; 4. Applicability of sec. 170 and/or sec. 616 to the construction and dedication of a roadway determined; 5. Form 1040 filed by petitioners did not constitute a return for the purposes of secs. 1348 (maximum tax on earned income), 6501 (statute of limitations), and 6653(c) (definition of underpayment); and 6. Sec. 6653(b) addition to tax for fraudulent underpayment imposed for each of the years in issue.

Petitioner's husband was ordered to pay her periodic support payments while they were separated. Held: petitioner is taxable under sec. 71(a)(3), I.R.C. 1954, on the support payments to the extent they exceed her ownership interest in the current community income and previously accumulated property.

Petitioner, a nonexempt agricultural cooperative, operates both a grain department and an agricultural supply department. Held: Petitioner is entitled to carry forward under sec. 172, I.R.C. 1954, losses incurred in its grain marketing and storage operations during 1971 and 1972 to offset income from its 1973 farm supply operations. 2.

Petitioner, having been denied tax-exempt status as a religious organization under sec. 501(c)(3), I.R.C. 1954, as amended, petitioned the Court for a declaratory judgment pursuant to sec. 7428. Petitioner's minister contributed virtually all of the church's income, and in turn, the church paid the minister's living expenses. Held: Petitioner is not entitled to tax-exempt status under sec. 501(c)(3). The administrative record does not establish that petitioner serves a public rather than a private purpose.

Petitioner possesses a rare type of blood. Thus, her blood plasma is a rare commodity which is profitably processed and marketed by others who are willing to pay "donors" for the plasma. Petitioner has sold her blood plasma for a number of years, including 1976, as her primary source of funds. As a seller of blood plasma, petitioner devotes constant attention to her diet and made 95 "donations" in 1976 for which she was paid by the pint. Held, the payments received by petitioner for her plasma "donations" were income received in her trade or business of selling the product of blood plasma: Held, further, health insurance is an inherently personal expense deductible only as allowed as a medical expense under sec. 213, I.R.C. 1954: Held, further, the loss of minerals from the blood and the eventual loss of the ability of the blood to regenerate from "donations" are not among those depletions of "natural deposits" for which deductions are provided within the scope of sec. 611, I.R.C. 1954: Held, further, the amount of other business deductions are determined.

Decedent sold stock and property for which he received promissory notes as payment. Held: the notes are not to be included in decedent's gross estate.

Petitioner's ex-wife performed more than her household duties and by her efforts in petitioner's business helped maintain the value of the business. Held: Petitioner's ex-wife had a special equity in petitioner's estate under Florida law. Therefore, payments made by petitioner under a divorce decree were for special equity and not alimony. Held, further, such payments were not ordinary and necessary business expenses.

1. P created T, a trust, for the purpose of developing and selling certain real estate for profit. P was one of three trustees, but he held all the shares of beneficial ownership of T. Under the terms of the trust indenture, T was to continue until 20 years after the death of the original trustees unless terminated sooner by a majority vote of them. The trustees had broad powers to conduct the affairs of T, each having the individual authority to bind T in all matters relating to the trust property. The trust indenture also provided that the liability of the trustees and the beneficiary was limited to the property of T. Before any shares of T could be transferred, the beneficiary had to obtain the unanimous consent of all the trustees. On the Federal income tax returns filed by P and his wife for 1973, 1974, and 1975, they deducted the losses of T. Held: T is an association taxable as a corporation since T had associates, an objective to carry on a business for joint profit, continuity of life, centralization of management, and limited liability for its members. Sec. 301.7701-2, Proced. & Admin. Regs. Accordingly, P and his wife may not deduct the losses of T on their returns. 2. To finance the purchase of the trust property, T took out a mortgage with B. As a condition of granting the mortgage to T, B required P to personally guarantee the note. T defaulted on the mortgage, and B foreclosed on the property and sold it at public auction. The proceeds from such auction were insufficient to satisfy the amount due under the note, and B then sued P for the balance. P and his wife deducted such balance on their income tax return for 1976 as a business loss. Held, P and his wife are not entitled to a deduction for a business loss under sec. 165(c)(1), I.R.C. 1954, since any such loss would be a bad debt subject to sec. 166, I.R.C. 1954. Held, further, P and his wife are not entitled to a bad debt deduction in 1976, since he admitted that he paid nothing to B in such year. 3. At the time B foreclosed on the mortgage, T owed interest and real estate taxes on such mortgage. B included such amounts as part of the total due from P under his personal guarantee of the mortgage. P and his wife deducted such amounts for interest and real estate taxes on their Federal income tax return for 1976. Held , P and his wife are not entitled to deduct interest due on the mortgage of T since such amount is not interest on P's own indebtedness. Held, further, P and his wife are not entitled to deduct real estate taxes of T since such taxes were not imposed on them. Sec. 1.164-1(a), Income Tax Regs. 4. P was also employed as a newsman for a television station during the years in issue. He deducted as business expenses amounts for his wardrobe, laundry and dry cleaning, haircuts and makeup, hotels and meals, and automobile use and depreciation. Held, P has failed to prove that he is entitled to any deductions for such expenses in excess of the amounts allowed by the Commissioner. 5. P and his wife deducted in 1976 expenses for the use of a room in their residence as a home office. Held, under sec. 280A(a), I.R.C. 1954, they are not entitled to deduct such expenses since the home office was not the principal place of business of either of them, and it was not maintained for the convenience of their employers. 6. The Commissioner determined that T failed to report the sale of property in 1975 on its income tax return for such year. Held, determination of the Commissioner is sustained, since T failed to introduce any evidence on this issue.

Petitioner was created by State statute to serve as a component of the University of Massachusetts Medical School and its teaching hospital, the University of Massachusetts Hospital at Worcester. Petitioner is composed of the faculty members of the medical school who also participate in the clinical program at the teaching hospital. Pursuant to statute, petitioner collects fees for the services of its members, which are then deposited in a trust fund and disbursed according to legislatively mandated purposes. Among the permissible uses of the funds is the payment of members' salaries and noncash benefits. Held, respondent erred in failing to rule favorably on petitioner's application for exemption under sec. 501(c)(3), I.R.C. 1954. B.H.W. Anesthesia Foundation, Inc. v. Commissioner, 72 T.C. 681 (1979), followed.

Mr. Hesse was a general partner in a limited partnership. He died on July 16, 1970. During 1970, the partnership sustained substantial losses. Held: Mrs. Hesse is not entitled to report her husband's share of partnership losses on the final joint return she filed with him for 1970. Rather, the decedent's distributive share of partnership losses must be reported on the fiduciary income tax return of his estate.

Petitioners owned 31 percent of Clinton State Bank (CSB). In 1970, petitioner-wife established a life insurance trust funded with policies covering the life of petitioner-husband. Held: CSB's payments of the policies' premiums constituted dividends to petitioners.

Petitioner is a nonprofit corporation formed to promote and foster the performing arts, particularly the theatre. Held: petitioner is operated exclusively for charitable and educational purposes under sec. 501(c)(3), I.R.C. 1954.

Petitioners had certain trees removed from their property in order to protect their residence. Held, the removal of the trees was not a casualty under sec. 165(c)(3). Held: the removal of the trees was not a casualty under sec. 165(c)(3).

In connection with a Rule 155 proceeding, petitioner moved to have the Court consider a question relating to the eligibility of certain U.S. Treasury bonds (flower… Held: petitioner's motion is denied without prejudice because a Rule 155 proceeding may not be used to raise a new issue. Held, further, the Court will defer entry of decision in order to afford petitioner an opportunity to seek resolution of the question of eligibility of said bonds with the Court of Claims.

Petitioner offered repurchase agreements as an ordinary and customary bank deposit. Held: Under sec. 163, I.R.C. 1954, a deduction for interest paid to depositors on repurchase agreements backed by tax-exempt obligations is allowed. Sec. 265(2) will not apply to disallow the deduction.

Under a settlement agreement incident to a divorce, petitioner W received monthly child support and alimony, property, and a $ 100,000 fixed principal sum to be paid in 11 annual installments. Held: W proved that, under California law, a substantial part of her husband's interest in a partnership was community property which she relinquished in the settlement agreement.

1. Petitioner purchased medical equipment and furnishings in 1974 which he immediately leased to a corporation of which he was an employee under a written lease dated… Held: cancellation of the lease does not permit petitioner to meet the conditions of sec. 46(e)(3), I.R.C. 1954, for allowance of an investment credit with respect to the property. 2. Petitioner purchased two automobiles in 1974 which he purportedly used in his business of being an employee of the corporation.

In 1971, decedent transferred bonds to a trust for the benefit of her grandchildren, retaining the severable interest coupons payable through 1979. She died in 1974. Held: sec. 2036(a), I.R.C. 1954, requires the inclusion of the value of the bonds in the decedent's gross estate.

Petitioner Dunlap, together with one Weil, were officers and shareholders of petitioner Hawkeye Bancorporation. Held: Hawkeye had no income, and Dunlap no deduction, with respect to the $ 681,507 of Jasper earnings which would have been payable had the F.R.B. rejected the sale.

Decedent possessed an inter vivos power of appointment over property held in trust; said property was includable in her gross estate under sec. 2041, I.R.C. 1954. Held: the provisions of sec. 2055(e) are applicable, Estate of Sorenson, 72 T.C. 1180 (1979); the trust as originally established did not meet the requirements contained therein. Held, further, the estate is eligible for the relief provision contained in sec. 2055(e)(3).

On petitioners' consolidated Federal income tax returns for the taxable years ending Feb. 26, 1972, and Dec. 29, 1973, deductions were claimed for intangible drilling costs… Held: the intangible expenses incurred in drilling each of the wells in issue constitute intangible drilling and development costs within the meaning of sec. 1.612-4, Income Tax Regs., and were properly deducted by petitioners. Standard Oil Co. (Indiana) v. Commissioner, 68 T.C. 325 (1977), followed.

On petitioners' consolidated Federal income tax return for the taxable year 1971, deductions were claimed for intangible drilling costs incurred in connection with the drilling… Held: the intangible expenses incurred in drilling each of the wells in issue constitute intangible drilling and development costs within the meaning of sec. 1.612-4, Income Tax Regs., and were properly deducted by petitioners. Standard Oil Co. (Indiana) v. Commissioner, 68 T.C. 325 (1977), followed.

Petitioners purchased all the issued and outstanding stock of X corporation from its sole shareholder for cash and promissory notes. Petitioners and X corporation cosigned the notes. Held: payments by X corporation to seller under the consulting agreement are deductible under sec. 162, I.R.C. 1954. Held, further, payments by X corporation in partial satisfaction of the promissory notes issued seller are constructive dividends to petitioners.

Petitioners acquired interests in two limited partnerships. Held: the respective arrangements between the seller, the intermediate lender, and the partnerships did not give rise to bona fide indebtedness sufficient to support interest deductions. Held, further, such arrangement did not result in interest being paid within the intendment of sec. 163(a), I.R.C. 1954.

Petitioners are income beneficiaries and remaindermen of T, a simple testamentary trust, which owned land and a building in New Haven, Conn. Held: the interest received as part of the condemnation award is includable in T's 1971 income and taxable to the petitioners to the extent of their distributive shares; the interest is compensation for the delay in making payment for the property, and is not part of the gain on the involuntary conversion of property entitled to…