Volume 75 — Tax Court Reports

P, an attorney engaged in private law practice, admitted he failed to file Federal income tax returns for the years 1966 through 1969, but contended that he did file returns for the years 1963,… Held: P's testimony, as purportedly refreshed through hypnosis, was too dubious to render it admissible. But even if admissible, the Court gives no weight to it under the particular circumstances. 2. P failed to file Federal income tax returns for the years 1963, 1964, and 1965. 3.

In connection with a judgment rendered in a divorce proceeding, petitioner was ordered to pay a lump sum to his former wife. Held: the principal purpose of the damage assessment is to deter frivolous appeals, not to compensate the judgment creditor for the use of her funds while the appeal is pending; therefore, the damages do not constitute deductible interest under sec. 163, I.R.C. 1954.

In connection with a judgment rendered in a divorce proceeding, petitioner's former husband was ordered to pay her a lump sum. He appealed the judgment, and in accordance with the Kentucky Rules of Civil Procedure, he posted a supersedeas bond to stay execution on that part of the judgment ordering the lump-sum payment, which stay was to remain effective pending the outcome of the appeal. His appeal was partially successful and the amount of the lump-sum award was reduced. However, under Kentucky law he was required to pay to petitioner an additional sum, denoted as damages, equal to 10 percent of the amount of the superseded judgment which was affirmed on appeal. Held, the damages are not part of the property settlement incident to the divorce and constitute gross income to petitioner under sec. 61, I.R.C. 1954.

Petitioner and her husband purchased U.S. Treasury bonds (flower bonds) which were redeemable at their par value to the extent they were utilized to pay Federal estate tax. Held: the flower bonds passing to petitioner as her community one-half interest had a basis equal to their fair market value at the time of the death of petitioner's husband under sec. 1014(b)(6), I.R.C 1954.

Petitioners deducted as real estate taxes a payment made in 1973 to redeem their property from the State of California. Held: the delinquent taxes, delinquent penalty, costs, and fees must be capitalized, but petitioners may deduct the statutory redemption penalty.

JRYA, a corporation, purchased a building and its underlying and adjacent real property for $ 650,000. Held: The purchase price so far exceeded the fair market value of the building that the payments by 7th P.A. and 11th P.A. did not yield equity to the partnerships and did not constitute an investment in the building.

In order to issue stock to the public, petitioner was required to terminate agreements providing for patent royalties and sales commissions payable to corporations controlled by its founder. Held: petitioner's cost basis in the acquired patents and terminated agreements is the value of the stock and options given up in the exchange. Pittsburgh Terminal Corp. v. Commissioner, 60 T.C. 80 (1973), followed.

Petitioner is a newly formed Christian religious organization located in southern California. Petitioner's ministers are each paid predetermined percentages of the gross tithes and offerings received. Held: Part of petitioner's net earnings inure to the benefit of private shareholders or individuals. Accordingly, petitioner is not exempt as an organization described in sec. 501(c)(3), I.R.C. 1954.

Petitioner sold stock, subject to restrictions, in a corporation of which he was a majority shareholder, to employees in order to induce them to work for the corporation. Held: Capital loss deduction claimed by petitioner sustained, Downer v. Commissioner, 48 T.C. 86 (1967), followed. Sec. 1.83-6(d), Income Tax Regs., treating such transaction as capital contribution to the corporation, held invalid.

Petitioners formed a partnership to purchase real property on which to operate a landfill business. Held: The dump fees paid by the partnership are not deductible as rent because it had an equity interest in the land. Sec. 162(a), I.R.C. 1954. 2.

T received interest-free loans from a family corporation of which he was an officer-stockholder. Held: T did not realize any taxable income based upon his use or enjoyment of such tax-free loans. Stare decisis requires that Dean v. Commissioner, 35 T.C. 1083 (1961), be followed in the circumstances of this issue, nor is Dean inapplicable on this record by reason of T's investments in federally tax-exempt securities.

In 1962, three general partners, acting individually, formed a total of 12 trusts, each with a fractional interest in the partnership assets, and all of which were identical except in grantor,… Held: the sec. 38, property of the limited partnership ceased to be such with respect to the trusts on the date of their termination, as intended by the grantors, and the resulting return of the partnership interests to the grantors.

P and M were brothers who inherited from their father stock in a family corporation and an interest in real estate. They also jointly purchased other real property. Held: The deductions for losses sustained from the sales of property between brothers are not allowed by sec. 267, I.R.C. 1954. Family hostility does not create an exception to the absolute prohibition contained in the statute.

Held, unless a timely election was made under sec. 754, I.R.C. 1954, the bases of the assets of a California husband-wife partnership were… Held: unless a timely election was made under sec. 754, I.R.C. 1954, the bases of the assets of a California husband-wife partnership were not adjusted on the death of the husband under sec. 1014(a) and (b)( 6), I.R.C. 1954, even though the bases of the interests of the respective partners were adjusted and both the deceased husband's…

Petitioner applied for an IRS ruling that it was tax exempt as an organization described in sec. 501(c)(3), I.R.C. 1954, and that it was not a private foundation under sec. 509(a). Held: declaratory judgment jurisdiction under sec. 7428 is limited to actual controversies involving secs. 170(c)(2), 501(c)(3), 509(a), or 4942(j)(3). Held, further: Petitioner's advance ruling was not favorable and constitutes an adverse ruling under sec. 509(a).

Petitioner mined vanadium and tungsten ore involving a solvent extraction process as to both ores and, subsequent to the use of that process, precipitation (by adjusting the pH of… Held: Petitioner's solvent extraction process is a mining process because it is substantially equivalent to precipitation within the meaning of sec. 613(c)(4)(D), I.R.C. 1954, and is necessary to other mining processes within the meaning of the exception clause of sec. 613(c)(5), I.R.C. 1954; 2.

Held, P's mini-motorhome which provides living facilities is a dwelling unit within the meaning of sec. 280A(f)(1)(A), I.R.C. 1954, as amended. Held: P's mini-motorhome which provides living facilities is a dwelling unit within the meaning of sec. 280A(f)(1)(A), I.R.C. 1954, as amended.

A building and loan association paid or credited a bonus distribution to depositors or to the accounts of depositors on Sept. 30, 1972. Held: the bonus distribution is deductible as a dividend under sec. 591, I.R.C. 1954.

In 1969, P made the election to be taxed as a small business corporation under subch. S, I.R.C. 1954. Held: The order of the Illinois court must be disregarded for Federal tax purposes. 2. The election by P was terminated since sec. 1.1371-1(e), Income Tax Regs., provides that such a trust cannot hold stock in an electing small business corporation and since such regulations are valid.

In September 1973, petitioners purchased a lot upon which they planned to construct a new principal residence. Held: for purposes of sec. 44(e)(1)(A), I.R.C. (1954), construction of the new principal residence commenced with the installation of the French drains and, thus, before Mar. 26, 1975. Reddy v. United States, 436 F. Supp. 377 (N.D. Ill. 1977), distinguished.

Petitioner, with another corporation, formed a joint venture to acquire, produce, and sell agricultural products. Held: amounts paid to T by petitioner as compensation for services actually rendered to the joint venture are not deductible by petitioner since they were not ordinary and necessary expenses of petitioner and T was not acting as petitioner's agent in rendering services to the joint venture.

Petitioner Sam Klein was a creditor/shareholder of a subch. S corporation which was completely liquidated, thereby closing its taxable year, and which had a net operating loss for that year. Held: his share of the net operating loss should be taken into account before reduction of his basis in his equity and stock by the amounts distributed to him in complete liquidation on account of his creditor/ shareholder status. Abdalla v. Commissioner, 69 T.C. 697 (1978), applied.

An estate had gross income of X and deductions of X + 1 in its year of termination. The total deductions included the charitable deduction allowable under sec. 642(c), I.R.C. 1954. Held: sec. 642(c) charitable deductions of an estate are not considered in the sec. 642(h)(2) computation of excess deductions which may be allowed as deductions to the beneficiaries of the estate.

Under the Air Traffic Controllers Act, Pub. Held: payments received by petitioner while participating in such program are not workmen's compensation or in the nature of workmen's compensation under sec. 104(a), I.R.C. 1954, and sec. 1.104-1(b), Income Tax Regs., nor payments under a wage continuation plan nor disability payments under sec. 105, I.R.C. 1954.

Respondent sent a notice of deficiency by certified mail to petitioner, a corporation, at the address which petitioner has used for many years and still uses. Held: the evidence does not support a finding that the notice of deficiency was mishandled by postal officials; accordingly, the notice was properly mailed to petitioner at its last known address.

After adopting a plan of complete liquidation under sec. 337, I.R.C. 1954, two of the petitioners, both shareholder-employees, purportedly "forgave" accrued salaries, bonuses, and interest owed to them by their corporation. Held, the "forgiveness" is disregarded as it lacks economic reality and is a sham. Held, further: Amounts paid to petitioners during the process of liquidation constitute ordinary income to the extent of the salaries, bonuses, and interest due them. Only the excess received is a distribution in complete liquidation under sec. 331(a).

Held, under the facts, petitioner is not entitled to deduct certain education expenses. Held: under the facts, petitioner is not entitled to deduct certain education expenses. Held, further, petitioner may not deduct the bank charges incurred to maintain a checking account which she used primarily for personal purposes and only incidentally for tax records.

Besides its many undisputedly educational and charitable activities, petitioner operates two art galleries which exhibit and sell artworks. Held: Petitioner qualifies for exemption under sec. 501(c)(3), I.R.C. 1954, as amended, since petitioner is organized and operated exclusively for an exempt purpose, is not operated in furtherance of a substantial commercial purpose, and serves public rather than private interests.

In 1972, petitioner elected to let her husband's will direct the disposition of her community property share. Held: petitioner's 1976 release of her limited powers to appoint W trust corpus is a taxable gift of the remainder interest in her community share. Held, further, the value of the gift is not reduced under sec. 2512(b), I.R.C. 1954, by the interest petitioner received in her husband's property in 1972.

Decedent's daughter was the administratrix and sole heir of decedent's estate. Held: the expenses of selling the cooperative apartment were allowable expenses of the estate under New York State law.

D bequeathed her residual estate to a trust of which a church was a contingent remainderman. Held: sec. 2055(e)(2) is constitutional, and therefore, the estate is not entitled to an estate tax charitable deduction for such contingent remainder interest. Held, further, certain dividends omitted from the estate tax return are includable in the decedent's gross estate.

Held, interest income earned by a U.S. trust is not U.S. source income where the beneficiary is a nonresident alien. Held: interest income earned by a U.S. trust is not U.S. source income where the beneficiary is a nonresident alien.

An income tax audit for prebankruptcy years (1972 and 1973) began and a 30-day letter was issued prior to the filing of a voluntary bankruptcy petition in a… Held: The Tax Court has jurisdiction to redetermine the deficiencies and additions to tax. Orenduff v. Commissioner, 49 T.C. 329 (1968), followed. 2. The Tax Court lacks the requisite subject matter jurisdiction to decide whether the deficiencies and additions to tax were discharged in the bankruptcy proceeding.

Rule 90(a), Tax Court Rules of Practice and Procedure. Held: P's service upon R of an admission request over 11 months after effective date of Rule revisions before attempting to attain the objectives of the Rule through informal consultation or communication is ineffective. Held, further, R's refusal to serve answers upon P, justified. Held, further, P's motion to review R's response, denied.

Petitioners Mr. Widmer and Mrs. Nielander were divorced in 1971. At the time of their divorce, their net worth was approximately $ 195,000. Held: under Indiana law the $ 4,000 annual payment constitutes a division of property. Held, further, payment thereof is neither deductible by Mr. Widmer nor income to Mrs. Nielander. See secs. 71 and 215, I.R.C. 1954.

T is an accrual basis calendar year regulated gas company. Held: the Commissioner may not require T to accrue as income for the current year charges allocable to gas consumed by its budget billing customers between the last meter reading date in December and Dec. 31, except to the extent that the customers have in fact paid for such charges prior to the end of the year.

Petitioner-husband was a partner in two limited partnerships formed to construct housing projects. Held: The partnerships were not engaged in a trade or business under sec. 162(a), I.R.C. 1954, since the projects were not completed or occupied by tenants until after the taxable year.

Petitioners had ordinary income and capital losses from sources without the United States, but no capital gains from such sources. Held: to the extent that petitioners' capital losses were so used, such losses are properly apportioned or allocated to gross income from sources without the United States, pursuant to sec. 862(b), I.R.C. 1954, in computing the numerator of the fraction set forth in sec. 904(a), I.R.C. 1954, namely taxable income from sources without the…

Separation agreement entered into incident to a divorce provided, among other things, that By way of property settlement, husband would pay wife $ 300,000 in installments of $ 12,000 per year. Despite the fact that the parties intended and agreed that the $ 12,000 annual payments would be treated as a division of property for State court and Federal tax purposes, the payments were in fact in the nature of support or alimony, taxable to the wife and deductible by the husband.

Ps paid dues to a labor union. Some of the dues were allocated by the union to a building fund and to a fund for the construction of recreation centers for the union members. Held: The dues allocated to the building fund were not ordinary and necessary expenses under sec. 162, I.R.C. 1954, since Ps received the redeemable certificates; and 2. The dues allocated to recreation centers were personal expenses not deductible under sec. 162(a).

While exclusive settlement jurisdiction of this case was vested in the Office of the IRS Regional Director of Appeals in Boston, Mass., in accordance with the IRS… Held: the superior's authority to disapprove a settlement requires at the very least that the proposed settlement be submitted to him for consideration; petitioner therefore cannot enforce the settlement because it was never submitted to an IRS official with the delegated final authority over such settlements.

Petitioner, a corporation organized under the laws of the State of Delaware which is exempt from taxation under sec. 501(c)(3), I.R.C. 1954, operates a private school in Paris, France. Held: since petitioner is a corporation created or organized under the law of a State within the meaning of sec. 170(c)(2)(A), contributions to or for the use of petitioner are deductible under sec. 170(a).

Under Connecticut law, the Probate Court judge has discretion, when determining whether to grant a widow's allowance to a surviving spouse, to include a provision vesting the… Held: the Connecticut widow's allowance fails to qualify for the marital deduction under sec. 2056, I.R.C. 1954. Jackson v. United States, 376 U.S. 503 (1964), followed. Held, further: Under Connecticut law, the widow at most received a life estate in one-third of the estate following her disclaimer.

CONTENTSPageHeadnote499Opinion (Introduction)505General Findings of Fact506I.Issue (i): Rapid Amortization of Freight Cars515Findings of Fact515Opinion534II.Issues (hh)… Held: the Office of Defense Mobilization, in issuing the 1956 necessity certificate, intended petitioner to acquire the certified cars as quickly as possible under the prevailing conditions and did not necessarily intend to preclude from certification those cars delivered to petitioner after Dec. 31, 1957.