Volume 80 — Tax Court Reports

Petitioner was engaged in the business of designing, manufacturing, and marketing electronic components. In 1968, it decided to enter the microwave industry. Held: GRFF possessed goodwill and going-concern value equal to the amount paid by petitioner to purchase that corporation in excess of the value attributable to GRFF's realty and tangible assets. Petitioner did not spontaneously create goodwill by such acquisition.

Petitioners paid substantial amounts of investment interest subject to the limitation of sec. 163(d), I.R.C. 1954. Petitioners are also shareholders of three subch. Held: sec. 163(d)(4)(C), I.R.C. 1954, does not attribute the character of a subch. S corporation's operating income to its shareholders for purposes of the sec. 163(d) limitation. Held, further: Such amounts of the subch.

SUBSTANTIVE ISSUES Issues 1 and 3: REALLOCATIONS OF INCOME UNDER SEC. 482, I.R.C. 1954. T, J, D, and B (a father and three sons) were equal partners in FP, a general partnership. Held: Sec. 482, I.R.C. 1954, is not unconstitutional as an invalid delegation of legislative power. (Pp. 140-142.) b. The Commissioner's determinations under sec. 482, I.R.C. 1954, must be sustained unless proven unreasonable, arbitrary, or capricious.

Petitioner, administrator of a defined benefit pension plan, seeks judgment, pursuant to sec. 7476, I.R.C. 1954, declaring that respondent's adverse determination letter with respect to qualification of the plan under sec. 401, I.R.C. 1954, is erroneous. Respondent's adverse determination letter is based on certain plan language prescribing anticipation of cost-of-living increases as a basis for the actuarial assumptions by which a current year's contributions are determined. Held, respondent's determination is based upon correct application of valid criteria for disqualification of defined benefit pension plans.

Respondent determined that petitioner's subsidiary, Durbin International, Inc., failed to qualify as a Domestic International Sales Corporation (DISC) for the taxable years here in issue. This determination was based on Durbin International's failure to satisfy the "paid-in" capital requirement of sec. 1.992-1(d)(1), Income Tax Regs., and the separate bank account requirement of sec. 1.992-1(a)(6), Income Tax Regs.Held: Sec. 1.992-1(d)(1), Income Tax Regs., and sec. 1.992-1(a)(6), Income Tax Regs., are both invalid. Durbin International qualified as a DISC for the taxable years here in issue.

Alps Corp. was one of a group of corporations involved in the construction business. Held: In each of the fiscal years 1973 and 1974, Alps Corp. accumulated its earnings in excess of its reasonable business needs and, therefore, in each of such years is subject to the accumulated earnings tax.

Petitioner is a church which respondent has previously found to be exempt from taxation. In 1980, respondent sought to reexamine petitioner's exempt status. Respondent requested certain information from petitioner, warning that failure to provide such information might result in the revocation of petitioner's exemption. Petitioner refused to provide the information and in several letters requested that respondent cease his examination. Respondent neither ceased his examination nor issued a notice of proposed revocation of exemption. On Mar. 1, 1982, petitioner filed a petition in this Court invoking our declaratory judgment jurisdiction under sec. 7428, I.R.C. 1954, seeking a declaration that petitioner is still exempt and an injunction to prohibit respondent's investigating petitioner in future without this Court's permission. Held, this Court lacks jurisdiction to hear this case under sec. 7428, I.R.C. 1954, because there is not as yet a sufficiently immediate and real adverse controversy regarding petitioner's exempt status and because petitioner's letters to respondent did not constitute requests for a redetermination of petitioner's exempt status.

Petitioner trust A was formed in 1915 by N. Petitioner trust B was formed in 1938 by N's son. In the taxable year in issue, both trusts had the same income beneficiary, but different contingent beneficiaries. To offset capital gains for the year in issue, trust A sold at a loss certain stocks to trust B, and trust B sold certain stocks at a loss to trust A. All sales were at market price and effectively transferred legal ownership of the shares involved. Held, the sales in question were bona fide and the trusts' losses are therefore allowed. Sec. 1.267(c)-1, Income Tax Regs.

In 1975, petitioners, through a partnership, purchased a mobile home park which included a private water and sewer distribution system. Held: this water and sewer system qualifies initially as sec. 38, I.R.C. 1954, property. Held, further, at the time of purchase, this water and sewer system consisted of both new and used sec. 38 property.

In late December, P received word of the proposed merger of corporation A into corporation B. P, a stockholder in both corporations, purchased large amounts of shares in corporation A. The merger was… Held: P is taxable on the gain resulting from the merger exchange. The transfers to the children's accounts represented anticipatory assignments of income. P purchased stock for custodial brokerage accounts established for his children, of which he was custodian.

Petitioner is a Mennonite Church formed in 1955. While most of its activities were religious in nature, it also adopted a medical aid plan for its members. About 22 percent of its total disbursements and a substantial part of its receipts were paid for the medical care of its members until Jan. 20, 1981, when petitioner discontinued the medical plan. Respondent determined that petitioner did not qualify under sec. 501(c)(3), I.R.C. 1954, as a religious organization prior to Jan. 20, 1981, because it was not organized and operated exclusively for exempt purposes and because it served a private rather than a public interest. Petitioner brought this declaratory judgment action to have this Court declare that respondent's determination was incorrect. Held: Petitioner's medical aid plan did not serve an exempt purpose and was not an insubstantial activity. Consequently, petitioner was not operated exclusively for religious or other exempt purposes prior to Jan. 20, 1981. Respondent's determination sustained.

Held, based on the facts and circumstances in the record, taxpayer, a full-time gambler, was in the trade or business of gambling. Held: based on the facts and circumstances in the record, taxpayer, a full-time gambler, was in the trade or business of gambling. Higgins v. Commissioner, 312 U.S. 212 (1941), followed, and Gentile v. Commissioner, 65 T.C. 1 (1975), overruled.

Partnership A purchased an apartment complex, with the benefits and obligations of ownership passing as of July 1, 1977. Held: In each case, the rent purportedly reserved to the seller was income to the purchaser-partnership, because it was, in substance, part of the consideration paid by the partnership for the acquisition of the complex. Bryant v. Commissioner, 399 F.2d 800 (5th Cir. 1968), affg. 46 T.C. 848 (1966).

Petitioner engaged in speculative commodity futures transactions that were neither hedging transactions in connection with his farming operation nor an integral part of his farming or other business operations within the doctrine of Corn Products Refining Co. v. United States, 350 U.S. 46 (1955). Petitioner claims that the losses he incurred in these speculative transactions were ordinary losses because there was no "sale or exchange" but merely the release or discharge of contract rights under Commissioner v. Pittston Co., 252 F.2d 344 (2d Cir. 1958), cert. denied 357 U.S. 919 (1958), and that line of cases. Held, the transactions using the mechanism of the various commodity exchanges constituted sales or exchanges. Covington v. Commissioner, 42 B.T.A. 601 (1940), affd. on this issue 120 F.2d 768 (5th Cir. 1941), cert. denied 315 U.S. 822 (1942); Hoover Co. v. Commissioner, 72 T.C. 206 (1979), followed.

In 1975 and 1976, petitioner acquired automobiles and trucks for the use of commercial and consumer customers and claimed investment tax credit on these vehicles. Held: petitioner's commercial leases are qualified motor vehicle agreements within the meaning of sec. 210, Tax Equity and Fiscal Responsibility Act of 1982.

In 1975, petitioner Margarette S. Laughinghouse acquired real estate from her parents in exchange for a cash payment and two series of promissory notes, one series payable to her father and the other… Held: for gift tax purposes, the value of the interests in land transferred in 1976 is reduced by the amount of the outstanding secured notes payable to Margarette's father.

P is a nonprofit corporation whose membership consists of virtually the entire U.S. life insurance industry. Held: P qualifies under sec. 501(c)(6), I.R.C. 1954, as a tax-exempt business league. It is not engaged in a business of a kind ordinarily conducted for profit.

Under a written separation agreement, petitioner was given the right to occupy, free of charge, an apartment leased by her ex-husband through… Held: the rent payments are income to petitioner under sec. 71(a)(2), I.R.C. 1954, except to the extent such payments represent the proportionate part of the cooperative's real estate tax and mortgage interest payments deductible by the ex-husband under sec. 216(a), I.R.C. 1954, and except to the extent the rent payments increase the…

Decedent's wife made a gift between Sept. 8, 1976, and Jan. 1, 1977, which was considered as made one-half by the decedent pursuant to an… Held: for purposes of estate taxes, the amount allowed as a specific exemption for a gift considered as made by the donor's spouse causes a reduction in the amount of the unified credit for the nondonor under sec. 2010(c), I.R.C. 1954; therefore, the amount of specific exemption used by decedent should be considered in determining the…

Decedent's estate included personal property used in a hardware business and real and personal property used in farming operations. Held: the properties of the separate businesses could not be aggregated in determining whether the estate qualified for special use valuation of the farm real property under sec. 2032A, I.R.C. 1954.

Petitioners exchanged one parcel of real property for another of like kind in a series of exchanges involving three properties, four parties, and… Held: An exchange qualifying for nonrecognition treatment under sec. 1031(a), I.R.C. 1954, occurred. Where an integrated exchange plan was conceived and implemented and petitioners ultimately received only property in exchange for like-kind property, the interim steps taken to accomplish the exchange do not alter the results.

Petitioner, a medical doctor, owned a 25-percent interest in a partnership which owned and managed a medical building. Disputes arose between the partners, and petitioner withdrew from the partnership, thus dissolving it, in 1969. Two years later, the medical building was condemned. Petitioner elected under sec. 1033(a), I.R.C. 1954, to defer recognition of his gain attributable to the condemnation of the building; however, no such election was filed by the partnership. Petitioner was treated as a partner on the partnership's 1971 return; and for the taxable years 1971 through 1974, he reported receipts from the partnership as partnership income on his individual returns. Petitioner received additional proceeds from the building's condemnation in 1975 and again made a sec. 1033(a) election on his individual return. Held: The partnership was not terminated under sec. 708(b) at the time the building was condemned. Consequently, even though the partnership was dissolved at the time of the condemnation, the election to defer recognition of gain under sec. 1033(a) must be made at the partnership level.

Petitioner and his former wife, Sheila, were divorced in Connecticut in 1976. Held: the transfer was in the nature of a division of property and was not a taxable transaction. United States v. Davis, 370 U.S. 65 (1962), distinguished.

Petitioner joined in the filing of consolidated returns of a group of related corporations. Held: notwithstanding the fact that the notice of deficiency spans petitioner's entire calendar years 1970 and 1971, this Court lacks jurisdiction under sec. 6214(b), I.R.C. 1954, since the notice of deficiency is based on incorrect taxable years. Atlas Oil & Refining Corp. v. Commissioner, 17 T.C. 733 (1951), followed.

In April of 1976, petitioner acquired a leasehold interest in a parcel of undeveloped land. Held: the 1976 rental payments are not deductible pursuant to sec. 162, I.R.C. 1954, since petitioner was not carrying on a trade or business at the time they were made.

Petitioner borrowed Luxembourg francs from a Luxembourg bank to acquire a 50-percent interest in a Luxembourg corporation. Held: the foreign currency transactions must be considered separate and apart from the underlying stock transaction and petitioner had losses on the foreign currency transactions for tax purposes. Held, further, the foreign currencies were capital assets in petitioner's hands.

Petitioner, a savings and loan association, used the reserve method of accounting for bad debts in 1975 and, under the reserve method, used the experience method of… Held: petitioner complied with the requirements of sec. 593, I.R.C. 1954, 1All section references are to the Internal Revenue Code of 1954 as amended. and is entitled to its claimed bad debt deduction for 1975. Held, further, petitioner is not entitled to a deduction for the minimum tax on tax preference items.

Petitioners are 7 of 10 co-tenants of commercial real estate. The purchase price for the co-tenants' interests was $ 4 million, which included a $ 3,920,000 nonrecourse loan from the seller. Held: The fair market value of the co-tenants' interests did not exceed $ 2 million upon acquisition. The $ 4 million purchase price and the $ 3,920,000 nonrecourse amount unreasonably exceeded the value of the co-tenants' interests.

1. Prior to his death on Nov. 27, 1969, decedent was an executive vice president of GM. Shortly before the date of death, GM had tentatively determined to issue bonuses for 1969 to a group of employees, including decedent. However, it was not until Mar. 2, 1970 -- more than 3 months after the date of death -- that the bonus was formally awarded to decedent. The bonuses were paid under an established deferred compensation plan, with bonuses never having been denied to executive vice presidents and decedent's having received over $ 300,000 annually in bonuses during the years 1964 through 1968. Held, amounts paid pursuant to this postmortem bonus are income in respect of a decedent, because, under the facts of this case, decedent had a right or entitlement to the bonus payments as of the date of his death. 2. GM also awarded decedent bonuses in each of the years 1964 through 1968. These lifetime bonus awards, as well as the postmortem bonus award for 1969, were payable in annual installments, most of which became payable during years subsequent to 1969. Under decedent's will, rights to receive the bonus installments became part of the residue of the estate. The estate distributed to P, the residuary legatee, the rights to receive certain of these installments when paid in years subsequent to the year of distribution. Both the estate and P treated the distribution of the rights as a distribution of the estate's distributable net income, even though the bonus installments would constitute income in respect of a decedent when paid. In the year the rights were distributed, P reported as income under sec. 662(a), I.R.C. 1954, the date-of-distribution fair market values of the rights, and the estate took a corresponding deduction under sec. 661(a), I.R.C. 1954. Under sec. 1.661(a)-2(f), Income Tax Regs., P took the date-of-distribution values as its basis in the rights, and in the subsequent years when the bonus installments were paid to it, P reported as income only the difference between such basis and the amount received. Held: Sec. 691, I.R.C. 1954, requires P to report the entire amount of bonus installments paid to it as income in the year when received. P had no basis in the rights to receive income in respect of a decedent because the estate's distribution of these rights to petitioner was not a distribution subject to secs. 661 and 662, I.R.C. 1954.

A capital loss carryback and an investment credit carryback, both from 1974, were properly allowed with respect to petitioner's taxable year… Held: sec. 6501(h) and (j) is not applicable, under the facts of this case, since the extended periods of limitation on assessment prescribed in that section are provided only to permit the recovery of a refund that has been improperly allowed as a result of error in the application of a capital loss carryback or an investment credit…

Petitioner, a construction subcontractor, needed to retain earnings and profits to assure adequate bonding capacity; also, it had a reasonable business need to expand its plant. Held: Petitioner's retentions of earnings and profits exceeded the reasonable needs of its business. 2. Petitioner was availed of for the purpose of avoiding the income tax with respect to its shareholder and is liable for the accumulated earnings tax. Sec. 531, I.R.C. 1954.

Petitioner, the estate of a nonresident alien, claimed, under the estate tax convention between the United States and Italy, a credit against its estate tax in excess of the credit permitted under… Held: the sec. 2010 unified credit is a specific exemption as that term is used in the Italian treaty; petitioner is entitled to the higher credit.

The will of decedent, who died on Oct. 16, 1964, provided for the establishment of a "charitable trust" as defined by sec. 4947(a)(1), I.R.C. 1954. The terms of the trust provided for accumulation of all trust income during the existence of the trust. The trust is to terminate upon the earlier of (1) the publication of a designated book by a specified organization described in sec. 509(a)(1), or (2) the expiration of 21 years from the death of the survivor of three persons named in decedent's will. If the trust terminates as a result of the book's being published, the trust estate is to be distributed to the specified organization described in sec. 509(a)(1). If the trust terminates upon the passage of the 21-year period, then the trust estate is to be equally distributed to two other organizations designated in decedent's will. Held, since the trust's articles of organization expressly empower it to benefit organizations other than specified organizations described in sec. 509(a)(1) or (2), the trust is not a supporting organization within the meaning of sec. 509(a)(3). Sec. 1.509(a)-4(c), Income Tax Regs. Since the trust's creation, its trustee has accumulated all its income and made no distributions of income or principal to any of the charitable beneficiaries. For the fiscal years ended Sept. 30, 1974, and Sept. 30, 1975, the trust's "adjusted net income" as defined by sec. 4942(f) exceeded its "minimum investment return" as defined by sec. 4942(e). Respondent determined excise taxes under secs. 4942(a) and 4942(b) for failure to distribute income earned in the fiscal years ended Sept. 30, 1974, and Sept. 30, 1975. Held: Cal. Civ. Code sec. 2271 et seq. did not automatically reform the trust's governing instrument to require the trust to "distribute its income for each taxable year (and principal if necessary) at such time and in such manner as not to subject the assets of the trust to tax under Section 4942." Consequently, resort to a judicial proceeding was necessary to reform, or to excuse the trust from compliance with, its governing instrument to comply with sec. 4942. Held, further: The only judicial proceeding instituted by the Mabury Trust to reform, or to excuse it from complying with, the provisions of its governing instrument requiring accumulation of income failed before the years in issue. Accordingly, pursuant to sec. 101(l)(3)(B) of the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487, during the years in issue, the trust was not required to comply with the requirements of sec. 4942 (and is not subject to tax for failing to do so) to the extent its income is required to be accumulated. See sec. 53.4942(a)-2(e)(3), Foundation Excise Tax Regs.

Petitioner, a tax-exempt private foundation, awarded scholarships without obtaining approval of its grant-making procedures as required by sec. 4945(g), I.R.C. 1954. Held: petitioner is liable for the initial excise tax imposed by sec. 4945(a)(1); provisions regarding correction of improper expenditures do not apply to the first-tier tax.

Held: Retirement pay received by an attorney out of the current earnings of the law firm in which he was a retired partner does not qualify for exclusion from self-employment tax under sec.… Held: Retirement pay received by an attorney out of the current earnings of the law firm in which he was a retired partner does not qualify for exclusion from self-employment tax under sec. 1402(a)(10), I.R.C. 1954.

K, an exempt social club, owned a replica of a pirate ship which it used 1 day each year in staging a mock invasion of Tampa. The invasion was followed by a parade. Held: The gross income which K received from the concessions and the sales of the logbooks is unrelated business taxable income within the meaning of sec. 512(a)(3)(A), I.R.C. 1954. 2.

T, a former amateur and professional tennis champion, was paid substantial royalties by W in 1975 and 1976 from the sale of tennis equipment, primarily racquets, bearing his name. Held: the royalties were paid primarily for the grant of the exclusive right to use T's name, and only secondarily for the personal services rendered by T under the royalty contract.

Decedent devised real property used in farming operations to the grandniece of decedent's predeceased spouse and to the spouse of the grandniece. Held: the real property did not pass from the decedent to qualified heirs within the meaning of sec. 2032A(e)(1), I.R.C. 1954. Held, further, the definition of member of the family in sec. 2032A(e)(2), I.R.C. 1954, does not establish an arbitrary classification of persons in violation of the Fifth Amendment of the Constitution.

Petitioner created a trust, with an initial corpus of $ 5, with the Aruba Bonaire Curacao Trust Co., Ltd., as trustee. Held: LaFargue v. Commissioner, 689 F.2d 845 (9th Cir. 1982), followed. Petitioner is not taxable on the income of the trust under the grantor trust rules, and payments received by her pursuant to the annuity agreement are bona fide annuity payments.

Petitioner-husbands were employees of B, a corporation. Held: B's payments of the civil penalties imposed on petitioner-husbands resulted in gross income taxable to petitioners. 2. Since these civil penalties were imposed in order to punish petitioner-husbands for violating State law, sec. 162(f), I.R.C. 1954, bars any deduction otherwise allowable under sec. 162(a), I.R.C. 1954.

Petitioner-husband, in 1968, was unable to take his distributive share of ordinary losses sustained by a partnership in 1967 and 1968 under sec. 704(d), I.R.C. 1954, 1All section references are the the Internal Revenue Code of 1954 as amended. because the adjusted basis of his partnership interest had previously been reduced to zero as a result of prior losses. He sold his partnership interest to the partnership in December of 1968 and agreed to pay to the partnership an amount equal to his share of the partnership losses in excess of his basis. He paid a portion of this amount to the partnership in 1969 and, to the extent of this payment, claimed as a loss in 1969 his distributive share of the 1967 and 1968 partnership losses. Held petitioners are not entitled to a deduction in 1969 for the distributive share of the 1967 and 1968 partnership losses under sec. 704(d) because petitioner-husband was not a partner in 1969.

Petitioner seeks a declaratory judgment that it is entitled to tax-exempt status as a religious organization under sec. 501(c)(3), I.R.C. 1954. Petitioner recruits new members by emphasizing to a great extent that tax benefits of becoming a minister in petitioner's "religion." Tax avoidance counseling permeates petitioner's literature. 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 it fails the operational test of sec. 501(c)(3) in that petitioner's tax counseling serves a substantial nonexempt purpose.

G and B formed a joint venture to complete and operate an apartment complex. G contributed $ 100,000 cash and B contributed its $ 100,000 equity in the partially completed apartment complex. Held: that the special allocation of depreciation to G was made principally for the purpose of tax avoidance, sec. 704(b), I.R.C. 1954. Orrisch v. Commissioner, 55 T.C. 395 (1970), affd.

Held, the deduction provided by sec. 809(d)(5), I.R.C. 1954, is applicable to P's risk premium reinsurance. Held: the deduction provided by sec. 809(d)(5), I.R.C. 1954, is applicable to P's risk premium reinsurance.

P donated 461 colored gems to the Smithsonian Institution slightly more than 9 months after purchasing them. Held: because the jewelers who set gems into rings or other jewelry are the ultimate consumers of gems like those contributed by petitioner, these gems should be valued on the basis of the price that would have been paid by a jewelry store to a wholesaler to obtain comparable gems.

Held, bona fide transfer by the controlling shareholder in a subch. Held: bona fide transfer by the controlling shareholder in a subch. S corporation of one share of stock owned by him to himself as custodian under Uniform Gifts to Minors Act is recognized for tax purposes, and failure of new shareholder to consent to subch. S status terminates election.

In 1974, Z, a majority shareholder and officer of P, purchased all of the shares of T Corp. and merged T into P. P wrote down the amount of ending inventory for such year. Held: P may not utilize T's net operating loss since the transaction did not qualify as a reorganization within the meaning of sec. 368(a)(1), I.R.C. 1954.

Petitioners were limited partners in a Florida limited partnership called Levon Records. Held: the activities of Levon Records with respect to the master recordings were not engaged in with the predominant purpose and intention of making a profit.

Petitioner Mohammad Shafi a cash basis taxpayer, is a doctor practicing medicine in Wisconsin. In 1977, petitioner entered into a tax shelter promoted by the International Monetary Exchange (IME), a Panamanian corporation, wherein he purported to provide dredging services in Panama. Petitioner paid $ 40,000 to a local subcontractor to do the actual work. IME allegedly advanced $ 30,000 on behalf of petitioner to the subcontractor. Thus, petitioner paid $ 10,000 in cash and issued a $ 30,000 promissory note to IME. The note was payable only out of profits from the sale of oceanfront lots created by the dredging operation. Held: Petitioner's obligation is inherently so contingent it cannot be treated as a loan for tax purposes. Thus, even if IME made the $ 30,000 advance, petitioner is entitled to no deduction for this amount since a cash basis taxpayer is not entitled to a deduction for payment by a note. Eckert v. Burnet, 283 U.S. 140 (1931). Held, further, it is within the Court's discretion whether to hear respondent's motion for partial summary judgment with respect to only one docket which has been consolidated with another docket for purposes of trial, briefing, and opinion. Held, further, since there is no apparent prejudice or harm to petitioners in either docket, and the benefits of avoiding expensive and time-consuming litigation are obvious, respondent's motion is properly before the Court.

In 1978, petitioner, a cash basis taxpayer and airline pilot, acquired a gold claim in Panama through a tax shelter called "Gold For Tax Dollars." The shelter promoter, International Monetary Exchange (IME), as petitioner's agent, paid development expenses with funds of which petitioner deposited part with IME and borrowed the balance from IME on a nonrecourse obligation. Petitioner deducted the full amount of the expense under sec. 616(a), IRC 1954. Held, repayment of the nonrecourse obligation was so contingent that no debt was created, and the deduction is disallowed to the extent thereof. In 1979, petitioner leased a mineral claim in French Guiana through its agent, IME; paid IME 20 percent of the development expense in cash; financed the balance through the sale of an "option;" and claimed a deduction under sec. 616(a), IRC 1954, in the amount of the cash payment plus the "option" proceeds. Held, the "option" was illusory, thus the "option" proceeds must be recognized in 1979.

Petitioners claimed losses in connection with two partnerships engaged in the acquisition and promotion of books. Held: none of the claimed losses are deductible because the partnerships' activities were not engaged in for profit within the meaning of sec. 183, I.R.C. 1954, and because accrued but unpaid interest on nonrecourse notes given in connection with the purchase of the book publishing rights was not deductible since the notes were too…

In 1976, a cash basis partnership acquired real estate for $ 2 million, payable $ 300,000 in cash and $ 1,700,000 in a 10-year wraparound note, bearing interest at 8 1/4 percent. Held: the portion of the payments attributable to interest for 1976 and 1977 are interest on indebtedness within the meaning of sec. 163(a), I.R.C. 1954, and do not represent additional payments of purchase price. Hudson-Duncan & Co. v. Commissioner, 36 B.T.A. 554 (1937), followed.

Petitioners executed and respondent accepted a single Form 872, Consent to Extend the Time to Assess Tax, that extended the period for assessment for their 1974 and 1975 taxable years to Dec. 31, 1980. Thereafter, petitioners executed a single Form 872 that purported to extend the period for assessment for their 1974, 1975, and 1977 taxable years to June 30, 1981. Before accepting that form, and at a time at least 55 days prior to the expiration of the period for assessment, respondent struck through the reference to the 1977 taxable year. Respondent did not seek the consent of petitioners for this alteration. Held, the striking of the reference to 1977 was a material alteration rendering the form invalid. Held, further, petitioners' conduct does not estop them from asserting the invalidity of the form.

P is a corporation organized in 1946. P's shares were issued in effect one-half each to X and Y. Z, X, and Y organized a second corporation (GSB) in 1953. The stock of GSB was issued one-third to Z and two-thirds to P. These parties executed buy/sell agreements. After amendments in 1969, the agreements provided that one-half of the GSB shares held by P would be redeemed upon the death of X or Y and that all of Z's shares would be redeemed upon Z's death. X died in 1976. Pursuant to the buy/sell agreements, two redemptions occurred. P received a check plus a 5-year note in return for one-half of the GSB stock held by P, and the shares of P held by X's estate were redeemed. The value of the P stock was determined by separately valuing the GSB shares owned by P from P's remaining assets. X's estate received 50 percent of the value of the GSB stock held by P (the entire amount redeemed from P by GSB), but a lesser value of P's other assets, corresponding to the estate's actual ownership interest in P. The checks issued by GSB in payment for its shares and retirement of its note were assigned directly to the estate. The P and GSB stock each had a value in excess of its basis. Held: 1. (a) The "step transaction" doctrine is ineffective to recategorize the redemption of P's stock in GSB as a nontaxable distribution to the X estate followed by GSB's redemption of those shares directly from the estate. (b) P was not a mere conduit for the estate. Held, further: 2. (a) The agreements' requirement that Z's shares also be redeemed upon Z's eventual death is insufficient to establish a "series of redemptions" under sec. 302(b)(2)(D), I.R.C. 1954. (b) The redemption of P's GSB shares is not essentially equivalent to a dividend.

1. Petitioners Complete, Lomas, and Sandia are closely held corporations. Held: Complete, Lomas, and Sandia constituted a brother-sister controlled group of corporations within the meaning of sec. 1563(a)(2), I.R.C. 1954.

Petitioner, a partner of a law firm specializing in litigation, met with his colleagues each day at noon to discuss firm business, e.g., case assignments, scheduling, settlements. Held: luncheon costs incurred at these meetings are nondeductible personal expenses. Sec. 262, I.R.C. 1954.

In 1976, grantor created a trust to give her grandchildren $ 3,000 on June 13 of each year, beginning in 1977. Held: the transfer to the trust was a gift of future interests to the beneficiaries; petitioner, therefore, is not entitled to claim 13 annual exclusions under sec. 2503(b), I.R.C. 1954.

Petitioners Charles and Josephine Serianni were divorced in 1973. Held: having been awarded a special equity interest, Josephine is the party properly taxable on the capital gain from the Servan stock. Bosch v. United States, 590 F.2d 165 (5th Cir. 1979), followed.

In 1959, petitioner Wade E. Church, attorney general for the State of Arizona, delivered a speech to the American Federation of Labor convention held in Flagstaff, Ariz. Held: the entire $ 250,000 in compensatory damages is excludable from gross income under sec. 104(a)(2), I.R.C. 1954. Roemer v. Commissioner, 79 T.C. 398 (1982), on appeal (9th Cir., Nov. 15, 1982), distinguished.

Taxpayer, a wage earner, failed to file tax returns. Held: The constitutional status of the Tax Court under art. I is not impacted by Northern Pipeline Construction Co. v. Marathon Pipe Line, Co., 458 U.S. (1982). Other procedural contentions and his claim that he had no duty to file returns lack merit, and the additions to tax for fraud were properly determined.

On Mar. 16, 1973, petitioner-husbands executed a contract to sell KEV, an apartment complex, to S, a corporation, for $ 2,701,000. On Mar. 26, 1973, petitioner-husbands had outstanding debt against KEV of $ 1,963,222.69, and a combined basis in KEV of $ 1,576,410.29. On Mar. 26, 1973, they executed a warranty deed conveying KEV to S, in which they covenanted to continue to pay installments on the outstanding debt; S's president executed (1) a vendor's lien note (wraparound note) for $ 2,541,000, providing for monthly installment payments beginning May 1, 1973, and (2) a purchase money note for $ 155,000, payable on or before Aug. 1, 1973; S's president executed a deed of trust conveying KEV to a trustee to secure payment of the two notes which he executed on S's behalf. S also made a $ 5,000 payment to petitioner-husbands. Held: Sec. 1.453-4(c), Income Tax Regs., does not apply to the transaction. 1. The amount of indebtedness which exceeds basis does not constitute a payment received in the year of sale. 2. The amount of indebtedness included in the "total contract price" (within the meaning of sec. 453(a)(1), I.R.C. 1954) is not limited to such excess amount. Stonecrest v. Commissioner, 24 T.C. 659 (1955), is followed.

In 1939, independent parties sold vacation property and executed a deed granting decedent and his wife life interests, with remainder interests to their two sons. The deed states that "one dollar and other valuable considerations" were paid by decedent, his wife, and his two sons. The wife predeceased decedent. In connection with respondent's audit of her estate, the sons, executors of her estate, swore in affidavits that decedent bought the property and was a sole purchaser. The sons also became executors of decedent's estate. In a letter from one of the sons in connection with respondent's audit of decedent's estate, the son states that "I do not deny that [decedent] made a gift [to the sons] at the time of [the] purchase of [the property]." Held: 1. The affidavits and the letter are admissible into evidence as admissions under rule 801(d)(2), Fed. R. Evid.; the affidavits and the letter are not encompassed within the meaning of "ex parte affidavits" in Rule 143(b), Tax Court Rules of Practice and Procedure; and the affidavits and the letter are admissible to impeach the sons in their roles as witnesses. 2. Decedent furnished the consideration for the purchase of the property. 3. Decedent's gross estate includes the value of the property, as having been transferred with a retained life interest. Sec. 2036, I.R.C. 1954.

Petitioner-husband, who was self-employed, deducted certain business travel expenses on a per diem basis. Held: Away-from-home travel expenses of a self-employed individual are subject to the substantiation requirements of sec. 274(d), I.R.C. 1954. 1All section references are to the Internal Revenue Code of 1954 as amended. Petitioner-husband's claimed per diem expenses are not deductible because they have not been substantiated.

Petitioner-husband was a limited partner in RCA, a cash basis partnership engaged in constructing a shopping center during the years in question. Held: RCA did not pay interest within the meaning of sec. 163(a), I.R.C. 1954, because it did not have unrestricted control over the funds wired to its account by CPI.