Volume 83 — Tax Court Reports

Decedent owned a life estate in the income of certain trust property and also possessed a special power of appointment, exercisable inter vivos or by will, over the corpus. Held: decedent made a gift equal to the present value of the life income interest in the trust. Self v. United States, 135 Ct. Cl. 371, 142 F. Supp. 939 (1956), not followed.

On Dec. 26, 1974, S, a subsidiary of petitioner, merged with and into petitioner. The merger qualified as a reorganization described in sec. 368(a)(1)(F), I.R.C. 1954. For the taxable year ended Dec. 28, 1974, petitioner and its affiliates sustained a consolidated net operating loss. None of the loss was attributable to the business formerly operated by S. Petitioner claimed a refund based upon the carryback of the post-reorganization loss to a pre-reorganization (separate tax return) year of S. Held, respondent properly disallowed the carryback of the post-reorganization loss to S's pre-reorganization taxable year on the ground that the loss was not attributable to the business formerly operated by S.

In this declaratory judgment action filed pursuant to sec. 7428(a), I.R.C. 1954, petitioner seeks tax-exempt status under sec. 501(c)(3), I.R.C. 1954, and exemption as a church under sec. 509(a)(1),… Held: petitioner has not shown that it is organized and operated, or will be operated, exclusively for public rather than the private benefit of its organizers, and petitioner is not, therefore, entitled to sec. 501(c)(3) exempt status.

Golden Nugget, Inc., in 1974, exchanged debentures due in 1994 for about 11 percent of its outstanding common stock and here claims an annual… Held: petitioner's exchange of the debentures for the common stock was a reorganization in the form of a recapitalization under sec. 368(a)(1)(E), I.R.C. 1954, and hence under sec. 1232(b)(1), I.R.C. 1954, the issue price of the debentures was their stated redemption price at maturity; therefore, the debentures were not eligible for…

Petitioners sold real estate to a buyer under an installment sale contract. Held: The buyer's payment of liabilities of petitioners constitutes a payment in the year of sale. Petitioners received payments in the year of sale totaling more than 30 percent of the selling price and thus do not qualify for the use of the installment method of reporting under sec. 453(b), I.R.C. 1954, as in effect for the year in issue.

Petitioners claimed losses in connection with a limited partnership which obtained all the rights to an original paperback book for a stated… Held: none of the claimed losses are deductible because the partnership's activities were not engaged in for profit within the meaning of sec. 183, I.R.C. 1954, and interest paid on the $ 742,500 nonrecourse note is not deductible because there was no genuine indebtedness due to the fact that both the purchase price and the note…

Petitioners claimed losses in connection with a limited partnership which obtained all the rights to an original paperback book for a stated… Held: none of the claimed losses are deductible because the partnership's activities were not engaged in for profit within the meaning of sec. 183, I.R.C. 1954, and interest paid on the $ 687,500 nonrecourse note is not deductible because there was no genuine indebtedness due to the fact that both the purchase price and the note…

L, a limited partnership, was formed in April 1976 to develop an apartment project. P became a limited partner in July 1976. Held: L was not carrying on a trade or business as of Dec. 31, 1976, within the meaning of sec. 162, I.R.C. 1954. Goodwin v. Commissioner, 75 T.C. 424 (1980), affd. without published opinion 691 F.2d 490 (3d Cir. 1982), followed. 2.

In 1962, the H.T. Boggs Co., Inc., established a profit-sharing plan and related trust. Respondent issued a favorable ruling on the qualified status of the plan and trust in 1962. The plan and trust were terminated in 1976. Upon termination, P received a distribution of his account balance in the related trust, which he rolled over into an Individual Retirement Account (IRA). In 1978, respondent retroactively revoked the qualified status of the plan and trust, effective for the tax year beginning in 1974, on the grounds that the plan violated sec. 401(a)(3) and ( 4), I.R.C. 1954. As a result of the retroactive revocation, a portion of P's distribution represented trust earnings subsequent to loss of qualified status. In 1976, the funds deposited in the IRA earned interest in the amount of $ 1,850. Held, respondent properly revoked the qualified status of the plan and related trust, because although they met the coverage requirements of sec. 401(a)(3), I.R.C. 1954, they failed to satisfy sec. 401(a)(4), I.R.C. 1954, which forbids discrimination in favor of the prohibited group. Held, further: Although the plan and trust were no longer qualified at the time of the distribution to P, the portion of his account balance therein representing employer contributions and trust earnings prior to disqualification remained eligible for rollover treatment under sec. 402(a)(5), I.R.C. 1954. Baetens v. Commissioner, 82 T.C. 152 (1984), followed. The portion of P's distribution representing trust earnings subsequent to loss of qualified status is not eligible for sec. 402(a)(5), I.R.C. 1954, treatment, being subject instead to sec. 402(b), I.R.C. 1954. Greenwald v. Commissioner, 366 F.2d 538 (2d Cir. 1966), followed. Held, further, P's IRA is valid, and interest earned by P's IRA during 1976 is tax exempt. Benbow v. Commissioner, 82 T.C. 941 (1984), followed.

Petitioner instituted this action for a declaratory judgment pursuant to sec. 7476, I.R.C. 1954. Held: that the discharge of 34 percent and 51 percent of plan participants constituted partial terminations of the plan. Held, further, that as the discharged employees were not granted nonforfeitable rights to benefits upon the partial terminations, petitioner's profit-sharing plan is not qualified under sec. 401(a), I.R.C. 1954.

Petitioner owned 65 percent of the common stock and 13 percent of the preferred stock of a corporation. Held: Petitioner did not sustain a loss on his surrender to the corporation of his preferred stock and advances. His surrender constituted a contribution to the capital of the corporation.

Petitioner engaged in sand and gravel dredging at two locations on the Missouri River pursuant to nonexclusive licenses which granted no… Held: petitioner did not have an economic interest in said deposits sufficient to entitle it to percentage depletion deductions. Commissioner v. Southwest Exploration Co., 350 U.S. 308 (1956); Oil City Sand & Gravel Co. v. Commissioner, 32 T.C. 31 (1959); and Victory Sand & Concrete, Inc. v. Commissioner, 61 T.C. 407 (1947), distinguished.

For business reasons, petitioner created a wholly owned subsidiary mortgage company to which it loaned funds for use in making loans for home purchases… Held: under sec. 1.1502-14(d)(1), Income Tax Regs., the deduction for petitioner's additions to its bad debt reserve with respect to its loans to the mortgage company may not be taken in 1974 and 1975; such deductions are deferred until one of the events described in sec. 1.1502-14(d)(2) and (3), Income Tax Regs., occurs.

In 1971, G sold an apartment building and received a promissory note (AIPN) secured by an all-inclusive deed of trust (AITD) on the building. Held: the 1973 transfer of the AIPN and AITD to the foundation was an act of self-dealing. (Petitioner's motion for partial summary judgment will be granted to that extent.) Held, further, factual issues exist as to whether the 1974 transactions were correction of the prior act of self-dealing or were separate acts of self-dealing.

Decedent mailed checks to a number of charitable donees. The checks did not clear the drawee bank until after the date of decedent's death. Held: decedent's gross estate does not include the aggregate amount of the checks. Secs. 2031, 2033, I.R.C. 1954; Estate of Spiegel v. Commissioner, 12 T.C. 524 (1949), applied.

P, a testamentary trust, sold at a gain its one-half interest in a home that was the principal residence of its income beneficiary, the decedent-settlor's surviving spouse. Held: P's net capital gain deduction under sec. 1202, I.R.C. 1954, is an item of tax preference under sec. 57(a)(9)(A), I.R.C. 1954, and is not within the principal residence exclusion of sec. 57(a)(9)(D), I.R.C. 1954.

On their joint Federal income tax returns for 1974 and 1975, the taxpayers made elections under sec. 170(b)(1)(D)(iii) I.R.C. 1954, for purposes of determining their charitable… Held: the doctrine of election precludes the taxpayers from revoking the elections made on their returns as filed. During the years 1974 through 1979, cash basis taxpayers made prepayments, in each December, of delay rental on oil and gas leases due in February and March of the following year.

Based in part on information furnished by an informant, respondent determined that petitioner received a $ 100,000 labor racketeering payoff in 1965, which he failed to report as income. Held: Following the Second Circuit's decision in Llorente v. Commissioner, 649 F.2d 152 (2d Cir. 1981), affg. in part and revg. and remanding in part 74 T.C. 260 (1980), the notice of deficiency for 1965 was issued arbitrarily.

Petitioner Full Circle instituted this action for declaratory judgment pursuant to sec. 7428, I.R.C. 1954. Full Circle received a charter from the Universal Life Church, Modesto, Inc. (ULC). Held: that respondent had authority to examine Full Circle and issue an adverse determination letter. Held, further, that petitioner is not entitled to sec. 501(c)(3) status based upon the exempt status of the ULC.

H, the decedent, was responsible for certain torts before his death. Held: P may deduct the tort judgments and the attorney's fees paid with respect to such claims in full since, under Texas law, it was proper to pay such amounts from the one-half portion of the community property belonging to the decedent. 2.

Respondent issued a statutory notice to P, based entirely upon information obtained from certain grand jury proceedings pursuant to an order of an appropriate Federal District Court under rule 6(e),… Held: This Court has inherent jurisdiction and power to consider the validity of the District Court order, insofar as it may affect rulings on evidence and procedure in cases properly before it. 2.

A, B, and C died in 1975 each leaving property to D. A's, B's, and C's estates paid estate taxes attributable to the properties transferred to D in the respective amounts of $ 2,435.25, $ 168,199.50,… Held: sec. 20.2013-6, Estate Tax Regs., is valid, and D's credit for Federal estate tax on prior transfers under sec. 2013, I.R.C. 1954, is computed separately for each transferor.

T, a minority stockholder of BCA, was not only a guarantor of a note given by BCA to a bank but he had also put up his own securities as collateral. Held: Such payments constituted ordinary and necessary nonbusiness expenses within sec. 212(2), I.R.C. 1954; 2. Such payments were not personal, living or family expenses the deduction of which is precluded by sec. 262; but 3.

On Aug. 20, 1974, President Ford nominated Nelson A. Rockefeller to serve as Vice President of the United States pursuant to the 25th Amendment to the United States Constitution. Held: the expenses so incurred and paid by Mr. Rockefeller are not deductible under sec. 162(a) or sec. 162(e), I.R.C. 1954.

Petitioner, a Church incorporated in the State of California, was granted tax-exempt status in 1957 under sec. 501(c)(3), I.R.C. 1954. Held: petitioner was not the victim of selective enforcement of the tax laws since the notice of deficiency was based on valid regulatory considerations. Held, further, various other asserted constitutional rights of petitioner not violated.

P, a corporation which processed fresh fruit, constructed two rooms to cool and preserve such fruit. Held: the structural elements of the two rooms do qualify for the investment tax credit since they were integral parts of the production of fresh fruit.

T, a tax protester, claimed he was exempt from the Federal income tax on the grounds: (1) That the 1977 Form 1040 Privacy Act Notice was faulty; (2) that Forms 1040 and W-4 and the related Privacy… Held: The Form 1040 Privacy Act Notice meets the requirements of the Privacy Act of 1974; 2. Forms 1040 and W-4 or the related Privacy Act Notices need not be published in the Federal Register; and 3.

B purchased certain rights in a master recording in exchange for $ 90,000 cash and $ 560,000 in two nonrecourse notes payable solely out of the record sales proceeds. Held: the obligation represented by the nonrecourse note was too contingent to be included in basis irrespective of the existence of some value which might be considered fair market value. Held, further, petitioners have not carried their burden of proving that B had the requisite profit objective.

Petitioners, members of the Puyallup Indian Nation, operate a smokeshop on land held in trust by the United States under the provisions of the Medicine Creek Treaty of 1854 and the General Allotment… Held: income derived from the smokeshop is taxable because it is neither directly derived from the underlying trust land, nor expressly exempted from taxation by any statute or treaty.

Held: The payments made by petitioners to the various churches of Scientology were not charitable contributions within the meaning of sec. 170(c), I.R.C. 1954. The remittances were made with the expectation of receiving a benefit, and such benefit was received. Thus, the transfers were in reality a quid pro quo. Held, further, denial of the claimed deductions did not violate any of petitioners' constitutional rights.

P, an orchestra conductor, a nonresident alien, and a resident of the Federal Republic of Germany (FRG), contracted with C to make recordings of orchestral works, some of them in the USA. Held: under the effective income tax treaty between the FRG and the USA, the payments to P were not royalties exempt from tax by the USA, but were compensation for personal services, and were taxable by the USA.

Originally, P was the sole shareholder of C, a corporation. Held: the redemption of P's stock qualifies as a complete redemption of his interest in C under sec. 302(b)(3), I.R.C. 1954, since he did not retain a prohibited interest in the corporation within the meaning of sec. 302(c)(2)(A)(i), I.R.C. 1954, and since tax avoidance was not a principal purpose of the transfer of stock to his son within…

Petitioner owned an undivided interest in a coal mining venture that had made an election under sec. 761(a), I.R.C. 1954. Held: Respondent's motion for partial summary judgment granted. As a matter of law, the royalties paid in 1977 were not paid as the result of a minimum royalty provision within the meaning of sec. 1.612-3(b)(3), Income Tax Regs. Petitioner is not entitled to a deduction in 1977 for advanced royalties since no coal was sold in that year.

On or about Apr. 13, 1981, the District Director of Internal Revenue at Los Angeles mailed a statutory notice of deficiency covering the taxable years 1976 and 1977 to petitioners at the address… Held: While a taxpayer is required to notify the Commissioner of a change of address, once a District Director's Office begins to correspond with a taxpayer at a given address, the taxpayer has satisfied his duty of notifying that District Director's Office of his change of address.

In 1968, petitioner ABC, a diversified holding company, acquired approximately 65 percent of the stock of NBC, a bank. Held: the acquisition of NBC stock by ABC during the period 1968-72 was motivated primarily by investment purpose and, consequently, ABC realized a capital loss upon disposition of the stock.

Petitioners filed a motion for a determination as to admissibility of an expert witness' testimony and report. Held: Rule 408 bars use of settlement material by a party as an admission against the other party who submitted the material in settlement negotiations. Rule 408 has no application where the party who submitted the material in the settlement negotiations is the party who seeks to admit the settlement material as evidence at trial.

P was a limited partner in a partnership formed to acquire, develop, and license four unpatented inventions. The partnership executed, on the same day, an acquisition agreement, a research and development agreement, and an exclusive license agreement with respect to each of the four inventions. Under the acquisition agreements, the partnership acquired all of the rights in the inventions from the inventors thereof. Under the research and development agreements, the partnership agreed to pay N $ 650,000 over 3 years to develop the inventions into commercially exploitable products. Under the license agreements, the partnership granted N an exclusive worldwide license to make, use, and sell the four inventions and any improvements thereto for the duration of their patent lives in return for the payment by N of royalties based upon future sales of the developed products. The partnership claimed depreciation deductions with respect to the inventions and a deduction under sec. 174(a), I.R.C. 1954, of $ 650,000 for the obligation under the research and development agreements. Held: 1. The successful development of the inventions was not a condition precedent to the effectiveness of the license agreements, and therefore, the license agreements effected sales of the inventions to N on the same day as the partnership acquired such inventions. 2. The partnership received no "license" or other asset of a depreciable nature in return for the sales to N. 3. Because the partnership did not hold the inventions for investment or use them in a trade or business, the partnership is not entitled to depreciation deductions. 4. The partnership's payments to N for research and development were not made in connection with a trade or business within the meaning of sec. 174(a) and therefore are not deductible under such section.

After an opinion in these cases was filed, 82 T.C. 239 (1984), R submitted computations of deficiencies under Rule 155, Tax Court Rules of Practice and Procedure, together with… Held: Argument under Rule 155 proceedings is strictly limited to consideration of the correct computation of deficiency, liability, or overpayment. Accordingly, Ps' request that the Court determine the form of appeal bond is premature and will not be considered as part of a Rule 155 proceeding.

D leased her ranch for a fixed sum to an unrelated third party who conducted cattle operations. D resided on the ranch until the time of her death and participated in the operation of the ranch. Held: D's ranch does not constitute qualified real property under sec. 2032A(b), I.R.C. 1954, because D had no equity or financial interest in the cattle business being conducted on her property.

Held: 1. The 1979 Panama Canal Treaty with its implementation agreement does not exempt petitioners from U.S. income tax on wages received from the Panama Canal Commission. Held: The 1979 Panama Canal Treaty with its implementation agreement does not exempt petitioners from U.S. income tax on wages received from the Panama Canal Commission. McCain v. Commissioner, 81 T.C. 918 (1983), followed. 2.

In 1972, P issued debentures which were convertible into shares of common stock of its foreign parent. Held: the interest and premium paid by P to its parent upon the converted debentures are not deductible by P. Held, further, the unamortized issue costs of the debentures and costs of redemption must be amortized over the lives of the promissory notes.

Held: The alternative minimum tax imposed by sec. 55, I.R.C. 1954, is predicated upon applying specified percentages to a base of alternative minimum taxable income of which certain tax preferences… Held: The alternative minimum tax imposed by sec. 55, I.R.C. 1954, is predicated upon applying specified percentages to a base of alternative minimum taxable income of which certain tax preferences are a significant but not necessarily an indispensable component.

From Jan. 1, 1975, to Dec. 22, 1975, petitioner was a U.S. citizen. On Dec. 23, 1975, petitioner adopted Austrian citizenship, thereby losing her U.S. citizenship. Held: petitioner did not have tax avoidance as one of her principal purposes in expatriating; thus her income is not taxable under sec. 877, I.R.C. 1954.

During the years in question, all of the petitioners deducted losses in connection with various mining investment projects offered by Resources America, Inc. These losses were attributable to deductions for purported "advanced minimum royalties," which petitioners "paid" in the form of cash and nonrecourse notes. Held: The mining investment projects did not constitute an activity engaged in for profit, but rather represented a blatant, abusive tax shelter. Therefore, the purported "advanced minimum royalties" are not deductible under sec. 162(a), I.R.C. 1954.

Respondent conceded all the issues that gave rise to the deficiencies in petitioner's Federal income tax and additions to tax for 1979 and… Held: that in order for petitioner to be a prevailing party under sec. 7430(c)(2)(A)(i), I.R.C. 1954, he must establish that respondent's position after the petition was filed was unreasonable. Held, further, that respondent's concession of the case does not automatically mean that his position in the civil proceeding was unreasonable.

Petitioners incurred a net operating loss in 1976. Held: petitioners did not make an effective election under sec. 172(b)(3)(E), I.R.C. 1954, to relinquish the entire carryback period with respect to their 1976 net operating loss; they may not carry such loss forward in its entirety to 1977.

The construction of the Baldwin Power Station, a multiunit electric generating station commenced in March of 1967. The construction of unit 3 began in 1971 and it was placed in commercial service on June 20, 1975. Sargent & Lundy, an engineering partnership, designed and provided construction management for the project, and Baldwin Associates, a joint venture of construction companies, performed the actual physical construction of unit 3. Petitioner Illinois Power provided general criteria for unit 3 to its agent, Sargent & Lundy, purchased all major components, approved specifications, accepted delivery of, stored, and safeguarded components and equipment delivered to the jobsite. It also held legal title to all work completed and in progress and bore the risk of damage or loss to the plant and equipment during construction. Further, petitioner retained the right to change the scope of work, to cease work at any stage, and to prevent the hiring of any subcontractor without explicit approval. Thus, petitioner exercised active and significant control over the details of construction. Held: Unit 3 of the Baldwin Power Station was constructed by petitioner Illinois Power Co. within the meaning of sec. 46(a)(1)(D)(i), I.R.C. 1954. Accordingly, petitioner constructed rather than acquired unit 3 and is entitled to a 10-percent investment tax credit only for that portion of the cost basis of unit 3 attributable to construction completed after Jan. 21, 1975. In 1974 and 1975, petitioner charged certain customers a substantially higher rate for gas as an incentive for such users to switch to alternative fuel sources. The Illinois Commerce Commission (ICC) required petitioner to retain a portion of these funds pending its further order. These Rider R amounts were commingled with petitioner's other funds, were available for general corporate purposes, and remained in petitioner's possession at the end of each respective taxable year of receipt. In late 1979, the ICC directed petitioner to "refund" all such Rider R amounts to certain customers (not the same customers who paid such amounts) through a monthly credit against such customer's facilities charge. Held, further, amounts designated as Rider R income are taxable to petitioner in the year of receipt.

Petitioners failed to establish that amounts paid and nonrecourse notes delivered to Einar C. Erickson, consulting geologist, in 1978 were paid or incurred for the development of a mine or other natural deposit. Such sums, therefore, are not deductible under sec. 616, I.R.C. 1954 as amended. Petitioners in related cases are not relieved of their stipulation to be bound by the result in these cases.

Petitioner, a manufacturer of custom-order steel products, reported its income under the completed contract method of long-term contract accounting. Held: Petitioner's method of computing contract costs by using inventories conformed to both the regulations and generally accepted accounting principles, was consistently used, and therefore clearly reflected income. 2. Petitioner's use of the LIFO method of inventory valuation clearly reflected income.

Five days prior to her open-heart surgery, decedent created a foreign trust and entered into an annuity agreement with the trustee of the… Held: following the Ninth Circuit's opinion in La Fargue v. Commissioner, 689 F.2d 845 (9th Cir. 1982), affg. in part and revg. in part 73 T.C. 40 (1979); and in Stern v. Commissioner, 747 F.2d 555 (9th Cir., Nov. 15, 1984), revg. and remanding 77 T.C. 614 (1981), we find that decedent entered into a valid annuity agreement with the…

On the date of death, decedent was a U.S. citizen but a resident of Spain and owned bank deposits in Spanish branches of Spanish banks. Held: due to the residency of decedent in Spain, the bank deposits are treated as located within Spain, and estate taxes paid to Spain with respect to the deposits are eligible for the Federal estate tax credit, sec. 2014, I.R.C. 1954.

Ps are partners in S, a coal mining venture. Pursuant to a coal lease, S strip mined coal and loaded it into the trucks of independent contractors. The truckers hauled the coal over the "bench" and over private and public roads to the premises of C, S's purchaser. The truck drivers unloaded the coal into a dumping bin, at the bottom of which was a stationary steel grate. On virtually each trip, the truck driver used a sledge hammer or pickax to force a few oversize or jammed pieces of coal through the steel grate. Thereafter, C applied to the purchased coal one or more of the coal mining "treatment processes" specified in sec. 613(c)(4)(A), I.R.C. 1954. Held, for transportation to be considered as mining ("mining transportation") under sec. 613(c)(2), I.R.C. 1954, the transportation must be to a plant or mill in which the mine owner or operator, itself, applies to the transported mineral or ore one or more of the mining treatment processes allowable under secs. 613(c)(2) and 613(c)(4), I.R.C. 1954. Rowe v. United States, 228 Ct. Cl. 269, 655 F.2d 1065 (1981), followed. Held, further, the truckers' incidental breaking of a few pieces of oversize coal at C's dumping bin did not constitute a mining treatment process, and S did not apply any mining treatment process after transporting the coal from the mine to C's premises. Held, further, S's cost of transporting its coal to C's premises is "nonmining transportation" and must be excluded from its gross sales to C in calculating S's "gross income from mining" under sec. 613(c)(2), I.R.C. 1954, for purposes of determining S's deduction for percentage depletion under secs. 611 and 613, I.R.C. 1954. Held, further, that the portion of transportation cost representing haulage over the bench cannot be deemed part of "gross income from mining" under sec. 613(c)(1), I.R.C. 1954, either as "mining transportation" or as part of "extraction of * * * [the coal] from the ground" under sec. 613(c)(2), I.R.C. 1954.

Respondent's 30-day letter, sent by ordinary mail, informed petitioner that respondent intended to impose the accumulated earnings tax on… Held: Petitioner's motion was not premature, and 2. The mailing of the 30-day letter to petitioner by ordinary mail does not satisfy the mailing notification requirement of sec. 534(b). Accordingly, respondent has the burden of proving that petitioner permitted its earnings and profits to accumulate beyond its reasonable business needs.