Volume 89 — Tax Court Reports

P, a notice partner of Byrd Investments, filed a petition for redetermination of partnership adjustments out of time. P received an FPAA addressed to Byrd Investments' tax matters partner. Held: P received adequate notice of the partnership proceedings in time to protect his rights. Held, further , P has not suffered an injury traceable to respondent's conduct or a defect in the statute.

Petitioner is a veterans' organization exempt from income tax by sec. 501(a), I.R.C. 1954. Held: Petitioner's Christmas card program was a trade or business. The Christmas card packages were not low-cost articles sent incidental to the solicitation of charitable contributions. 2. Petitioner's Christmas card program was regularly carried on. 3. Petitioner's Christmas card program was unrelated to petitioner's exempt purpose. 4.

Held, lump-sum payment received by P in return for his agreement to alter the method of computing pension benefits, to which he had no vested right, was ordinary income. Held: lump-sum payment received by P in return for his agreement to alter the method of computing pension benefits, to which he had no vested right, was ordinary income.

Held, the mitigation provisions of secs. 1311 through 1314, I.R.C. 1954, are not applicable where there has been no determination within the meaning of sec. 1313(a).

Subsequent to our prior opinion, 88 T.C. 28 (1987), petitioners sought to reopen the record to introduce further evidence that payments made under the Water Bank Program, 16 U.S.C. sec. 1301 et seq.,… Held: because petitioners have not established that the payments were cost-sharing payments, they are not excludable from income under sec. 126, I.R.C. 1954.

Held: Decedent's activities with respect to the operation of her farm constituted material participation within the meaning of sec. 2032A(b)(1)(C)(ii), I.R.C.… Held: Decedent's activities with respect to the operation of her farm constituted material participation within the meaning of sec. 2032A(b)(1)(C)(ii), I.R.C. 1954. Accordingly, petitioner's election of special use valuation for the farm is allowed. Estate of Coon v. Commissioner, 81 T.C. 602 (1983), distinguished.

Respondent received documentary evidence 2 days prior to trial and did not offer it to petitioner for purposes of stipulation in accord with Tax Court Rule 91 and the requirements of an outstanding pretrial order. Respondent, instead, held the document for impeachment purposes, which is an exception to Rule 91 and the pretrial order. At the conclusion of the trial, respondent offered the document to impeach documents in the record and petitioner's entire position. Held, that documentary evidence may not be held or reserved to "impeach" documents or an adversary's position and that the concept of impeachment applies to a specific witness' veracity.

PFLIC commenced operations as a life insurance company in 1965; it ceased to be a life insurance company on June 30, 1974. Held: Pursuant to sec. 812(b)(2), I.R.C. 1954, the entire amount of loss from operations for each taxable year, which includes that year's special deductions, must be carried over before utilization of the loss from a carryover year. PFLIC's policyholders surplus account as of June 30, 1974, is $ 89,025.

Held, petitioners' motion for litigation costs is denied because they have failed to establish that the position of the United States was not substantially justified.

During the 1980 taxable year, P, a corporation, realized and reported a net capital gain of $ 9,600,701 on its corporate return, which was part of its total taxable income of $ 10,035,963. P also had available tax credits totaling $ 2,186,855. P chose to calculate the amount of its item of tax preference for capital gain under the alternative formula found in sec. 1.57-1(i)(2)(i), Income Tax Regs., rather than by the statutory formula found in sec. 57(a)(9)(B), I.R.C. 1954, based on its belief that application of the alternative formula would result in a determination of a lower amount of tax preference item than would otherwise be calculated by utilizing the statutory formula. P takes the position that tax credits should be considered in applying the alternative formula, so as to reduce the amount of the item of tax preference for capital gain. R disagrees. Held, tax credits are not to be considered in applying the alternative formula.

Ps filed a motion for award of litigation costs. Ps are dairy farmers who used the cash method of accounting. Held: Ps have exhausted their administrative remedies. Minahan v. Commissioner, 88 T.C. 492 (1987), followed.

P is a federally subsidized, nonexempt, nonprofit corporation organized to provide housing for persons of low and moderate incomes. Held: interest income earned on those accounts is not income derived * * * from members or transactions with members within the meaning of sec. 277(a), I.R.C. 1954, and constitutes nonmembership income. Held, further, expenses attributable to and deductible against such nonmembership income determined.

Decedent died on Oct. 12, 1981. Petitioner, D's estate, attempted to elect sec. 2032A, I.R.C. 1954, special use valuation on its estate… Held: petitioner's failure to make the special use valuation election on a timely return pursuant to sec. 2032A(d)(1), I.R.C. 1954, as it applies to estates of decedents dying prior to Jan. 1, 1982, defeated petitioner's attempted election despite the relief provisions of sec. 2032A(d)(3), I.R.C. 1954, enacted in 1984 and made effective…

P is the common parent corporation of an affiliated group of corporations involved in various railroad related activities. In the consolidated Federal corporation income tax returns filed for the 1972 and 1973 calendar years, certain member corporations of the affiliated group changed their method of depreciation from the 200-percent declining-balance method (DDB) to the straight-line method of depreciation, with respect to certain assets placed in service before Jan. 1, 1971. Beginning in 1973, certain member corporations of the affiliated group also began including in the depreciable basis of their roadway assets amounts for interest and taxes during construction as were estimated by the Interstate Commerce Commission (ICC) pursuant to the Railroad Valuation Act of 1913, 37 Stat. 701. Held, upon a change in depreciation method from DDB to straight-line, sec. 1.167(a)-12, Income Tax Regs., requires that an asset's unrecovered basis be recovered by utilizing a remaining-life, as opposed to a whole-life, calculation. Held, further, amounts for interest and taxes during construction, as estimated by the ICC, are properly includable in the depreciable basis of P's roadway assets. Southern Pacific Transportation Co. v. Commissioner, 75 T.C. 497 (1980), followed. Held, further, terms letters agreed to by certain member corporations of the affiliated group with respondent in 1944, in order to secure respondent's consent to change the method of depreciation with respect to certain of P's roadway assets (i.e., ratably depreciable roadway property), do not estop P from including portions of the above-referenced interest and taxes during construction attributable to such property in the depreciable basis of such property. Chicago, Burlington & Quincy RR. Co. v. United States, 197 Ct. Cl. 264, 455 F.2d 993 (1972), followed.

Petitioner sells land taking wraparound installment obligations as at least a part of the sales price. Held: sec. 15A.453-1(b)(3)(ii) of the Temporary Income Tax Regs. is invalid as inconsistent with sec. 453 of the Code, and the method of taxing wraparound installment sales approved in the line of cases headed by Stonecrest is applicable to petitioner's wraparound installment sales.

Ward, a member of P's consolidated group, is an accrual basis taxpayer which reports its income from installment credit sales pursuant to the provisions of sec. 453, I.R.C. 1954. Held: cost of goods sold is determined pursuant to the inventory accounting rules of sec. 471 and is utilized in the calculation of gross profit percentage for purposes of the installment sales provisions of sec. 453.

R filed motions to dismiss partnership actions brought on behalf of CPL. 1. PII was tax matters partner of CPL. Pyke, president of PII, filed a petition as an individual tax matters partner on June 13, 1986, although Pyke was not a partner of CPL. On June 17, 1986, PII filed for bankruptcy protection. On Aug. 7, 1986, Pyke filed an amended petition purporting to substitute PII as petitioner. Held, Pyke's petition at docket No. 20653-86 did not commence a partnership action. Held, further, the so-called amended petition purporting to substitute PII as petitioner was ineffective to commence a partnership action because the automatic stay provision of the Bankruptcy Code, 11 U.S.C. sec. 362(a)(8) (1982), bars commencement of an action in this Court after a bankruptcy petition has been filed until the bankruptcy proceeding is completed or the stay lifted. 2. W.P. Builders, a notice partner of CPL, is an alter ego of PII and a named debtor in the bankruptcy proceeding commenced by PII. William C. Mitchell and James C. Bearden are notice partners of CPL. W.P. Builders and Mitchell filed a timely notice partner petition on Aug. 11, 1986. Bearden filed a timely notice partner petition on Aug. 12, 1986. Held: W.P. Builders, as a named debtor in a bankruptcy proceeding, could not commence an action in this Court. 11 U.S.C. sec. 362(a)(8) (1982). The petition at docket No. 32952-86 remains before the Court, however, as a timely notice partner petition filed by William C. Mitchell. Held, further, once PII filed its bankruptcy petition, PII's and W.P. Builders' partnership items became nonpartnership items, and PII and W.P. Builders ceased to have an interest in the outcome of the proceeding. Sec. 6231(c), I.R.C. 1954; sec. 6226(d); sec. 301.6231(c)-7T(a), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987). Held, further, PII ceased to be tax matters partner when it filed its petition in bankruptcy. Sec. 301.6231(a)(7)-1T(l)(4), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6792 (Mar. 5, 1987). Held, further, because PII and W.P. Builders ceased to have an interest in the outcome of the proceeding and PII ceased to be tax matters partner as of the date the bankruptcy petition was filed, the proceeding will no longer "concern the [debtors]" within the meaning of 11 U.S.C. sec. 362(a)(8) (1982), and the automatic stay provision does not prevent the partnership proceeding from going forward. Held, further, James C. Bearden's notice partner petition at docket No. 33223-86 dismissed, but Bearden may file an election to participate in the action that goes forward. Sec. 6226(b)(4); sec. 6226(b)(2); Rule 244(c), Tax Court Rules of Practice and Procedure.

Petitioners are members of an affiliated group of corporations that filed consolidated Federal income tax returns. Wyman-Gordon, the parent corporation, canceled a debt owed to it by Woods & Copeland, a second-tier subsidiary, and Wyman-Gordon claimed a bad debt loss with respect thereto. Due to its insolvency, Woods & Copeland did not include in taxable income the discharge of indebtedness income associated with the cancellation of its debt to Wyman-Gordon, but Woods & Copeland did increase its earnings and profits by the amount of the discharge of indebtedness income. As a result of the increase to Woods & Copeland's earnings and profits, the excess loss account of Rome Industries (a first-tier subsidiary that owned the stock of Woods & Copeland) with respect to its investment in Woods & Copeland was reduced to zero. Held: Within the context of consolidated Federal income tax returns filed by members of an affiliated group of corporations, the realization of discharge of indebtedness income that is not included in the debtor-corporation's taxable income due to the corporation's insolvency is a disposition event under sec. 1.1502-19(b)(2), Income Tax Regs., and triggers the inclusion in income of the balance of any excess loss account of the corporation that owns the stock of the debtor-corporation. In including in income the balance of the excess loss account, the amount of the discharge of indebtedness income not included in the debtor-corporation's taxable income due to its insolvency does not increase the debtor-corporation's earnings and profits and does not reduce the balance of the excess loss account prior to the recognition thereof under sec. 1.1502-19, Income Tax Regs.

Petitioner corporation seeks a declaratory judgment that its pension and profit-sharing plans qualify under sec. 401, I.R.C. 1954. Held: workers are not employees of petitioner leasing organization under common law principles and respondent's regulations. Therefore, petitioner's plans violate the exclusive benefit rule of sec. 401(a)(2), I.R.C. 1954.

Within 3 years of decedent's death, decedent's wife purchased life insurance on decedent's life and signed the original application as… Held: under the plain language of sec. 2035(d), I.R.C. 1954, the life insurance policy proceeds are not includable in decedent's gross estate because decedent never possessed any incident of ownership in the policy under sec. 2042. Thus, sec. 2035(d)(2) is inapplicable and sec. 2035(d)(1) precludes application and analysis of sec. 2035(a).

The revised receipts and disbursements program of the Universal Life Church, Inc., of Modesto, California, was a sham. Petitioner's "contributions" to pay for disbursements thereunder are not deductible charitable contributions.

P and L-P were 50-percent partners in Tri-Eagle Co. P purchased L-P's interest, resulting in a liquidation of the partnership. Held: for purposes of sec. 47(a)(1), I.R.C. 1954, a partnership must be treated as an entity apart from its individual partners. Thus, because Tri-Eagle disposed of its sec. 38 property early, sec. 47(a)(1) requires petitioner to recapture its investment tax credit unless the mere change in form exception applies. See sec. 47(b).

From 1976 until D's death in 1981, D's farm was leased to individuals who were not members of her family. Held: The farm was not being used for a qualified use within the meaning of sec. 2032A(b)(2), I.R.C. 1954, and neither D nor a member of her family materially participated in the operation of the farm; therefore, P is not entitled to value such farm by use of the special use valuation provisions of sec. 2032A, I.R.C. 1954. 2.

Petitioners owned farmland but did not plant crops or raise cattle thereon, and did not lease the land to others. Held: petitioners' farming activity was an activity not engaged in for profit. Held, further, petitioner Dolphus E. Schirmer is liable for the addition to tax under sec. 6661(a). Held, further, petitioners are liable for the addition to tax under sec. 6653(a)(1) and (a)(2).

Petitioners, husband and wife, incurred a joint tax liability for 1979. In 1981, respondent served a notice of levy on the bank trustee of the Keogh account of the husband-petitioner. In compliance with the levy, the bank trustee withdrew $ 22,340.94 from the husband-petitioner's Keogh account and mailed respondent a cashier's check in that amount. At the time of the withdrawal, the husband-petitioner had not yet attained the age of 59 1/2 nor was he disabled. Held: 1. Husband-petitioner constructively received $ 22,340.94 from his Keogh account when the levied funds were withdrawn and applied to petitioners' 1979 tax liability; such amount is includable in petitioners' 1981 income. Secs. 402(a) and 72(m)(4)(A), I.R.C. 1954. 2. Petitioners are not liable for the 10-percent premature distribution penalty provided for by sec. 72(m)(5). 3. Petitioners are not liable for additions to tax pursuant to sec. 6653(a)(1) and (a)(2).

Petitioner Gladys L. McDonald (P) and decedent held real property in joint tenancies which were created before 1976. Held: the transfers of the property interests occurred upon the creation of the joint tenancies. Held, further, the disclaimer was not made within a reasonable time as required by sec. 25.2511-1(c), Gift Tax Regs., and thus constituted a taxable transfer under sec. 2511, I.R.C. 1954.

Held, expenses incurred in moving a sailboat are moving expenses under sec. 217, I.R.C. 1954. Aksomitas v. Commissioner, 50 T.C. 679 (1968), distinguished. Held: expenses incurred in moving a sailboat are moving expenses under sec. 217, I.R.C. 1954. Aksomitas v. Commissioner, 50 T.C. 679 (1968), distinguished.

R moved to dismiss for lack of jurisdiction because the petition was filed more than 3 years after the notice of deficiency was allegedly mailed. Held: the proof of mailing offered by R was insufficient to meet the proof necessary to satisfy the requirements of sec. 6212.

For the years 1974, 1975, and 1976, petitioners claimed an investment credit for their distributive share of Kerry Bros.' basis in qualified investment property. Held: petitioners are not entitled to make a late sec. 48(d) election based upon the statute, regulations, and administrative burdens involved therein. Held, further, petitioners failed to substantially comply with the election provisions of sec. 48(d).

R and P filed cross-motions for partial summary judgment on the issue of whether forward contracts in stock constitute positions in personal property within the meaning of sec. 1092(d)(2)(A), I.R.C.… Held: sec. 1092(d)(1) excludes stock from the definition of personal property, therefore, a forward contract in stock is not a position in personal property within the meaning of sec. 1092(d)(2) and not subject to the loss limitation of sec. 1092(a).

Respondent determined deficiencies in petitioner's personal holding company tax under sec. 541, I.R.C. 1954, for the fiscal years ended Sept. 30, 1979, and Sept. 30, 1982. Held: the Court lacks jurisdiction to address the interest abatement issue raised under sec. 6404(e).

Messrs. M, S, and Z each owned 300 shares of stock of a corporation. The corporation used a fiscal taxable year ending Mar. 31. Held: the plain meaning of the statutory language under sec. 1372(e)(1), as amended by the Tax Reform Act of 1976, does not require that new shareholders file an affirmative refusal to consent to a corporation's subch. S election with the Internal Revenue Service (Service) in order to terminate the corporation's election.

Petitioner is an integrated oil company. Following the enactment of the Crude Oil Windfall Profit Tax Act of 1980, Pub. L. 96-223, 94 Stat. 229, petitioner changed its method of calculating "taxable income from the property" under sec. 613(a), I.R.C. 1954. Consequently, petitioner claimed a net income limitation benefit against its windfall profit tax liability pursuant to sec. 4988(b), I.R.C. 1954, totaling $ 241 million, which respondent disallowed in full. Held, petitioner may treat net interest expense incurred in the acquisition of oil and gas properties through one of its wholly owned subsidiaries as financial overhead allocable, in part, to its producing properties in the calculation of taxable income from the property. Held, further, dry hole costs incurred on petitioner's abandoned and nonproducing properties, abandoned geological and geophysical costs, and costs of abandoned leaseholds may not be treated as indirect costs of its producing properties in the calculation of taxable income from the property. Held, further, if otherwise deductible for income tax purposes, costs of exploration efforts may be deducted in the calculation of taxable income from the property. Held, further, exploratory or developmental efforts not directly or indirectly attributable to producing properties may not be allocated to producing properties in the calculation of taxable income from the property. Held, further, intangible drilling costs currently deducted under sec. 263(c), I.R.C. 1954, are properly included in the stipulated allocation base used to allocate indirect expenses in the calculation of taxable income from the property. Held, further, petitioner's windfall profit tax liability is properly included in the stipulated allocation base used to allocate indirect expenses in the calculation of taxable income from the property. Held, further, current geological and geophysical expenditures must be included in the stipulated allocation base used to allocate indirect expenses in the calculation of taxable income from the property. Sec. 613(a), I.R.C. 1954, sec. 1.613-5(a), Income Tax Regs., interpreted.

K formed T as a limited partnership on Jan. 4, 1978, with two general partners and one limited partner. On that date T had no assets, no liabilities, and no business. During 1978, K decided to utilize T as a vehicle for entering into an equipment sale-leaseback venture. On Dec. 29, 1978, T acquired new and additional partners and significant assets, and an amended and restated certificate of limited partnership and partnership agreement was filed with the Massachusetts Secretary of State evidencing the partners' present intention of carrying on a business. On Dec. 31, 1978, T entered into the equipment sale-leaseback transaction with D. On Feb. 8, 1979, T obtained permanent financing for the transaction from a bank. During 1979, most of T's limited partners, Ps, delivered to the bank their personal guarantees whereby they severally guaranteed a portion of T's obligation to the bank. The amounts guaranteed were calculated not to exceed Ps' projected distributive share of loss and investment interest expense deductions minus their capital contributions, and in total were substantially less than the amount of T's note to the bank. Held, T's first tax year commenced on Dec. 29, 1978. Held, further, Ps were not at risk by reason of their personal guarantees for amounts in excess of their cash contributions to T. Brand v. Commissioner, 81 T.C. 821 (1983); Abramson v. Commissioner, 86 T.C. 360 (1986) distinguished. Held, further, under I.R.C. 1954 sec. 6621(c), relating to interest on substantial underpayments attributable to tax-motivated transactions, the question of T's first tax year did not involve use of an accounting method under I.R.C. 1954 sec. 6621(c)(3)(A)(iv); the 1979 and 1980 underpayments resulted from tax-motivated transactions in that the underpayments were based upon losses disallowed by reason of sec. 465(a).

Petitioner was engaged in the trade or business of commodities futures trading. In 1978, petitioner took delivery of 10,000 ounces of gold pursuant to the terms of 100 long gold futures contracts. Held: to the extent a trader has incurred debt in order to carry on ordinary trading activities as part of his trade or business of trading, the interest paid thereon is not subject to the investment interest limitations of sec. 163(d), I.R.C. 1954.

Before June 9, 1976, the only real property that petitioner-husband (C) owned was his personal residence. On this date, the owner of an apartment complex with 21 four-plex units sold 3 of these units to C and the other 18 units to people who had been brought together for this purpose by C and C's partner, with a view to common management of the entire complex. About 6 months later, the other owners began selling their units at substantial profits. C sold his units on June 24, 1977. C incurred a loss on operations during the period he held the 3 four-plexes, but a gain on the sale of the units. C, personally and through his wholly owned corporation (DRC), later engaged in other real estate ventures. Held: 1. C did not hold the four-plex units primarily for sale to customers in the ordinary course of his trade or business; his gain is long-term capital gain. Sec. 1231(b)(1)(B), I.R.C. 1954. In the spring of 1977, C held a 25-percent general partnership interest and a 1-percent limited partnership interest in partnership A. A had an option to acquire a 93-apartment complex, to convert the property to a condominium, and to sell the apartments therein. A began the condominium conversion on Sept. 1, 1977, but could not complete the conversion until 50 of the 93 apartments could be sold simultaneously. On Oct. 21, 1977, C transferred to DRC, pursuant to sec. 351, I.R.C. 1954, his 25-percent general partnership interest in A, but retained his limited partnership interest therein. As of that date, A had not yet bought the property and could not yet satisfy the 50-apartment requirement. On Nov. 15, 1977, A bought the property, completed the condominium conversion, and conveyed legal title to 53 apartment buyers. Held: 2. The entire 25-percent distributive share of the profits from the condominium sales was properly allocated to DRC, and not to C, because pursuant to the interim closing of the books method under sec. 706(c)(2)(B), I.R.C. 1954, A had no income from condominium sales on or before Oct. 21, 1977.

P successfully ran for sheriff of Mahoning County, Ohio, in 1980. During his campaign, P received payments from competing organized crime factions. Held: P may not introduce testimony or other evidence with respect to the recorded statements. S.E.C. v. Cymaticolor Corp., 106 F.R.D. 545 (S.D. N.Y. 1985). Held, further, P's refusal to testify gives rise to a negative inference that if he had testified he would have confirmed the substance of the recorded conversations.

On Dec. 27, 1980, petitioners, husband and wife, purchased from an art dealer warehouse receipts representing a large quantity of posters. Held: Petitioners made a charitable contribution of the posters on Dec. 31, 1980. Held, further, the fair market value of the posters on the contribution date was equal to the sum of petitioners' cash payment and the present discounted value of petitioners' recourse promissory notes.

D's executor, on her behalf, undertook to renounce and disclaim her survivorship rights in certain personal property which D had acquired as joint tenant… Held: The disclaimers were invalid for Federal estate tax purposes because they were invalid under applicable State law (North Carolina). 2. As to joint interests created after Dec. 31, 1981, the disclaimers did not qualify under the provisions of sec. 2518(c)(3), I.R.C. 1954, so as to avoid the applicability of State law.

Petitioner, a private social club exempt from tax pursuant to sec. 501(c)(7), I.R.C. 1954, engaged in three nonexempt activities: nonmember banquets, nonmember golf tournaments with associated… Held: each nonexempt activity, separately considered, was entered into by petitioner with a profit objective. Held, further, losses from one such profit-seeking activity are deductible against net gains from another such activity.

Petitioners formed charter congregations of the Universal Life Church, Inc., Modesto, opened bank accounts in the name of Universal Life Church, Inc., of which they were sole… Held: Petitioners did not make gifts to a tax-exempt organization when they transferred funds into the bank accounts. Held, further, petitioners' charter congregations were not such an integral part of Universal Life Church, Inc., Modesto, as to also be tax-exempt at the time of the fund transfer. 2.

Petitioner seeks a declaratory judgment from respondent's adverse final determination that petitioner is not an organization described in sec. 501(c)(3), I.R.C. 1954. Held: the mere act of rating candidates for judicial office, without more, does not constitute prohibited political campaign activities, and therefore petitioner is an organization entitled to tax-exempt status under sec. 501(a) as an organization described in sec. 501(c)(3).

The decedent (D) owned four farm properties, portions of which P elected to value pursuant to sec. 2032A, I.R.C. 1954. Held: Brittingham's income interest in the farm properties is an interest in the property for which special use valuation is sought. Held, further, Brittingham accepted the benefits of the interest disclaimed, sec. 2518(b)(3), and Brittingham's disclaimer is without effect for Federal estate tax purposes.

Petitioner was the lead plaintiff in a class action sex discrimination suit filed against the Public Printer under tit. Held: the amount received by petitioner as back pay was not damages for a personal injury but wages due for an action in the nature of breach of contract and therefore the back pay award is not excludable from petitioner's taxable income under sec. 104(a)(2), I.R.C. 1954.

Freedland owned 89 percent of the stock of Freedland Ltd., a Canadian corporation. Freedland owned 50.01 percent and Sherwood owned 49.99 percent of the stock of Huron, a Canadian corporation. In June 1977, Huron sold all of its assets for $ 1 million. In July and August 1977, Huron advanced Freedland $ 500,000. Testimony was provided that the advances were to be used by Freedland to maintain the steel allocations of Huron in the United States. However, Freedland treated the advances on its books as loans payable which were ultimately repaid in April and May 1979. Held: The advances constituted an investment in U.S. property within the meaning of sec. 956(b), I.R.C. 1954, and are taxable to petitioners under sec. 951(a), I.R.C. 1954. The advances do not come within the exceptions in sec. 956(b)(2)(C), I.R.C. 1954, orsec. 1.956-2(d)(2)(ii)(a), Income Tax Regs. On Dec. 15, 1977, the shareholders of Freedland Ltd. and Huron approved a plan of amalgamation whereby the two corporations agreed to amalgamate pursuant to sec. 197 of the Business Corporations Act, Ont. Rev. Stat., ch. 53 (1970), as amended, as of the close of business on Dec. 31, 1977. On Dec. 16, 1977, the articles of amalgamation were sent to the appropriate authorities. On Mar. 10, 1978, the authorities issued a certificate of amalgamation which provided that the articles of amalgamation were effective on Dec. 31, 1977. A ruling request was not filed with the Internal Revenue Service pursuant to sec. 367(a), I.R.C. 1954. Held: There was an exchange pursuant to the amalgamation which began before Jan. 1, 1978, and, therefore, the transitional rule contained in sec. 367(d), I.R.C. 1954, was applicable. Accordingly, a ruling was required under sec. 367(a), I.R.C. 1954, and because a ruling was not requested, the exchange of the stock of petitioners in Freedland Ltd. and Huron for stock of the amalgamated corporation is taxable. Because the exchange comes within sec. 1248, I.R.C. 1954, the gain is taxable as a dividend to the extent defined therein.

R determined deficiencies and additions to tax for each of the taxable years 1981 and 1982 in respective amounts greater than $ 10,000. Held: Ps are entitled to have their case heard under the small tax case procedure since the amount of deficiency placed in dispute (including additions to tax) for each year does not exceed $ 10,000.

P, a farmers cooperative association, sought to qualify as an exempt cooperative association under sec. 521, I.R.C. 1954. Held: For purposes of sec. 521, I.R.C. 1954, any amount of patronage will be sufficient for a patron to be considered active for purposes of the subsequently all or 85-percent test. Respondent's 50-percent test is rejected.

P is the parent corporation of an affiliated group of corporations, and used a fiscal year ending on January 31 as its annual accounting period for tax purposes. B.B. & Co. is a wholly owned subsidiary of P, and is a member of P's affiliated group. B.B. & Co. adopted the B.B. & Co. Plan, which was a target benefit plan and was considered a money purchase pension plan. Under the B.B. & Co. Plan, separate accounts were maintained for each employee who was a plan participant and there was full and immediate vesting of amounts credited to the accounts of the participants. The B.B. & Co. Plan used a plan year ending on Jan. 31. Respondent issued a favorable determination letter with respect to the qualified status of the B.B. & Co. Plan under sec. 401(a), I.R.C. 1954. P decided that it would intentionally make contributions in excess of its plan liabilities (hereinafter advance contributions). P made advance contributions under the B.B. & Co. Plan for the plan year ended Jan. 31, 1976, and did not claim a deduction for such contributions. P only claimed deductions for amounts it was required to contribute under the plan. Advance contributions were not allocated to the separate accounts of plan participants. On Jan. 28, 1977, P adopted the W.B. Co. Plan. This plan also was a money purchase pension plan, and used a plan year ending on Jan. 31. As of Jan. 31, 1977, the B.B. & Co. Plan was merged into the W.B. Co. Plan. On the last day of the plan year ended Jan. 31, 1977, there was an excess of plan assets over trust liabilities. This excess was the result of advance contributions made by petitioner. Held, petitioner's advance contributions violated the requirement contained in sec. 1.401-1(b)(1)(i), Income Tax Regs., that contributions be "fixed without being geared to profits," and the money purchase pension plans in issue are therefore not qualified under sec. 401(a). Held, further, the amounts contributed under the B.B. & Co. Plan to the separate accounts of plan participants satisfy the "separate accounts" requirement contained in sec. 404(a)(5) and sec. 1.404(a)-12(b)(3), Income Tax Regs., and those amounts are deductible by petitioner. See sec. 404(a)(5). Held, further, respondent provided petitioner with sufficient notice of his intention to raise the issue concerning the funds in the W.B. Co. Plan trust attributable to advance contributions. See Schuster's Express, Inc. v. Commissioner, 66 T.C. 588 (1976), affd. per curiam 562 F.2d 39 (2d Cir. 1977); Rubin v. Commissioner, 56 T.C. 1155 (1971), affd. 460 F.2d 1216 (2d Cir. 1972).

Held, for purposes of sec. 821(b)(3) of the Tax Reform Act of 1986, Pub. Held: for purposes of sec. 821(b)(3) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2373, petitioner's method of accruing utility income qualifies as a metersread method of accounting. Held, further, petitioner's pumped storage hydroelectric plant was not placed in service in 1972.

Held, notes and bonds issued under the United States Housing Act of 1937, as amended, are included in the decedent's gross estate.

R issued a notice of final partnership administrative adjustment to N.C.F. The accompanying explanation of items referred to additions to tax that R intended… Held: a partnership proceeding is designed to resolve only disputes over the proper treatment of partnership items; sec. 6221, I.R.C. 1954. Held, further, the additions to tax at issue are affected items as defined in sec. 6231(a)(5) that can only be determined after the conclusion of the partnership level proceeding.

Prior to D's death, D and P, American citizens, were husband and wife and resided in the Philippines. Following D's death, P moved back to the State of Utah where D's estate was probated. Held: following the law of the Ninth Circuit, upon D's death P became the sole owner of one-half of all community income received by the representatives of D's estate, therefore, P is taxable on one-half of such income.

P, an American subsidiary of a Japanese corporation, makes loans in the United States and in foreign countries as part of its business operations. Held: For purposes of sec. 901, I.R.C. 1954, P is legally liable under Brazilian law for the Brazilian withholding tax. 2.

The Court granted R's motion to dismiss for lack of jurisdiction on the ground that R had not complied with the partnership audit and litigation procedures. Sec. 6221, I.R.C. 1986, et seq. Ps then filed for an award of litigation costs and we held (88 T.C. 1036 (1987)), that we had jurisdiction to consider Ps' motion but would not decide whether Ps were entitled to an award until R had had an opportunity to respond to the substantive allegations in Ps' motion. R has now responded. Held, a comment in note 6 of our prior opinion, 88 T.C. 1036, 1038, on the unreasonableness of R in issuing the statutory notice of deficiency was not a holding and does not foreclose us from determining in this proceeding whether R's position was substantially justified. Held, further, the "position taken by the United States in the civil proceeding" within the meaning of sec. 7430(c)(4)(A), I.R.C. 1986, applies only to R's position after a civil proceeding has been commenced by the timely filing of a petition. Sher v. Commissioner, 89 T.C. 79 (1987), followed. Held, further, there was no "administrative * * * inaction by the District Counsel" that gave rise to the "position of the United States" expressed in the notice of deficiency. Sec. 7430(c)(4)(B). Held, further, Ps have failed to show that the "position of the United States" was not substantially justified and they are, therefore, not prevailing parties.

Ps filed a motion to dismiss for lack of jurisdiction on Dec. 4, 1986, alleging that the notice of deficiency was invalid because R failed to comply with the partnership audit and litigation… Held: The time for making the net worth determination required by sec. 7430(c)(2)(A)(iii) is at the time the civil proceeding in this Court is commenced.

R issued a notice of deficiency on Nov. 13, 1985. P did not receive the notice of deficiency and R later agreed that it was not sent to P's last known address. On May 27, 1986, an agent of R sent P a copy of the Nov. 13, 1985, notice. A petition was filed on June 26, 1986. P moved to dismiss on the grounds that the Nov. 13, 1985, notice of deficiency was invalid and that the copy of the Nov. 13, 1985, notice of deficiency, mailed on May 27, 1986, did not constitute the issuance of a notice of deficiency so as to support jurisdiction. R, throughout the proceeding, maintained that the May 27, 1986, mailing was sufficient to support jurisdiction. When R conceded on Apr. 15, 1987, that the Court was without jurisdiction in this matter, P filed a motion for award of reasonable litigation costs. Held: R's failure to carefully consider the facts and his maintenance of a position which was clearly against the weight of authority and inconsistent with his positions in other similar cases was unreasonable. Accordingly, R's position was not substantially justified and P is entitled to an award of litigation costs.

R issued a notice of deficiency for the taxable year 1980 on Apr. 10, 1984. Held: the date upon which R has notice of information shown on a return is generally the date the information is posted to R's computer records, rather than the date the return is received by R. Held, further, R did not unreasonably delay in posting the information shown on P's 1983 return to his computer records.

Petitioner filed a motion in limine to exclude evidence of post-taxable-years' financial data. Held, the evidence of post-taxable-years' financial data is excluded under Rule 403, Federal Rules of Evidence.

Ps owned 100 percent of the stock of A, a subch. S corporation. From time to time after the initial incorporation, Ps made payments to A in accordance with their proportionate stock interests. Held: under the objective test of Fin Hay Realty Co. v. United States, 398 F.2d 694 (3d Cir. 1968), the payments constitute equity contributions because they were transferred under terms far more speculative than those an outside lender would require.

Held, losses from transactions in forward contracts written by First Western Government Securities are not deductible. Held: losses from transactions in forward contracts written by First Western Government Securities are not deductible.

Respondent moved to dismiss this case for failure properly to prosecute both as to the underlying deficiencies and additions to tax under secs. 6651(a)(1) and 6653(a), I.R.C. 1954, claimed in respondent's answer and as to which he has the burden of proof. Held, respondent's motion is granted. Bosurgi, Transferee v. Commissioner, 87 T.C. 1403 (1986), applied.

M operated NCEA as a membership organization. M accepted deposits from members, acquired precious metals with such funds, and paid such members' bills in cash. M died in 1983. Held: A prerequisite to this Court's jurisdiction to review a deficiency determined under sec. 6867, is that, at the time of the jeopardy assessment, the possessor of funds did not claim that they belonged to him or to a readily ascertainable person who acknowledged such ownership.

Deficiencies determined by respondent were sustained because petitioners' property was not placed in service during the years in issue. Held: the underpayments of petitioners' taxes were not attributable to the valuation overstatement, and additions to tax under sec. 6659, I.R.C. 1954, as amended, do not apply for the years in issue.

P was a probationary member of the North Arkansas Annual Conference of the United Methodist Church, an ordained deacon of that denomination, and a licensed local pastor of a church of that denomination. As such, he administered the sacraments of baptism and the Lord's Supper to members of his congregation, conducted worship and other religious services for his local church, and performed services in the control, conduct, and maintenance of his local church and the annual conference. The United Methodist Church considered a deacon as part of its ordained ministry and the annual conference listed P as a ministerial member of that conference. P did not timely file a form for exemption as a minister from self-employment tax under sec. 1402(e), I.R.C. 1954. P contends he was not a minister because he had not yet become a member in full connection in the Annual Conference and had not yet been ordained as an elder. Held, P was "a duly ordained, commissioned, or licensed minister" within the meaning of sec. 1402(c) and (e), I.R.C. 1954, and hence liable for self-employment tax under sec. 1401, I.R.C. 1954.

Decedent died testate on Apr. 20, 1982, survived by his wife and six children. Held: The formula marital deduction provision in decedent's will is not a formula within the meaning of sec. 403(e)(3), Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 305. Consequently, that statute does not preclude petitioner from qualifying for an unlimited marital deduction under sec. 2056, I.R.C. 1954.

P, a limited partner, assumed the primary obligation of the principal, but not the interest, of a portion of a recourse note, bearing nonrecourse interest, given by a partnership for purchase of a… Held: P was at risk for his percentage of the amount of principal assumed, without reduction to present value of the obligation, and (2) the partnership's basis in the motion picture is not reduced for imputed interest under sec. 483, I.R.C. 1954, as amended.

Ps were shareholders of M. M was a domestic corporation, and MI was its wholly-owned foreign subsidiary. Held: the shares of MI stock received by Ps do not constitute property within the meaning of sec. 304(a)(2)(A), I.R.C. 1954.

Petitioners resided in East Lansing, Michigan, where petitioner-husband, Thomas, was a stockbroker. They purchased 3 acres of beach front property near Northport, Michigan, on West Grand Traverse Bay. There were three buildings, containing living accommodations, on the property. The property is located approximately 200 miles from Lansing. Thomas held various meetings with business associates at the property, which typically lasted several days. On occasion, the families of the business associates accompanied them. Petitioners and their family did not take a vacation at the Northport property nor use it as a residence. Held, petitioners are not entitled to depreciate the Northport property because they failed to establish that the Northport property was not used in connection with entertainment within the meaning of sec. 274(a)(1)(B), I.R.C. 1954. Held, further, for taxable years ending after Dec. 31, 1978, incidental use of a facility in connection with entertainment will not prevent the facility from being considered used in connection with entertainment. Sec. 274(a)(1)(B), I.R.C. 1954. Held, further, petitioners are not liable for the additions to tax under sec. 6653(a)(1) and ( 2), I.R.C. 1954.

Petitioner invested in the Southern Star Land & Cattle Co., Inc., tax shelter program. Held: the purported sales of cattle were lacking in economic substance and the benefits and burdens of ownership were not transferred to petitioner. Held, further, applicability of sec. 6621(c), I.R.C. 1954, determined.

In 1971, Gulf incorporated Insco, a wholly owned foreign subsidiary, to conduct a general insurance business. Held: the sums paid to Insco are not deductible as ordinary and necessary business expenses. Humana v. Commissioner, 88 T.C. 197 (1987); Clougherty Packing Co. v. Commissioner, 84 T.C. 948 (1985), affd. 811 F.2d 1297 (9th Cir. 1987); and Carnation Co. v. Commissioner, 71 T.C. 400 (1978), affd. 640 F.2d 1010 (9th Cir. 1981), followed.

In our opinion reported at 88 T.C. 449 (1987), we disregarded Sutton's participation in a transaction between AG, the purported… Held: Sutton's blink-of-an-eye interest in the transaction was not an ownership interest, but was an interest as a straw man designed to create the image of multiple party transaction, and to avoid the at-risk limitations of sec. 465, I.R.C. 1954, and its purported ownership interest in the equipment should be disregarded for Federal…

Respondent issued a notice of deficiency on Apr. 7, 1977. In his petition filed Nov. 4, 1985, petitioner alleged that he never received the notice of deficiency for the years in issue. Held: Even if the notice of deficiency was not sent to petitioner at his last known address, the notice was nevertheless valid because petitioner received actual notice of the deficiencies determined against him within sufficient time to file a timely petition with this Court.

On their 1978 joint Federal income tax return, petitioners reported a nonbusiness bad debt in the amount of $ 567,424. Under the provisions of sec. 166(d), I.R.C. 1954, as amended, only $ 116,800 thereof was deductible as an offset against petitioners' short-term capital gain. Held: For purposes of calculating the limitations on investment interest deductions under sec. 163(d), I.R.C. 1954, as amended, nonbusiness bad debts are treated as "investment expenses" only to the extent they are currently deductible. Accordingly, only $ 116,800 of petitioners' nonbusiness bad debts are treated as investment expenses in 1978.

Ps, in an amended reply filed after trial, denied an allegation in R's amended answer that an extension for time to assess tax had been executed. Held: a pleading filed after trial does not shift the burden of going forward with the evidence where the other party has prejudicially relied on Ps' previous admissions to the contrary.

A dividend declared by a wholly owned subsidiary and paid by a promissory note prior to commencement of efforts by the parent to dispose of the subsidiary is held to be a dividend and not part of the selling price.

P is the income beneficiary of a testamentary trust created under the will of her late husband. Held: neither the trust instrument nor local law specifically requires an allocation of different classes of trust income for tax purposes to different beneficiaries.

Held, in computing a private foundation's "undistributed income," on which the sec. 4942, I.R.C. 1954, excise tax is imposed, capital gains and losses from the sale or other disposition of property are taken into account only in an amount equal to any net short-term capital gain for the taxable year; the same rule in this respect applies to private foundations which are trusts as to private foundations which are corporations. Held, further, sec. 4942, I.R.C. 1954, does not violate art. I, sec. 8 or sec. 9, the 5th Amendment or the 16th Amendment of the Constitution of the United States.

A decision of the Tax Court for respondent was reversed on appeal, and petitioners sought to recover the cost of premiums paid for bonds pursuant to sec. 7485, I.R.C. 1954. Held, the cost of the premiums is not a cost enumerated in 28 U.S.C. sec. 1920 and, therefore, 28 U.S.C. sec. 2412 does not authorize such cost to be awarded against the United States.

Petitioner incurred and paid interest on the unpaid balance of a Federal estate tax liability deferred under sec. 6166, I.R.C. 1954. Held: the interest is deductible as an administration expense under sec. 212, I.R.C. 1954.

M Corp. maintained a retirement plan for the benefit of its employees. Ps were officers, directors, and employees of M Corp. and participants in such plan. Held: All remaining Ps are disqualified persons under sec. 4975(e), I.R.C. 1954; Ps can avoid liability for excise tax imposed on prohibited transactions only by correcting such transactions. 2.

Held, petitioner Gibbons International does not qualify as a Domestic International Sales Corporation because commissions receivable due from its domestic parent corporation were not "paid" within the meaning of sec. 1.994-1(e)(3), Income Tax Regs.

P is the tax matters person of B, an S corporation which, during its 1983 taxable year, had only one shareholder. R examined B's Federal income tax return pursuant to the S corporation audit and litigation procedures, sec. 6241 et seq., and issued a Notice of Final S Corporation Administrative Adjustment (FSAA). The partnership audit and litigation procedures were, in general, grafted onto the S corporation audit and litigation procedures except as modified or made inapplicable by regulations. In 1983, there were no regulations under the S corporation audit and litigation procedures. Held: The small partnership exception set forth in sec. 6231(a)(1)(B), I.R.C. 1954, which exempts partnerships with 10 or fewer partners from the partnership audit and litigation procedures, "[relates]" to partnership items and, therefore, is made applicable to S corporation audits by sec. 6244(2). Consequently, the statute mandates an exception for small S corporations. Held, further, R's failure to promulgate regulations does not eliminate that exception. Held, further: Due to the differences between S corporations and partnerships, the statute does not contemplate a small S corporation exception set at 10 shareholders, and we will not sit as the tax administrator in choosing the appropriate number. Nevertheless, because the statute mandates that a small S corporation exception exist, it exists for S corporations with one shareholder. B was exempt from the S corporation audit and litigation procedures in 1983. Held further, the FSAA is invalid and we lack jurisdiction.

Ps (individuals and their wholly owned corporation) sold real estate and a day-care center and nursery school business in 1979 for $… Held: Ps' failure to report the sale and elect the installment method under sec. 453, I.R.C. 1954, and sec. 1.453-8(b)(1), Income Tax Regs., in 1979, the year of sale, and their reporting the sale as a closed transaction in 1980 preclude them under the binding election rule and the pertinent regulations from using the installment method.

Estimated interest payable on Federal estate tax and State inheritance tax, and on deficiencies with regard to such taxes, is chargeable to the income of the estate and does not reduce the amount of the marital deduction.

Through his son as agent, decedent issued checks, representing gifts, to his children. Held: a valid agency was created so that funds represented by a check drawn on decedent's account and cashed before decedent's death are not includable in the gross estate. Held, further, the funds represented by checks written on decedent's bank account and not paid until after his death, are so includable. Secs. 2031, 2033, I.R.C., 1954.

Petitioner-husbands were professional dentists. Ps purchased or leased farm property in the San Joaquin Valley, California, from Pacific Agricultural Services, Inc. (Pac Ag). Held: Ps formed enterprises with Pac Ag and more than 35 percent of the losses from these enterprises were allocable to petitioners under sec. 464(c)(1)(B). Ps' motion for summary judgment is denied. R's motion for partial summary judgment is granted.

P, an individual, entered into four separate transactions with F concerning the sale and leaseback of certain computer equipment. Held: the H and the A transactions are determined to be shams devoid of economic substance which shall be disregarded for Federal income tax purposes.

P diverted to his own use income from his solely owned corporations. Held: the diverted funds were constructive dividends and taxable to P in the manner provided by secs. 301(c) and 316(a). DiZenzo v. Commissioner, 348 F.2d 122 (2d Cir. 1965,) and Simon v. Commissioner, 248 F.2d 869 (8th Cir. 1957,) followed. Leaf v. Commissioner, 33 T.C. 1093 (1960), affd.