Volume 90 — Tax Court Reports

Held, petitioner is not liable for the accumulated earnings tax because earnings and profits were not accumulated beyond the reasonable needs of its business.

P, a calendar year and accrual basis taxpayer, is in the business of manufacturing and selling greeting cards and other social expression merchandise. Held: since the all events test is not satisfied until the year following shipment, P is not required to accrue income from advance-shipped Valentine merchandise in the year of shipment. Held, further, P does not employ a hybrid method of accounting.

Petitioner, a mutual life insurance company, treated certain prepayment penalties attributable to its post-1954 corporate mortgage loans as long-term capital gain under sec. 1232, I.R.C. 1954, and,… Held: in computing its gross investment income under sec. 804(b), petitioner must include the prepayment penalties as income described under sec. 804(b)(1)(C), in each of the years at issue.

Ps, through C partnership, leased energy management devices from OEC, under a plan whereby C would install the devices and share energy savings with… Held: value of the energy management devices determined. Held, further, Ps are not entitled to the credits or deductions associated with the leases because the partnership did not have a profit objective. Held, further, with respect to the disallowed credits, Ps are subject to the sec. 6659, I.R.C. 1954, overvaluation addition.

Held, the amount of an appeal bond under sec. 7485, I.R.C. 1954, may not be reduced by the amount of any pending claims for refund. Held: the amount of an appeal bond under sec. 7485, I.R.C. 1954, may not be reduced by the amount of any pending claims for refund. Held, further, stripped U.S. obligations may not be used as collateral in lieu of a surety bond under 31 U.S.C. sec. 9303 (1982).

Petitioners filed a petition in Bankruptcy Court, thereby imposing an automatic stay on the collection and assessment of taxes (11 U.S.C. sec. 362(a)(6) (1982)), as well as suspending the running of… Held: lifting the automatic stay, without notice thereof to respondent, ended the suspension on the running of the statute of limitations. Held, further, respondent's notice of deficiency untimely.

Ps. A and B, were shareholders in a corporation which distributed computer software designed to assist nursing homes with State reporting requirements by incorporating State reporting regulations onto the software. Petitioners claimed a 10-percent investment tax credit for the software as a qualified investment. Held, Ps' investment in nursing home computer software had economic substance and was an activity engaged in for profit within the meaning of sec. 183, I.R.C. 1954. Held, further, petitioners' computer software is not tangible personal property or other personal property eligible for the investment tax credit. Held, further, Ps are subject to additional interest for that part of the deficiencies attributable to tax-motivated transactions under sec. 6621(c). Held, further, petitioner A is not entitled to unsubstantiated business deductions.

Respondent sent a joint notice of deficiency to H and W. H did, but W did not, receive the notice. H filed a petition and an amended petition forging W's signature. Held: the decision will be vacated as it relates to W because the decision was entered when the Court lacked jurisdiction over W. Brannon's of Shawnee, Inc. v. Commissioner, 69 T.C. 999 (1978), followed.

R mailed a notice of deficiency to Ps, attached to which were computational sheets relating to another taxpayer. Held, the notice of deficiency is valid. Held: the notice of deficiency is valid.

Ps are limited partners in W, an Ohio limited partnership organized to purchase and exploit the rights to a motion picture. Held: W did not acquire a 100-percent ownership interest in the movie, but did acquire an interest in a joint venture with others to own, exploit, and participate in the profits from the film. Held, further: Ps are limited to determining the film's depreciation under the income forecast method.

Respondent sent a notice of deficiency to corporation P, in which he determined deficiencies against P. On the same day, respondent sent a notice of deficiency to S (P's subsidiary), in which he… Held: this Court lacks jurisdiction to redetermine the deficiencies that respondent determined against S.

A testamentary charitable bequest was voidable by the exercise of statutory rights of forced heirs under Louisiana law. Held: under the facts of this case and because the forced heirs did not exercise their statutory rights, a charitable estate tax deduction under sec. 2055, I.R.C. 1954, as amended, is allowed for the charitable bequest.

In 1974, Ps transferred land (but not the improvements thereon) to PL, their controlled corporation, and leased back the land from PL under lease agreements under which the rent was fixed for the… Held: Ps are collaterally estopped from litigating the reasonableness of the rental payments for the remaining 2 years of the original 5-year term of the lease.

Petitioner intended to restructure its business by disposing of its energy subsidiaries and redeeming its shares. Held: petitioner's distribution of Vickers in exchange for its own stock qualified for nonrecognition under secs. 311(a) and 311(d)(2)(B), I.R.C. 1954.

Pursuant to a property settlement agreement, petitioner paid $ 18,000 to his ex-spouse and she transferred their former residence to him. Soon afterward, petitioner sold the house to a third party. Held: sec. 1041, I.R.C. 1954, as added by the Deficit Reduction Act of 1984, applies to these facts. Held, further, petitioner cannot increase the basis of the house by the $ 18,000 he paid his former spouse for purposes of computing gain realized on the subsequent sale.

Ps were shareholders in V, an electing small business corporation under subch. S of the Internal Revenue Code. Held: absent an economic outlay by Ps, Ps' guarantees of the loan do not increase their basis in their stock in V. Brown v. Commissioner, 706 F.2d 755 (6th Cir. 1983), affg. T.C. Memo. 1981-608, and Calcutt v. Commissioner, 84 T.C. 716 (1985), followed. Selfe v. United States, 778 F.2d 769 (11th Cir. 1985), explained.

Pursuant to an undercover investigation, the Internal Revenue Service concluded that Henry Kersting was involved in a scheme in which fictitious debt was created in order to generate interest… Held: in order for petitioners to contest the propriety of the search and seizure, they must establish that the search and seizure violated their Fourth Amendment rights. Rakas v. Illinois, 439 U.S. 128 (1978), followed.

Petitioner-husband, a Chippewa Indian, earned income from commercial fishing. The Chippewa-United States treaties guaranteed fishing rights. Held: such income is not exempt from Federal income taxation.

Held, a notice of deficiency addressed to an estate mailed within 3 years of the date of the filing by decedent of his Federal income tax return is valid and timely absent a proper request for prompt assessment in accordance with the provisions of sec. 6501(d), I.R.C. 1954, even though, when the notice was mailed, the personal representative of the estate had been discharged and the assets of the estate have been distributed. Held, further, the ratification by the personal representative after her reappointment of the timely petition which was filed on behalf of the estate by an attorney cures any jurisdictional defects that may have existed by virtue of the filing of the petition by the attorney.

Petitioner was indicted for violating Federal drug laws. Petitioner was not arrested upon being indicted because he was a fugitive from justice. Petitioner presently remains a fugitive from justice. Held: petitioner's residence for purposes of sec. 7482(b), I.R.C. 1954, was in Philadelphia, Pennsylvania, at the time the petitions in these cases were filed. Brewin v. Commissioner, 72 T.C. 1055, 1059 (1979), revd. and remanded on other issue 639 F.2d 805 (D.C. Cir. 1981).

Sec. 6653(a)(2), I.R.C. 1954, is effective for taxes the last date prescribed for payment of which is after December 31, 1981. Held: The last date prescribed for payment of the 30-percent withholding tax under sec. 1442 and sec. 1461 is the last date for filing the return (Form 1042), in this case, Mar. 15, 1982. P is liable for the addition to tax under sec. 6653(a)(2).

Ps were targeted for grand jury investigation in the late 1970s. In 1979 and 1981, R obtained orders from a U.S. District Court pursuant to rule 6(e) of the Federal Rules of Criminal Procedure (rule… Held: the materials in issue are matters occurring before the grand jury within the meaning of rule 6(e) and may be disclosed only pursuant to a valid rule 6(e) order.

Petitioner constructed and placed in service a freezer facility and claimed an investment credit with respect thereto under sec. 38, I.R.C. 1954. Held: petitioner is not entitled to an investment credit with respect to the freezer facility under sec. 38, I.R.C. 1954, because the freezer facility does not constitute other tangible property * * * used as an integral part of * * * furnishing transportation within the meaning of sec. 48(a)(1)(B)(i), I.R.C. 1954.

Decedent created a revocable, inter vivos trust and authorized the trustees, in their discretion, to pay all Illinois inheritance taxes arising… Held: under sec. 2056(b)(4)(A), I.R.C., 1954 as amended, P's marital deduction must be reduced by the amount of inheritance tax attributable to the marital property. At death decedent owed Federal and State income taxes on income earned in the year prior to death; however, his probate estate was not sufficient to pay the income tax.

Shortly prior to trial, the parties negotiated a settlement, which was reduced to a written agreement specifying the manner of resolving various issues. Held: unilateral error of counsel, in the absence of misrepresentation by the adverse party, is not a sufficient ground to vacate a settlement agreement. Held, further, the settlement agreement is susceptible of interpretation and enforcement in accordance with the terms set out in the writing.

In a lottery, petitioner acquired from the U.S. Department of Interior a mineral lease on 311.53 acres of land in Wyoming which was not within any known geologic structure of a producing oil or gas… Held: based on the record, there was no reasonable prospect or expectation that the lease would produce as much as $ 10,000 per acre from 5 percent of the production, if any, from the lease.

Petitioner used the completed-contract method to account for income from several of its manufacturing divisions. Held: Items produced by two of petitioner's divisions were unique items within the meaning of sec. 1.451-3(b)(1)(ii), Income Tax Regs., and petitioner's use of the completed-contract method to account for income from these two divisions consequently was proper; and (2) contracts entered into by those two divisions need not be severed by…

Petitioner, a regulated savings and loan institution, entered into reciprocal sales and purchases of loan participations with four other unrelated savings and loan institutions. Held: petitioner realized losses on the transfers; these losses are recognized for Federal income tax purposes and are deductible. Secs. 1001, 165, I.R.C. 1954.

P exchanged interests in pools of mortgage loans it owned for interests in pools of mortgage loans owned by unrelated third parties. Held, P realized recognizable losses on the exchanges. Secs. 165, 1001, I.R.C. 1954. P purchased mortgage loans that had been made by unrelated lenders. The proceeds of the mortgage loans were used, in part, to repay other mortgage loans that P owned. Held, P did not exchange the mortgage loans that had been repaid for the mortgage loans it purchased. Held, further, P realized taxable gain when its bases in the mortgage loans that were repaid were less than the amounts that were repaid.

Tuition payments were made by P's employer, NYU Law School, on behalf of P's children directly to the educational institutions they attended. Held: These payments are not scholarships under sec. 117, I.R.C. 1954, and are taxable compensation to petitioner. Held, further, the Court does not have jurisdiction to enforce the fringe benefit moratorium.

P and R entered into a Special Consent to Extend the Time to Assess Tax (Form 872-A). Held: the record in this case does not support a finding that R breached an obligation to provide Forms 872-T. Held, further, P was not prejudiced by the inability to obtain Forms 872-T, and P was effectively able to terminate the Form 872-A agreement and pursue litigation, if necessary.

After obtaining an undergraduate degree in operations research, P began employment in his professional area for the summer and then ceased the employment and continued his education seeking a Master… Held: P is not entitled to deduct the cost of his graduate education because he had not established himself in his trade or business.

Ps were general partners in Goodbody, a stock brokerage firm. Due to the failure of record-keeping technology to keep up with trading volume, Goodbody incurred large, anticipated "back office" liabilities to its customers and other stock brokerage firms, precipitating withdrawals of firm capital and violation of New York Stock Exchange rules. In order to prevent the financial collapse of Goodbody, M Corp. agreed to assume Goodbody's business, all its assets and liabilities, subject to an obligation by Ps to pay to M any deficit in Goodbody's net worth. Held, liabilities attributable to an accrual basis partnership's deductible expenses must meet the "all events" test before they may be included in the bases of Ps' partnership interests. Held, further, reserves representing "back-office" liabilities are not includable in the bases of Ps' partnership interests in determining the amount of their loss. Held, further, Ps realized an amount equal to Goodbody's liabilities upon the transfer of its business to M. Held, further, the transfer of Goodbody's business to M resulted in a sale or exchange of Ps' partnership interests.

Ps signed employment agreements which provided, inter alia, for each of them to receive 12 1/2 percent of the amount, if any, by which the adjusted proceeds from a sale of substantially all of the… Held: the only relationship created by the employment agreements was that of employer-employee; the payments therefore are ordinary income to Ps as compensation for services. Freese v. United States, 455 F.2d 1146 (10th Cir. 1972), followed.

Held, the rate of the addition to tax provided by sec. 6661, I.R.C. 1986, is 25 percent on additions assessed after Oct. 21, 1986. Held: the rate of the addition to tax provided by sec. 6661, I.R.C. 1986, is 25 percent on additions assessed after Oct. 21, 1986. Tax Reform Act of 1986, sec. 1504, and Omnibus Budget Reconciliation Act of 1986, sec. 8002, construed.

Petitioner was engaged in the business of leasing various categories of tangible property, predominantly railroad rolling stock, under fixed-term leases. Held: Petitioner's use of the income-forecast method to compute a reasonable allowance for depreciation under sec. 167, I.R.C. 1954, is inappropriate under the circumstances of this case.

Petitioner-husbands claimed deductions and investment tax credits in connection with motion pictures through their interests as limited partners in either of two partnerships. Held: The partnerships did not acquire depreciable interests in the motion pictures but purchased contractual rights to payments contingent on the success of the respective motion picture. Durkin v. Commissioner, 87 T.C. 1329 (1986), and Tolwinsky v. Commissioner, 86 T.C. 1009 (1986), followed. 2.

Ps are an affiliated group of corporations engaged primarily in exploration for and development, production, refining, and sale of oil and natural gas and exploration for, production and mining of… Held: sulphur is entitled to percentage depletion under sec. 613(b)(1), I.R.C. 1954, and not sec. 613(b)(7).

Petitioner, the estate of a nonresident alien, claimed, under the estate tax convention between the United States and France, a marital deduction and… Held: petitioner is limited to the lower credit allowed by sec. 2102(c). Estate of Burghardt v. Commissioner, 80 T.C. 705 (1983), affd. without published opinion 734 F.2d 3 (3d Cir. 1984), distinguished. Held, further, petitioner's estate tax liability is the lower of that computed under the treaty or under secs. 2101-2108.

Ps executed purchase agreements for the alleged purpose to acquire videotapes for use in commercial television. Held: The transactions lack economic substance, and are to be disregarded for Federal income tax purposes; 2. Such transactions are tax motivated transactions within the meaning of sec. 6621(c); 3. Additions to tax under sections 6651, 6653, 6659, and 6661 determined.

P was a debtor in a bankruptcy proceeding having filed a voluntary petition for reorganization (chapter 11) on Mar. 11, 1980. Held: the Bankruptcy Court had authority to decide the tax claims asserted and R is a party in privity with the United States, the party which filed a claim in the bankruptcy proceeding. McQuade v. Commissioner, 84 T.C. 137 (1985).

While F, P's attorney, was away on vacation, P signed a Form 872, entitled Consent to Extend the Time to Assess Tax, that purported to extend the period of limitations on assessment with respect to… Held: P's overt act of signing the first Form 872 constituted her assent to that form, and the form therefore is valid. Held, further, R is not equitably estopped from relying upon the first Form 872.

Petitioners seek to depose two individuals to perpetuate testimony in anticipation of filing a petition with this Court pursuant to Rule 82. The prospective deponents are neither advanced in years nor threatened by illness or infirmity. Held, Rule 82 requires that an applicant for a deposition to perpetuate testimony show that the testimony is in danger of being lost before trial.

After reaching a settlement agreement, petitioners moved for an award of litigation costs. Held: Court without authority to award litigation costs in a case, filed before the effective date of sec. 7430, I.R.C. 1954, that was consolidated with a case filed after that effective date. Held, further, respondent's position on statute of limitations issue reasonable.

Petitioners owned working interests in the East Binger Unit. In September 1977, a miscible flue-gas injection project was begun. Held: based upon all the facts and circumstances, the implementation of case IV was a significant expansion within the meaning of sec. 4993(d)(4), I.R.C. 1954, of the initial miscible flue-gas injection project.

Approximately 1 month prior to the decedent's death, the directors of a corporation controlled by the decedent adopted a plan which provided for the payment of an annuity to the surviving spouses of… Held: the commuted value of the post mortem annuity is includable in the decedent's gross estate under sec. 2038, I.R.C. 1954.

In 1977 and 1978, petitioner donated to the Carnegie Institute undivided interests in a collection of 44 works of art. Under the terms of the deeds of gift, the Institute was entitled to possession of the works of art during each of the years following the donations for that portion of each year reflected by the Institute's undivided interests therein. The Institute, however, did not actually take possession of any of the works of art during 1977 or 1978. Held, the donations qualify as charitable contribution deductions in 1977 and 1978 under sec. 1.170A-7(b)(1), Income Tax Regs. The value of nine of the works of art also determined.

In Shell Oil Co. v. Commissioner, 89 T.C. 371 (1987), the Commissioner determined deficiencies in petitioner's windfall profit tax for the taxable quarters ended Mar. 31,… Held: in footnote 3, that the proper taxable period for determination of a deficiency in windfall profit tax is a calendar year, citing Page v. Commissioner, 86 T.C. 1 (1986). Respondent filed a motion for reconsideration of our opinion with respect to our holding in footnote 3. Petitioner did not object.

Ps entered into Form 906 closing agreements with R settling disputes in earlier years relating to matters other than the matters at issue in this case. Held: the closing agreements are final only as to the matters agreed upon. Sec. 7121, I.R.C. 1954.

Decedent died owing $ 210,615.97. His last will directed that all his debts be paid as soon as practicable after his death from his residuary estate. Held: decedent's $ 210,615.97 debt was an obligation of his residuary estate. In re Cline's Estate, 170 Kan. 496, 227 P.2d 157 (1951), followed. Held, further, the $ 210,615.97 debt reduces the estate's marital deduction. Sec. 2056(a), I.R.C. 1954; sec. 20.2056(b)-4(b), Estate Tax Regs.

P, engaged in the business of furnishing railroad transportation, deducted expenditures made in connection with its support of, or opposition to, ballot propositions pending before the State electorate of Arizona and the State and certain local electorates of California. P had a direct interest in the outcome of all the ballot propositions which it supported or opposed. Held, P is not entitled to a deduction under sec. 162(e), I.R.C. 1954, for these expenses. P spent approximately $ 4.9 million in connection with the construction of 47 public highway overpasses above its tracks and roadbeds. Held, P is entitled to an investment tax credit under sec. 38, I.R.C. 1954, with respect to these expenses.

Decedent's will directed that certain Federal and State death duties due on his estate be paid out of the residue of the estate. Held: that direction does not apportion the Federal estate tax due on the residue among the persons with an interest in the residue. Held, further, no part of the Federal estate tax due on the residue is allocable to the surviving spouse's interest in the residue. Succession of Bright, 300 So. 2d 614, 617 (La. App. 1974), followed.

Member States of NATO entered into the Ottawa agreement to extend certain privileges and immunities to members of NATO's international staff. Held: the salary and emoluments paid to P by NATO are exempt from tax.

A timely petition was filed on June 10, 1985. R failed to file a timely answer. Held: R failed to establish that he exercised reasonable diligence to ensure that his answer was timely filed.

Petitioner, a noncorporate taxpayer, leased an airplane to a related corporation in 1976. Held: the 1981 lease of the airplane satisfied the 50-percent requirement of sec. 46(e)(3)(B), I.R.C. 1954, and (2) the leases of the two airplanes need not be aggregated under sec. 1.46-4(d)(4), Income Tax Regs.

P proposes to issue bonds pursuant to an indenture between P and a corporate trustee and seeks a declaratory judgment that such bonds would be described in sec. 103(a), I.R.C. 1986. Held: the lenders' authority over bond proceeds is the equivalent of an agent employed by P to promote an efficient distribution of bond proceeds and the lenders thus will not use the bond proceeds in their trade or business within the meaning of sec. 141(b)(6).

In 1973, the Brewery Workers Pension Fund and the Teamsters Pension Fund agreed to merge. Held: that Ts are not entitled to declaratory relief as they have not demonstrated that there is an actual controversy within the meaning of sec. 7476, I.R.C. 1954. Held, further, that Ps do not have standing to seek declaratory relief as they are not interested parties with respect to the Brewery Workers Fund.

In 1973, the Brewery Workers Fund and the Teamsters Fund agreed to merge. Held: that Ts and Ps are not interested parties with respect to a request for a determination as to the qualified status of the Brewery Workers Fund.

R obtained a copy of a criminal indictment, after it had been filed in open court, and used the information contained therein as a basis for the notices of deficiency issued to Ps. Ps contend that R's obtention and use of the indictment was a violation of rule 6(e), Federal Rules of Criminal Procedure (rule 6(e)), which shields from public disclosure matters occurring before the grand jury. R's position is that the filed indictment is a public record and the procurement of a copy thereof and the subsequent use of the information contained therein is reasonable and proper. Neither Ps nor R ever filed a petition for disclosure pursuant to rule 6(e) with the U.S. District Court seeking matters occurring before the grand jury. Held, the indictment filed in the U.S. District Court on Sept. 30, 1982, is a public record. Held, further, R's obtention of a copy of the indictment and his use thereof in formulating the notices of deficiency was reasonable and proper and, hence, did not violate the secrecy provisions of rule 6(e). Held, further, Ps' motion to shift the burden of going forward with untainted evidence and motion to suppress evidence improperly attained is denied.

In 1982, petitioners purchased units in a gold mine tax shelter and claimed mining development expenses relating thereto on their 1982 Federal income tax returns. Held: the gold mine tax shelter was a sham transaction, devoid of any economic substance. Held, further, petitioners' positions are frivolous and groundless and this proceeding was instituted and maintained primarily for delay; therefore, damages are awarded to the United States pursuant to sec. 6673, I.R.C. 1954.

Ps' 1979 Federal income tax return was required to be filed by June 15, 1980. On June 13, 1980, Ps' 1979 return was deposited in the U.S. mail; the return was not sent by registered or certified mail. Held: For purposes of the statute of limitations on the assessment of tax, Ps assume the risk of nondelivery; accordingly, the failure of the U.S. Postal Service to deliver the return constituted the failure of Ps to file their return.

An agreement settling litigation obligated P, an accrual method taxpayer, to make monthly payments to Mrs. Reichhelm for the rest of her natural life. P deducted the estimated sum of these payments in 1980 based on actuarial tables of estimated life expectancy. R concedes that the P's liability was determinable with reasonable accuracy in 1980. R argues, however, that the fact of liability would not occur until payment is made. Held, P's liability was fixed and definite in 1980; the death of Mrs. Reichhelm is a condition subsequent that will terminate P's existing liability, and P may deduct the liability to Mrs. Reichhelm in 1980 pursuant to the "all events" test of sec. 1.461-1(a)(2), Income Tax Regs.Held, further, P is not required to discount its current deduction of the liability to present value.

Ps conducted an Amway distributorship in the evenings and on weekends during the years in issue. They claimed deductions for various business expenses which were allegedly necessary to the Amway distributorship. Ps submitted records to support their claimed deductions consisting of a notebook with incomplete entries and many unannotated receipts. Ps conducted the Amway distributorship in an unbusinesslike fashion. Held, Ps failed to show that they engaged in the Amway distributorship with the actual and honest objective of making a profit, and, therefore, Ps improperly claimed deductions for business expenses. Held, further, Ps are liable for an addition to tax under sec. 6651(a)(1), I.R.C. 1954, for failure to timely file their Federal income tax return for taxable year 1981. Held, further, Ps are liable for an addition to tax under secs. 6653(a)(1) and 6653(a)(2) for negligent underpayment of tax.

Held, availability to petitioner of per se dealer rule determined under sec. 108(b) of the Tax Reform Act of 1984 (Division A of the Deficit Reduction Act of 1984, Pub. Held: availability to petitioner of per se dealer rule determined under sec. 108(b) of the Tax Reform Act of 1984 (Division A of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630), as amended by sec. 1808(d) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2817.

Petitioners extracted oil and gas in 1981, reported gross income therefrom in 1982, and offset that income with a percentage depletion allowance pursuant to sec. 613A, I.R.C. 1954. Held: petitioners must use the 1982 rate of 18 percent, and not the 1981 rate of 20 percent, as the applicable percentage depletion rate under the rate schedule of sec. 613A(c)(5), I.R.C. 1954.

T was discharged from her employment with company G in the midst of an investigation by the Equal Employment Opportunity Commission (EEOC)… Held: That a substantial portion of the payment was allocable to a claim for a tort-like injury and a substantial portion of the payment was allocable to other claims, predominantly of a contractual nature. In the absence of more precise evidence in the record, it is found that half of the $ 20,000 was allocable to the tort-like claim.

In March 1976, P and other defendants were indicted for Federal antitrust law violations that involved folding cartons and not milk cartons. Held: For purposes of amounts paid by P to settle class action, determined that allocation of P's payments between milk carton claims and folding carton claims is based upon aggregate sales of all the settling defendants in the class action to the settling plaintiffs in such action.

P, a not-for-profit corporation, is the national office of a college men's fraternity. P is exempt from Federal income tax pursuant to sec. 501(c)(7), I.R.C. 1954. The income from an endowment fund owned and maintained by P is used to finance the quarterly publication of the fraternity magazine. Held, P's magazine was not published for one of the exempt purposes specified in sec. 170(c)(4), I.R.C. 1954. Held, further, the net investment income of P's endowment fund is taxable to P as unrelated business income.

Shortly before trial set for January 1987, a decision was entered, pursuant to stipulation, determining petitioners' tax liability for 1977. Petitioners then moved to vacate the decision, claiming entitlement to a net operating loss carryback from 1978, and the decision was vacated in March 1987. The case was thereafter set for trial in December 1987. The week before trial, petitioners moved for a continuance, which was denied. Respondent moved for entry of decision in accordance with the prior stipulation of the parties. Held: Petitioners' claim for a net operating loss carryback was not raised properly or timely. Respondent's motion to enter decision granted.

Through an intermediary, petitioner purchased computer equipment from O. Petitioner then leased the equipment to O for a period of 9 years. Held: The investment tax credit is not a substitute for or component of economic profit. Petitioner's transaction had no economic substance and must be disregarded for Federal income tax purposes.

Decedent's will is governed by Virginia law. In his will, he bequeathed to his wife the marital residence and 50 percent of the residuary estate. Held: the Virginia apportionment statute, which would have maximized the allowable marital deduction, does not apply in this case because decedent's will provides for payment of taxes out of the residuary estate without apportionment. Virginia Code Ann. secs. 64.1-161, 64.1-165 (1987).

Petitioners were Conrail employees who lost their jobs in 1982 as a result of enactment of the Northeast Rail Service Act (NERSA). Held: such benefits are includable in gross income under sec. 61(a), I.R.C. 1954. Held, further, such benefits are not unemployment compensation within the meaning of sec. 85, I.R.C. 1954.

D and E are the transferees and former majority shareholders of S, a corporation that had been engaged in the business of farming row crops. Held: the tax-benefit rule does not require S to include in income the expenses deducted for materials and services which were used and consumed prior to the liquidation in the cultivation of the crops. Hillsboro National Bank v. Commissioner and United States v. Bliss Dairy, Inc., 460 U.S. 370 (1983), applied.

In our previous opinion, reported at 89 T.C. 198 (filed July 27, 1987), we held that P's general partners were ineligible to serve as tax… Held: because a tax matters partner is essential to the operation of the statutory procedures of secs. 6221 et seq., and to the fair, efficient, and consistent disposition of partnership proceedings before us, the Court will exercise its inherent powers to appoint a limited partner of P, after notice and hearing, to serve as tax matters…

P held commodities futures contracts in the form of spread, or straddle, positions, and P owned a seat on the NYMEX, the exchange on which the trades took place. Held, the per se rule of sec. 108(b) of the Deficit Reduction Act of 1984, as amended by the Tax Reform Act of 1986, does not apply because the spread transactions were executed in violation of the rules of the NYMEX. Held, further, the spread transactions were not bona fide, competitive trades, so the gains and losses therefrom are not recognized for Federal tax purposes. Held, further, P has introduced no evidence to indicate that prior spread trades were not bona fide, legitimate transactions, so gains on those trades are includable in P's taxable income. Held, further, P is not liable for additions to tax for fraud because of the spread transactions.

Petitioner, a Los Angeles County deputy sheriff, was injured in the course of his employment. Under California Labor Code sec. 4850 and the Los Angeles County Code, he received payments, equivalent to his full salary for 1 year, which the parties agree are excludable under sec. 104(a)(1), I.R.C. 1954, as payments received under a worker's compensation act. Thereafter, under the Los Angeles County Code provisions providing for compensation for injuries received in the course of employment, he was paid for his accumulated sick leave. Held, payments received based on accumulated sick leave are amounts received under a worker's compensation act as compensation for personal injuries and are excludable from gross income.

Petitioners purchased limited partnership interests in Western Reserve Oil & Gas Co. (Western Reserve) and claimed deductions for their distributive shares of losses and other deductions reported by… Held: Western Reserve did not incur the disputed losses and expenditures in carrying on a trade or business within the meaning of sec. 162(a) or sec. 167(a), I.R.C. 1954; therefore, the claimed deductions are not allowable.

P, a DISC, was organized and operated in reliance upon the handbook, a guidebook for DISC's issued by the Department of the Treasury. Held: Because P was entitled to rely on the handbook, the regulation cannot be applied retroactively to P with respect to taxable year 1976. Therefore, P was disqualified as a DISC for taxable year 1977 only. Held, further, P was the proper taxpayer with respect to its current income for taxable year 1977.

E Corp. was the wholly owned subsidiary of R Corp. and had duly elected to be treated as a DISC under sec. 991, I.R.C. 1954. Held: the backdated promissory note does not constitute payment within 60 days after the close of E's taxable year, and therefore E did not qualify as a DISC for the year in issue because it failed to meet the qualified export assets requirement of sec. 992(a)(1)(B).

P, tax matters person for an S corporation having three shareholders in 1983, moved to dismiss this case for lack of jurisdiction. Held: setting the number of qualifying shareholders for the small S corporation exception at greater than one should be left to R's administrative discretion. Held, further, the statute requires only that single shareholder S corporations be excepted. Blanco Investments & Land, Ltd. v. Commissioner, 89 T.C. 1169 (1987), followed.

Petitioners invested in limited partnerships that engaged in transactions identical to and controlled by the Court's opinion in Julien v. Commissioner, 82 T.C. 492 (1984), and Glass v. Commissioner,… Held: petitioners are not entitled to theft loss deductions for the out-of-pocket amounts of their investments.

In our earlier opinion (87 T.C. 527 (1986)), we denied petitioners' motion for litigation costs under sec. 7430, I.R.C. 1954, holding that… Held: petitioners unreasonably protracted this proceeding by refusing to accept a full concession by respondent 4 months before trial, and will not be awarded costs for the period in which they protracted the litigation. Held, further, petitioners will not be awarded costs for attorneys fees incurred on behalf of other taxpayers.

C is a limited partnership formed for the purpose of developing and commercially exploiting specific products and product concepts. Held: C did not acquire all substantial rights to the patents and therefore did not subsequently transfer all substantial rights. Accordingly, gains from the sales may not be treated as capital gains under sec. 1235.

Held, income from sales of crude oil sourced under title passage rule of sec. 1.861-7, Income Tax Regs., for purposes of determining petitioners' per-country limitation on foreign tax credit. Held: income from sales of crude oil sourced under title passage rule of sec. 1.861-7, Income Tax Regs., for purposes of determining petitioners' per-country limitation on foreign tax credit.