Volume 93 — Tax Court Reports

W died 38 hours after H as a result of injuries sustained in a common accident. Held: Ariz. Rev. Stat. Ann. (1975) sec. 14-2601 (Uniform Probate Court sec. 2-601), requiring survival by 120 hours, does not apply because will contained language dealing explicitly with simultaneous deaths and requiring that W survive in order to take under the will. H's share of community property is includable in W's estate.

Held: Respondent entered into a closing agreement with petitioner and his two controlled corporations, Manufacturing and Specialty, whereby income was allocated… Held: Respondent entered into a closing agreement with petitioner and his two controlled corporations, Manufacturing and Specialty, whereby income was allocated to Manufacturing from Specialty pursuant to sec. 482. Petitioner and the corporations elected the relief available under Rev. Proc. 65-17, 1965-1 C.B. 833.

Helen Novotny (decedent) left a life interest in real property to her husband, Gustav Novotny, by will. The issue for decision is whether the property is qualified terminable interest property. Held: that, where limits imposed on a life estate received by a surviving spouse do not exceed limits independently applicable to him, those limits do not result in failure of the property to qualify as terminable interest property.

Petitioners, husband and wife, filed a joint 1982 tax return bearing address A. Husband filed his 1983 and 1984 returns using address A, and applied… Held: This Court lacks jurisdiction with respect to wife because the notice of deficiency was invalid as to her. Respondent was on notice of wife's new address and separate residence, but failed to mail a duplicate original of the joint notice of deficiency to her last known address as required by sec. 6212(b)(2), I.R.C. 1954.

Petitioner, a private foundation, made grants to two other private foundations, all three of which had been established by the same person to… Held: on the facts of this case, petitioner is subject to the 10 percent excise tax on taxable expenditures imposed by sec. 4945(a)(1) of the Internal Revenue Code, since its contributions to the other two foundations during 1981-1983 were taxable expenditures within sec. 4945(d)(4), by reason of its failure to exercise expenditure…

F directly owned 100 percent of the stock of both P (a life insurance company) and C, and 56.32 percent of the stock of CBN. Held: P's acquisitions of F's stock and C's stock in CBN are treated as distributions in redemption of P's stock under sec. 304(a)(1). Held, further, P made distributions under sec. 815 resulting in phase III taxable income under sec. 802(b)(3) to the extent made out of its policyholders' surplus account.

P, the acquired firm in a friendly takeover, incurred legal, investment banking, and other fees incident to the takeover. Held, the fees are capital expenditures rather than current expenses and, thus, are not deductible under sec. 162(a).

R has moved to dismiss this declaratory judgment action under sec. 7476, I.R.C. 1954, for lack of jurisdiction citing P's failure to exhaust its administrative remedies. Held: In seeking initial qualification of its retirement plans, P must demonstrate that it exhausted all administrative remedies prior to the issuance of the final adverse determination letters. Sec. 7476(b)(3). It did not do so. Held, further: This Court lacks jurisdiction under sec. 7476(b)(4) because some of the provisions of the plans with respect to which P seeks a declaratory judgment had not been put into effect prior to the filing of the petition. Arthur Sack, Pension Paperwork, Inc. v. Commissioner, 82 T.C. 741 (1984), followed. R's motion to dismiss for lack of jurisdiction will be granted.

Petitioners were the controlling shareholders of several corporations. One of these (Van), owned real estate (the I-10 property). Held: The exchange qualifies for nonrecognition treatment under sec. 1031(a), I.R.C. 1954, because the property received was held for investment purposes.

P, a member of the Puyallup Tribe, operated a smoke shop in Indian trust land. Held: the competitive advantage available to P by reason of her status did not qualify smoke shop profits as earned income for purposes of the maximum tax under sec. 1348.

Petitioner husband was convicted of criminal violations of Federal statutes governing fraudulent activities. He was sentenced to prison and fined on some counts. Held: the deduction of the restitution payment is governed by sec. 165(c)(2), I.R.C. 1954, and not sec. 162(a), I.R.C.Held, further, the standards governing the application of sec. 162(f), I.R.C., may be utilized in determining deductibility under sec. 165(c)(2).

P received a lump-sum distribution of cash and stock from a profit-sharing plan. Held: the substance of the transaction wherein P transferred cash and stock to the trustee controls and the trustee's bookkeeping error will be disregarded. P made a timely rollover to his IRA.

In March 1979, Ps and R settled a refund suit for the taxable years 1967 and 1968. Held: Ps may deduct such portion of the overpayments which R used to offset assessed interest, as an interest expense paid in the taxable year 1979, under sec. 163(a), I.R.C. 1954. Held, further, R has failed to establish that any portion of such overpayments constituted income to Ps in the taxable year 1979 under sec. 61, I.R.C. 1954.

P made a series of interest-free demand loans to two of her children. Held: the proper valuation of the gift element of an interest-free demand loan does not depend on how much interest the lender could have legally charged to a particular borrower; rather, the value of the gift element is determined based on the reasonable value of the use of the borrowed funds.

An estate tax closing letter was mailed to the estate of Clara M. Evans indicating a final total Federal estate tax liability of $ 877,507.45. Held: the expiration of the period of limitations on assessment of additional tax against the estate before the distribution of assets to petitioners not only bars the Commissioner the remedy of collecting the tax from petitioners but also extinguishes the liability of the estate.

From 1975 through 1979, C, a subchapter S corporation engaged in printing, paid kickbacks to the purchasing agents of various customers. Held: the payments constitute ordinary and necessary business expenses deductible under sec. 162(a). Held, further, R has failed to prove, by clear and convincing evidence, that the kickbacks were illegal under local law and are therefore nondeductible under sec. 162(c)(2).

Subsidiaries in an affiliated group of corporations filing a consolidated return petitioned this Court while the common parent corporation was in bankruptcy. Held: sec. 1.1502-77(a), Income Tax Regs., precludes the subsidiaries from petitioning this Court; accordingly, respondent's motion to dismiss for lack of jurisdiction is granted.

D, a decedent, established an irrevocable inter vivos trust with B, a bank, as trustee. Held: D never possessed incidents of ownership in the life insurance policy within the meaning of I.R.C. sec. 2042. Held, further, because D never possessed under section 2042 any incidents of ownership in the policy on his life, the proceeds therefrom are not includable in his gross estate under I.R.C. secs. 2035(d)(2) and 2035(a).

Farms and Dairy Fresh, wholly owned subsidiaries of P, are farming corporations. Held: the step transaction doctrine does not apply to A's purchase and P's subsequent redemption of the preferred stock. Held, further, for the year in issue, for purposes of sec. 447(a), P met the family corporation exception requirements.

P, a bail bondsman, is the agent of the surety that issues each bailbond. Held: the funds collected and paid to the surety are contributions to a reserve for future liabilities and are not deductible business expenses. Held, further, P earned the funds that were used as security for his promise to indemnify, and P is taxable on the funds in the year he earned them.

Decedent owned a 35.5-percent interest in an incorporated family farm. Held: the value of the shares to be included in the gross estate (based, as agreed by the parties, upon the sum of the values of the assets of the farm including that of the real estate as reduced pursuant to sec. 2032A) is not the fair market value of the shares, and is thus not entitled to a minority interest discount that would…

Peter and Vernice Gasser owned certain properties in California as community property prior to Peter's death in 1982. They placed the property in service prior to 1981. Held: Vernice is not entitled to use ACRS deductions for depreciation of her one-half interest in the property after Peter's death.

Decedent devised farm property to petitioner, her son, and her estate properly elected to value the property under the special use valuation provisions of sec. 2032A, I.R.C. 1954. Held: the lease of the property to petitioner's nephew caused a cessation of the qualified use of the property and petitioner is liable for the additional estate tax imposed by sec. 2032A(c)(1), I.R.C. 1954.

R issued examination reports for 3 of Ps' tax years, proposing deficiencies totaling $ 4,496. Held: based on Weiss v. Commissioner, 850 F.2d 111 (2d Cir. 1988), revg. 88 T.C. 1036 (1987), R's position for 2 of the 3 years in question was not substantially justified.

An inter vivos trust, includable in P, the grantor's estate, distributed funds to an educational organization which had had its tax-exempt status revoked. Held: P is not entitled to a sec. 2055(a) estate tax deduction. Held, further, the trustees' lack of personal knowledge of the deletion is immaterial.

A testamentary trust, which funded a surviving spousal annuity, granted the trustee power to invade trust corpus during the life of the surviving spouse for the emergency needs not only of the surviving spouse but also of decedent's surviving son and brother. Held, because a payment could be made from trust corpus funding the annuity to someone other than the surviving spouse during the surviving spouse's life, the interest passing to the surviving spouse was not a qualifying income or annuity interest under secs. 2056(b)(7)(B) or (C), I.R.C. 1954, as amended.

Held, husband petitioner on rotation of 28 days work on a platform in Angolan waters and 28 days of rest at his place of origin (Texas) commencing in January 1983 maintained an abode in the… Held: husband petitioner on rotation of 28 days work on a platform in Angolan waters and 28 days of rest at his place of origin (Texas) commencing in January 1983 maintained an abode in the United States because of numerous domestic ties to his home in Texas and lack of ties to Angola.

B is a stockholder in G, a subchapter S corporation. Held: in the absence of any specific provision of law authorizing the carryover, G is not entitled to any carryover of the recaptured investment tax credit on the facts of this case under some general nonstatutory principle claimed by B to be applicable in the case of a tax-free reorganization where the new corporation continues to conduct…

In 1979 and 1982, P commenced civil actions for defamation. Held: sec. 104(a)(2) excludes the settlement proceeds from gross income. Held, further, any portion of the settlement proceeds characterized as punitive damages are nevertheless excluded from gross income by sec. 104(a)(2). Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), is distinguished.

Held, petitioner's motion to reconsider our opinion in Long v. Commissioner, 93 T.C. 5 (1989), is denied, as the doctrine of constructive payment is inapplicable to the satisfaction of an account… Held: petitioner's motion to reconsider our opinion in Long v. Commissioner, 93 T.C. 5 (1989), is denied, as the doctrine of constructive payment is inapplicable to the satisfaction of an account receivable established pursuant to Rev. Proc. 65-17, 1965-1 C.B. 833.

P claims to be an innocent spouse entitled to relief under sec. 6013(e), I.R.C. 1954, for the years 1974, 1975, and 1976. Held: Secs. 1373 (prior to its 1982 amendment effective for years after 1982) and 6013(e) require that an increase to a shareholder's reported income from a subch. S corporation be considered an item omitted from gross income within the meaning of sec. 6013(e)(2)(A).

Surviving spouse elected to take against decedent's will, which contained a residuary clause pouring over assets to a valid inter vivos trust. Held, under local law, surviving spouse's election against the will did not affect her right to receive income as a beneficiary of the separate and independent trust. Held, further, residuary estate bequeathed to the trust "passed from the decedent" to the surviving spouse within the meaning of sec. 2056, I.R.C., and the regulations thereunder and is qualified terminable interest property within the meaning of sec. 2056(b)(7)(B), I.R.C., since all other requirements thereunder are satisfied.

On their timely filed income tax returns, Ps claimed credits for withholding tax and requested refunds of withheld amounts. The requested refunds were made. The Court later determined that Ps' taxes were understated on the returns. Held, amounts refunded pursuant to the claims on Ps returns were "underpayments" subject to the sec. 6661(a)1All section references are to the Internal Revenue Code of 1986 as in effect for the years in issue, unless otherwise indicated. addition to tax for substantial understatements.

P, a stock life insurance company, was required by the California Insurance Department to increase its reserves for certain policies. P filed suit in California to challenge that action. Held: W Corp.'s advances to P were loans rather than contributions to capital, and the interest payable on the Certificates of Contribution is deductible by P as interest on indebtedness incurred for emergency financing.

Held, petitioner's entitlement to innocent spouse relief determined; held, further, petitioner is liable for additions to tax pursuant to sec. 6651(a)(1). Held: petitioner's entitlement to innocent spouse relief determined; held, further, petitioner is liable for additions to tax pursuant to sec. 6651(a)(1).

T Corp. had between 80 and 128 permanent employees and approximately 13,000 temporary personnel. Held: the deduction of the fees, otherwise precluded by sec. 274(a)(1), is permissible by reason of the exception in sec. 274(e)(5) [now sec. 274(e)(4)], relating to recreational expenses primarily for the benefit of employees (other than officers, stockholders or other owners, or highly compensated employees).

As executor of an estate, P filed an untimely estate tax return reporting the value of an interest in certain real estate as $ 409,062 and paid only part of the reported estate tax before distributing the assets of the estate. Held, the return did not overstate the value of decedent's interest in the real property and P is liable as fiduciary under sec. 3713(b), title 31, U.S.C. (1982), for an assessment of the unpaid estate tax shown on the return, additions to tax under sec. 6651(a)(1) and ( 2), I.R.C., and interest.

Real property of an estate was distributed to petitioners, and the estate, if not already insolvent, was rendered insolvent by the distribution. Held: petitioners are liable under sec. 6901, I.R.C. 1954, as amended, as transferees for the Federal estate tax liability of the estate.

Held, to determine whether an organization is organized exclusively for one or more exempt purposes under I.R.C. sec. 501(c)(3), an examination must be made of all surrounding facts… Held: to determine whether an organization is organized exclusively for one or more exempt purposes under I.R.C. sec. 501(c)(3), an examination must be made of all surrounding facts and circumstances, not only the organization's stated purposes as they appear in its articles of incorporation.

P was engaged in the business of selling metal fasteners. Prior to fiscal year 1982, P determined opening and ending inventory using a perpetual book inventory record keeping system. P verified book inventory by taking a partial physical inventory. For fiscal year 1982, P determined both opening and ending inventory on the basis of a complete physical inventory that was completed several months after the close of the fiscal year. This physical inventory, after adjustments, indicated that opening inventory for fiscal year 1982 was ten times greater than ending inventory reflected in the books and as originally reported for the end of the prior fiscal year. R determined that P's opening inventory for fiscal year 1982 was $ 268,681, based on original book inventory, rather than $ 2,640,114, based on P's complete physical inventory. R did not question the accuracy of P's ending inventory for fiscal year 1982 even though ending inventory was based on the same complete physical inventory. R also argues that P's revaluation of opening and ending inventory for fiscal year 1982 is a change in accounting method. Held: Opening and ending inventory must be computed using the same method of accounting. P's method of determining both opening and ending inventory on the basis of a complete physical inventory for fiscal year 1982 constitutes a change in accounting method requiring an adjustment under sec. 481, 1Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. I.R.C. 1954.

Decedent formed a corporation and transferred his farm property to the corporation. Held: The gifts of stock by decedent to his sons are included in his gross estate only for purposes of determining whether decedent's remaining stock qualifies for special use valuation under sec. 2032A. Petitioner must include the sons' shares of stock on the estate tax return as adjusted taxable gifts; it is not eligible for sec. 2032A…

A civil suit alleging certain antitrust violations was brought against petitioner corporation in 1978. Held: Petitioner has waived both the attorney-client privilege and the work product doctrine. Accordingly, with the exception of two documents, respondent's motion is granted.

P seeks to strike from R's reply brief references to and quotations from technical books and articles not proffered at trial, relied on, or referred to by any expert witness. Held: this material is hearsay not subject to the exception for learned treaties pursuant to Rule 803(18), Fed. R. Evid.Held, further, this material is not suitable for the Court to take judicial notice of pursuant to Rule 201, Fed.

P moved to correct the trial transcript regarding two different types of matters. One involved a situation where testimony of a witness was erroneously attributed to another person. The other involved intentional statements of a witness which they corrected in later testimony or which are in conflict with other parts of the record. R agrees that the testimony attributed to the wrong person should be corrected, but contends that erroneous, but accurately recorded and transcribed testimony, should not be "corrected." Held, erroneous, but accurately transcribed testimony will not be corrected. Held, further, the error attributing testimony to the wrong person will be corrected.

Petitioner held a 75-percent partnership interest in F, whose sole asset was a tract of unimproved real estate purchased with nonrecourse financing. Held: Because there was no overt manifestation of abandonment in 1976, petitioner is not entitled to a loss pursuant to sec. 165(a) in that year. Petitioner was a 40-percent shareholder in E, which had elected pursuant to sec. 992(a) to be taxed as a DISC.

R moved to dismiss this partnership action for lack of jurisdiction on the ground that the petition was not timely filed by the TMP. Held: the timeliness of the FPAA is not relevant to the jurisdiction of the Court under sec. 6226. R's motion to dismiss will be granted.

Our decision for respondent on the controverted issues in an income tax case (88 T.C. 906 (1987)) was affirmed on appeal (855 F.2d 435 (7th Cir. 1988)). Respondent asks us to liquidate the appeal bond ( sec. 7485, I.R.C. 1986) and pay the proceeds to him. Petitioners claim an offset on account of the petitioner estate's apparent overpayment of estate tax, under the doctrine of equitable recoupment. Held: 1. We do not have jurisdiction to decide petitioners' claim of equitable recoupment. 2. Petitioners' claim of equitable recoupment does not reduce the amount of their liability that is secured by the appeal bond.

Petitioners, professional hockey players, formed personal service corporations. Held: the control of the partnership over the services performed by petitioners was sufficiently extensive to constitute petitioners employees of the partnership and not of their respective personal service corporations.

After respondent had issued notices of deficiency and petitioners had docketed their cases in this Court, respondent served administrative summonses to inquire into petitioners' tax liabilities for… Held: respondent is prohibited from using in this Court any testimony, documents or other information obtained pursuant to the summonses.

Held: Manning Association, Inc., is not exempt from tax under sec. 501(c)(3) of the Code as an organization operated exclusively for * * * educational purposes. Held: Manning Association, Inc., is not exempt from tax under sec. 501(c)(3) of the Code as an organization operated exclusively for * * * educational purposes.

P (husband) was an employee of Bell Labs for approximately 10 years. In 1985, P received an award of $ 5,000 from Bell Labs for sustained individual performance. P was nominated by his supervisor without P's knowledge, and the award was not contingent upon any future services to be performed by P. P did not include this award in his income. Held, the award was given to P by his employer in connection with P's employment as compensation for P's services and is not excludable under sec. 74(b), I.R.C. 1954. Held, further, Ps have failed to rebut by clear and convincing evidence the presumption of sec. 6653(g), I.R.C. 1954, that their failure to report dividend income was due to negligence.

A petition for redetermination of a Notice of Final S Corporation Adjustments was filed by the president of the S corporation as the tax matters person. Respondent moved to dismiss for lack of jurisdiction on the ground that the president was not a shareholder in the S corporation and accordingly could not be a tax matters person. Held, sec. 6244 of the Code applies the partnership provisions relating to audits and judicial determinations to subch. S items, including the designation of a tax matters person. Held, further, the tax matters person of an S corporation must have a shareholder interest in the corporation. Held, further, the imperfect petition filed by the president may be cured by an amended petition by a shareholder as tax matters person where it can be shown the president was authorized to file the imperfect petition on behalf of the shareholder.

P, under his employment contract as administrator of hospital H, was provided an option to purchase partnership units at a fixed price over a 4-year period. Held: That the partnership units became transferable in 1979 and P realized ordinary compensation income in that year. Sec. 83, I.R.C. 1954, and sec. 1.83-3(d), Income Tax Regs., interpreted. Further, held, P realized a short-term capital gain in 1980 in the amount of the excess received over the 1979 value/basis.

Petitioner allegedly incurred short-term capital losses when he engaged a foreign investment bank to trade at its discretion metals futures on his behalf. Held: The loss and interest deductions claimed with respect to the metals futures transactions are disallowed because the transactions did not occur and the loans did not exist. 2.

H and W understated their joint tax liabilities in an amount in excess of $ 2.2 million. P contests R's determination by claiming that W was an innocent spouse within the meaning of sec. 6013(e), I.R.C. 1954. P argues that it would be inequitable to hold W's estate liable because W did not receive benefits from the uncontested understatements, other than normal support. P argues that H and W were "wealthy" before, during, and after the years in issue and that W's lifestyle was always consistent with that wealth. Held: P bears the burden of proving that W received no significant benefit from the understatements other than normal support. This burden must be met with specific facts regarding such things as lifestyle expenditures, asset acquisitions, and the disposition of the benefits of the understatements. P has failed to meet its burden of proof.

Taxpayer paid loan fees associated with a purported $ 20 million loan. Taxpayer intended to use the loan proceeds to purchase large hotel properties. Held: the taxpayer's effort to become an owner of hotels constituted the start-up of a new business or a new income-producing activity. Held, further: The loan fees are start-up or pre-opening expenses that are not deductible under either sec. 162 or sec. 212, I.R.C. 1954.

Held, the will of decedent, who was a resident of Texas at the date of her death, is unambiguous in providing that all administrative expenses are to be deducted from her residuary estate prior to… Held: the will of decedent, who was a resident of Texas at the date of her death, is unambiguous in providing that all administrative expenses are to be deducted from her residuary estate prior to its passage into two charitable annuity trusts.

R issued notices of final partnership administrative adjustment (FPAAs) on Apr. 13, 1987, determining adjustments to the 1982 and 1983 partnership returns of Pepiot. No petition for readjustment of partnership items was filed in response to the FPAAs. After the period for filing a readjustment petition expired, R computed and assessed the tax owed by Ps, limited partners in Pepiot, for 1982 and 1983 pursuant to sec. 6225(c), I.R.C. On Aug. 12, 1988, R issued a notice of deficiency to Ps determining additions to tax under secs. 6653(a)(1) and (2) and 6661(a), I.R.C., and additional interest under sec. 6621(c), I.R.C., for the taxable year 1982. In their petition, Ps seek a redetermination of the deficiencies resulting from the adjustments to the partnership returns of Pepiot for 1982 and 1983 as well as the additions to tax and additional interest for 1982. Held: The deficiencies attributable to partnership items for 1982 and 1983 were properly determined at the partnership level under sec. 6221, I.R.C., and assessed under sec. 6625(c), I.R.C. Thus we have no jurisdiction to consider the deficiencies attributable to partnership items in a subsequent deficiency proceeding to redetermine additions to tax and additional interest against Ps for 1982. Our jurisdiction for 1982 is limited to a redetermination of the additions to tax and additional interest determined in the notice of deficiency. Held, further, since no deficiency notice was issued for 1983, we have no jurisdiction with respect to that year. Held, further, since we have no jurisdiction with respect to the deficiency for 1982 attributable to partnership items, we will strike Ps' claim that the period of limitations on assessment of the deficiency attributable to partnership items has run for that year.

Held, the capital gain deduction on Schedule D of petitioners' 1984 income tax return is an item of "tax preference" within the meaning of sec. 55(b)(2) of the Internal Revenue Code in the computation of the alternative minimum tax imposed by sec. 55(a), as required by secs. 57(a)(9)(A) and 1202, notwithstanding that the capital gain in this case is referable to the artificially computed component of the taxable portion of a lump-sum distribution to the husband of his interest, upon retirement, in a qualified retirement plan. Secs. 401, 402(a)(2), 402(e)(4). Sullivan v. Commissioner, 76 T.C. 1156 (1981), affd. by unpublished order (10th Cir. 1983), followed. Held, further, the term "regular tax" in sec. 55(a)(2) in the computation of the alternative minimum tax means the tax computed without regard to the "separate tax" imposed by sec. 402(e)(1) in respect of the noncapital gain component of the taxable portion of the lump-sum distribution. Sec. 55(f)(2) of the Code as in effect in 1984, the relevant portion of which is now contained in sec. 55(c)(1).

Decedent's will established a split-interest charitable remainder trust which failed to comply with the form requirements for deduction… Held: no judicial proceeding was commenced to change the trust's remainder interests into deductible interests within the deadline set forth in sec. 2055(e)(3)(C)(iii), I.R.C. 1954, with the result that there was no qualified reformation within the meaning of sec. 2055(e)(3), I.R.C. 1954, and charitable deductions for those interests are…

Petitioner, a calendar year taxpayer, had property expropriated by the government of Iran in 1979. Held: since petitioner had no reasonable prospect of recovery as of Dec. 31, 1979, it was entitled to a deduction for losses sustained during the taxable year.

Held, where petition from a notice of deficiency is timely filed in this Court, this Court has jurisdiction to determine the issues and enter a decision in the case even though petitioner's motion for receivership is granted by a State court and a receiver appointed subsequent to the filing of the petition in this Court. Held, further, facts deemed admitted by petitioner because of failure to adequately reply to respondent's request for admissions leave no issue of material fact in this case and, therefore, respondent's motion for entry of decision in accordance with his determination as modified by a concession is granted.