Volume 94 — Tax Court Reports

P filed a voluntary liquidating bankruptcy. Held: under the circumstances of this case, the Tax Court has jurisdiction to redetermine Federal income tax deficiencies with respect to prebankruptcy tax years. Held, further, the Tax Court has no jurisdiction to determine whether P's taxes were discharged in the bankruptcy proceeding.

P presently has two petitions pending in this Court with respect to the year 1983, and a single petition pending with respect to the year 1984. R sent P a notice of intention to levy with respect to assessments made for the years 1983, 1985, and 1987. Held, this Court lacks jurisdiction under sec. 6213(a), I.R.C., to restrain R from collecting assessments pertaining to 1985 and 1987, because such years are not the subject of timely filed petitions pending in this Court. Held, further, since P's request for an injunction with respect to the year 1983 states grounds that are plausible and believable, R bears the burden of proving by a preponderance of the evidence that the assessments he intends to collect for 1983 are not the subject of either of the two petitions pending in this Court with respect to 1983. Williams v. Commissioner, 92 T.C. 920 (1989), followed. Held, further, R failed to meet his burden of proof. Held, further, under the authority of sec. 6213(a), I.R.C., R is enjoined from collecting the premature assessment contained in his notice of intention to levy until our decisions with respect to 1983 become final.

P used a room in his apartment exclusively to manage his medical practice. He had no other office space available to him. Held: P is entitled to deduct expenses for his home office.

Ps carried on a dog breeding and grooming operation. Held: the dog breeding and grooming operation constituted a single activity for purposes of I.R.C. sec. 183(a) and sec. 1.183-1(d)(1), Income Tax Regs.Held, further, Ps engaged in dog breeding and grooming for profit within the meaning of I.R.C. sec. 183(a).

D died 3 hours after H due to a common accident. Held: Payable on death designations are valid under an Oklahoma statute in effect at the time of death. Oklahoma law interpreted. Held, further, Federal statutes and regulations are determinative of the ownership of U.S. savings bonds.

D, an organization exempt from Federal income tax, rented the names on its donor list to other organizations, both tax-exempt and for profit, for… Held: the amounts D received from its rental activities were royalties which are excluded from UBTI because sec. 512(b)(2) excludes all royalties from UBTI whether or not derived from the active conduct of a trade or business. National Collegiate Athletic Assn. v. Commissioner, 92 T.C. 456 (1989); National Water Well Assn.

Ps contend that the period within which to assess and collect deficiencies had expired at the time R mailed Ps' notice of deficiency. Held: The evidence offered by R, however, was not sufficient to entitle him to the presumption of official regularity. The habit evidence, the incomplete Form 3877, and the contiguous Forms 3877 with cancellation stamps were sufficient to enable R to carry his burden of production and to prove timely mailing.

Held, legal expenses in successful defense of RICO charges were not paid or incurred for the management, conservation, or maintenance of property held for the production of income and, accordingly,… Held: legal expenses in successful defense of RICO charges were not paid or incurred for the management, conservation, or maintenance of property held for the production of income and, accordingly, are not deductible under sec. 212(2).

From 1971 through 1980, P deducted additions to its bad debt reserve. The amounts deducted were calculated with reference to P's taxable income for each year. In 1981 and 1982, P had net operating losses (NOLs). Held, subdivisions (vi) and (vii) of sec. 1.593-6A(b)(5), Income Tax Regs., are invalid to the extent they require that taxable income reflect any NOL carrybacks before the deduction for addition to bad debt reserve is calculated for certain financial institutions.

Petitioner husband (H) owned all the stock of Q, a subchapter S corporation. Q sold its horse and cattle ranch. Held: Petitioners' unsuccessful motion to be relieved from a stipulation as to basis does not cause the doctrine of judicial estoppel to preclude petitioners from contending that W is entitled to innocent spouse status ( sec. 6013(e), I.R.C. 1954) as to the mischaracterized ordinary income or the erroneous basis deduction. 2.

Petitioner, a calendar-year taxpayer, had property expropriated by the government of Iran in 1979. Held: even though petitioner retained Iranian deposit accounts, it had no legal right to offset its expropriation claims against such accounts, any practical possibility of setoff was no more than a bargaining chip which did not give rise to a reasonable prospect of recovery as of Dec. 31, 1979, and this case is otherwise controlled by…

P sued his attorney for malpractice for the negligent handling of a personal injury action. P was awarded damages on the malpractice claim together with interest thereon from Jan. 27, 1984 to Apr. 1, 1986. Held, the interest was not paid "on account of" P's personal injury. Sec. 104(a)(2), I.R.C., as amended. Held, further, the interest portion of the damage award is taxable income to P. Sec. 61(a)(4).

Decedent, N, owned all of the outstanding shares of class A voting and class B nonvoting common stock in a closely held corporation, A, at his death. Held: Where a State law issue about the relative rights and duties of different classes of stock is incapable of resolution except through actual litigation, as evidenced by the profound disagreement of several noted experts, a willing buyer would experience uncertainty about the rights of the common shareholder.

P purchased master recordings and executed nonrecourse promissory notes (notes) for 84 percent of the purchase price, payable solely from… Held: P physically abandoned the master recordings by storing them in an area that was not climate-controlled, sec. 1.167(a)-8(a)(4), Income Tax Regs.; held, further, when he abandoned the master recordings, P realized a benefit, equal to the amount of the nonrecourse debt, that is taken into account to determine loss pursuant to sec.…

Held, where a trust failed to provide for the disposition of the trust corpus after the termination of the trust, a beneficial interest in the trust corpus reverted to the settlor of the trust when the trust terminated and was included in his gross estate under sec. 2033. Held, further, the widow's allowance paid under Mississippi law to the decedent's widow qualifies for the marital deduction provided in sec. 2056(a). Held, further, respondent failed to meet his burden of proving that rental proceeds from the decedent's farmland were improperly omitted from the gross estate on the decedent's estate tax return.

P, a private school, sought a declaratory judgment that it is exempt from tax under sec. 501(c)(3) of the Code. Held: P must satisfy its burden of proof by a preponderance of the evidence. Federation Pharmacy Services v. Commissioner, 72 T.C. 687, 691 (1979), affd. 625 F.2d 804 (8th Cir. 1980).

Held: Petitioner's motion for summary judgment, as amended, will be denied. Respondent's cross-motion for summary judgment will be granted in part, and denied in part. Held: Petitioner's motion for summary judgment, as amended, will be denied. Respondent's cross-motion for summary judgment will be granted in part, and denied in part.

H and W, after regularly filing returns and paying Federal tax, claimed exemption from the withholding of their income tax and ceased filing returns. Held: R determined deficiencies with respect to W and attempted to mail notice of such determination to her.

1. Petitioner wife, under her physician's recommendation, spent the winter months in Florida in order to mitigate her chronic heart and lung ailments. Held: Lodging expenses while in Florida are not deductible medical expenses under sec. 213(d)(2), I.R.C. Petitioner wife went to Florida to alleviate her chronic ailments, not to obtain treatment from a physician in a licensed hospital or equivalent outpatient facility. 2. Petitioners made expenditures to repair the wooden bathroom floor in rental property they owned. Held, these expenditures are currently deductible under sec. 162, not capital expenditures under sec. 263.

P used a room in his apartment only for business-related activities. Held: a taxpayer may conduct more than one business activity from a home office or offices and qualify under sec. 280A(c), I.R.C.Held, further, P's employee activity did not meet the requirements of sec. 280A(c)(1), and if any of several business activities do not meet the requirements of sec. 280A(c)(1), the exclusivity test is not met…

In February 1984, P sold four unimproved parcels of real estate to the Federal Government. Held: The December 1984 sale to the Government represents a second disposition by a related party, subject to sec. 453(e)(1). 2. The exception provided by sec. 453(e)(6) is not applicable because the December 1984 sale was voluntary and was not made under the threat or imminence of condemnation. 3.

C, a California corporation, was organized by M, a Canadian citizen and U.S. nonresident, to market time-share units in a 15-unit condominium. Held: C was responsible as a withholding agent under sec. 1441(a) for withholding tax on M's interest income. Tonopah & T. R. Co. v. Commissioner, 112 F.2d 970 (9th Cir. 1940), revg. 39 B.T.A. 1043 (1939), distinguished.

Ps were partners of M, which purchased a golf course and leased it to C, a corporation controlled by M's partners. Due to the fact that C's operating expenses payable to unrelated third parties exhausted its funds, C paid no rent to M. Respondent allocated rent from C to M under sec. 482, I.R.C., and issued corresponding notices of deficiency to Ps. Held, the amount of rent, if any, properly allocable to M under sec. 482 is essentially a factual issue, and there are no per se rules or bright-line tests for the determination. Held, further, an unrelated lessee dealing at arm's length would not, under the facts of this case, have paid any rent to M during the years in issue and accordingly no sec. 482 adjustment should have been made in this case.

Petitioner, Russell D. Thornock, invested in a partnership that invested in a multiple-party equipment leasing transaction involving computer equipment. Held: the partners were not at risk under sec. 465(b), 1Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. I.R.C. 1954, with regard to the partnership debt obligations.

Pursuant to an employment contract, petitioner purchased for full market value ($ 285,000) a house owned by a terminated executive employee. Held: petitioner's loss on the resale of the house was a capital loss, not deductible as an ordinary loss. Arkansas Best Corp. v. Commissioner, 485 U.S. 212 (1988).

P and another person purchased a condominium in 1983 for $ 1,514,000. They paid $ 10,000 in cash and executed and delivered a fully recourse, non-interest-bearing note in the amount of $ 1,504,000. Held: neither see. 446(b) nor sec. 461(g) restricts petitioner's deduction of his share of the $ 315,482 characterized as interest by sec. 483.

F, a limited partnership, purchased a farm in 1981 for a contract price in the amount of $ 870,000. Held: The amount of interest imputed under the contract, and the rate at which it is to be deducted, is governed by sec. 483. Sec. 461 does not override that section's pro rata allocation of interest, and the provisions of sec. 461 concerning the economic accrual of interest do not apply to interest so imputed.

Held, petitioner is collaterally estopped from denying that he received $ 23,334.50 in 1978 under circumstances which constituted a violation of the Hobbs Act, 18 U.S.C. sec. 1951 (1976). Held: petitioner is collaterally estopped from denying that he received $ 23,334.50 in 1978 under circumstances which constituted a violation of the Hobbs Act, 18 U.S.C. sec. 1951 (1976).

State regulatory authorities required P to maintain a minimum reserve for its universal life insurance policies equal to the total cash surrender value of the policies. P complied with this requirement by listing, in its annual statement filed with the States, two separate reserve amounts that together equaled the total cash surrender value. The annual statement represented one reserve amount as a preliminary term reserve and the other as an excess miscellaneous reserve. P contends that the purported preliminary term reserve was subject to the revaluation provisions of sec. 818(c), I.R.C. 1954, as in effect in 1982 and 1983. Held, the total cash surrender value of P's universal life policies was a life insurance reserve within the meaning of sec. 801(b). Held, further, P maintained what was essentially a net level reserve for these policies, rather than a preliminary term reserve, and thus was not eligible for a revaluation under sec. 818(c).

Income and expenses related to the business of renting self-storage units are found to be "rentals [and deductions] from real estate" within the meaning of sec. 1402(a)(1), I.R.C. 1954, and sec. 1.1402(a)-4(a) and (c), Income Tax Regs., and are therefore excludable from the computation of net earnings from self-employment. P cannot offset his share of the net loss from the self-storage business against income from his law practice in determining net earnings from self-employment which are subject to self-employment tax.

Ps moved to vacate the assignment of their cases to a special trial judge of this Court. Held: I.R.C. sec. 7443A authorizes the chief judge of the Tax Court to assign these cases to a special trial judge. Held, further, special trial judges are inferior officers of the United States as defined in the U.S. Constitution art. II, sec. 2, cl. 2.

P moved the Court to reconsider our opinion, T.C. Memo. 1989-536, in which we denied P's motion to disqualify R's expert witness on the basis of conflict of interest and privileged communication… Held: there is no conflict of interest and our prior opinion, T.C. Memo. 1989-536, is deemed correct. Held, further: There is no Federal privilege for appraisers of property. Consequently, all motions are denied.

T entered into an agreement of Apr. 28, 1982, to sell his Federal oil and gas lease to AQ Co. (AQ) for $ 2 million, which paid $ 400,000 earnest money therefor in May 1982. On some undisclosed date prior to July 1982, Browne Land Trust contracted to purchase a farm and related Federal Land Bank stock from an undisclosed seller for $ 877,000. The trust had no connection either with T or with AQ. The trust agreed on July 6, 1982, to transfer its interest in the farm to T for an additional $ 200,000. On July 7, 1982, the trust purchased the farm and stock, making payment therefor in part with cash furnished by T. In T's 1982 income tax return there was attached Schedule F relating to the operation of a farming business. It was concerned solely with the farm that was still under contract to be sold to T by the trust. That schedule reported income received in 1982 by T from the operation of the farm and claimed a wide range of deductions for expenses paid and depreciation sustained in connection with the farm during that year. In 1983, in order to "save or defer" taxes, T participated in three "restructured" agreements whereby AQ purportedly undertook to buy the farm from the trust, and AQ in turn agreed to "exchange" the farm for T's oil and gas lease. Held: In the circumstance of this case, there had already been such "substantial implementation" of T's purchase of the farm in 1982, cf. Coupe v. Commissioner, 52 T.C. 394, 405 (1969), as to preclude the availability of the nonrecognition provisions of sec. 1031(a) of the Internal Revenue Code upon the 1983 "restructuring" of the transactions. The Commissioner had filed an amended answer claiming an increased deficiency based solely upon a recomputation of the alternative minimum tax. Held, unless there is more to the matter than has been disclosed to the Court, what is involved here is merely a mechanical computation that can be made by the parties under Rule 155 without the production of any evidence by the Commissioner, notwithstanding that the burden of proof in respect of an increased deficiency would otherwise be upon the Commissioner.

Ps petitioned this Court to contest R's determination that Ps' travel between their homes and office was commuting. Held: this Court is without authority to consider Ps' motion for costs and attorneys' fees under sec. 7430 because the law of the case doctrine precludes our reexamination of matters considered and acted upon (either expressly or by implication) by a Court of Appeals.

Petitioners acquired and installed a heating and cooling system in their house. Held: The system is not renewable energy source property which uses solar energy. Sec. 44C(c)(5)(A)(i) (now in sec. 23), I.R.C. 1954. Sec. 1.44C-2(f)(1), Income Tax Regs., validly disallows the claimed residential energy credit. 2. The system is not renewable energy source property which uses energy derived from geothermal deposits.

Petitioners and other individuals each invested approximately $ 8,000 in various limited partnerships. Held: losses claimed by each investor, which were in excess of $ 90,000, are disallowed.

Held, respondent's determination that petitioner had unreported cash income from an unidentified source is sustained. Held, further: Respondent must prove both an underpayment and fraudulent intent by clear and convincing evidence in order to satisfy his burden of proof with respect to an addition to tax for fraud. When allegations of fraud are intertwined with unreported and indirectly reconstructed income, respondent can satisfy his burden of proving an underpayment in one of two ways. Respondent may prove an underpayment by proving a likely source of the unreported income, Holland v. United States, 348 U.S. 121 (1954), or where the taxpayer alleges a nontaxable source, by disproving the specific nontaxable source so alleged. United States v. Massei, 355 U.S. 595 (1958). Held, further, respondent disproved an alleged specific nontaxable source by showing that his reconstruction of income was accurate and that the evidence as to the specific nontaxable source was implausible, inconsistent, and not supported by objective evidence in the record. Held, further, liability for additions to tax for fraud sustained. Held, further, liability for the addition to tax for a substantial underpayment of tax sustained.

H's testamentary trust gave to W so much of the net income therefrom * * * as * * * [she] may from time to time require to maintain [her] usual and customary standard of living. Held: W was not entitled to all the income from the property under the terms of the trust, and her interest in the trust therefore failed to qualify for the marital deduction as qualified terminable interest property within the meaning of sec. 2056(b)(7), I.R.C.

D and her husband filed a joint income tax return for 1986 in which they failed to calculate and report the proper alternative minimum tax. Held: The failure to calculate and report alternative minimum tax does not constitute a grossly erroneous item within the meaning of sec. 6013(e)(2), I.R.C. 1954. Thus, D does not qualify for relief from liability as an innocent spouse under sec. 6013(e).

Prior to trial, R conceded two of the issues raised in the petition. After the trial, but before either party had filed opening briefs, R conceded the remainder of the case. Held: Considering the facts presented in the record, R's position was not unreasonable. P's motion for litigation costs is denied.

During 1984, P, as a landlord farmer, sold grain crop share rentals for $ 83,280.79 and entered into contracts for future payments, the price of which was fixed at the market value… Held: the contracts did not constitute an evidence of indebtedness payable on demand within the meaning of sec. 453(f)(4)(A), I.R.C., and therefore did not constitute a payment under sec. 453(f)(3) with the result that the transactions qualify as an installment sale under sec. 453(a) and (b)(1).

R took several alternative positions in the notices of deficiency and answers, but did not explicitly identify them as such. Held: Ps' motions for litigation costs were not precluded by the prior settlement of all of the other issues in these cases.

In April 1981, E and M, husband and wife and residents of Louisiana, a community property state, each applied for a life insurance policy insuring the life of the other. Held: Each policy is the separate property of the noninsured spouse.

P owned 13 rental properties. In 1983, P purchased a new BMW which she used to inspect and maintain said properties. Held: because the BMW was used in connection with the furnishing of lodging, it is not sec. 38 property; hence, P is not entitled to the claimed investment tax credit.

In November and December 1981, G, a limited partnership, purchased Treasury Bills (T-Bills) maturing in January 1982. G simultaneously entered into repurchase agreements (repos) involving the same T-Bills, with the same dealers who sold G the T-Bills. Under the terms of the repos, G sold the T-Bills to the dealers and promised to repurchase the T-Bills at future dates for the same prices plus stated interest. One of the repos, from its inception, was to close on the maturity date of the corresponding T-Bills (a repo to maturity). On the dates other repos were to close, G entered into new repos. Some of the new repos were repos to maturity, while other repos were for shorter terms. G, however, eventually entered into repos to maturity on the closing dates of those repos. Held, the T-Bill acquisitions and repos were not fictitious, but real. Held, further: The repos lacked tax-independent purpose and economic substance. Accordingly, interest accruing on the repos may not be deducted. Goldstein v. Commissioner, 44 T.C. 284 (1965), affd. 364 F.2d 734 (2d Cir. 1966), followed.

Held, that for purposes of sec. 6013(e)(2), I.R.C., the fact that a portion of a claimed deduction has been disallowed by respondent does not make it ipso facto a grossly erroneous item, where… Held: that for purposes of sec. 6013(e)(2), I.R.C., the fact that a portion of a claimed deduction has been disallowed by respondent does not make it ipso facto a grossly erroneous item, where another portion of the same deduction was allowed.

R mailed a notice of final partnership administrative adjustment (FPAA) 7 days after mailing the notice of the beginning of an administrative proceeding at the partnership level (commencement notice). Held: the FPAA was nevertheless valid and suspended the period of limitations for making assessments. Secs. 6223 and 6229(d), I.R.C.

In docket No. 13298-88, on Feb. 1, 1988, R mailed a notice of Final Partnership Administrative Adjustment (FPAA) for the partnership's 1983, 1984, and 1985 taxable years addressed to the… Held: In docket No. 13298-88, the amended petition would involve conferring jurisdiction on the Court over taxable years which otherwise would not come within its jurisdiction under the original petition. Accordingly, the motion for leave to file an amended petition is denied.

Libby, a member of petitioner's affiliated group of corporations, sold a portion of its inventory to Pierce in consideration of promissory notes of Pierce and preferred stock of Pierce. The preferred stock provided for optional and mandatory redemption. Held, in calculating the amount which Libby realized from the sale of its inventory under sec. 1001(b), I.R.C. 1954, the preferred stock is not "money received" but is, instead, "property." Accordingly, the amount realized from receipt of the preferred stock is its fair market value not its redemption price.

Ps moved to restrain the collection of taxes, alleging that the IRS was demanding payment of deficiencies for 1983, 1984, and 1985 prior to a final decision of the Tax Court. Held: R's motion to dismiss for lack of jurisdiction as to P-husband will be granted. 11 U.S.C. sec. 362(a)(8).

D's will predated his marriage and, therefore, made no mention of or provision for his surviving spouse, S. As D's surviving spouse, S was entitled to a statutory homestead right. In settlement of her homestead right under Texas law, S took a share of D's residual estate. Held: The Texas homestead right of decedent's surviving spouse is not an interest in qualified terminable interest property and, therefore, is not eligible for the estate tax marital deduction. In 1984, D's business associate, W, filed a claim against the estate for $ 4.8 million. Also in 1984, W initiated a lawsuit against the estate in Federal court. In 1985, the Federal court action was dismissed for lack of diversity of citizenship, and W filed suit in an Oklahoma district court. In 1986, the Oklahoma trial court granted the estate's motion for summary judgment on the ground that W's bankrupt corporation was the real party in interest. In 1989, the State court action became final when the Oklahoma Supreme Court denied W's petition for certiorari. Held, petitioner has not carried its burden of proving that W's claim was a valid, enforceable claim against decedent's estate at the date of death and, therefore, no estate tax deduction is allowable for the claim.

Ps were partners in three partnerships that were subject to the unified partnership procedures contained in sec. 6221 et seq., I.R.C. 1954. R mailed a notice of deficiency to Ps in which he disallowed Ps' claimed losses from the partnerships on the grounds that the losses exceeded the amounts for which Ps were at risk under sec. 465. R's determination was based upon alleged stop loss agreements with third parties. Held: Ps' amount at risk under sec. 465 was not an item required to be determined by the partnership and, therefore, is not a "partnership item" within the meaning of sec. 6231(a)(3). R's notice of deficiency making the "at risk" disallowance at the partner level was appropriate.

P was the only shareholder of FA, an S corporation. FA timely filed its return for the taxable year ended Nov. 30, 1985. Held: The notice of deficiency was timely. Under secs. 6037(a) and 6501(a), I.R.C. 1954, assessment of P's income tax for 1985 is not barred by the statute of limitations. Kelley v. Commissioner, 877 F.2d 756 (9th Cir. 1989), reversing and remanding T.C. Memo. 1986-405, not followed herein on this issue.

R redetermined P's estate tax liability by increasing the adjusted taxable gifts under sec. 2001(b)(1)(B), I.R.C., when the time for redetermining the value of… Held: sec. 2504(c) does not bar R from revaluing prior taxable gifts when calculating adjusted taxable gifts for estate tax purposes pursuant to sec. 2001(b)(1)(B). Held, further, the taxpayer is entitled to have the gift taxes payable under sec. 2001(b)(2), I.R.C., adjusted in conformity with any increase in value.

Ps sold land to their sons on June 29, 1981, pursuant to an installment sale agreement, with interest on the remaining balance to be paid at the interest rate set by sec. 1.483-1(d)(1)(ii)(B), Income Tax Regs. R used a higher market interest rate to discount the installment payments in determining the value of the gift on the sale. Held, R used the proper interest rate to discount the installment payments as sec. 483 does not apply to gift tax valuation. Ballard v. Commissioner, 854 F.2d 185 (7th Cir. 1988), revg. T.C. Memo. 1987-128, not followed on this issue.

This case was submitted for the limited purpose of deciding whether petitioner husband qualified as a commodities dealer in the trading of commodities as provided in sec. 108(b) of the Deficit… Held: petitioner husband's status as an investor and associated person does not qualify him as a commodities dealer in the trading of commodities for purposes of sec. 108 of the Deficit Reduction Act of 1984, as amended by the Tax Reform Act of 1986.

Manufacturer of alcoholic beverages paid Federal excise tax on distilled spirits sold domestically and utilized DISC as commission agent for export sales of its liqueur product. Held: for purposes of computing the overall profit percentage limitation (OPPL) under sec. 1.994-2, Income Tax Regs., gross receipts from domestic sales includes the total sales proceeds received from customers, without reduction for manufacturer's payment of excise tax on distilled spirits.