Volume 95 — Tax Court Reports

This case is controlled by the S corporation audit and litigation procedures contained in section 6241 et seq. R filed a motion for entry of decision pursuant to Rule 248(b). The proposed decision purports to decide the amount of each shareholder's basis in the subch. S corporation. Held: The amount of a shareholder's basis in an S corporation is not a "subchapter S item" that can be decided at the corporate level pursuant to section 6241 et seq. Therefore, we lack jurisdiction to decide the amount of a shareholder's basis.

G was a worldwide grain merchant whose business consisted primarily of purchasing grain (soybeans, corn, and wheat); cleaning, drying, aerating, fumigating, and blending this grain; and then selling… Held: G was not engaged in the production or growing of export property within the meaning of sec. 993(d)(1)(C), I.R.C., and, therefore, the loans by E to G did not qualify as producer's loans within the meaning of sec. 993(d).

S, a domestic building and loan association, filed consolidated returns on a calendar year basis with its affiliated group for all taxable periods from 1971 through Dec. 23, 1982. Held: because the filing of a separate short-period return was required by the consolidated return regulations, and because S allocated interest expense in compliance with those regulations, sec. 461(e) is inapplicable.

WROG and 1983 WROG are limited partnerships. The tax matters partner, P, disappeared in 1985 when a warrant was issued for his arrest. Held: The petitions filed in the Tax Court in response to the FPAA's were not filed in violation of the automatic stay of sec. 362(a) of the Bankruptcy Code since the bankruptcy cases involve the partnership, and the TEFRA partnership proceedings relate to the tax liability of the individual partners. 2.

Respondent determined a deficiency in which he disallowed a special allocation of partnership intangible drilling costs. Held: The form was properly executed and is binding on both petitioners; 2. Respondent is not estopped from asserting the deficiency; 3. The special allocation did not have substantial economic effect and is not recognized pursuant to sec. 704(b)(2), I.R.C.; and 4.

Respondent issued notices of Final S Corporation Administrative Adjustment (FSAA) for 1984 and 1985 in which he reallocated income of an S corporation from the shareholders of record to H, who is not… Held: the reallocation of a subchapter S item from shareholders of record to a taxpayer who is not a shareholder of record is not within the scope of judicial review in an S corporation proceeding.

P's claimed an investment tax credit for 1982 in respect of computer equipment purchased by P in 1982 and leased by him to a corporation wholly owned by P's. On their face the leases were for… Held: The fact that the case was submitted on the basis of a stipulated record does not change petitioners' burden of proof. The stipulated facts are to be treated in the same manner as facts found by the Court on the basis of evidence offered in the trial of a case.

Petitioners failed to timely file their Federal income tax returns for each of the years 1977 through 1983. Held: The deteriorating health of petitioner husband in these circumstances does not excuse the imposition of additions to tax under sec. 6653(a) for negligence or intentional disregard of rules or regulations. 2. Sec. 6661 additions to tax are applicable where delinquent returns are filed after contact by the Internal Revenue Service. 3.

P and his wife were the founders, controlling shareholders, and principal officers of H. P sustained serious physical injuries while in H's employment. P served a written demand upon H asking compensation for his injuries. Thereafter, based upon the advice of their respective attorneys regarding H's liability, P and H executed a settlement agreement under which H paid P $ 122,500. Held: The payment from H to P was for damages on account of personal injuries. P is entitled to exclude this amount from gross income under sec. 104(a)(2), I.R.C. 1954, and H is entitled to a deduction in this amount under sec. 162(a).

T purchased a coke-producing plant shortly after the plant had suffered a devastating fire. T made certain expenditures to remove debris from the fire and to repair the plant. Held: because no demolition occurred, sec. 1.165-3(a)(1), Income Tax Regs., is inapplicable, and T therefore correctly allocated the cost of the expenditures to its basis in the coke plant.

From 1980 through 1985, Ps borrowed money from their employer's qualified plan. Held: respondent complied with sec. 4975(h), which requires that respondent notify DOL prior to determining a sec. 4975 excise tax deficiency. Held, further, the DOL settlement does not prevent respondent from determining the sec. 4975 excise taxes against Ps.

In 1979 and 1981, 885, a limited partnership, donated parcels of land to the city of Sacramento for use as a scenic corridor and claimed charitable contribution deductions for such transfers. In 1983, the city conveyed the donated parcels back to 885. Held: 1. No charitable contribution deduction is allowable for the 1979 and 1981 conveyances because such conveyances were subject to a condition, the occurrence of which was not so remote as to be negligible. Sec. 1.170A-1(e), Income Tax Regs. Therefore, the individual petitioners, partners in 885, are not entitled to deduct as a charitable contribution their distributive share of 885's donations. 2. The individual petitioners are not liable for the additions to tax under sec. 6659, I.R.C. 1954, or increased interest under sec. 6621 (c). 3. This Court has jurisdiction of an adjustment to P's income because a tax benefit item is a partnership item under sec. 6231 (a)(3), I.R.C. 1954. 4. The reconveyance of the parcel donated in 1981 did not result in income to P for 1983. However, as to the reconveyance of the parcel donated in 1979, the tax benefit rule requires the fair market value of such parcel to be included in income up to the amount of the charitable contribution deduction previously taken. The fair market value of such parcel at the time of reconveyance is determined.

P attempted to elect special use valuation, under sec. 2032A, I.R.C. 1954, on its estate tax return (Form 706) timely filed on July 16, 1985. Although the face of Form 706 referred to required agreements described in the Form 706 instructions, P did not attach a notice of election or a recapture agreement to the return. Held, P did not substantially comply with the applicable regulations within the meaning of sec. 2032A(d)(3), I.R.C. 1954. Held, further, by failing to attach a recapture agreement, P did not provide substantially all the required information within the meaning of sec. 1421, Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2716; Prussner v. United States, 896 F.2d 218 (7th Cir. 1990), not followed on this issue.

Petitioner M acquired an insolvent bank through FDIC bidding processes and thereafter disposed of assets of the acquired bank and deducted losses realized in such sales on a consolidated return. Held: the losses incurred by M were incurred in rehabilitating the acquired bank and are not built-in deductions within the meaning of sec. 1.1502-15(a)(2), Income Tax Regs.

In partnership administrative proceedings, R made adjustments to ordinary income of two partnerships in which P was one of two general partners. Held: although guaranteed payments cannot be reallocated in this proceeding, P's claimed overpayment was attributable to affected items requiring factual determinations at the partner level. The Court has jurisdiction to determine an overpayment under sec. 6512(b).

After the partnership level proceeding was completed, R issued a notice of deficiency to Ps determining that Ps were liable for additional interest under I.R.C. sec. 6621(c) and additions to tax under I.R.C. secs. 6651(a)(1), 6653(a)(1), 6653(a)(2) and 6659. Ps timely filed a petition for redetermination of R's determinations. R filed a motion to dismiss for lack of jurisdiction as to I.R.C. sec. 6621(c). Held, this Court does not have jurisdiction under I.R.C. section 6230(a)(2)(A)(i) to redetermine I.R.C. sec. 6621(c) interest because I.R.C. sec. 6621(c) interest is not a "deficiency" attributable to an affected item requiring partner level determinations. Held, further, this Court does not have jurisdiction under I.R.C. sec. 6621(c)(4) to determine whether sec. I.R.C. 6621(c) interest applies because the deficiency before the Court is not a substantial underpayment attributable to tax-motivated transactions.

R made a jeopardy assessment against P. At or about the same time R seized P's boat, advertised it for sale, and provided P the opportunity to post bond to avoid the sale of P's boat. Held: the term perishable is interpreted and, in the context of this case, P's boat is not perishable so as to permit R to sell the boat as an exception to the normal prohibition on sale of property during the pendency of a proceeding in this Court pursuant to a jeopardy assessment.

Amesbury is a limited partnership. Ballard Equity and Bowen Ballard have identical profit interests as the sole general partners of Amesbury. Held: Since Amesbury did not designate a tax matters partner and since the two general partners (Ballard Equity and Bowen Ballard) had identical profits interests, Bowen Ballard, the general partner whose name would first appear in an alphabetical listing, is the tax matters partner.

Sente Partnership (S) was a limited partner of D and E, two separate and distinct partnerships. Held: the partnership items of D and E must be determined in separate partnership proceedings relating to those entities and not in the proceeding relating to S, a passthrough partner of D and E. Sec. 6221.

R mailed notices of transferee liability to Ps determining that they were liable for a deficiency in the transferor's 1982 income tax. Held: A deficiency within the meaning of sec. 6211(a), I.R.C. 1954, is calculated by reference to the amount of tax shown on the return if a return showing an amount of tax has been filed. A determination of a deficiency within the meaning of sec. 6212(a), I.R.C. 1954, includes determining whether a return was filed.

P carried back 1981 and 1980 NOL deductions to 1979. The assessment period for 1981 expired on June 30, 1985. The assessment period for 1979 was extended by agreement to June 30, 1987. Held: 1979 is an open year and respondent is not time barred from assessing a deficiency in that year even though it resulted from the disallowance of an NOL carryback from 1981, an otherwise closed year. Sec. 6501(h) is not applicable here.

On June 12, 1975, D executed a trust agreement and made an inter vivos transfer of certain property to the trust. On Mar. 6, 1978, D amended the trust agreement in its entirety. Held: the formula in the trust is not the type of formula contemplated by sec. 403(e)(3), Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 305 (sec. 403(e)(3)). Held, further: Sec. 403(e)(3) does not preclude P from qualifying for an unlimited marital deduction under I.R.C. sec. 2056.

AG, a Swiss corporation and a wholly owned subsidiary of petitioner, owned 100 percent of E, a corporation organized in Spain. Spanish law effectively precluded E from making royalty payments to AG for the use of petitioner's intangible property. Respondent determined that an allocation of income from E to AG pursuant to section 482 was necessary to clearly reflect income. The allocation in turn increased petitioner's subpart F income under section 951. Held, because Spanish law effectively precluded E from paying AG, effectively blocking AG's receipt of the income, there was no impermissible shifting of income and the section 482 allocation was unwarranted. Commissioner v. First Security Bank of Utah, 405 U.S. 394 (1972), and Salyersville National Bank v. United States, 613 F.2d 650 (6th Cir. 1980), are controlling.

By formal interrogatories, Ps requested of R certain detailed information regarding the persons employed, their compensation, and other expenses incurred by R in preparing the instant cases, in which additions to tax under sec. 6653(b), I.R.C., are proposed, as well as in certain prior criminal cases involving these petitioners. R moved the Court for a protective order. Held, the requested interrogatories are oppressive and burdensome to R, and would produce no facts which are relevant to any issues in the present case. United States v. Halper, 490 U.S. 435 (1989), interpreted.

DA, a Liberian corporation, is a controlled foreign corporation under sec. 957(a), I.R.C. 1954. Held: T is not a branch or similar establishment for purposes of determining the foreign base company sales income of DA. Sec. 954(d)(2), I.R.C.

P contributed three third-party promissory notes to his defined benefit pension plan in order to meet P's funding obligation as calculated by his actuary. Held: P's contribution of the third-party promissory notes to the plan was not a sale or exchange or a prohibited transaction within the meaning of sec. 4975(c), I.R.C., and is not subject to the excise tax imposed by sec. 4975(a) and (b).

Petitioner was engaged in oil and gas exploration and production and was liable for windfall profit tax. Held, in calculating the net income limitation on windfall profit under sec. 4988, I.R.C., it was proper for petitioner to exclude from "taxable income from the property" a portion of lease bonuses which it paid and it was also proper for petitioner to capitalize a like amount in calculating "cost depletion" solely for purposes of the net income limitation. Woods Investment Co. v. Commissioner, 85 T.C. 274 (1985), followed.

Held: Respondent notified the partnership's tax matters partner and notice partners of the beginning of an administrative proceeding for the years 1982 and 1983 on Nov. 29, 1984. Held: Respondent notified the partnership's tax matters partner and notice partners of the beginning of an administrative proceeding for the years 1982 and 1983 on Nov. 29, 1984. Thereafter, the partnership filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Act.

Petitioners had a $ 781,927 net operating loss (NOL) in 1976. Held: the mitigation provisions of sections 1311-1314 are applicable to lift the bar of the statute of limitations to permit assessment of deficiency based upon the reduction of the $ 460,382 NOL deduction for 1980 to the correct amount of $ 63,081.

P, an accrual basis taxpayer, established nonqualified deferred compensation arrangements (DCA's) for eight key executives and one outside member of its board of directors (DCA participants). Held: the amount designated as interest under the DCA's is not interest deductible under sec. 163, I.R.C. 1954, but instead represents additional deferred compensation for personal services deductible only as permitted by sec. 404(a)(5) or (d).

Respondent recomputed petitioners' tax liability for a prior year, for which an assessment is barred by the statute of limitations, and, because of an increase in the tax so recomputed, reduced the… Held: sec. 6214(b) imposes no jurisdictional bar to the computation of petitioners' pre-credit tax liability for a prior year in order to determine the amount of investment credit used in that year and, thus, unavailable for carryover to the year in issue.

P attempted to elect special use valuation under sec. 2032A, I.R.C. 1954, on its estate tax return timely filed in January 1985. Held: P's failure to obtain a written appraisal prior to filing the return precludes special use valuation. Sec. 20.2032A-8(a)(3)(ix), Estate Tax Regs.; sec. 2032A(d)(3), I.R.C. 1954; sec. 1421, Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2716.

The Court filed its opinion in this case at T.C. Memo. 1990-141. Ps were limited partners in certain partnerships involved in computer software development. Held: The partnerships were not engaged in the activity of leasing sec. 1245 property, under sec. 465(c)(1)(C). The partnerships were engaged in an activity covered by sec. 465(c)(3)(A).

MSA is a limited partnership. C, the accountant for MSA, was elected the managing general partner of MSA in 1985. Held: C was not and is not a partner in MSA and, therefore, could not qualify under the statute as TMP. 1983 Western Reserve Oil & Gas Co. v. Commissioner, 95 T.C. 35 (1990). Held, further: That the petition filed does not conform with sec. 6226(a), I.R.C. or Rule 240(c)(1), Tax Court Rules of Practice and Procedure.

T, a retired farmer, leased his farm to his son Paul, who conducted a farming business thereon. In June 1984, T guaranteed Paul's indebtedness to a bank incurred in that business. The son did not give T either cash or property as consideration for the guarantee. In November and December 1984, T paid $ 141,000 to the bank pursuant to the guarantee. As recognized in Putnam v. Commissioner, 352 U.S. 82, 84 (1956), the son's debt to the bank became a debt to T upon T's payment under the guarantee. T and his wife filed a joint return for 1984, in which they claimed a $ 141,000 short-term capital loss deduction on account of the worthlessness of the son's debt to T. 1. Held: Sec. 1.166-9(e), Income Tax Regs., precludes the deduction since T received neither cash nor property as consideration for the guarantee from his son. A son is included among those members of the taxpayer's family or household listed in sec. 152(a) of the Internal Revenue Code, which was made applicable by the above regulation. The rent paid by the son was solely for use of the farm and not for the guarantee. Held, further , the deduction is in any event unavailable since the loss was not incurred either in T's trade or business or in a transaction entered into for profit by T. 2. Held, further, additions to tax under sec. 6653(a) of the Code sustained for failure of proof, and additions to tax under sec. 6661 sustained because taxpayers failed to show that there was any "substantial authority" for the claimed deduction (sec. 6661(b)(2)(B)(i)) or that the relevant facts were disclosed in a statement attached to the return or in the return itself (sec. 6661(b)(2)(B)(ii)).

Petitioner purchased cable television systems and amortized the amount attributable to the franchise cost under sec. 1253(d)(2), I.R.C.Held, a cable television franchise is properly included in the… Held: a cable television franchise is properly included in the sec. 1253(b)(1) definition of franchise; thus the cost of the cable television franchise properly established by petitioner is amortizable.

Held, Dr. Gerald L. Wallace (petitioner) was a limited entrepreneur who did not actively participate in his cattle feeding business and therefore was entitled under sec. 464 to deduct only the cost… Held: Dr. Gerald L. Wallace (petitioner) was a limited entrepreneur who did not actively participate in his cattle feeding business and therefore was entitled under sec. 464 to deduct only the cost of feed purchased which was actually consumed by the cattle during the year.

R determined deficiencies in and additions to Ps' Federal income taxes attributable to nonpartnership items for 1981 and 1982. Ps timely filed a petition for redetermination of R's deficiency determinations and claimed therein that they had made an overpayment of tax attributable to partnership items for 1982. R moved to dismiss for lack of jurisdiction as to Ps' claim for an overpayment attributable to the partnership items. Held, this Court does not have jurisdiction to determine an overpayment attributable to partnership items in a proceeding for redetermination of deficiencies attributable to nonpartnership items. Maxwell v. Commissioner, 87 T.C. 783 (1986).

P elected the alternate valuation date under sec. 2032(a)(1), I.R.C., for estate tax purposes. The estate included various interests in oil and gas properties. Held: application of the risk reduction factor to the daily production was not justified.

VI is a wholly owned Swiss subsidiary of VE, a California corporation. VI is a controlled foreign corporation (CFC) within the meaning of sec. 957(a). Held: the wholly owned subsidiary VO is not a branch or similar establishment of VI, a CFC, within the meaning of sec. 954(d)(2). Ashland Oil, Inc. v. Commissioner, 95 T.C. 348 (1990), followed. Held, further, we do not address whether sec. 954(d)(1) by itself applies because it was not raised by the parties.

Ps were present in the Commonwealth of the Northern Mariana Islands (CNMI) in excess of 183 days in 1985. Held: the issue of whether the substantial presence test or a facts and circumstances test provides the standard for determining whether Ps were residents of CNMI in 1985 is appropriate for summary judgment. Held, further, Ps' residency in CNMI is to be determined pursuant to a facts and circumstances test.

R issued an FPAA to a partnership that had not formally designated a tax matters partner. Held: the FPAA was validly issued to the Tax Matters Partner. Held, further, R was not properly notified of the change in the partnership's address. Sec. 301.6223(c)-1T(b), Temporary Proced. & Admin. Regs., applied. Held, further, R's motion to dismiss for lack of jurisdiction granted.

R determined that Ps were liable for late filing additions to tax under I.R.C. sec. 6651(a)(1) for 1977 through 1979 and increased interest under I.R.C. sec. 6621(c) for… Held: this Court does not have jurisdiction to determine whether Ps are liable for I.R.C. sec. 6621(c) interest because late filing additions to tax under I.R.C. sec. 6651(a)(1) are not deficiencies which are substantial underpayments attributable to tax-motivated transactions under I.R.C. sec. 6621(c)(4).

Before trial Ps moved to dismiss on the ground that the statutory notices of deficiency sent to them were invalid, because neither respondent nor the District Director had authority to issue them… Held: Treasury Department orders need not be published in accordance with the Federal Register Act or the Administrative Procedure Act to be effective. Held, further, sec. 301.7805-1, Proced. & Admin. Regs., is excepted out of the requirements of the Administrative Procedure Act.

Petitioner husband, a U.S. citizen, was employed in the United States by Intelsat, an international organization which was not subject to Federal, State, or… Held: It was the intent of Congress to tax petitioner's total compensation from Intelsat as if he were an employee subject to FICA tax. As such, all of his compensation from his employer, including the remuneration for taxes, is includable as net earnings from self-employment. Held, further, additions to tax determined.

Ps placed stock of their closely held corporation in trusts for a period of years and retained the right to the income for the duration of the trusts. Held: table B, sec. 25.2512-5(f), Gift Tax Regs., should be used to determine the value of Ps' gifts.

P, an individual, filed for bankruptcy under 11 U.S.C. ch. 13 (1982 edition as amended). The matter was subsequently converted to ch. 11. Held: Confirmation of the ch. 11 plan serves either to discharge or deny discharge to P within the meaning of 11 U.S.C sec. 362(c), so that the automatic stay under 11 U.S.C. sec. 362(a)(8) is terminated. Wahlstrom v. Commissioner, 92 T.C. 703 (1989), on appeal (9th Cir., June 29, 1989), distinguished as involving a ch. 13 proceeding.