Volume 96 — Tax Court Reports

On motion by Ps to reduce the amount of a surety bond filed in respect of the appeal of our decisions entered in accordance with our opinion in… Held: This Court has jurisdiction to reduce the amount of the bond even though decisions in the above-docketed cases have become final. 2. The surety bond is reduced by payments made subsequent to the filing of the bond and in respect of a refund due petitioner W. Page Wodell but not in respect of other amounts claimed by Ps. 3.

P, a debtor in bankruptcy, executed a settlement agreement with the trustee in bankruptcy waiving his right to a discharge. The bankruptcy court approved the terms of the settlement. Thereafter, R issued statutory notices of deficiency to P for taxable years 1986 and 1987 and to P's wife for taxable year 1986. P and his wife filed separate petitions for redetermination. P subsequently filed a motion to stay proceedings. Held, P's waiver of his right to a discharge served as a denial of a discharge which terminated the automatic stay of 11 U.S.C. sec. 362(a)(8), upon approval by the bankruptcy court. Held, further, the Court has jurisdiction over P because the automatic stay was not in effect on the date R issued the statutory notices to P and/or on the date P filed a timely petition for redetermination.

P1 is an affiliated group of corporations that filed consolidated returns for the years at issue. P2 is a third-tier, wholly owned subsidiary of the parent of the P1 group. Held: all the transactions at issue constituted insurance for purposes of the Federal income tax.

H, the common parent of an affiliated group of corporations filing consolidated income tax returns, is a holding company which engages, through certain of its domestic and foreign subsidiaries, in… Held: H's affiliated group is entitled to the claimed deductions for insurance premiums paid by its domestic subsidiaries to R. Held, further, amounts paid by H's foreign subsidiaries to R are not taxable to H as constructive dividends.

P is the parent of three wholly owned insurance company subsidiaries, S1, S2, and S3. Held: the arrangement between P and S1 is insurance and will not be recharacterized and treated as self-insurance. Held, further, S2 and S3 did not incur a loss undersec. 832(b)(5) until the insured lender acquired title to the mortgaged property.

P elected to value a ranch owned by decedent at the time of his death under the special use valuation provision of sec. 2032A of the I.R.C. of 1954, as amended. Held: The election of special use valuation was valid. It complied with all the requirements of sec. 2032A(d)(3) of the Internal Revenue Code of 1954, as amended, sec. 20.2032A-8, Estate Tax Regs., and sec. 1421 of the Tax Reform Act of 1986.

P and R entered into a Form 872-A agreement to extend the period for assessment. The agreement terminated upon R's mailing a notice of deficiency or upon a final assessment being made. Held: this Court will no longer follow Roszkos v. Commissioner, 87 T.C. 1255 (1986), but will instead follow the rationale of the Courts of Appeals for the Third, Sixth, and Ninth Circuits that a misaddressed notice of deficiency does not terminate the Form 872-A agreement herein.

Decedent's will provided for a charitable remainder interest that did not qualify for an estate tax deduction under sec. 2055(e)(2)(A), I.R.C. 1954. Held: Where the only reason for termination or modification of an otherwise nonqualifying split-interest charitable bequest is circumvention of the requirements of sec. 2055(e)(2)(A), I.R.C. 1954, an estate tax deduction will not be allowed with respect to the direct payment to the charitable organization.

Petitioner Charles Dodge engaged in an insurance speculation scheme under which he purchased an excessive number of hospital indemnification policies. Held: Petitioners have not established that the proceeds received under the hospital indemnification policies related to actual personal injuries or sickness. Accordingly, the proceeds are not excludable under sec. 104(a)(3), I.R.C. 1954, as amended.

Petitioner is a physician. His residence and business were searched by State officers pursuant to a State warrant on Aug. 28, 1985, following a warrantless inspection of his business by State officers on Aug. 21, 1985. Currency, precious stones, large amounts of prescription drugs, and records were seized from the residence. Large amounts of prescription drugs and records containing dispensing and income information were seized from the business. Several hours after the search began on Aug. 28, 1985, the State officers called in respondent's agents. Respondent's agents assisted in counting currency and inventorying precious stones and prescription drugs; when asked, they indicated to the State officers whether certain records were useful to show disposition of prescription drugs. Certain records which contain both dispensing and income information on the same sheets are the predominant evidence that respondent relied on in determining the deficiencies under the notice of deficiency. Held: Respondent's agents' activities did not constitute "Federal participation" under United States v. Janis, 428 U.S. 433, 455 n. 31 (1976); even if petitioner's Fourth Amendment rights were violated, then the violations were intersovereign, not intrasovereign; petitioner's motion to suppress the seized evidence is denied.

While under examination, petitioner applied, pursuant to Rev. Proc. 80-51, for permission to change a method of accounting and asked for permission to spread the adjustment required under sec. 481(a)… Held: respondent properly exercised his discretion under sec. 446(b) in changing petitioner's method of accounting. Held, further, respondent's refusal to consider petitioner's application is reviewable for abuse of discretion.

During 1977 and 1978, petitioner and its subsidiaries manufactured and sold numerous products, including the constant speed drive (CSD), an extremely complex avionic device used to drive an airplane… Held: respondent abused his discretion under sec. 482, I.R.C. 1954, when he determined that SunPac acted as a subcontractor of petitioner.

P was a 48-percent shareholder and two other U.S. corporations were each 10-percent shareholders in TVCL, a Saudi Arabian corporation, the remaining shareholders being Saudi Arabian nationals. Held: the term accumulated profits in the denominator of the fraction utilized to determine the indirect foreign tax credit under sec. 902, I.R.C., includes only that portion of such profits of TVCL allocable to the U.S. shareholders and not the entire accumulated profits of TVCL.

S, a domestic bank, and its related subsidiaries (consolidated affiliates) purchased shares in F, a foreign bank. Held: that sec. 902 and the consolidated return regulations, considered separately or in conjunction with each other, do not permit S and its affiliates to aggregate shareholdings to meet the 10-percent requirement of sec. 902. Held, further, that S's subsidiaries were not agents within the meaning of Commissioner v. Bollinger, supra.

A corporation constructed a 15-unit condominium building in 1979, sold one unit in 1981, and rented other units until 1984. Held: the carrying charges included in the net operating losses incurred while the corporation was in subch.

Held, with respect to the summonses issued both before and after petitioner filed her petition to this Court, petitioner's motion for a protective order will be denied. Held: with respect to the summonses issued both before and after petitioner filed her petition to this Court, petitioner's motion for a protective order will be denied.

P, a life insurance company, received prepayment premiums upon the early retirement of mortgage loans made to corporate borrowers after 1954. Held: The prepayment premiums are to be treated as long-term capital gain and, as such, are excludable from P's gross investment income under sec. 804(b). Prudential Insurance Co. of America v. Commissioner, 90 T.C. 36 (1988), revd. 882 F.2d 832 (3d Cir. 1989), will no longer be followed.

P, a life insurance company, issued group term life insurance policies that provided extended life insurance coverage without further payment of premiums for employees who became totally disabled. Held: The reserve qualifies as a life insurance reserve under sec. 801(b). P utilized an annual premium assumption for its group term life insurance policies, resulting in the inclusion of net deferred and uncollected premiums in reserves, assets, and premium income.

Ps' case was dismissed pursuant to Rules 104(c)(3) and 123(b), Tax Court Rules of Practice and Procedure, for failure to comply with a discovery order and failure to prosecute. Held: monetary sanctions against counsel under Rule 104(c)(4) are appropriate in light of Ps' failure to comply with a discovery order pertaining to Rule 72.

Ps were members of a partnership that conducted an over-the-air subscription television operation. The partnership transmitted an over-the-air scrambled signal from a broadcast studio. Held: whether security deposits are taxable income turns on the nature of the rights and obligations that the taxpayer assumed when the deposits were made. Commissioner v. Indianapolis Power & Light Co., supra at 593.

Ps owned 100 percent of JWC, a partnership. JWC and M formed a partnership, V, wherein JWC and M had respective ownership interests of 25 percent and 75 percent. Held: The transaction was in substance a sale by JWC of a 75-percent interest in the property to M. Otey v. Commissioner, 70 T.C. 312 (1978), affd.

The Commissioner determined deficiencies in petitioner's windfall profit tax for calendar years 1981 and 1982. Held: the notice of deficiency determining deficiencies in windfall profit tax upon a calendar year basis is valid notwithstanding the fact that petitioner filed its income tax return on a fiscal year basis. Century Data Systems, Inc. v. Commissioner, 80 T.C. 529 (1983), distinguished.

PM is the common parent of an affiliated group of corporations that filed consolidated returns for the years in issue. Held: PM correctly valued S's intangible assets pursuant to sec. 334(b)(2) and the regulations thereunder. Held, further, the refined upward adjustment made to the adjusted basis of the S stock pursuant to sec. 1.334-1(c)(4)(v), Income Tax Regs., is correct.

P was a trustee of the Teamsters' Pension Fund. P was indicted for conspiring to bribe a U.S. Senator. Held: P is subject to the excise tax imposed under sec. 4975(a), I.R.C. 1954.

P, a manufacturer of computer products, utilized a domestic international sales corporation (DISC) as a commission agent for export sales of its products. Held: combined taxable income (CTI) of P and its DISC computed under full cost accounting must be reduced by the full amount of discount incurred on the transfer of export accounts receivable from P to its DISC.

In 1971, D created a revocable trust. In the absence of his incapacity, D was the sole permissible beneficiary of the income and principal of the trust during his lifetime. Held: gift transfers from the revocable trust effected in 1984, although within 3 years of D's death, are not included in D's gross estate pursuant to I.R.C. secs. 2035(d)(2) and 2038(a)(1).

P, an exempt organization under sec. 501(c)(3), I.R.C., that was established pursuant to interlocal agreements with 11 Texas public school districts to formulate, develop, and administer programs on… Held: that P is not a political subdivision because it is not authorized to exercise any sovereign power.

This case was submitted for the limited purpose of deciding whether the partnership must recapture a portion of the rehabilitation tax credit and reduce its basis in the underlying rehabilitated property upon its donation of a historical facade easement in the same year it claimed the credit under sec. 48. The partnership was formed to acquire, rehabilitate, and operate commercial property. The property consisted of a three-story building situated in a historic district, and was designated a certified historic structure within the meaning of sec. 48(g)(3) and sec. 1.48-12(d), Income Tax Regs. The partnership "substantially rehabilitated" the building within the meaning of sec. 48(g)(1)(A)(i) in 1984. In late 1984, the partnership deeded a facade and conservation easement with respect to the building to a charitable corporation organized to preserve and protect the architectural heritage of the State of Georgia. The easement constituted a "qualified conservation contribution" as defined in sec. 170(h)(1) in 1984. In Rev. Rul. 89-90, 1989-2 C.B. 3, respondent ruled that the donation of a qualified conservation contribution constitutes a partial disposition of the underlying real property under sec. 47(a), thus triggering recapture of a portion of the rehabilitation tax credit. Held, petitioner's grant of a historical facade easement constitutes a disposition for purposes of sec. 47. Petitioner must recapture a portion of the rehabilitation tax credit and reduce its basis in the underlying property upon the donation of a facade easement.

Ps and R executed a settlement agreement resolving partnership items pertaining to the taxable years 1983 and 1984. Subsequently, R issued notices of deficiency to Ps determining additions to tax under I.R.C. sec. 6659 for the taxable years 1983 and 1984 and increased interest pursuant to I.R.C. sec. 6621(c). Ps filed timely petitions for redetermination disputing the additions to tax, the increased interest, and the tax attributable to the settlement of partnership items. R assessed both the tax attributable to the settlement of partnership items and increased interest under I.R.C. sec. 6621(c). R then initiated collection efforts with respect to these amounts. Ps filed motions to restrain assessment and collection. Held, the Court lacks jurisdiction to redetermine Ps' liability for the tax attributable to a settlement of partnership items. I.R.C. sec. 6230(a). Held, further, the Court lacks jurisdiction to redetermine Ps' liability for increased interest under I.R.C. sec. 6621(c). White v. Commissioner, 95 T.C. 209 (1990), followed. Held, further, because the Court lacks jurisdiction to redetermine Ps' liability with respect to both the tax attributable to a settlement of partnership items and increased interest under I.R.C. sec. 6621(c), the Court lacks jurisdiction to enjoin the assessment and collection of such amounts under I.R.C. sec. 6213(a).

In 1981, P bought and sold options to buy stock, realizing a large profit which was reported for 1981 as short-term capital gain. Held: petitioners are entitled to a credit under sec. 1341(a)(5), I.R.C. 1954, for 1984 in an amount equal to the decrease in tax for 1981 attributable to the removal of short-term capital gain of $ 54,400 from 1981 gross income.

The Hawaii Housing Authority designated P-lessee's lot for acquisition and filed a complaint in eminent domain against L-lessor to acquire the lot. In settlement of that action, P paid to L the value of the lot as of the date of designation plus blight of summons damages at the rate of 5 percent per annum on that amount from the date of valuation to the date of closing. Held, the 5-percent additional amount was not paid on indebtedness within the meaning of I.R.C. sec. 163(a) and is not deductible as interest under that section.

Decedent, a cotrustee of a family trust established by his mother, was a beneficiary of the trust under a provision that allowed an invasion of the trust principal as required for [his] continued… Held: decedent possessed at his death a general power of appointment over the principal of the trust within the meaning of sec. 2041(a)(2), so that the value of the trust principal is includable in the value of decedent's gross estate.

As part of a comprehensive estate plan, D and his wife, W, established a revocable inter vivos trust. Held: Due to the accumulation of income provision, W did not have a qualifying income interest for life within the meaning of sec. 2056(b)(7), I.R.C. 1954, as amended, in the property which passed from D to the marital deduction trust.

R issued a notice of final S corporation administrative adjustment (FSAA) to E for its taxable year ending Dec. 31, 1984. E, an S corporation, had four shareholders during 1984. Held: prior to the effective date of sec. 301.6241-1T(c), Temporary Proced. & Admin. Regs., no S corporations are exempt from the unified audit and litigation procedures.

A partner's share of a partnership's loss is deductible in the year of loss to the extent of his adjusted basis in the partnership, and such deduction is not limited under sec. 165 by the possibility of recovery by the partner in a suit brought against remaining partners for mismanagement and fraud.

Held: With respect to 1979 and 1980, the filing of partnership information returns does not affect the statute of limitations relating to respondent's authority to determine deficiencies against… Held: With respect to 1979 and 1980, the filing of partnership information returns does not affect the statute of limitations relating to respondent's authority to determine deficiencies against individual partners of a partnership.

P and her former husband, H, filed a joint income tax return for 1985. Held: assessment of the 1985 tax is not time barred. Held, further, P is not entitled to innocent spouse relief under sec. 6013(e), I.R.C. 1954, as amended.

Ps were key management employees of K. K created a deferred compensation plan (old plan) for key management employees, in which Ps participated. Held: Ps were not in constructive receipt of the new plan benefits upon conversion to new plan or termination of their employment with K.

P petitioned this Court as tax matters person (TMP) of Games, an S corporation, and moved for summary judgment on the ground that the notice of final S corporation administrative adjustment (FSAA)… Held: The consent agreement to extend the limitations period as to all shareholders is valid notwithstanding that a different shareholder was subsequently authorized to file the petition herein as TMP. P's motion is denied.

T is a tax-exempt organization pursuant to secs. 401(a) and 501(a). Held: although the interest received on the old certificates is excludable from unrelated business taxable income (sec. 512(a)(1) and (b)(1)) subject to the tax imposed by sec. 511(a)(1) and (2), the net amount of interest received on the new certificates is income from debt-financed property (sec. 514(a)) and is not similarly excludable…

P1 and P2 each owned 50 percent of P3, a C corporation, and served as its president and secretary/treasurer, respectively. P3 was engaged in the business of printing and lithography. P1 and P2 ran P3's day-to-day operations and maintained its books and records. P1 and P2 opened secret bank accounts and deposited a portion of P3's gross receipts into the accounts. P1 and P2 withdrew funds from the secret bank accounts. P1 and P2 did not maintain any books or records reflecting transactions made with respect to the secret bank accounts. P3 did not report any of the gross receipts deposited into the secret bank accounts on its corporate income tax returns for the years in issue. P1 and P2 did not report any of the funds withdrawn from the secret bank accounts on their individual income tax returns for the years in issue. Held, P1, P2, and P3 understated the taxable income required to be shown on their income tax returns for the years in issue. Held, further, P1, P2, and P3 are liable for additions to tax for fraud under I.R.C. sec. 6653(b) for the years in issue. Held, further, P3 is liable for an addition to tax underI.R.C. sec. 6661 for 1982. Held, further, the statute of limitations does not bar assessment and collection of the deficiencies in and additions to tax due from P1, P2, and P3. Held, further, the spouses of P1 and P2 are not entitled to relief from any tax liability under the innocent spouse provisions of I.R.C. sec. 6013(e) for the years in issue. Held, further, R's use of a special agent who participated in the grand jury investigation of P1 and P2 to assist him in this case did not violate rule 6(e), Federal Rules of Criminal Procedure, or give R an "unfair discovery advantage" because the special agent did not disclose information about matters occurring before the grand jury.

In 1985, Ps filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. Held: this Court is without jurisdiction over the petition filed by Ps because the automatic stay imposed by 11 U.S.C. sec. 362(a)(8) proscribes the commencement or continuation of proceedings in this Court against or concerning debtors in bankruptcy whether the deficiency in dispute may be characterized as a prepetition or postpetition…

P manufactured and sold games and game-related products. In developing the games, P conducted research on the various topics which formed the basis of the games. Held: The sec. 44F credit only applies to research that is scientific or technological in nature. Research and game development conducted by P is not scientific or technological in nature and therefore does not qualify for the sec. 44F, I.R.C. 1954, credit.