Volume 97 — Tax Court Reports

R disallowed deductions Ps claimed with respect to a partnership on their Federal tax return for the taxable year 1981. Held: this Court lacks jurisdiction to redetermine Ps' liability for increased interest pursuant to I.R.C. section 6621(c). White v. Commissioner, 95 T.C. 209 (1990). Held further, the closing agreement in question is only final as to matters agreed upon therein. I.R.C. section 7121(b).

Ps contend that R's criminal investigators, after uncovering sufficient information from which a criminal case could have been opened, instead referred the case for civil examination. Ps further contend that R's civil examiner knowingly used the civil examination process to obtain additional evidence for purposes of supplying it to R's criminal investigators for prosecution in violation of P's Fourth Amendment rights. Held, even if R's agents did violate P's constitutional rights, in the setting of this civil case, the exclusionary rule will not be employed.

P is an affiliated group of corporations that filed consolidated returns for the years at issue. Held: the income from the LNG sales was derived partly from sources within and partly from sources without the United States. Sec. 863(b)(2), I.R.C. 1954, applied; sec. 1.863-1(b), Income Tax Regs., invalidated.

When petitioner (H) was divorced from his former wife (W), in 1976, H was a fully vested participant in his employer's tax-qualified profit-sharing plan. The divorce decree ordered H to pay $ 75,000 to W, about half of the value of H's interest in the plan at that time. The decree ordered H to pay the $ 75,000 at the rate of $ 60 per week until (1) it was all paid, or (2) H died or retired (in which event the balance was due as a lump sum). The decree also ordered H to assign to W that portion of H's interest in the plan needed to satisfy H's obligation to W; H made the assignment. H retired in 1983, received a lump-sum distribution from the plan, and paid the remaining balance due (about $ 53,000) to W. Held: (1) H, not W, is the distributee and must include the entire 1983 plan distribution in his income. Sec. 402(a)(1), I.R.C. 1954. (2) No portion of the $ 75,000 H paid to W is excludable from H's income under sec. 72, I.R.C. 1954.

D created an irrevocable inter vivos trust to which she contributed property during each of the two years preceding her death. The value of each contribution was $ 70,000. Held: The unrestricted right of withdrawal given to each of D's grandchildren was a present interest in trust corpus. Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), revg. on this issue T.C. Memo 1966-144, followed.

In September 1989, petitioners commenced a case contesting respondent's deficiency determination for 1986. Respondent conceded that case, and a stipulated decision was entered in January 1990. In January 1991, petitioners filed this action for administrative costs under I.R.C. sec. 7430(f)(2). Respondent moved to dismiss for lack of jurisdiction on the ground that the doctrine of res judicata bars petitioners' claim for administrative costs. Held, in actions for administrative costs under sec. 7430(f)(2), the doctrine of res judicata does not affect the Court's jurisdiction. Held further, the doctrine of res judicata bars an action for administrative costs under sec. 7430(f)(2) to the extent that the recovery of such costs could have been pursued in a prior deficiency, liability, revocation, or partnership case.

After being investigated by respondent and after being indicated and pleading guilty to criminal charges for failing to file Federal income tax returns for 1980 through 1983, petitioner, in… Held: Under sec. 1.6661-2(d)(2), Income Tax Regs., in computing petitioner's liability for additions to tax under sec. 6661, I.R.C. 1954, amounts of tax shown on petitioner's delinquent tax returns are to be ignored.

R issued a notice of final S corporation administrative adjustment (FSAA) to S Corp for its taxable year ended September 30, 1986, disallowing a deduction claimed with respect to contracted services. Held: the case is dismissed for lack of prosecution. Held further, a penalty of $ 1,000 is imposed under I.R.C. sec. 6673. Held further, the penalty is imposed on VF, as tax matters person, rather than S Corp or all the shareholders of S Corp.

P purchased the assets of M and T in separate transactions, assigning a portion of the purchase price to inventory acquired from M and T. The value assigned to the purchased inventory was less than… Held: R's determination that inventory purchased in the acquisitions of M and T should be separated from raw materials purchased or goods produced subsequent to such acquisitions constituted a change in method of accounting to which section 481 applied.

P, an airline pilot, sued his former employer under the Age Discrimination in Employment Act of 1967 (ADEA) claiming that certain actions of his employer constituted unlawful age discrimination in… Held: under sec. 104(a)(2), an ADEA claim is a tort or tort-like claim to redress a personal injury.

Respondent served a third-party administrative summons on petitioners' bank. Pursuant to sec. 7609(b)(2) petitioners filed in the district court a petition to quash the summons. Held: sec. 301.7609-5(b), Proced. & Admin. Regs., comports with the plain language of section 7609(e) its origin and purpose and therefore is a valid regulation.

P borrowed $ 60,000 and, along with three other limited partners, invested in a partnership (V) in order to produce a motion picture. The general partner was a corporation (C). The motion picture was made by use of the capital invested by the limited partners and no debt was incurred by V. Upon completion, the negative came into the possession of the executive producer (an unrelated third party which had certain rights in it). Controversy arose over possession of the negative, and V was unable to obtain the negative. V had a copy of the film (from which only poor quality copies could be made) and C decided to make an X-rated film from the copy. P and the other limited partners decided, at the end of 1981, not to advance any additional capital, not to become involved in the production of an X-rated movie, and to dissolve V. At the close of business 1981, V had no liabilities, had made no profit, and was not in possession of the negative. P did not expect to and did not receive any distributions from V and it was clear to all involved that P was to have nothing further to do with V. P asserts he is entitled to an ordinary loss equal to his capital investment in V and contends it was from theft or embezzlement or from abandonment. R argues alternatively that if a loss occurred, it was from a sale or exchange and should be characterized as capital and limited to $ 3,000 for 1981. Held: P did not have a loss from theft or embezzlement. Held further: P was entitled to an ordinary loss because no sale or exchange occurred in connection with his abandonment of the partnership interest. Held further: The amount of P's basis and loss determined.

Corporation P and the shareholders of corporation R entered into an agreement to enable P to acquire certain R assets by means of an exchange of stock, with P to receive all the stock of R.… Held: the asset transfer from R to FS does not result in investment tax credit recapture. Sec. 1.1502-3(f)(2) and (3), Income Tax Regs.Held further, the step transaction doctrine does not apply to qualify or override sec. 1.1502-3(f)(2) and (3), Income Tax Regs.

Petitioner husband exercised his option to receive a lump-sum payment and an annuity from the U.S. Civil Service Retirement System fund. Held: the lump-sum payment is received from a plan described in section 401(a), I.R.C. within the meaning of section 402(a), I.R.C. and under an annuity contract; it is, therefore, subject to tax under section 72(e), I.R.C.

Ts purchased property on November 30, 1984, and promptly began to renovate the building, a certified historic structure. The renovations were completed in 1985. Held: Ts are not entitled to an investment credit based upon the $ 39,465 expenditures, since those expenditures did not exceed the adjusted basis of the building as required here by sec. 48(g)(1)(C)(i)(I) of the Internal Revenue Code.

P purchased the stock of a corporation which it then liquidated. Held: the assembled work force is not a wasting asset separate and distinct from goodwill and going-concern value and therefore may not be amortized.

Respondent mailed notices of FSAA's in which he determined adjustments to enumerated subchapter S items and determined that two of the three shareholders had insufficient bases to support their… Held: We have no jurisdiction to determine the amount of individual shareholders' bases, but we do have jurisdiction over those subchapter S items enumerated in the FSAA's, even though these items affect shareholders' bases.

Ps had a negative adjusted gross income and paid no regular income tax. Held: the tax benefit adjustment under sec. 55(h), I.R.C., does not permit Ps to obtain a reduction of their preference items to the extent that the amount thereof has been taken into account in their negative adjusted gross income.

L and K were the general partners of a limited partnership during 1983. K resigned as general partner in 1984 and converted his interest in the partnership to that of a limited partner. Held: K, the equal profits interest general partner in 1983 whose name takes alphabetic precedence, is the tax matters partner for 1983.

By motion for partial summary judgment, petitioner argues that the special statutory period for the assessment of a deficiency described in sec. 183(e)(4), I.R.C. 1954, cannot be extended by a… Held: Petitioner's motion will be denied. Sec. 183(e)(4) modifies sec. 6501(a) with regard to a sec. 183 activity for which an election under sec. 183(e)(1) has been made.

Ps engaged in the photo-finishing business. Both the photographic film Ps received from their customers for developing and the paper purchased by Ps for use in making prints contain silver halide compounds, which are removed during the developing process. Ps extracted silver-bearing waste materials from the chemical solutions used in photo-finishing and sold them in the ordinary course of their photo-finishing business. The sales were frequent and generated substantial income. Ps originally reported the sales proceeds as ordinary income on their tax returns, but subsequently amended such returns, reclassifying such proceeds as short-term capital gains. Held, the silver waste is property held primarily for sale to customers in the ordinary course of Ps' trade or business, and therefore is not a capital asset.

The will of decedent (D) gave his wife (W) an income interest in trust B and provided that, if D's executor did not elect to treat the property in trust B as qualified terminable interest property… Held: D's estate is not entitled to an estate tax marital deduction for W's interest in the trust B property with respect to which an election was made.

Ps had not filed a tax return for 1982 nor a claim for credit or refund of 1982 tax as of the date of mailing of deficiency notices to them. Ps actually overpaid their 1982 tax through withholding. Ps had executed a Form 872-A consent agreement more than two years after payment of the 1982 tax. Held, the consent agreement does not revive the expired time period for filing a claim for credit or refund of the overpayment of tax and does not nullify the statutory limitation on the amount of any credit or refund allowable. Secs. 6501(c)(3) and (4), 6512(b) applied.

Nonparty accountant voluntarily executed an affidavit for Criminal Investigation Division of IRS (CID) concerning P's corporate tax returns. Held: the nonparty waived any claim to the Fifth Amendment privilege that he may have possessed when he voluntarily executed the affidavit for the IRS; there is no further danger of incriminating the nonparty by allowing P to disclose the affidavit's contents.

On the death of H, practically all of the property included in his gross estate passed to W as surviving joint tenant with the result that there was no probate estate. Held: the liability for interest in the deferred estate tax was created after the death of H and to protect W's surviving joint tenancy and should not be taken into account in computing the credit for tax on prior transfers.

A codicil to decedent's will provided that his personal representatives, in their discretion, could select and compensate persons who had contributed to decedent's well-being during his lifetime. The codicil limited each such bequest to a maximum of 1 percent of decedent's gross probate estate, without limiting the number of such bequests that could be made. Decedent's will left the residue of his estate to charitable beneficiaries. Held, the value of the residue was not ascertainable at the date of decedent's death and thus is not deductible from his gross estate as a transfer to charity under sec. 2055(a), I.R.C.

Petitioners owned a tract of land in North Dakota which they used for farming purposes. Oil was discovered under the land. Held: Petitioners were disqualified persons under sec. 4975(e), I.R.C. 1954. (2) The real estate transactions entered into between petitioners and the ESOP were prohibited transactions under sec. 4975(c), I.R.C. 1954.

Pending disposition of this case on remand, Ps move to release the surety bond posted at the time of filing their notice of appeal. Held: Ps' motion is denied, on the ground that sec. 7485, I.R.C., requires that the bond be conditioned upon the payment of the deficiency as finally determined and the bond itself so provides.

Held, a corporation which had its privileges and charter forfeited under Texas statutes for failure to file a franchise tax report and… Held: a corporation which had its privileges and charter forfeited under Texas statutes for failure to file a franchise tax report and pay franchise tax and was denied right to sue or defend in Texas courts lacked capacity to bring petitions in this Court, and therefore cases filed by such corporation are dismissed for lack of jurisdiction.

H filed the petition in this case, signing his and W's names on it. W did not authorize H to sign the petition on her behalf. Held: Because W is not a party to this case, we do not decide whether the statutory notice of deficiency was valid as to her.

P is the publisher of a daily newspaper. Held: the newspaper clippings library is property similar to a letter or memorandum which was prepared or produced for P and is excluded from the definition of a capital asset under sec. 1221(3), I.R.C.

This case was closed by stipulated decision setting forth agreed deficiencies and additions to tax for 1983, 1984, and 1986 and an overpayment for 1985, without taking into consideration carrybacks from 1987 (a year not before the Court). After the decision became final, petitioners filed a Motion for Court to Redetermine Interest on Deficiency under Rule 261. Held, petitioners' motion is denied to the extent that it seeks to enforce a predecision "accord and satisfaction" and granted to the extent that the correct amount of interest will be recomputed.

P is the related supplier of I, a domestic international sales corporation (DISC). P and I use the 50/50 combined taxable income method of computing the transfer price allowable under sec. 994(a). Held: The research and development expense allocation and apportionment moratorium established by sec. 223 of the Economic Recovery Tax Act of 1981 is inapplicable to the computation of combined taxable income.

P, a State bank, acquired the assets and liabilities of another State bank, W. P allocated a portion of the purchase price to a core deposit intangible asset, based on its calculation of the cost… Held: the core deposit intangible asset arising from the purchase of W is separate and distinct from goodwill and has a limited useful life, the duration of which can be ascertained with reasonable accuracy.

P, a private nonoperating foundation, received distributions totaling $ 350,000 per year from a split-interest trust as defined by sec. 4947(a)(2), I.R.C.Held, the distributions from the… Held: the distributions from the split-interest trust are not included in distributable amount as defined in sec. 4942(d), I.R.C.; sec. 53.4942(a)-2(b)(2), Foundation Excise Tax Regs., invalidated. Held, further, P is not liable for additions to tax pursuant to sec. 6651(a)(1), I.R.C.

After P filed a Tax Court petition, his bankruptcy case was reopened. P contends that his Tax Court case should be stayed. Held: the automatic stay is terminated when the bankruptcy case is closed, dismissed, or a discharge is granted or denied. Moody v. Commissioner, 95 T.C. 655 (1990). Held further, the automatic stay is not reimposed upon the reopening of a bankruptcy case.

As a result of partnership-level proceedings, R made assessments of income tax including increased interest pursuant to sec. 6621(c), I.R.C. After the partnership-level proceedings were completed, R… Held: Pursuant to the Tax Court's jurisdiction under sec. 6512(b)(1) to determine whether an overpayment has been made, the Court may determine whether sec. 6621(c) interest applies.

Ps filed a motion for an order enjoining R from collection activities. Held: this Court lacks jurisdiction to restrain R from collecting Ps' outstanding income tax liabilities because such taxes are based upon assessments not subject to the deficiency procedures of secs. 6211 et seq. and are not deficiencies that are validly pending before us. I.R.C. sec. 6213(a).

As a condition for obtaining a 5-year automobile distributorship from TMS, P redeemed its outstanding shares from all but one… Held: applying the origin and nature of the transaction test, neither the amount paid for the stock nor the incidental expenses incurred in connection with the redemption are deductible under sec. 162(a), I.R.C.Held further, both the purchase price of the stock and the incidental expenses in connection with the redemption are nondeductible…

Ps filed a motion to reconsider an order of this Court granting R's motion to dismiss as to I.R.C. sec. 6621(c) interest. Held, this Court lacks jurisdiction over I.R.C. sec. 6621(c) interest in a partnership level proceeding because I.R.C. sec. 6621(c) interest is an "affected item" which can only be determined, if at all, at the individual partner level.

Ps on March 23, 1982, sold several vessels and incidental related property for $ 26 million. Held: the subordinated note became totally worthless as of February 28, 1983. Held further, petitioners are not barred from claiming a bad debt deduction under sec. 166 by the rules which limit the deferral available under sec. 453 if an installment obligation is disposed of or canceled. Sec. 453B(a), (f).

Ps jointly filed income tax returns for years A, B, and C. On Ps' return for year C they reported a loss attributable to depreciation on a computer leasing transaction. Ps then jointly filed a Form 1045 (Application for Tentative Refund) to carry the net operating loss from year C to years A and B and to claim overpayment of tax in years A and B. R determined income tax deficiencies and additions to tax for years A, B, and C. P husband conceded all deficiencies and additions to tax determined by R, and P wife contends that she is entitled to relief as an innocent spouse. R contends that P wife is precluded from seeking innocent spouse relief for years A and B because sec. 6013(e)(1)(B), I.R.C. 1954, requires that the "grossly erroneous items" must have been claimed on Ps' joint returns for years A and B. P wife contends that the Form 1045 amended or affected the returns for years A and B so as to come within the statutory language. Held, P wife may seek innocent spouse relief in the circumstances of this case.

P, an active member of the Democratic Party, was appointed a deputy registrar of the State Bureau of Motor Vehicles in Butler County, Ohio. Deputy registrars operated the State's license bureaus, which charged customers for processing driver's license applications, vehicle registrations, license plates, and license tabs. Deputy registrars in Ohio were appointed pursuant to annual contracts with the Registrar. In order to obtain the appointment and ensure renewal of his contract in following years, P was required to obtain the recommendation of the Democratic Party. In order to get that recommendation, P agreed to pay 10 percent of his bureau receipts to the county Democratic Party. This method of financing political activities was a common practice in Ohio during the years in issue. The county Democratic Party billed P each month based on the number of transactions conducted at his license bureau. One-third of P's payments to the county party were forwarded to the State party. P deducted or otherwise did not include the amount of such payments in his income. R determined that the payments were nondeductible political contributions. Held: P's payments to the county Democratic Party constitute nondeductible political contributions. Held further: Ps were not negligent with respect to their tax treatment of the political contributions. Held further: R abused his discretion in not waiving the sec. 6661, I.R.C., addition to tax.

Ts sustained net operating losses (NOLs) and alternative minimum tax NOLs in 1984 and 1985. Held: the regular and alternative tax net operating loss deductions are governed by a single carryback period, to which only a single election made under sec. 172(b)(3)(C) [now sec. 172(b)(3)] may apply. Held further, Ts effectively communicated their intent to make an election which was unavailable to them, and which was therefore invalid.

P referred clients to law firm A, by whom he was employed as an associate. He received a salary and a percentage of fees generated by the referred clients. Held: With one exception, P had not earned the fees prior to becoming a partner. Held furrther: Income earned after P became a partner of B should be reported by partnership B and recognized by each partner in their respective partnership shares.

P's position as vice chairman of Intel Corporation required frequent and extensive travel. By virtue of P's use of his private airplane, he was able to increase the number of meetings he could attend on behalf of Intel. Pursuant to Intel's policies, employee air travel was reimbursable only to the extent of commercial coach rates. Also as a matter of corporate policy, Intel officers were expected to bear certain travel expenses without reimbursement. R disallowed deductions P claimed for depreciation and expenses related to using the airplane in his employment with Intel. Held: P's use of his private airplane and payment of related expenses in the course of his employment were part of his trade or business of being a corporate official. P may deduct depreciation and expenses related to such travel to the extent such amounts exceed amounts reimbursable under Intel's policy. Held further: In determining whether expenses are reasonable in amount so as to be "ordinary and necessary" within the meaning of sec. 162, I.R.C., the amount of such "expenses" does not include amounts allowed by statute to be deducted for depreciation. Held further: Deductions for depreciation pursuant to sec. 168, I.R.C., (ACRS) are not subject to the requirements of sec. 162, I.R.C., that they be "ordinary and necessary" or reasonable in amount. Held further: Business use of the airplane was 36.7 percent of the total use.

An application for tentative refund (Form 1045) to carry back a net operating loss (NOL) for 1987 to 1985 was tentatively allowed and a credit made against the amount of Ps' 1985 tax that… Held: a credit against unpaid taxes that is allowed as a result of a tentative carryback adjustment for a NOL under sec. 6411 constitutes a rebate within the meaning of sec. 6211(b)(2), just as a refund of such taxes constitutes a rebate. Pesch v. Commissioner, 78 T.C. 100 (1982), applied.