Volume 98 — Tax Court Reports

Petitioner wife (W) was a tenured associate professor at college S. In July 1983 and September 1983, W filed racial discrimination charges… Held: The payment was received on account of a potential breach of contract claim and also on account of a potential racial discrimination claim. Petitioners may exclude from gross income the portion of the payment which was received on account of the potential racial discrimination claim. Amounts allocated. Sec. 104(a)(2), I.R.C. 2.

R filed a motion for reconsideration of our opinion, T.C. Memo. 1991-282, filed June 24, 1991, in which we concluded that P was entitled to reimbursement for her reasonable administrative and… Held: the COLA's to the $ 75 per hour attorney fee reimbursement limitation set forth in sec. 7430(c)(1)(B)(iii) should be computed from Oct. 1, 1981, the effective date of the EAJA.

H and W filed a petition in this Court in 1983. Held: W's motion to amend the petition to assert an innocent spouse claim denied since (1) it was untimely raised, and (2) a claim of innocent spouse based upon a so-called London Options loss deduction would be unavailing, such deduction not being grossly erroneous within the contemplation of sec. 6013(e)(2), I.R.C.Douglas v.…

P, a commercial bank, routinely made short-term loans to customers in the ordinary course of its business. Held: sec. 1281 does not require P to accrue interest on short-term loans made to its customers in the ordinary course of its business.

R issued a notice of final S corporation administrative adjustment (FSAA) to D, an S corporation, for its taxable year ending Aug. 31, 1984. Held: this Court lacks jurisdiction to determine whether a shareholder is entitled to innocent spouse relief under sec. 6013(e), I.R.C., in a corporate level proceeding controlled by the S corporation audit and litigation procedures contained in sec. 6241 et seq., I.R.C.

Pursuant to a plan of merger, in 1982, P's exchanged their shares of stock in a State-chartered stock savings and loan association for passbook savings accounts and certificates of deposit in the… Held: Ps were entitled to report the gain on the disposition of their stock under the installment method.

R issued two separate statutory notices (notice A and notice B) to P dated Sept. 7, 1990, relating to P's tax liability for 1984, 1985, and 1986. P timely filed a petition contesting R's determinations made in notice A. P attached to its petition notice A but not notice B. P did not specifically refer to notice B or dispute R's determinations contained therein in the petition. After the expiration of the period for filing a petition, P filed a motion for leave to file amendments to petition to contest the deficiencies and additions to tax determined in notice B. P and R agree that notice B determined deficiencies in P's corporate income tax for 1984, 1985, and 1986. Held, notice A determined deficiencies in P's liability for withholding tax for 1984, 1985, and 1986. Held, further, R was not precluded under sec. 6212(c), I.R.C., from issuing the two separate notices to P. S-K Liquidating Co. v. Commissioner,64 T.C. 713 (1975). Held, further, each notice must be considered independently for purposes of this Court's jurisdiction. Held, further, this Court did not acquire jurisdiction over the corporate income tax deficiencies determined in notice B by virtue of the petition filed herein. Held, further, the amendments which P seeks to effectuate would impermissibly confer jurisdiction on this Court over a matter which would otherwise not come within our jurisdiction under the petition as originally filed.

In April 1987, H requested that R make a determination of whether a pension plan sponsored by H sustained a partial termination in 1986. R issued a proposed determination in September 1988 concluding that a partial termination had occurred. H timely requested an appeals conference, which was held in July 1989. A second appeals conference was held in February 1990. In August 1990, H requested that R exercise his discretion under sec. 7805(b), I.R.C., to limit the retroactive effect of R's final determination in the event R finally determined that a partial termination of the plan occurred in 1986. In November 1990, H filed a petition for declaratory judgment in this Court for decision on the partial termination issue. R moved to dismiss the petition for lack of jurisdiction on grounds that H had failed to exhaust its administrative remedies, as required by sec. 7476(b)(3), I.R.C.Held: H has exhausted its administrative remedies, and this Court has jurisdiction to decide the partial termination issue. In 1986, N was laid off by H, causing N to forfeit nonvested benefits in H's pension plan. After H filed its request for a determination, N timely filed a comment letter with R. N subsequently filed a petition for declaratory judgment in this Court on the partial termination issue. R moved to dismiss N's petition for lack of jurisdiction on grounds that N failed to exhaust his administrative remedies. Held, further, N has exhausted the administrative remedies available to him, and the Court has jurisdiction to hear N's claim.

From 1970 through 1982, P deducted additions to its bad debt reserve. The amounts deducted were calculated with reference to P's taxable income for each year. 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 addition to bad debt reserve is calculated for certain financial institutions.

Held,sec. 1.6661-2(d)(1), Income Tax Regs., which includes the self-employment tax in the calculation of an understatement of income tax under sec. 6661, is a reasonable interpretation of sec. 6661 and is valid.

P purchased equipment which it used to process animal bone into gelatin bone. Held: P's equipment constitutes recycling equipment within the meaning of sec. 48(1)(6), I.R.C.Held, further, the exclusion of animal waste from the category of solid waste in the definition of recovery equipment in sec. 1.48-9(g)(1), Income Tax Regs., is invalid.

Respondent disallowed deductions taken by petitioner for employee bonuses accrued in its fiscal year ended Jan. 31, 1986, but not paid within 2 1/2 months from the end of that fiscal year as required… Held: sec. 1.404(b)-1T, Temporary Income Tax Regs., is valid. Held, further, petitioner fails to bring itself within the exception, and that temporary regulation applies to petitioner's bonus payments method.

When Ps originally filed their 1980 tax return, they were not liable for alternative minimum tax. Held: Ps must take into account the net operating loss deduction in recomputing their alternative minimum tax liability for 1980.

Petitioner husbands (Ps) were convicted of mail fraud, Federal income tax evasion, and violations of the Racketeer Influenced and Corrupt Organization Act (RICO), 18 U.S.C. secs. 1961-1968 (1988). Ps were each sentenced to prison, fined, and ordered to forfeit $ 666,667 as his share of the restaurant receipts they skimmed in violation of RICO during 1979 through 1982. Ps satisfied the judgments of forfeiture in 1989 and 1990. R determined Federal income tax deficiencies and fraud additions to tax under sec. 6653(b), I.R.C., for 1981 and 1982 arising from Ps' failure to report the skimmed receipts as taxable income. Ps question whether the receipts are gross income under sec. 61, I.R.C., on the ground that legal title to the receipts vested in the United States in the taxable years at issue. Ps contend that, if the receipts are gross income, Ps are entitled to loss deductions under sec. 165(a), I.R.C., in the taxable years at issue as a result of their forfeitures to the United States. In the alternative, Ps contend that holding them liable for Federal income tax and fraud additions to tax, in addition to the criminal forfeitures, would violate the Double Jeopardy Clause of the Fifth Amendment or the Excessive Fines Clause or Cruel and Unusual Punishments Clause of the Eighth Amendment to the U.S. Constitution. Held, the skimmed receipts are gross income to Ps under sec. 61, I.R.C., and Ps are not entitled to loss deductions under sec. 165(a), I.R.C., in the taxable years at issue. Held, further, Ps' constitutional rights under the Fifth and Eighth Amendments are not violated by holding them liable for Federal income tax and additions to tax for fraud under sec. 6653(b), I.R.C.

P, which had previously qualified as a DISC, sold a helicopter on Dec. 31, 1983, to a related corporation which was not a DISC. Held: the provision in sec. 1.993-3(d)(2)(i)(b), Income Tax Regs., requiring the U.S. purchaser of export property from a DISC to resell the same for use outside the United States within 1 year of such purchase is valid.

During 1984, C was an investment company incorporated under the laws of Delaware. C's principal place of business was located in the United States Virgin Islands (USVI). Held: C is an inhabitant of the USVI. Held, further, under secs. 1275(b) and 1277(c)(2) of the Tax Reform Act of 1986 (TRA 1986), Pub.

Trust paid fees in 1987 to an investment counseling firm for investment advice provided to the trustees and claimed deductions in full… Held: the fees paid by trust for investment advice do not qualify under the exception clause of sec. 67(e), I.R.C., as trust administration costs which would not have been incurred if the assets in question had not been held in trust and, hence, the deduction for fees is subject to the 2 percent of adjusted gross income limitation provided…

P granted to certain employees nonstatutory stock options which did not have readily ascertainable fair market values at grant. Held: income generated upon the exercise of the nonstatutory stock options in question (spreads) constitutes wages paid or incurred to an employee for qualified services performed by such employee under sec. 44F(b)(2)(A)(i), I.R.C. 2.

P was the parent of members of a consolidated group, including two subsidiaries conducting railroad operations. Held: denial of P's application to revoke the election was an abuse of discretion because its purpose was to prevent P's reliance on favorable Court precedent. Held, further, P was not required to recognize income from sidetrack deposits at the time that construction pursuant to industry track agreements was completed.

R issued a notice of deficiency to P and his wife, in which she determined adjustments to nonpartnership items reported on income tax returns jointly filed by P and his wife. Held: this Court lacks jurisdiction in this partner level proceeding to order R to issue an affected item notice of deficiency at the conclusion of a partnership proceeding which would entitle P to claim innocent spouse relief under sec. 6013(e) in a later partner level proceeding.

Respondent mailed petitioner a notification under sec. 534(b), I.R.C., that respondent proposed to issue a notice of deficiency determining that petitioner was liable for the accumulated earnings tax… Held: Notwithstanding the lack of prejudice to petitioner, respondent's notification was deficient and respondent will have the burden of proof. Sec. 534(a), I.R.C. Respondent's notification must include the year to which it pertains. Sec. 534(b), I.R.C.

Ps are limited partners who were required, if called upon by the general partners, to pay three times the amount of cash contributions. Held: the facts of this case are distinguishable from Pritchett and Ps are not at risk for amounts in excess of their cash contributions.

Ps deposited funds in IRA certificates at B, a savings and loan association. Held: the funds Ps received from M constitute distributions from their IRA's and, under sec. 408(d), I.R.C., are includable in Ps' income for the year received. Held, further, that Ps are liable for the additional tax for early withdrawals under sec. 408(f), I.R.C.Held, further, that Ps did not establish they overreported interest income.

Decedent devised the residue of his estate to a revocable trust, which he had established prior to death, for the benefit of both charitable and noncharitable beneficiaries. The bequest did not qualify for the estate tax deduction for bequests to charitable entities because it violated the prohibition against bequests of split interests in sec. 2055(e)(2), I.R.C. After decedent's death, the trustees modified the dispositive provisions of the trust, effectively purging it of its split interest. The modification was not a "qualified reformation" under sec. 2055(e)(3), I.R.C.Held, where the only reason for the modification of the trust is to circumvent the requirements of sec. 2055(e)(2), I.R.C., no deduction for the split interest will be allowed. Estate of Burdick v. Commissioner,96 T.C. 168 (1991), followed. P requested and was given a 6-month extension of time to file its estate tax return. Pursuant to sec. 20.6081-1, Estate Tax Regs., a second extension was not available. P, relying on the erroneous advice of counsel, filed for a second extension of time in which to file its estate tax return. As a result, P failed to file timely and pay its estate taxes. Held, further, the additions to tax under sec. 6651(a)(1) and ( 2), I.R.C., do not apply because the failure to file timely and pay taxes was due to reasonable cause.

In 1983, four donors created a charitable lead trust. The trust agreement provided that qualified charities would be paid an annuity of $ 975,000 annually for 45 years. Held: the reference in the trust agreement to the maximum charitable deduction otherwise available hereunder refers to the charitable deduction for purposes of the Federal gift tax under sec. 2522(c)(2)(B).

In 1982, D sold to his four children equal amounts of common stock in his wholly owned corporation, S. The purchase agreement stated that the… Held: The installment obligations held by D at his death were canceled within the meaning of sec. 453B(f), I.R.C. As a result, each installment obligation is treated as if it were disposed of in a transaction other than a sale or exchange by D. Sec. 453B(f)(1), I.R.C.Held, further, the 6-year period of limitations on assessment and…

Petitioner received payments in settlement of her claim to a community property share of her ex-husband's military retirement pay. Held: pursuant to sec. 1041, I.R.C., no income is recognized by petitioner on receipt of such payments.

R examined the information returns of P, an organization exempt from Federal income tax. Held: On the date P filed its petition, R had failed to make a determination within 270 days of P's request for a determination within the meaning of sec. 7428, I.R.C. Accordingly, this Court has jurisdiction pursuant to sec. 7428, I.R.C., over this matter, and R's motion to dismiss for lack of jurisdiction will be denied.

Petitioner (P) and her husband (H) filed joint income tax returns. H was adjudicated bankrupt. Subsequently, respondent (R) issued deficiency notices to P and H. P filed petitions in the Tax Court. Held: P's motion to amend her petitions will be granted. 2. Held, further: P was not actually, or by implication, a debtor or a party to her husband's bankruptcy case. Thus, R did not settle her tax liabilities on that basis.

Decedent died testate. Petitioner claimed the surviving spouse had a qualifying income interest for life in property (QTIP) transferred from the decedent's estate… Held: the trustee had the power to appoint part of the corpus of Fund B to someone other than the surviving spouse. The surviving spouse does not have a qualifying income interest for life. Petitioner is not entitled to a marital deduction for the property passing to Fund B. Sec. 2056(b)(7)(B)(ii), I.R.C., 1954.

Petitioners made a charitable contribution of capital gain property to the City of San Bernardino in May 1980 and a charitable contribution of… Held: In determining whether a deduction was allowable for the Campus Crusade contribution it is immaterial that the amount of the earlier San Bernardino contribution exceeded the total amount allowable for the 1980 contributions of capital gain properties under sec. 170 pursuant to the percentage limitations of that section.

P's subsidiary purchased three radio stations for $ 15 million in 1974. P seeks to deduct a portion of the purchase price which it claims is attributable to the FCC broadcast licenses which were transferred pursuant to the sale. Held: An FCC broadcast license constitutes a "franchise" and the FCC retained a "significant power, right, or continuing interest with respect to the subject matter of the franchise" as those terms are used in sec. 1253, I.R.C. A ratable portion of the purchase price attributable to the licenses is therefore deductible under sec. 1253(d)(2), I.R.C.

P, a large timber user, combined its Oregon and California timber into a single block for purposes of computing its depletion under secs. 611 and 631, I.R.C. R determined and contends that: (1) P's… Held: The pooling of P's Oregon and California timber was within the ambit of the regulations.

Petitioner husband received lump-sum distributions from his employer's profit-sharing and incentive savings plans in 1986 on account of his separation from service. Both plans were qualified under sec. 401(a), I.R.C. P elected to roll over the total taxable amount of the incentive savings distribution pursuant to sec. 402(a)(5), I.R.C., and elected 10-year averaging under sec. 402(e)(1), I.R.C., with respect to the profit-sharing distribution. Held, 10-year averaging as provided by sec. 402(e)(1), I.R.C., is available only to taxpayers electing such treatment for all lump-sum distributions received in a single taxable year. Held, further, P is not entitled to utilize 10-year averaging with respect to his profit-sharing distribution.

Petitioner's shareholder, who together with his wife owned all of petitioner's stock, diverted income from petitioner. Petitioner omitted such income from its original return for the taxable year but filed a timely amended return including such income but claiming an offsetting deduction for "wages paid" to the shareholder. Held, the deduction for "wages paid" is not allowable because the amounts in question were not paid as compensation; they constituted constructive dividends. Held, further, the issue of fraud is resolved on the basis of the amended return not the original return, since the amended return was timely filed. Consequently, the existence of fraud turns upon the deduction for "wages paid" and not the omission from gross income. Held, further, respondent has not carried her burden of proof as to fraud.

For many years, P and some of its subsidiaries, including Sundstrand Data Control, Inc. (SDC), have served as prime contractors or subcontractors on various defense contracts. Held: the payments did not arise from the recovery of excessive profits through a renegotiation of a Government contract within the meaning of sec. 1481.

Ps transferred improved real property to their children on Oct. 7, 1985, receiving in exchange a promissory note in the principal sum of $ 380,000, bearing interest at 7 percent, and secured by a first deed of trust on the improved real property. 1. Held, the highest and best use of the improved real property was industrial use. Held, further, the value of the property was $ 1 million, allocating $ 950,000 to the land and $ 50,000 to the improvements. 2. Held, further:Sec. 7872, I.R.C., provides the proper interest rate to discount the promissory note for gift tax purposes. Ballard v. Commissioner,854 F.2d 185 (7th Cir. 1988), not followed on this issue. Likewise, sec. 1274, I.R.C., is not applicable for gift tax valuation purposes.

Ps filed a motion for leave to file a first amended petition which, among other things, involved a claimed right to reclassify a portion of Indonesian foreign tax credits from taxes attributable to foreign oil extraction income to taxes attributable to transportation service income. Held, Ps' motion is denied insofar as it relates to reclassification of Indonesian foreign tax credits because such reclassification, even if Ps prevailed, would not affect the taxable years in issue, LTV Corp. v. Commissioner,64 T.C. 589 (1975), and because the doctrines of res judicata and collateral estoppel would not bar Ps from raising the Indonesian foreign tax credits reclassification issue in any subsequent litigation.

Decedent transferred her personal residence to her son, who was her only heir, and his wife in 1984, and continued to reside therein until her death in 1986. Held: The transaction must be viewed as a whole, and substance prevails over form.

In 1987, M, the sole general partner of C (a partnership subject to the unified audit and litigation procedures), filed a petition in bankruptcy. Held: the assertion of the bar of the statute of limitations is an affirmative defense in TEFRA partnership proceedings and not a jurisdictional question. Barbados #7 v. Commissioner,92 T.C. 804 (1989), and Badger Materials, Inc. v. Commissioner,40 T.C. 1061 (1963), applied.

P resided on the Puyallup Indian Reservation which is bordered on all sides by the State of Washington. Held: the reservation is not outside the United States for purposes of sec. 6213(a). Held, further, R's motion to dismiss for lack of jurisdiction will be granted.

While working for the U.S. Immigration and Naturalization Service in Montreal, Canada, during 1986-88, P received a living quarters allowance (LQA) exempt from Federal income tax under sec. 912(1)(C), I.R.C. R disallowed a portion of Ps' mortgage interest and real estate tax deductions attributable to their residence in Canada during these years. R also disallowed some of the moving expenses Ps claimed in 1988, and imposed an addition to tax under sec. 6653(a)(1), I.R.C., for 1988. Held, Ps' mortgage interest and real property tax are indirectly allocable to their tax-exempt LQA, and therefore, the portion of each deduction allocable to their LQA is disallowed under sec. 265(a)(1), I.R.C., and sec. 1.265-1(c), Income Tax Regs.Held, further, R's determination with respect to Ps' 1988 moving expense deduction is deemed conceded by Ps. Held, further, the addition to tax under sec. 6653(a)(1), I.R.C., for 1988 is sustained.

P collected and processed seismic data and information, which was recorded on output tapes. Held: those original tapes were not property of a U.S. person used within the meaning of sec. 48(a)(2)(B)(vi), I.R.C., and P is not entitled to claim an investment tax credit thereon.

P reinsured a portion of the casualty insurance business of a Swiss company and received annual statements from that company in respect of the premium income, losses, and expenses of that business. In its Federal income tax returns, P included the data reflected in those statements. R adopted the premium income figures but disallowed the losses and expenses in their entirety. Held, under sec. 832, I.R.C., P is required to report and prove the gross figures shown on the Swiss company's statements and not simply the net amount of income or loss. Held, further, the statements are admissible in evidence as to the existence of losses and expenses of the Swiss company, but not the amounts thereof, under various exceptions to the hearsay rules set forth in rule 803, Fed. R. Evid.Held, further, P has not satisfied its burden of proof as to the claimed amounts of the losses and expenses and the allowable amounts are determined. Held, further, P's treatment of the taxable year for reporting the income, losses, and expenses is sustained.

P had not filed a Form 1040, U.S. Individual Income Tax Return, for 1986 nor a claim for credit or refund of 1986 tax as of the date of mailing of a deficiency notice to him, Apr. 12, 1990. P actually overpaid his 1986 tax through withholding and a $ 20,000 estimated tax payment made when filing a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, on Apr. 15, 1987. P subsequently filed a Form 2688, Application for Additional Extension of Time to File U.S. Individual Income Tax Return, on Aug. 15, 1987, to extend his time to file to Oct. 15, 1987. P mailed his Form 1040 for the taxable year 1986 on Sept. 19, 1991. Held, the Forms 4868 and 2688 do not constitute tax returns for purposes of statutory limitations on time for filing claims for credit or refund or limitations on amount of any credit or refund allowable. Secs. 6011(a), 6511(b), and 6512(b), I.R.C., applied.

P, a U.S. citizen, resided and worked in Geneva, Switzerland. P received foreign source income on which he paid income tax to Switzerland. On his U.S. Federal income tax return, P offset his entire tax liability with a foreign tax credit with respect to the tax he paid to Switzerland. R determined that P was liable for the alternative minimum tax and that, by virtue of sec. 59(a)(2), I.R.C., the alternative minimum tax foreign tax credit under sec. 59(a), I.R.C., is available to offset only 90 percent of such liability. P asserts that the imposition of the alternative minimum tax constitutes double taxation, and thus the United States-Swiss Confederation Income Tax Convention, May 24, 1951, 2 U.S.T. (Part 2) 1751 (the treaty), must override the application of sec. 59(a)(2), I.R.C.Held, pursuant to sec. 1012(aa) of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3341, 3531, P is subject to the limitations of sec. 59(a)(2), I.R.C., notwithstanding the provision of the treaty which proscribes double taxation of income.

The will of decedent (D) gave his wife (W) an income interest in trusts M-2 and M-3 and provided that if D's executor did not elect to… Held: D's estate is not entitled to an estate tax marital deduction for W's interest in the trusts M-2 and M-3 property, where W's interest in trusts M-2 and M-3 was contingent on the executor's making the QTIP election and thus did not satisfy the requirements of sec. 2056(b)(7), I.R.C.Estate of Clayton v. Commissioner,97 T.C. 327 (1991),…

During 1988, P, a resident of Switzerland, was a nonresident alien present in the United States engaged in paid research for a law firm. Held: R is not precluded by the issuance of the certificate of compliance from determining a deficiency in the Federal income tax reported on P's return. 2. Held, further,secs. 55(e) and 6013(a)(1), I.R.C., do not unconstitutionally discriminate against married, nonresident aliens. 3.